This refers to the article on "India's fetish for gold( ET Dt, 20 th Dec2010).It is well known that India has a weakness for Gold and it is unlikely to have a shift away from gold into financial savings.The crux of the matter is that investments in gold is unproductive as the economy is concerned. The economy has high growth aspirations and there is urgent need to develop the infrastructure to support the growth.It would be worthwhile to think of establishing a National Gold Bank taking advantage of huge holdings of gold and with the backing of gold money can be raised to finance the infrastructure. There can also be a regulated way of investments in gold and subsequent dealings in gold if there is such a bank.
T.V,Gopalakrishnan
( This appeared in ET dated 24 th December 2010)
Saturday, December 25, 2010
Friday, November 12, 2010
Monetary Policy : More needs to be done
Monetary policy: More needs to be done
The monetary policy announced by the Reserve Bank for the second quarter is on expected lines.
In the context of a mixed backdrop of persistent sluggishness in advanced economies, positive signals of growth in developing economies, continued inflationary pressures in domestic economy and the need to maintain the trajectory of GDP growth in the region of nine per cent, the Reserve Bank has very limited choice to venture into any dynamic policies although the inflows of foreign exchange continue to disturb the exports, exchange rate, current account deficit, money supply, inflation, liquidity and interest rate and demand a separate treatment.
Growth of economy
Earlier, measures and professional approach of the Reserve Bank have paid off very well in ensuring steady growth of the economy at around 8.5 per cent. It may even cross nine per cent by March 2011 provided industrial, export and import growth maintain the present trend.
Even agricultural production can be better in view of the favourable monsoon this year. The non-food credit pick-up has been on the projected lines at around 20 per cent and would continue to persist/improve further.
consumer confidence index
The consumer confidence index has placed India in a strong position (India's index points 129 for the April – June quarter) and this should help the industry, particularly consumer durable industry, to perform well. The money supply has been well contained within the projected level and at the same time, by and large, adequate liquidity has been maintained in the economy. Base rate system, replacing BPLR introduced with effect from July 1, has more or less stabilised indicating effective transmission of the Reserve Bank's measure in the credit market.
RBI steps to curb inflation
However, the concern of the Reserve Bank to contain inflation continues and the measures announced in the present review are well aimed at bringing down the inflation to around 5.5 per cent. But, unfortunately, inflation control in the economy is dependent on several factors which inter-alia include the inflows of foreign exchange on which the Reserve Bank has only limited control.
The quantitative easing in advanced economies has of late been unpredictable and the interest rate scenario in international market has reached its lowest ebb forcing investors to look for greener pastures in developing economies and India is a better destination due to its political and economic stability.
The flow is more on account of international economic scenario and unless and until the advanced economies recover and their interest rates tend to be attractive, the inflows will continue to be there.
Although the funds are welcome, the speculative nature of inflows can destabilise our system and needs to be tackled with some innovative measures.
The need to counter FIIs' dominance over the domestic capital market is the need of the hour and the present policy review has not come out with any measures to prevent undesirable inflows. Inflation being caused on account of such inflows in particular is somewhat difficult to contain as the normal approach of intervention in forex market and resorting to sterilisation measures have their own limitations and cost to the economy.
This dilemma of the Reserve Bank is a reality in the present scenario of domestic and international economic situation.
The financial position of the Government has improved considerably and this should give the Reserve Bank lots of comfort.
The fiscal deficit will be well within the budget estimate in the context of large spectrum auction realisation, improved tax revenues, significant inflows from disinvestment and reduced market borrowings.
Repo rates hike
The increase in repo and reverse repos rate by 25 basis points each will make the funds costlier i.e., only to check inflation growth but not to affect economic growth adversely.
The fact that the cash reserve ratio has not been touched will ensure continued availability of reasonable liquidity.
However, the deposit growth, which continues to lag behind, will have its own consequences on banks' funds position and needs to be tackled.
Deposit growth
The Reserve Bank's observation that the real rate of interest continues to be negative despite hike in deposit rates on account of high inflation and diversion of deposits seeking higher rate of return from alternative investments in gold, real estate, stock market etc. takes place needs to be seriously viewed and action initiated to arrest this trend.
The stake is very high for the economy as there is already a boom in real estate, gold and stock market prices. The abnormal increase in prices in these assets should not be construed to mean by any means the strength of the economy.
This has been adequately cautioned by the Reserve Bank and some measures in the housing loan segment have been proposed.
The prices should really reflect the fundamentals of the economy, purchasing power of the large segment of the population and the demand and supply of assets. The monetary policy of the Reserve Bank alone cannot be a panacea for the problems the economy faces.
Dr.T.V.gopalakrishnan
(This appeared in Business Line dt 8/11/10)
The monetary policy announced by the Reserve Bank for the second quarter is on expected lines.
In the context of a mixed backdrop of persistent sluggishness in advanced economies, positive signals of growth in developing economies, continued inflationary pressures in domestic economy and the need to maintain the trajectory of GDP growth in the region of nine per cent, the Reserve Bank has very limited choice to venture into any dynamic policies although the inflows of foreign exchange continue to disturb the exports, exchange rate, current account deficit, money supply, inflation, liquidity and interest rate and demand a separate treatment.
Growth of economy
Earlier, measures and professional approach of the Reserve Bank have paid off very well in ensuring steady growth of the economy at around 8.5 per cent. It may even cross nine per cent by March 2011 provided industrial, export and import growth maintain the present trend.
Even agricultural production can be better in view of the favourable monsoon this year. The non-food credit pick-up has been on the projected lines at around 20 per cent and would continue to persist/improve further.
consumer confidence index
The consumer confidence index has placed India in a strong position (India's index points 129 for the April – June quarter) and this should help the industry, particularly consumer durable industry, to perform well. The money supply has been well contained within the projected level and at the same time, by and large, adequate liquidity has been maintained in the economy. Base rate system, replacing BPLR introduced with effect from July 1, has more or less stabilised indicating effective transmission of the Reserve Bank's measure in the credit market.
RBI steps to curb inflation
However, the concern of the Reserve Bank to contain inflation continues and the measures announced in the present review are well aimed at bringing down the inflation to around 5.5 per cent. But, unfortunately, inflation control in the economy is dependent on several factors which inter-alia include the inflows of foreign exchange on which the Reserve Bank has only limited control.
The quantitative easing in advanced economies has of late been unpredictable and the interest rate scenario in international market has reached its lowest ebb forcing investors to look for greener pastures in developing economies and India is a better destination due to its political and economic stability.
The flow is more on account of international economic scenario and unless and until the advanced economies recover and their interest rates tend to be attractive, the inflows will continue to be there.
Although the funds are welcome, the speculative nature of inflows can destabilise our system and needs to be tackled with some innovative measures.
The need to counter FIIs' dominance over the domestic capital market is the need of the hour and the present policy review has not come out with any measures to prevent undesirable inflows. Inflation being caused on account of such inflows in particular is somewhat difficult to contain as the normal approach of intervention in forex market and resorting to sterilisation measures have their own limitations and cost to the economy.
This dilemma of the Reserve Bank is a reality in the present scenario of domestic and international economic situation.
The financial position of the Government has improved considerably and this should give the Reserve Bank lots of comfort.
The fiscal deficit will be well within the budget estimate in the context of large spectrum auction realisation, improved tax revenues, significant inflows from disinvestment and reduced market borrowings.
Repo rates hike
The increase in repo and reverse repos rate by 25 basis points each will make the funds costlier i.e., only to check inflation growth but not to affect economic growth adversely.
The fact that the cash reserve ratio has not been touched will ensure continued availability of reasonable liquidity.
However, the deposit growth, which continues to lag behind, will have its own consequences on banks' funds position and needs to be tackled.
Deposit growth
The Reserve Bank's observation that the real rate of interest continues to be negative despite hike in deposit rates on account of high inflation and diversion of deposits seeking higher rate of return from alternative investments in gold, real estate, stock market etc. takes place needs to be seriously viewed and action initiated to arrest this trend.
The stake is very high for the economy as there is already a boom in real estate, gold and stock market prices. The abnormal increase in prices in these assets should not be construed to mean by any means the strength of the economy.
This has been adequately cautioned by the Reserve Bank and some measures in the housing loan segment have been proposed.
The prices should really reflect the fundamentals of the economy, purchasing power of the large segment of the population and the demand and supply of assets. The monetary policy of the Reserve Bank alone cannot be a panacea for the problems the economy faces.
Dr.T.V.gopalakrishnan
(This appeared in Business Line dt 8/11/10)
Tuesday, November 2, 2010
Failure of regulation
This refers to your edit Banks should not be forced to lend to MFIs (ET dt 30/10/10). Micro Finance Institutions are in the news for the past few days for all wrong reasons. The MFIs emerged on the model of Grameena Banks in Bangla Desh as a panacea to remove the poverty levels among the poor in agricultural and rural sector through provision of small loans without requiring collaterals, have of late been a cause of concern for the authorities. They were allowed to grow and function without much of regulatory and supervisory controls and they had grown very fast exploiting the weaknesses in the credit delivery system particularly under rural segment.
The failure of banking system to make financial inclusion a reality and the inclusion of loans by banks to MFIs as a priority sector advances became very handy for MFIs to lay strong foundation in rural areas. In the garb of an institution and with the indirect encouragements they received as Non Banking Financial Companies they took the role of informal money lenders and could entice the poor with their initial concessions and incentives. Some of the new generation banks in particular found it convenient to expand their exposure to agriculture and village industries through MFIs and for the latter the funds they got from banks became a source to spread their business only to exploit the poor. The crux of the issue is financial exclusion and failure of authorities to come out with proper regulation and supervision of MFIs at appropriate time. As rightly pointed out in your edit, the solution to control MFIs is to make the financial inclusion compulsory with the aid of technology, mobile phones and UID.
Dr T.V.Gopalakrishnan
( An edited version of this appeared in Economic Times Dt 2/11/10)
The failure of banking system to make financial inclusion a reality and the inclusion of loans by banks to MFIs as a priority sector advances became very handy for MFIs to lay strong foundation in rural areas. In the garb of an institution and with the indirect encouragements they received as Non Banking Financial Companies they took the role of informal money lenders and could entice the poor with their initial concessions and incentives. Some of the new generation banks in particular found it convenient to expand their exposure to agriculture and village industries through MFIs and for the latter the funds they got from banks became a source to spread their business only to exploit the poor. The crux of the issue is financial exclusion and failure of authorities to come out with proper regulation and supervision of MFIs at appropriate time. As rightly pointed out in your edit, the solution to control MFIs is to make the financial inclusion compulsory with the aid of technology, mobile phones and UID.
Dr T.V.Gopalakrishnan
( An edited version of this appeared in Economic Times Dt 2/11/10)
Sunday, October 24, 2010
Banks put up good show during the global financial crisis
Banks in India put up good show during the global financial crisis:
The performance of various bank groups as on March 2009 and March 2010 had been impressive despite constraints faced by them due to slow down in the economy because of global financial crisis and adverse real economic scenario witnessed all over the whole world. A few selected parameters indicating Bank Group-wise Performance as at end March 2009 & 2010 is furnished below.
(Fig in per centage)
Bank Groups Cost of fund Return on adva Return on Net NPAs
adj to cost assets
of funds
2009 2010 2009 2010 2009 2010 2009 2010
SBI & Subsidiaries 5.94 5.32 3.95 3.60 1.02 0.91 1.47 1.50
Nationalised Banks 6.09 5.35 4.09 3.83 1.03 1.00 0.68 0.91
Old Private Sector Bks 6.67 6.13 5.15 4.81 1.15 0.95 0.90 0.83
New Private Sector Bks 6.06 4.43 5.23 5.13 1.12 1.38 1.40 1.09
Foreign Banks 4.46 2.82 8.14 7.17 1.99 1.26 1.81 1.82
All Sch.Commercial Bks 5.96 5.09 4.53 4.19 1.13 1.05 1.05 1.12
Source: Reserve Bank of India- A profile of banks 2009-10.
Performance Parameters during the two year period showed that banking sector exhibited its remarkable resilience in withstanding the impact of global economic crisis. Increase in Net NPAs or fall in return on assets during the period was marginal whereas the cost of funds registered a significant decline. Analysis of bank group-wise performance was as follows.
Cost of funds:
The cost of funds had come down considerably during the year 2009-10 although it continued to be high for all bank groups except for foreign banks. While the cost of funds which ranged between 4.46 per cent and 6.67 per cent for different bank groups in March 2009 came down considerably and worked out between 2.82 per cent and 6.13 per cent in March 2010. Foreign banks could bring down their cost of funds from 4.46per cent to 2.82 per cent during the period, whereas the state bank group and nationalized banks could bring down their cost only from 5.94 per cent to 5.32 per cent and 6.09 per cent to 5.35 per cent respectively. While the new private sector banks could bring down their cost of funds sharply by 1.63 per cent, the old private sector banks could bring down their cost of funds only by 0.54 per cent during the period. Cost of funds for public sector banks and old private sector banks continued to remain high and is a matter of concern. The reasons perhaps for their high cost of funds could be due to high overhead costs because of comparatively low penetration of computerization, information technology, high wages of their human resources as they are comparatively in the higher age profile and relatively higher rate of interest offered on deposits and high cost of deposits. The cost of funds in general and interest rate on advances in particular have to be necessarily brought down to remain competitive in business and improve the credit portfolio.
Return on advances adjusted to cost of funds:
Return on advances adjusted to cost of funds in respect of various bank groups remained in the range of 3.95 per cent and 8.14 per cent as at end Mach 2009 and 3.60 per cent and 7.17 per cent as at end March 2010. Among various bank groups State Bank Group had the lowest return on advances for both the years March 2009 and March 2010. Foreign banks outperformed the entire bank groups as their return on advances adjusted to cost of funds stood at 8.14 per cent and 7.17 per cent as at end March 2009 and 2010 respectively. The new private sector banks also did well as compared to all other bank groups with 5.23 per cent and 5.13 per cent during the two years. Sustenance of this sort of return will be a major task for all bank groups in a dynamic financial market.
Return on assets:
In respect of return on assets, while the foreign bank group scored well as compared to the other bank groups, state bank group stood lowest even compared with old private sector banks. It is noteworthy to observe that while the new private sector banks increased their return on assets from 1.12 per cent in March 2009 to 1.38 per cent in March 2010, all other bank groups including foreign banks registered a decline on their return on assets during the period.
Net NPAs:
Barring state bank group, nationalized banks, and foreign banks, the other bank groups could show a reduction in their Net NPAs during the period 2009 -10. The benefit of restructuring of assets might have come to the rescue of banks to improve their NPAs position.
Analyses of different parameters indicate that foreign banks displayed comparatively a better show and there is scope for public sector banks and old private sector banks to better their performance. The economy is doing well except perhaps on inflationary front and the time augurs well for the banks to widen their business further taking advantage of the gaps in the area of financial inclusion, infrastructure funding and financing of agriculture and related industries.
T.V.Gopalakrishnan
(This appeared in Business Line dt25/10/10
The performance of various bank groups as on March 2009 and March 2010 had been impressive despite constraints faced by them due to slow down in the economy because of global financial crisis and adverse real economic scenario witnessed all over the whole world. A few selected parameters indicating Bank Group-wise Performance as at end March 2009 & 2010 is furnished below.
(Fig in per centage)
Bank Groups Cost of fund Return on adva Return on Net NPAs
adj to cost assets
of funds
2009 2010 2009 2010 2009 2010 2009 2010
SBI & Subsidiaries 5.94 5.32 3.95 3.60 1.02 0.91 1.47 1.50
Nationalised Banks 6.09 5.35 4.09 3.83 1.03 1.00 0.68 0.91
Old Private Sector Bks 6.67 6.13 5.15 4.81 1.15 0.95 0.90 0.83
New Private Sector Bks 6.06 4.43 5.23 5.13 1.12 1.38 1.40 1.09
Foreign Banks 4.46 2.82 8.14 7.17 1.99 1.26 1.81 1.82
All Sch.Commercial Bks 5.96 5.09 4.53 4.19 1.13 1.05 1.05 1.12
Source: Reserve Bank of India- A profile of banks 2009-10.
Performance Parameters during the two year period showed that banking sector exhibited its remarkable resilience in withstanding the impact of global economic crisis. Increase in Net NPAs or fall in return on assets during the period was marginal whereas the cost of funds registered a significant decline. Analysis of bank group-wise performance was as follows.
Cost of funds:
The cost of funds had come down considerably during the year 2009-10 although it continued to be high for all bank groups except for foreign banks. While the cost of funds which ranged between 4.46 per cent and 6.67 per cent for different bank groups in March 2009 came down considerably and worked out between 2.82 per cent and 6.13 per cent in March 2010. Foreign banks could bring down their cost of funds from 4.46per cent to 2.82 per cent during the period, whereas the state bank group and nationalized banks could bring down their cost only from 5.94 per cent to 5.32 per cent and 6.09 per cent to 5.35 per cent respectively. While the new private sector banks could bring down their cost of funds sharply by 1.63 per cent, the old private sector banks could bring down their cost of funds only by 0.54 per cent during the period. Cost of funds for public sector banks and old private sector banks continued to remain high and is a matter of concern. The reasons perhaps for their high cost of funds could be due to high overhead costs because of comparatively low penetration of computerization, information technology, high wages of their human resources as they are comparatively in the higher age profile and relatively higher rate of interest offered on deposits and high cost of deposits. The cost of funds in general and interest rate on advances in particular have to be necessarily brought down to remain competitive in business and improve the credit portfolio.
Return on advances adjusted to cost of funds:
Return on advances adjusted to cost of funds in respect of various bank groups remained in the range of 3.95 per cent and 8.14 per cent as at end Mach 2009 and 3.60 per cent and 7.17 per cent as at end March 2010. Among various bank groups State Bank Group had the lowest return on advances for both the years March 2009 and March 2010. Foreign banks outperformed the entire bank groups as their return on advances adjusted to cost of funds stood at 8.14 per cent and 7.17 per cent as at end March 2009 and 2010 respectively. The new private sector banks also did well as compared to all other bank groups with 5.23 per cent and 5.13 per cent during the two years. Sustenance of this sort of return will be a major task for all bank groups in a dynamic financial market.
Return on assets:
In respect of return on assets, while the foreign bank group scored well as compared to the other bank groups, state bank group stood lowest even compared with old private sector banks. It is noteworthy to observe that while the new private sector banks increased their return on assets from 1.12 per cent in March 2009 to 1.38 per cent in March 2010, all other bank groups including foreign banks registered a decline on their return on assets during the period.
Net NPAs:
Barring state bank group, nationalized banks, and foreign banks, the other bank groups could show a reduction in their Net NPAs during the period 2009 -10. The benefit of restructuring of assets might have come to the rescue of banks to improve their NPAs position.
Analyses of different parameters indicate that foreign banks displayed comparatively a better show and there is scope for public sector banks and old private sector banks to better their performance. The economy is doing well except perhaps on inflationary front and the time augurs well for the banks to widen their business further taking advantage of the gaps in the area of financial inclusion, infrastructure funding and financing of agriculture and related industries.
T.V.Gopalakrishnan
(This appeared in Business Line dt25/10/10
Monday, October 4, 2010
Bank Deposits and Risk Perception of Depositors
Bank deposits and risk perception of depositors
As banks have risk assessment for deploying their resources, depositors have their own perception of risk about banks for depositing their savings and to that extent the financial literacy can be considered to be very high and the awareness about market risk is appreciable. This is evident from the position of deposits of various bank groups in India during the period 2008- 2010 ie the beginning of crisis during the crisis and afterwards. The global financial crisis which triggered in September 2008 in US market and subsequently spread all over the world has impacted the Indian banking in several ways although it remained insulated from the severe jolt experienced by its counterparts particularly in advanced countries. The bank group wise figures illustrates that the confidence level of public in private sector banks including foreign banks has witnessed a set back and it has increased considerably in public sector banks during the crisis period. Depositors seem to have perceived more risk in depositing their money with private sector banks and shifted their loyalty to public sector banks as revealed by the figures.
Public confidence in banks depends basically on ownership, sound regulatory and supervisory system in force and insurance coverage for their deposits. They also worry about the inflation risk and they have their calculation on real interest and hedge against this risk. As the insurance coverage for deposits is limited to only Rs 1 lakh per depositor irrespective of the bank (whether private or public) in which the deposit is made, the preference of public for safety of their entire deposits with public sector banks is understandable and is fully justifiable during a crisis period like the one the world experienced since September 2008. Although the Indian banks are well run and financially sound because of efficient and effective regulatory and supervisory mechanism, the preference for public sector by depositors is apparent and well exhibited as revealed by various parameters. For instance, the share of public sector banks in total deposits which stood at 73.91 percent before the crisis ie as at end March 2008, increased to77.61percent as at end March 2009 ie during the crisis and further to 77.68 percent as at end March 2010 after recovery began. The following table will indicate share of deposits to total deposits and rate of growth of deposits in different bank Groups during 2008-10.
Bank groups 2007-08 2008-09 2009-10
Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits
Public Sector Banks 73.91% 23.05% 76.61% 26.85% 77.68% 18.60%
Old Private Sector Banks 4.99% 19.78% 4.90% 20.34% 4.84% 15.37%
New Private Banks 15.34% 23.13% 13.22% 5.43% 12.48% 10.39%
Foreign Banks 5.76% 26.81% 5.27% 11.99% 5.00% 11.11%
The rate of growth of deposits in general has registered a sharp decline in all bank groups as at end March 2010 as compare to that of end march 2008 perhaps evidencing increased awareness among public to hedge against inflation. While the inflation rate has been on the increase for the past couple of years, the rate of interest has fallen leaving no incentive to save money with the banks. High inflation adversely affects the capacity and propensity to save. In the absence of any real rate of interest, the public seem to have opted to spend more, save less and invest available surplus in alternative assets or instruments such as gold, real estate and other instruments of savings which fetch offer better return than banks. The increase in real estate, commodity prices (particularly gold and silver) and sensex which has recently crossed 20K is a clear indication that public awareness about investment market has gone up and their risk perception, risk assessment and risk management have improved well .
While the share of old private sector banks and foreign banks in total deposits showed a marginal decline during the period 2008 -10, the share of new private sector banks declined considerably from 15.34 percent in 2008 to 12.48 percent in 2010. The rate of fall in deposit during the crisis year ie 2009 is significant in new private sector and foreign banks as compared to other bank groups.
While the investors awareness about market risks and alternative avenues of investments is welcome, the risks they carry on speculative investments in gold and real estates are something of very high order. The markets and the economy also carry heavy risk from this sort of build- up of assets in the long run and need to be taken care of.
Dr.T.V.Gopalakrishnan
(This appeared in Business Line dt4/10/2010)
As banks have risk assessment for deploying their resources, depositors have their own perception of risk about banks for depositing their savings and to that extent the financial literacy can be considered to be very high and the awareness about market risk is appreciable. This is evident from the position of deposits of various bank groups in India during the period 2008- 2010 ie the beginning of crisis during the crisis and afterwards. The global financial crisis which triggered in September 2008 in US market and subsequently spread all over the world has impacted the Indian banking in several ways although it remained insulated from the severe jolt experienced by its counterparts particularly in advanced countries. The bank group wise figures illustrates that the confidence level of public in private sector banks including foreign banks has witnessed a set back and it has increased considerably in public sector banks during the crisis period. Depositors seem to have perceived more risk in depositing their money with private sector banks and shifted their loyalty to public sector banks as revealed by the figures.
Public confidence in banks depends basically on ownership, sound regulatory and supervisory system in force and insurance coverage for their deposits. They also worry about the inflation risk and they have their calculation on real interest and hedge against this risk. As the insurance coverage for deposits is limited to only Rs 1 lakh per depositor irrespective of the bank (whether private or public) in which the deposit is made, the preference of public for safety of their entire deposits with public sector banks is understandable and is fully justifiable during a crisis period like the one the world experienced since September 2008. Although the Indian banks are well run and financially sound because of efficient and effective regulatory and supervisory mechanism, the preference for public sector by depositors is apparent and well exhibited as revealed by various parameters. For instance, the share of public sector banks in total deposits which stood at 73.91 percent before the crisis ie as at end March 2008, increased to77.61percent as at end March 2009 ie during the crisis and further to 77.68 percent as at end March 2010 after recovery began. The following table will indicate share of deposits to total deposits and rate of growth of deposits in different bank Groups during 2008-10.
Bank groups 2007-08 2008-09 2009-10
Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits
Public Sector Banks 73.91% 23.05% 76.61% 26.85% 77.68% 18.60%
Old Private Sector Banks 4.99% 19.78% 4.90% 20.34% 4.84% 15.37%
New Private Banks 15.34% 23.13% 13.22% 5.43% 12.48% 10.39%
Foreign Banks 5.76% 26.81% 5.27% 11.99% 5.00% 11.11%
The rate of growth of deposits in general has registered a sharp decline in all bank groups as at end March 2010 as compare to that of end march 2008 perhaps evidencing increased awareness among public to hedge against inflation. While the inflation rate has been on the increase for the past couple of years, the rate of interest has fallen leaving no incentive to save money with the banks. High inflation adversely affects the capacity and propensity to save. In the absence of any real rate of interest, the public seem to have opted to spend more, save less and invest available surplus in alternative assets or instruments such as gold, real estate and other instruments of savings which fetch offer better return than banks. The increase in real estate, commodity prices (particularly gold and silver) and sensex which has recently crossed 20K is a clear indication that public awareness about investment market has gone up and their risk perception, risk assessment and risk management have improved well .
While the share of old private sector banks and foreign banks in total deposits showed a marginal decline during the period 2008 -10, the share of new private sector banks declined considerably from 15.34 percent in 2008 to 12.48 percent in 2010. The rate of fall in deposit during the crisis year ie 2009 is significant in new private sector and foreign banks as compared to other bank groups.
While the investors awareness about market risks and alternative avenues of investments is welcome, the risks they carry on speculative investments in gold and real estates are something of very high order. The markets and the economy also carry heavy risk from this sort of build- up of assets in the long run and need to be taken care of.
Dr.T.V.Gopalakrishnan
(This appeared in Business Line dt4/10/2010)
Wednesday, September 29, 2010
sensex,Real Economy and the reality
Sensex, Real economy, and the reality
This refers to your edit 'The Sensex Rides again' (ET,dt 22nd Sep,2010). The sensex has again crossed 20 K mark after a gap of 32 months and the market men are happy. Even the Finance minister has expressed his happiness by saying that after 2008 January, for the first time it has crossed 20,000. No doubt, it signifies the improvement in the confidence level among investors both from domestic and international market over the fact that the economy is performing well and will continue to perform better in future also. But, how far, this confidence is sustainable and manageable is an issue well analysed in your edit.
The rise in index is basically on account of increased flow of funds from international markets seeking better return. The investment climate in both the US and European markets is not very conducive both in terms risk and return and the investors have found better avenues to divert funds to Indian market which is safe and offer higher rate of return. From Foreign institutional investors angle, it is fine, but to what extent our economy can absorb these funds without being hurt is what needs to be examined when the index goes up and up. The real economy is not that bright as on today with low productivity in agriculture, high unemployment, high inflation, inadequate infrastructure,high level of poverty etc etc to boast of a high sensex index which in any case cannot be a yard stick to measure the real strengh of a developing economy.
The inflows of short term funds seeking quick returns purely on a speculative basis although essential perhaps to provide liquidity and strength for capital formation and capital market, bring with them the problem of exchange rate and interest rate management which have a bearing on exports, imports, inflation, current account deficit etc.This has to be kept in mind while assessing the benefits of rise in sensex. Capital market is germane to a large segment of population is a fact in India and cannot be ignored . In fact an index indicating how much of the population is part of the capital market would be a better yard stick to assess the strength of the real economy.
Dr.T.V.Gopalakrishnan
This refers to your edit 'The Sensex Rides again' (ET,dt 22nd Sep,2010). The sensex has again crossed 20 K mark after a gap of 32 months and the market men are happy. Even the Finance minister has expressed his happiness by saying that after 2008 January, for the first time it has crossed 20,000. No doubt, it signifies the improvement in the confidence level among investors both from domestic and international market over the fact that the economy is performing well and will continue to perform better in future also. But, how far, this confidence is sustainable and manageable is an issue well analysed in your edit.
The rise in index is basically on account of increased flow of funds from international markets seeking better return. The investment climate in both the US and European markets is not very conducive both in terms risk and return and the investors have found better avenues to divert funds to Indian market which is safe and offer higher rate of return. From Foreign institutional investors angle, it is fine, but to what extent our economy can absorb these funds without being hurt is what needs to be examined when the index goes up and up. The real economy is not that bright as on today with low productivity in agriculture, high unemployment, high inflation, inadequate infrastructure,high level of poverty etc etc to boast of a high sensex index which in any case cannot be a yard stick to measure the real strengh of a developing economy.
The inflows of short term funds seeking quick returns purely on a speculative basis although essential perhaps to provide liquidity and strength for capital formation and capital market, bring with them the problem of exchange rate and interest rate management which have a bearing on exports, imports, inflation, current account deficit etc.This has to be kept in mind while assessing the benefits of rise in sensex. Capital market is germane to a large segment of population is a fact in India and cannot be ignored . In fact an index indicating how much of the population is part of the capital market would be a better yard stick to assess the strength of the real economy.
Dr.T.V.Gopalakrishnan
Sunday, August 29, 2010
Banks, Deposits and Inflation
Banks, Deposits and inflation
The rate of growth of deposits of scheduled commercial banks has been on the decline for the past couple of years and concerns have been expressed on declining trend in deposits.
The reasons for the fall in deposit growth rate can be broadly attributed to unabated inflation , impact of the global financial crisis , lower GDP growth compared to the past trend , regulatory measures such as CRR, SLR , availability of alternate avenues of investment offering comparatively better returns than bank deposits and continued preference of people to have cash transactions. The deposit figures for the past few years are given below.
Deposit (Rs Crores)
2007-2008 31,96,939
2008-2009 38,34,110 (19.9%)
2009-2010 44,86,574p(17.0%)
P: provisional
The rate of growth of deposits is said to have further declined to around 15 % on a year on year basis as of 2nd July 30, 2010.
Source: RBI Bulletin –May 2010
The high level of inflation had entered into double digits in last February bringing down the real rate of interest and taking away depositors’ / Savers’ interest to save money with banks.
INTEREST ON DEPOSITS
Paradoxically, while the rate of inflation has gone up, the rate of interest on deposits has come down. The banks offer only 3.5 percent on savings deposits and between 6.5 percent and a maximum of 9 percent (for senior citizens) on long term deposits.
The Propensity to spend rather than to save money is very much visible among people. When inflation continues unabated, solution remains elusive and evasive, and with a vast majority of people struggling to make both ends meet, the savings will fall and banks’ deposits decline. Those who can afford to save even under high inflationary conditions will think of alternatives to protect their hard earned savings from erosion of value.
High inflation may perhaps be one of the reasons for increased demand for some of the consumer items as money spent today is more worth than to preserve and spend later.
PRESERVE VALUE OF WEALTH
Beside when other avenues of saving which offer a better return and hedge to fight inflation and preserve the value of wealth are available, the depositor- preference to bank deposits disappears.
Like banks people also have their own way of Asset – Liability Management and switch over to mutual funds, post office savings deposits, corporate deposits, real estate, capital market, gold and other commodities.
This reflects in a way improved financial literacy and better awareness of the availability of different markets and products. This should be a welcome signal from the angle of healthy competition and wider market to improve the financial system, although it has affected adversely the deposit growth of commercial banks.
CRR HIKES
The periodical increase in CRR though very essential as a monetary management tool to contain money supply and withdrawal of interest on the CRR balances ( payable over and above the 3 % minimum)have also been a cause for declining trend in deposits.
This, coupled with the minimum prescribed Investments under SLR and advances to preferred sectors which do not fetch attractive returns may be discouraging banks to mobilize deposits aggressively.
The general reluctance of banks to reduce their NIM from the present level of 3 and 3.5 percent because of various reasons also forces banks to offer lower rate of interest to depositors. Increasing non performing loans and additional provisional requirements towards bad debts compel banks to reduce expenditures mainly interest payment.
FINANCIAL INCLUSION
The concern expressed over declining deposits is justified and needs to be addressed. Financial inclusion (not only of the poor but also the well to do) is an immediate solution. Even in banked centres the exclusion is perhaps equal to inclusion, if not more.
Apart from rural and semi-urban centres, even in urban and metropolitan areas money lenders, chit fund and blade companies continue to thrive and survive well. Banks need to penetrate further to capture business and the opportunity should not be missed.
The easiest way to bring maximum people under the banking fold is to have a policy to ensure that all transactions above a cut off limit say Rs 5000 should only be by means of cheque and debit card. All real estate and gold related transactions above a cut off limit should be compulsorily routed through banks.
INFO-TECH
With the help of Information Technology, this measure can be easily complied with by proper tie-ups with concerned institutions. Minimum the cash transactions in the society the better for banks, public and all authorities. Fine tuning of all operations and increasing the turn over should help the banks to lower its NIM and offer better rate of interest to depositors.
(This article appeared in "The Hindu- Business Line" on 9th August 2010).
Dr.T.V.Gopalakrishnan
The rate of growth of deposits of scheduled commercial banks has been on the decline for the past couple of years and concerns have been expressed on declining trend in deposits.
The reasons for the fall in deposit growth rate can be broadly attributed to unabated inflation , impact of the global financial crisis , lower GDP growth compared to the past trend , regulatory measures such as CRR, SLR , availability of alternate avenues of investment offering comparatively better returns than bank deposits and continued preference of people to have cash transactions. The deposit figures for the past few years are given below.
Deposit (Rs Crores)
2007-2008 31,96,939
2008-2009 38,34,110 (19.9%)
2009-2010 44,86,574p(17.0%)
P: provisional
The rate of growth of deposits is said to have further declined to around 15 % on a year on year basis as of 2nd July 30, 2010.
Source: RBI Bulletin –May 2010
The high level of inflation had entered into double digits in last February bringing down the real rate of interest and taking away depositors’ / Savers’ interest to save money with banks.
INTEREST ON DEPOSITS
Paradoxically, while the rate of inflation has gone up, the rate of interest on deposits has come down. The banks offer only 3.5 percent on savings deposits and between 6.5 percent and a maximum of 9 percent (for senior citizens) on long term deposits.
The Propensity to spend rather than to save money is very much visible among people. When inflation continues unabated, solution remains elusive and evasive, and with a vast majority of people struggling to make both ends meet, the savings will fall and banks’ deposits decline. Those who can afford to save even under high inflationary conditions will think of alternatives to protect their hard earned savings from erosion of value.
High inflation may perhaps be one of the reasons for increased demand for some of the consumer items as money spent today is more worth than to preserve and spend later.
PRESERVE VALUE OF WEALTH
Beside when other avenues of saving which offer a better return and hedge to fight inflation and preserve the value of wealth are available, the depositor- preference to bank deposits disappears.
Like banks people also have their own way of Asset – Liability Management and switch over to mutual funds, post office savings deposits, corporate deposits, real estate, capital market, gold and other commodities.
This reflects in a way improved financial literacy and better awareness of the availability of different markets and products. This should be a welcome signal from the angle of healthy competition and wider market to improve the financial system, although it has affected adversely the deposit growth of commercial banks.
CRR HIKES
The periodical increase in CRR though very essential as a monetary management tool to contain money supply and withdrawal of interest on the CRR balances ( payable over and above the 3 % minimum)have also been a cause for declining trend in deposits.
This, coupled with the minimum prescribed Investments under SLR and advances to preferred sectors which do not fetch attractive returns may be discouraging banks to mobilize deposits aggressively.
The general reluctance of banks to reduce their NIM from the present level of 3 and 3.5 percent because of various reasons also forces banks to offer lower rate of interest to depositors. Increasing non performing loans and additional provisional requirements towards bad debts compel banks to reduce expenditures mainly interest payment.
FINANCIAL INCLUSION
The concern expressed over declining deposits is justified and needs to be addressed. Financial inclusion (not only of the poor but also the well to do) is an immediate solution. Even in banked centres the exclusion is perhaps equal to inclusion, if not more.
Apart from rural and semi-urban centres, even in urban and metropolitan areas money lenders, chit fund and blade companies continue to thrive and survive well. Banks need to penetrate further to capture business and the opportunity should not be missed.
The easiest way to bring maximum people under the banking fold is to have a policy to ensure that all transactions above a cut off limit say Rs 5000 should only be by means of cheque and debit card. All real estate and gold related transactions above a cut off limit should be compulsorily routed through banks.
INFO-TECH
With the help of Information Technology, this measure can be easily complied with by proper tie-ups with concerned institutions. Minimum the cash transactions in the society the better for banks, public and all authorities. Fine tuning of all operations and increasing the turn over should help the banks to lower its NIM and offer better rate of interest to depositors.
(This article appeared in "The Hindu- Business Line" on 9th August 2010).
Dr.T.V.Gopalakrishnan
Monday, July 26, 2010
Banking innovatively to build infrastructure
Investments in infrastructure in the eleventh five year plan are estimated at Rs 2.056,150 crores ($ 514 billion) and the avenues to raise them are limited.
According to the Planning Commission Report on projections of Investment in Infrastructure (August 2008) it is estimated that only 30 percent of the infrastructure needs can be met directly from the budget.
While 40 percent of the requirements are expected to be met from internal generation and market borrowings, the remaining 30 percent have to come from private investment and this depends upon the creation of a supportive investor friendly environment and the ability to roll out bankable projects.
Finding these resources is the challenge faced by the economy to achieve 9 to 10 percent growth in GDP by 2012.
This calls for an innovative approach to policies. Efforts are on to mobilize funds by offering tax incentives. The Government has allowed some institutions like Life Insurance Corporation of India, Industrial Finance Corporation of India, Infrastructure Development Finance Corporation and some non banking finance companies authorized by the Reserve Bank as infrastructure Companies to issue tax free Infrastructure Bonds to raise funds. Can these institutions raise the required funds ?
Time has come for banks to restructure their balance sheets and find ways and means to support infrastructure development in a big way. Although banks have been in infrastructure financing, the tendency to avoid long term funding of infrastructure projects citing short term nature of resources and consequent asset- liability mismatch has been there since late 1990s with the introduction of asset liability and risk management concepts. Minimization of cost and maximization of profit without locking up of funds in long term ventures has been the philosophy pursued and the reforms in regulation and supervisory areas also are well suited to follow this line of approach. No doubt it has paid huge dividends and our banking system has proved to be sound and safe. But can this approach go on?
The Financial Institutions catering to long term needs of industries also found the circumstances conducive to convert themselves as banks and we have ICICI and IDBI banks in the place of ICICI and IDBI which were prominently and successfully engaged in financing huge long term projects for decades. Only institution which remained and continues to function as an All India Financial Institution is only the Industrial Finance Corporation of India Ltd. Some institutions like Infrastructure Development Finance Corporation, Infrastructure Leasing and Finance Ltd , etc, have since been developed but they are not adequate enough to meet the ever growing demands of infrastructural developments in tune with the international standards and requirements of the economy slated to register double digit growth.
Reliable Source
Banking System is the best and reliable source for infrastructure funds. With branches spread all over the country and abroad and with knowledge of the people and markets banks can easily mobilize the resources.
However, there is need for policy, regulatory support and incentives without in any way compromising on banks’ safety and soundness.
The banks should be allowed to mobilize funds for a minimum period of five years and a maximum period of ten years and these funds have to be shown under the nomenclature “Deposit for infrastructure development”.
The funds should be exempt from CRR / SLR and their investments should be allowed comparatively to carry a lower risk weight for capital adequacy.
Though the exemption from CRR will have an adverse impact to contain particularly the defying inflation but the benefits that can accrue to the economy in terms of GDP growth and economy’s international reputation and image with improved physical infrastructure. The interest earned on these deposits up to Rs 20,000 can be considered for tax exemption . The rate of interest can be more or less equal to that of post office savings interest for Fixed Deposits with tax benefits.
To Counter Asset- Liability mismatch, the approach has to be something different as far as these funds are concerned. Since the maturity pattern is definite i.e. only after five years and more, the deployment of funds will also be beyond five years and above. Mismatch may even then arise but with enough head room for adjustment.
Banks will have adequate time and opportunities to bridge the mismatch. The periodical cash flows from investments have to be recycled in such a way that they minimize the mismatch.
The take out finance which did not take off as envisaged needs to be revived to encourage infrastructure financing by banks and specialized institutions.
Securitization of infrastructural advances and development of secondary market for these papers will also go a long way in finding the liquidity for banks and minimizing the adverse impact of mismatch. It is for authorities to come out with the right environment.
Dr.T.V.Gopalakrishnan
Former Chief General Manager,
Reserve Bank of India
( views are Personal)
( This appeared in Business Line dt 26/07/10).
According to the Planning Commission Report on projections of Investment in Infrastructure (August 2008) it is estimated that only 30 percent of the infrastructure needs can be met directly from the budget.
While 40 percent of the requirements are expected to be met from internal generation and market borrowings, the remaining 30 percent have to come from private investment and this depends upon the creation of a supportive investor friendly environment and the ability to roll out bankable projects.
Finding these resources is the challenge faced by the economy to achieve 9 to 10 percent growth in GDP by 2012.
This calls for an innovative approach to policies. Efforts are on to mobilize funds by offering tax incentives. The Government has allowed some institutions like Life Insurance Corporation of India, Industrial Finance Corporation of India, Infrastructure Development Finance Corporation and some non banking finance companies authorized by the Reserve Bank as infrastructure Companies to issue tax free Infrastructure Bonds to raise funds. Can these institutions raise the required funds ?
Time has come for banks to restructure their balance sheets and find ways and means to support infrastructure development in a big way. Although banks have been in infrastructure financing, the tendency to avoid long term funding of infrastructure projects citing short term nature of resources and consequent asset- liability mismatch has been there since late 1990s with the introduction of asset liability and risk management concepts. Minimization of cost and maximization of profit without locking up of funds in long term ventures has been the philosophy pursued and the reforms in regulation and supervisory areas also are well suited to follow this line of approach. No doubt it has paid huge dividends and our banking system has proved to be sound and safe. But can this approach go on?
The Financial Institutions catering to long term needs of industries also found the circumstances conducive to convert themselves as banks and we have ICICI and IDBI banks in the place of ICICI and IDBI which were prominently and successfully engaged in financing huge long term projects for decades. Only institution which remained and continues to function as an All India Financial Institution is only the Industrial Finance Corporation of India Ltd. Some institutions like Infrastructure Development Finance Corporation, Infrastructure Leasing and Finance Ltd , etc, have since been developed but they are not adequate enough to meet the ever growing demands of infrastructural developments in tune with the international standards and requirements of the economy slated to register double digit growth.
Reliable Source
Banking System is the best and reliable source for infrastructure funds. With branches spread all over the country and abroad and with knowledge of the people and markets banks can easily mobilize the resources.
However, there is need for policy, regulatory support and incentives without in any way compromising on banks’ safety and soundness.
The banks should be allowed to mobilize funds for a minimum period of five years and a maximum period of ten years and these funds have to be shown under the nomenclature “Deposit for infrastructure development”.
The funds should be exempt from CRR / SLR and their investments should be allowed comparatively to carry a lower risk weight for capital adequacy.
Though the exemption from CRR will have an adverse impact to contain particularly the defying inflation but the benefits that can accrue to the economy in terms of GDP growth and economy’s international reputation and image with improved physical infrastructure. The interest earned on these deposits up to Rs 20,000 can be considered for tax exemption . The rate of interest can be more or less equal to that of post office savings interest for Fixed Deposits with tax benefits.
To Counter Asset- Liability mismatch, the approach has to be something different as far as these funds are concerned. Since the maturity pattern is definite i.e. only after five years and more, the deployment of funds will also be beyond five years and above. Mismatch may even then arise but with enough head room for adjustment.
Banks will have adequate time and opportunities to bridge the mismatch. The periodical cash flows from investments have to be recycled in such a way that they minimize the mismatch.
The take out finance which did not take off as envisaged needs to be revived to encourage infrastructure financing by banks and specialized institutions.
Securitization of infrastructural advances and development of secondary market for these papers will also go a long way in finding the liquidity for banks and minimizing the adverse impact of mismatch. It is for authorities to come out with the right environment.
Dr.T.V.Gopalakrishnan
Former Chief General Manager,
Reserve Bank of India
( views are Personal)
( This appeared in Business Line dt 26/07/10).
Sunday, July 11, 2010
Is base rate sustainable?
Is Base Rate sustainable?
The Prime Lending Rate introduced early in 1990s and refined as Bench Mark Prime Lending rate (BPLR) in 2003 as a reference rate by the banking system has been given a go bye and in its place the Base Rate has been brought in effective from July 1, 2010.
What difference the Base rate makes to borrower customers and the banking system and how this rate will help the Reserve bank to transmit its monetary policy signals can be assessed or understood only after the rate stabilizes over a period of time?
Basically, the BPLR and the Base rate should reflect the cost of funds ,the risk margin, and the rate of return to the bank but the difference lies exactly in arriving at the cost of funds and the transparency in its computation and application. The computation of base rate is expected to be on a uniform basis and apparently leaves no scope for manipulation. It takes into account the cost of deposits, the operating costs, the negative carry on cost in the maintenance of statutory requirements i.e. Cash Reserve Ratio and Statutory Liquidity Requirements, risk and profit margin.
BPLR and Base Rate
Compared to BPLR, which was basically computed on historical basis, the base rate has to be assessed more on a futuristic basis. The base rate will vary from bank to bank and in a way it should reflect on bank’s efficiency in bringing down the cost of funds and dynamism in the overall management of funds. Unlike in the case of BPLR, the banks cannot lend funds below the base rate except in certain permitted categories of lending under Differential rate of interest schemes, advances against fixed deposits and agricultural advances having subvention from the Government and export credit. This is a major change and will be a challenge for banks to retain major corporate clients as borrowers as hitherto. This should also bring in some changes in the money market operations as some of the borrowers may switch over to short term instruments like commercial paper to raise funds at lower rates than the base rate.
Various banks have announced their base rates and they range between 7.5 percent and 8.5 percent. How they have arrived at the base rates, however, have not been made transparent . The rates are also much higher than the one year FD rates, call money rates, Bank Rate, repo rate, and the yield on Government bonds. They are also reflective of the generally high cost of the funds. The compulsion to maintain the NET Interest Margin at around 3 to 3.5 percent also seems to have influenced banks in fixing the Base rate comparatively at a higher level.
Struggle to maintain customers
Will the banks be able to realistically assess the Base rate reflecting both the past and future trends and will the rate be able to transmit the Reserve Bank’s monetary policy signals effectively are the major doubts lingering in the minds of knowledgeable public?
Although the base rate may come down in the long run, immediately the large borrowers particularly good borrowers who had enjoyed banking funds at less than the BPLR will have to shell out more towards interest as they cannot borrow at less than the base rate. This may naturally lead them to resort to some other means to raise funds or banks will be compelled to compensate them to retain as their customers which is not desirable.
They may go in for Commercial papers or external commercial borrowings or raise deposits from public directly at less than the base rate. In any case this will have an adverse impact on banks’ funds management and profitability. In such a situation, banks will be forced to entertain comparatively risky borrowers adding to their non performing loans and consequent problems.
Good Timing
Although, the concept of Base rate is good to establish healthy credit market and improve banks’ asset liability management down the years , it may in the immediate future upset the corporates’ borrowing programmes and bring some visible changes in the money market operations. In case the base rate stabilizes, it may also pave way to develop corporate Bond market in a big way. Present surplus liquidity situation in the economy and continued persistence of higher level of inflation, however, supports a higher base rate and from that angle the timing of introduction of base rate seems well intended and justifiable.
Dr.T.V.Gopalakrishnan
(This appeared in Business Line Dt July 12,2010).
The Prime Lending Rate introduced early in 1990s and refined as Bench Mark Prime Lending rate (BPLR) in 2003 as a reference rate by the banking system has been given a go bye and in its place the Base Rate has been brought in effective from July 1, 2010.
What difference the Base rate makes to borrower customers and the banking system and how this rate will help the Reserve bank to transmit its monetary policy signals can be assessed or understood only after the rate stabilizes over a period of time?
Basically, the BPLR and the Base rate should reflect the cost of funds ,the risk margin, and the rate of return to the bank but the difference lies exactly in arriving at the cost of funds and the transparency in its computation and application. The computation of base rate is expected to be on a uniform basis and apparently leaves no scope for manipulation. It takes into account the cost of deposits, the operating costs, the negative carry on cost in the maintenance of statutory requirements i.e. Cash Reserve Ratio and Statutory Liquidity Requirements, risk and profit margin.
BPLR and Base Rate
Compared to BPLR, which was basically computed on historical basis, the base rate has to be assessed more on a futuristic basis. The base rate will vary from bank to bank and in a way it should reflect on bank’s efficiency in bringing down the cost of funds and dynamism in the overall management of funds. Unlike in the case of BPLR, the banks cannot lend funds below the base rate except in certain permitted categories of lending under Differential rate of interest schemes, advances against fixed deposits and agricultural advances having subvention from the Government and export credit. This is a major change and will be a challenge for banks to retain major corporate clients as borrowers as hitherto. This should also bring in some changes in the money market operations as some of the borrowers may switch over to short term instruments like commercial paper to raise funds at lower rates than the base rate.
Various banks have announced their base rates and they range between 7.5 percent and 8.5 percent. How they have arrived at the base rates, however, have not been made transparent . The rates are also much higher than the one year FD rates, call money rates, Bank Rate, repo rate, and the yield on Government bonds. They are also reflective of the generally high cost of the funds. The compulsion to maintain the NET Interest Margin at around 3 to 3.5 percent also seems to have influenced banks in fixing the Base rate comparatively at a higher level.
Struggle to maintain customers
Will the banks be able to realistically assess the Base rate reflecting both the past and future trends and will the rate be able to transmit the Reserve Bank’s monetary policy signals effectively are the major doubts lingering in the minds of knowledgeable public?
Although the base rate may come down in the long run, immediately the large borrowers particularly good borrowers who had enjoyed banking funds at less than the BPLR will have to shell out more towards interest as they cannot borrow at less than the base rate. This may naturally lead them to resort to some other means to raise funds or banks will be compelled to compensate them to retain as their customers which is not desirable.
They may go in for Commercial papers or external commercial borrowings or raise deposits from public directly at less than the base rate. In any case this will have an adverse impact on banks’ funds management and profitability. In such a situation, banks will be forced to entertain comparatively risky borrowers adding to their non performing loans and consequent problems.
Good Timing
Although, the concept of Base rate is good to establish healthy credit market and improve banks’ asset liability management down the years , it may in the immediate future upset the corporates’ borrowing programmes and bring some visible changes in the money market operations. In case the base rate stabilizes, it may also pave way to develop corporate Bond market in a big way. Present surplus liquidity situation in the economy and continued persistence of higher level of inflation, however, supports a higher base rate and from that angle the timing of introduction of base rate seems well intended and justifiable.
Dr.T.V.Gopalakrishnan
(This appeared in Business Line Dt July 12,2010).
Monday, June 28, 2010
NABARD can change face of rural India
Need for a new approach to make agriculture and rural economy strong
The need to support the rural sector which is the real support of our promising economy has been well recognized and the efforts that have gone in this direction have been enormous and institutions set up to aid this sector have been aplenty. The allocation of resources exclusively to develop the agriculture and other rural segment of the economy by the Central and State Governments, financial institutions and other agencies is huge by any reckoning and the results achieved also albeit are commendable, but fall short of expectations. Definitely, the contributions from the rural sector particularly from agriculture do not commensurate with the resources spent or allocated.
The agricultural sector hitherto considered to be the backbone of the economy cannot and should not remain weak for long. The sector unfortunately is still a gambling on monsoon and dependent on informal credit .The problems encountered by the farmers (particularly small farmers and people from rural areas engaged in different vocations again belonging to lower segment) broadly relate to understanding and taking advantage of various facilities available from multi agencies such as Commercial banks, Regional Rural banks, Cooperative Banks, Local area banks, Government agencies, Self Help Groups, Micro Finance institutions absence of a steady income, high fluctuations in the prices of their products, high level of inflation affecting their limited and uncertain income, increased input costs, lack of dependable infrastructure like electricity, transport, marketing and storage facilities.
Reforms of land, labour laws, education system, elimination of middlemen, integrity of data relating to employment and creation of assets, migration of labour, proper identification of beneficiaries, corruption at all levels, lack of coordinated approach of agencies involved, unsympathetic and absence of commitment in the approach of credit providers , exploitation of the situation by powerful money lenders, dominance of large and influential farmers, lack of political understanding at states ruled by different political parties are the areas challenging effective and meaningful financing of agricultural and rural sector.
There is an urgent need to find a change in approach with a new focus to turn the rural sector attractive and regain its dwindling share in GDP growth. Basically development of agriculture and rural sector is a state subject and the initiative and leadership have to come from the states. The introduction of Rural Development Index based on which allocation of resources and grant of incentives by the Central Government can perhaps be a good beginning. The index should reflect improved rural infrastructure, enhanced productivity in agriculture, augmentation in productive rural assets including agricultural land and stoppage of migration of labourers to urban areas, reduction in poverty level, and change in the confidence of the people to continue to show interest in agriculture and rural activities.
National Bank for Rural and Agricultural Development (NABARD) has to play a constructive role in ensuring that the coordination between the States and the institutions involved in rural development is smooth and result oriented. NABARD needs to have a very focused and different approach for each state in identifying the gaps, deficiencies and problems in the development of agriculture and rural industries and providing the needed coordination, support, guidance and encouragement to the agencies involved therein.The multitude of agencies presently visible adds confusion and conflict of interest giving room for unhealthy practices, corruption and abuse of facilities. The approach should be preferably to have a single window concept and the institution should coordinate the support system including insurance for the borrowers with the aid of NABARD. The institution having a strong presence in terms of business, infrastructure and having proven commitment in serving the people should take up the role. The commercial banks should gradually give way to Regional Rural Banks (wherever feasible), Strong Cooperative banks or Local area banks and Micro finance institutions. NABARD can play an active rural in identifying the institution fit to serve a particular block or area and provide the leadership. The State Government and NABARD have to jointly change the rural face by introducing incentives and awards for retention of interest in the agricultural and rural activities both among providers of credit and borrowers. The Information Technology and the proposed Unique Identity Card can be of great help to optimize the distribution of credit and making the Financial Inclusion a reality.
Ultimately the human resources associated have to be mentally attuned to help the needy. The involvement of top Management Institutes and social workers can be thought of to activate the rural economy and realize enduring real benefits to the whole economy and its people.
T.V. Gopalakrishnan
Former Chief General Manager,
Reserve Bank of India.
(An edited version appeared in The Hindu Business Line 28/06/10)
Monday, June 21, 2010
Freeing of interest Rates
Freeing of interest rates.
This refers to your edit Set it free-Let go off Savings bank Interest rate ( ET ,June 19). The Reserve Bank's recognition of the need to deregulate the interest rate on savings bank deposits is appreciable and needs to be viewed as a very progressive step and part of next instalment of banking sector sector reforms. This will help to bring in constructive competition among public sector banks and between public sector and private sector banks. More than anything else, this step alone will bring in improved customer service in public sector banks as retention of deposits is based not only on interest payment but also on the efficiency of service. Customer stands to benefit a lot from this deregulation as and when made effective. Small depositors and pensioners can expect to have a better return from this change.
For banks, this is an opportunity to achieve better operational efficiency and improved customer service. Their cost of deposit on savings bank deposits will however, increase a bit which has already gone up effective from April1, on introduction of payment of interest on daily balance basis. The SB interest deregulation coupled with the implementation of base rate for their advances from 1st July, the banks will have to fine tune their balance sheet and bring in more dynamism and perfection in their Asset Liability Management to reduce the cost of funds and maintain net interest rate margin,
Dr.T.V.Gopalakrishnan
(an edited version of this appeared in Economic Times Dt 21/06/10)
This refers to your edit Set it free-Let go off Savings bank Interest rate ( ET ,June 19). The Reserve Bank's recognition of the need to deregulate the interest rate on savings bank deposits is appreciable and needs to be viewed as a very progressive step and part of next instalment of banking sector sector reforms. This will help to bring in constructive competition among public sector banks and between public sector and private sector banks. More than anything else, this step alone will bring in improved customer service in public sector banks as retention of deposits is based not only on interest payment but also on the efficiency of service. Customer stands to benefit a lot from this deregulation as and when made effective. Small depositors and pensioners can expect to have a better return from this change.
For banks, this is an opportunity to achieve better operational efficiency and improved customer service. Their cost of deposit on savings bank deposits will however, increase a bit which has already gone up effective from April1, on introduction of payment of interest on daily balance basis. The SB interest deregulation coupled with the implementation of base rate for their advances from 1st July, the banks will have to fine tune their balance sheet and bring in more dynamism and perfection in their Asset Liability Management to reduce the cost of funds and maintain net interest rate margin,
Dr.T.V.Gopalakrishnan
(an edited version of this appeared in Economic Times Dt 21/06/10)
Wednesday, June 16, 2010
Time to introduce Customer Service Ratio
Another Panel to improve Customer Service In banks
The Reserve Bank has appointed a Panel under the chairmanship of Mr. Damodaran, Former, SEBI, Chairman to improve the Customer Service in banks. In its Annual Policy for 2010-11, the Reserve Bank expressed its concern that ” The issue of ‘treating customers fairly’ is assuming critical importance as the experience shows that consumer’s interests are often not accorded full protection and properly attended to. Customer service in the banking industry is increasingly becoming important as banks are privileged institutions and banking is a special public utility service. The Reserve Bank and the Banking Ombudsman’s offices have been receiving several complaints regarding levying of excessive interest rates and charges on certain loans and advances.”
The present Committee will look into among other things the issue of services offered by banks to retail and small borrowers including pensioners, interest rates, bank fees and charges, the system of grievance redressal mechanism prevalent in banks , its structure and efficiency and suggest a mechanism for expeditious resolution of complaints..
The regulator has so much concern for customers, but unfortunately the service providers who earn their money and depend on customers have mastered the art of serving the customers who matter and ignore others conveniently although at a cost. The ingenuinity with which banks ignore the customers has to be experienced to believe. Unfortunately many who experience seldom takes the pains to escalate the complaints to appropriate forum as the efforts and time required are often unaffordable although results are generally favorable. Leave it and silently suffer have been followed faithfully as a fait accompli.
Competition will improve the service has all along been the expectation, but this has been belied as service is no way better in private Sector banks particularly the so called new generation banks compared to that of Public Sector Banks. The problems encountered by customers from new private sector banks are something different. They trap customers with variety of products other than banking products in bank branch premises and customers are forced to retain the products as otherwise they have to incur a heavy loss. Charges are never transparent and one comes to know only after the receipt of the formal document.
Service provided by the ATMS and internet banking are no doubt better as there is no personal inter action and machines do what they are programmed for. Again by chance MACHINES FAIL and an Inter-Action with HUMAN BEINGS become necessary to get a solution, and then one had it. All the joy enjoyed with the aid of machine vanishes the moment the machine fails. Then only contacts and influence will get one the solution early.
The approach of the committee should be to gather the nature of complaints reported and not reported. While information on reported complaints can be gathered from Consumer Forum,( District and National Forums), The Reserve bank, Banking Codes and Services Board Of India, Banking Ombudsman ,banks own head offices, Zonal/Regional Offices/ branches representing metropolitan, Semi-urban ,urban and Rural areas and Indian Banks Association, information on unreported complaints which are many fold than reported has to be obtained through surveys, incognito visits and personal interviews of all types of customers.
The committee has to identify innovative measures to forcefully change the attitude of human resources who provide the service. Introduction of incentives and disincentives in promotion, transfer, emoluments and bonuses linked to customer service will go a long way to change the mindset. The assessment of customer service has to be done independent of Reserve Bank annual inspection, but should reflect in Reserve Bank’s overall rating and should be made transparent for all customers of all banks to see. Perhaps a ratio akin to capital adequacy ratio reflective of Customer Service should be thought of to make bank and its human resources behave responsibly.
Change of mindset is the need of the hour. The message for employees should be “Do Not Ignore any Customer, Treat every Customer as the Bread Winner of the Bank and its employees and Know the Customer through Service”. The Committee’s task is not that easy.
Dr.T.V.Gopalakrishnan
(edited version of this appeared in Business Line Dt15/06/10).
The Reserve Bank has appointed a Panel under the chairmanship of Mr. Damodaran, Former, SEBI, Chairman to improve the Customer Service in banks. In its Annual Policy for 2010-11, the Reserve Bank expressed its concern that ” The issue of ‘treating customers fairly’ is assuming critical importance as the experience shows that consumer’s interests are often not accorded full protection and properly attended to. Customer service in the banking industry is increasingly becoming important as banks are privileged institutions and banking is a special public utility service. The Reserve Bank and the Banking Ombudsman’s offices have been receiving several complaints regarding levying of excessive interest rates and charges on certain loans and advances.”
The present Committee will look into among other things the issue of services offered by banks to retail and small borrowers including pensioners, interest rates, bank fees and charges, the system of grievance redressal mechanism prevalent in banks , its structure and efficiency and suggest a mechanism for expeditious resolution of complaints..
The regulator has so much concern for customers, but unfortunately the service providers who earn their money and depend on customers have mastered the art of serving the customers who matter and ignore others conveniently although at a cost. The ingenuinity with which banks ignore the customers has to be experienced to believe. Unfortunately many who experience seldom takes the pains to escalate the complaints to appropriate forum as the efforts and time required are often unaffordable although results are generally favorable. Leave it and silently suffer have been followed faithfully as a fait accompli.
Competition will improve the service has all along been the expectation, but this has been belied as service is no way better in private Sector banks particularly the so called new generation banks compared to that of Public Sector Banks. The problems encountered by customers from new private sector banks are something different. They trap customers with variety of products other than banking products in bank branch premises and customers are forced to retain the products as otherwise they have to incur a heavy loss. Charges are never transparent and one comes to know only after the receipt of the formal document.
Service provided by the ATMS and internet banking are no doubt better as there is no personal inter action and machines do what they are programmed for. Again by chance MACHINES FAIL and an Inter-Action with HUMAN BEINGS become necessary to get a solution, and then one had it. All the joy enjoyed with the aid of machine vanishes the moment the machine fails. Then only contacts and influence will get one the solution early.
The approach of the committee should be to gather the nature of complaints reported and not reported. While information on reported complaints can be gathered from Consumer Forum,( District and National Forums), The Reserve bank, Banking Codes and Services Board Of India, Banking Ombudsman ,banks own head offices, Zonal/Regional Offices/ branches representing metropolitan, Semi-urban ,urban and Rural areas and Indian Banks Association, information on unreported complaints which are many fold than reported has to be obtained through surveys, incognito visits and personal interviews of all types of customers.
The committee has to identify innovative measures to forcefully change the attitude of human resources who provide the service. Introduction of incentives and disincentives in promotion, transfer, emoluments and bonuses linked to customer service will go a long way to change the mindset. The assessment of customer service has to be done independent of Reserve Bank annual inspection, but should reflect in Reserve Bank’s overall rating and should be made transparent for all customers of all banks to see. Perhaps a ratio akin to capital adequacy ratio reflective of Customer Service should be thought of to make bank and its human resources behave responsibly.
Change of mindset is the need of the hour. The message for employees should be “Do Not Ignore any Customer, Treat every Customer as the Bread Winner of the Bank and its employees and Know the Customer through Service”. The Committee’s task is not that easy.
Dr.T.V.Gopalakrishnan
(edited version of this appeared in Business Line Dt15/06/10).
Saturday, June 12, 2010
Good Idea bad Timing
Good Idea ,bad timing,
The move to increase the share of public holding to 25 percent is long overdue and the capital market and retail investors should welcome it and encourage.
As pointed out, the timing may not be very appropriate, but that should not be taken as an excuse to implement it. Compliance to the requirement may take a little longer time than what is envisaged because of the present highly volatile market conditions and tight liquidity environment due to pressing demand for funds from different corners which include funding infrastructure,the idea should not be diluted or shelved even for the time being.
This is an opportunity for widening and deepening the capital market and the benefits are very many for the economy and retail investors. The craze for investments in gold and real estate will cool down and it is an excellent move for creation and distribution of wealth for a vast segment of people. The volatility seen in the market will also gradually get eliminated to a great extent when the share holding pattern changes. Retailers will derive the satisfaction of being contributors towards capital formation for nation building activities.
This approach of the Government carries wisdom and should be accepted and implemented although it may appear to be ill timed.
Dr. T.V. Gopalakrishnan
The move to increase the share of public holding to 25 percent is long overdue and the capital market and retail investors should welcome it and encourage.
As pointed out, the timing may not be very appropriate, but that should not be taken as an excuse to implement it. Compliance to the requirement may take a little longer time than what is envisaged because of the present highly volatile market conditions and tight liquidity environment due to pressing demand for funds from different corners which include funding infrastructure,the idea should not be diluted or shelved even for the time being.
This is an opportunity for widening and deepening the capital market and the benefits are very many for the economy and retail investors. The craze for investments in gold and real estate will cool down and it is an excellent move for creation and distribution of wealth for a vast segment of people. The volatility seen in the market will also gradually get eliminated to a great extent when the share holding pattern changes. Retailers will derive the satisfaction of being contributors towards capital formation for nation building activities.
This approach of the Government carries wisdom and should be accepted and implemented although it may appear to be ill timed.
Dr. T.V. Gopalakrishnan
Monday, June 7, 2010
A Healthy Move
Public Float
This refers to the news item Listed companies must have 25 percent public float(ET, 5th June,2010). This is an excellent move and retail investors should welcome,encourage,support and improve their own saving pattern by switching over to investment in capital market. Minimum 25 percent subscription by public will result in better and fair price discovery of the shares and bring in some order of stability in the volatility of the market.
Such a move as and when get fully implemented and complied with by all listed companies will ensure better distribution of wealth, improved liquidity in the availability of shares and also offer an opportunity for retailers to take part and contribute in the capital formation. This will also pave way to gradually move away from investment by households in gold and Jewelery. In the long run, this measure alone will prove to be a challenge for FIIS who dictate terms to our capital market. Over all this is going to improve the health of the capital markets in all respects.
Dr. T.V. Gopalakrishnan
(This appeared in ET Dt 7th June 2010)
This refers to the news item Listed companies must have 25 percent public float(ET, 5th June,2010). This is an excellent move and retail investors should welcome,encourage,support and improve their own saving pattern by switching over to investment in capital market. Minimum 25 percent subscription by public will result in better and fair price discovery of the shares and bring in some order of stability in the volatility of the market.
Such a move as and when get fully implemented and complied with by all listed companies will ensure better distribution of wealth, improved liquidity in the availability of shares and also offer an opportunity for retailers to take part and contribute in the capital formation. This will also pave way to gradually move away from investment by households in gold and Jewelery. In the long run, this measure alone will prove to be a challenge for FIIS who dictate terms to our capital market. Over all this is going to improve the health of the capital markets in all respects.
Dr. T.V. Gopalakrishnan
(This appeared in ET Dt 7th June 2010)
Banks need to discipline borrowers to contain NPAs
Nonperforming Assets (NPAs) are back in the news again. Gross NPAs of banking sector are likely to touch 5 percent in 2011 from 2.3 percent in 2008.In absolute terms; NPAs are estimated to triple by the year 2011 and would increase from Rs 55000 crores to Rs 1.9 lakh crores.
The Gross NPAs of public sector banks which stood at Rs 56473 crores in March 2002 came down to Rs 38968 crores in March 2007 and again increased to Rs 45 156 crores in March 2009.
They could reduce the NPAs during 2002 to 2007 because of the good performance of the economy, better recovery under SARFAESI Act, improved profitability particularly from treasury operations permitting banks to write offs, sale of NPAs to asset reconstruction companies and restructuring of assets as permitted by the regulator. The steep increase from the year 2008 onwards only confirms the worst fears of recession the economy experienced since the global financial crisis which triggered in the US since September 2008. Besides, higher rate of interest, failure of monsoon, high inflation, exchange rate fluctuations etc have added the NPAs .
Big Burden
Banks have umpteen ways to camouflage the NPAs; restructuring of assets is an officially permitted method they largely resort to. This helps them to make comparatively less provisioning and gain some time to recognize the problem.
However, the fact remains that NPAs continue to be a big burden and drain on banks’ resources affecting all stake holders who include, Government, good borrowers, depositors, investors and tax payers.
Banks’ provisions towards NPAs have also shown a corresponding increase during the year although they fall short of regulatory requirement stipulated at 70 % of bad debts. This regulation itself compels banks to underestimate NPAs , as more provisions mean less profit and consequential damage to the image.
Capitalisation
A good share of banks’ profit is earmarked to make provision towards NPAs and Government contributes a huge sum towards capitalization of banks at frequent intervals. The Government not only loses its dividend and also provides funds towards the capital of banks adding to its worsening deficit. The Government proposes to infuse a sum of Rs 16500 crores by March 2011 towards banks’ capital requirements.
Find Solution
As NPAs are like hidden bombs and it can burst at any time, banks have to discipline the borrowers and involve them in arriving at the solution to contain the NPAs. The approach of banks should be to rate the borrowers and levy a penalty based on the rating. This levy can form a corpus which if necessary can be supplemented by banks themselves. Over a period this fund will be equal to NPAs and banks are free from this menace with a strong balance sheet.
The present system of making provisions for bad debts and write offs affect the depositors, good borrowers, investors and all stake holders other than bad borrowers. This needs to be thoroughly reexamined. The loss to the exchequer and others is definitely avoidable.
Punishment should be for bad conduct of loan accounts by borrowers. When solution for NPAs lies within the banking system, expecting others other than the borrowers particularly the bad borrowers to bear the cost of NPAs is neither desirable nor justifiable. Time has come to make borrowers understand their responsibilities to banks that collect public money and lend to the borrowers.
Dr.T.V.Gopalakrishnan
( This article appeared In The Business Line Dt 7/06/10)
The Gross NPAs of public sector banks which stood at Rs 56473 crores in March 2002 came down to Rs 38968 crores in March 2007 and again increased to Rs 45 156 crores in March 2009.
They could reduce the NPAs during 2002 to 2007 because of the good performance of the economy, better recovery under SARFAESI Act, improved profitability particularly from treasury operations permitting banks to write offs, sale of NPAs to asset reconstruction companies and restructuring of assets as permitted by the regulator. The steep increase from the year 2008 onwards only confirms the worst fears of recession the economy experienced since the global financial crisis which triggered in the US since September 2008. Besides, higher rate of interest, failure of monsoon, high inflation, exchange rate fluctuations etc have added the NPAs .
Big Burden
Banks have umpteen ways to camouflage the NPAs; restructuring of assets is an officially permitted method they largely resort to. This helps them to make comparatively less provisioning and gain some time to recognize the problem.
However, the fact remains that NPAs continue to be a big burden and drain on banks’ resources affecting all stake holders who include, Government, good borrowers, depositors, investors and tax payers.
Banks’ provisions towards NPAs have also shown a corresponding increase during the year although they fall short of regulatory requirement stipulated at 70 % of bad debts. This regulation itself compels banks to underestimate NPAs , as more provisions mean less profit and consequential damage to the image.
Capitalisation
A good share of banks’ profit is earmarked to make provision towards NPAs and Government contributes a huge sum towards capitalization of banks at frequent intervals. The Government not only loses its dividend and also provides funds towards the capital of banks adding to its worsening deficit. The Government proposes to infuse a sum of Rs 16500 crores by March 2011 towards banks’ capital requirements.
Find Solution
As NPAs are like hidden bombs and it can burst at any time, banks have to discipline the borrowers and involve them in arriving at the solution to contain the NPAs. The approach of banks should be to rate the borrowers and levy a penalty based on the rating. This levy can form a corpus which if necessary can be supplemented by banks themselves. Over a period this fund will be equal to NPAs and banks are free from this menace with a strong balance sheet.
The present system of making provisions for bad debts and write offs affect the depositors, good borrowers, investors and all stake holders other than bad borrowers. This needs to be thoroughly reexamined. The loss to the exchequer and others is definitely avoidable.
Punishment should be for bad conduct of loan accounts by borrowers. When solution for NPAs lies within the banking system, expecting others other than the borrowers particularly the bad borrowers to bear the cost of NPAs is neither desirable nor justifiable. Time has come to make borrowers understand their responsibilities to banks that collect public money and lend to the borrowers.
Dr.T.V.Gopalakrishnan
( This article appeared In The Business Line Dt 7/06/10)
Sunday, May 30, 2010
Volatile Markets
This refers to your edit on Volatile markets (Et, May 28). The stock market has been very volatile since 2008 for some reason or other and the investors particularly retail and small investors are the confused lot when to enter and exit the market.The global financial crisis emanated from US in 2008 has brought down the sensex from its peak and the present Euro zone crisis does not allow to give a lift to the sensex although the economy continues to perform well in all fronts except perhaps in containing the inflation.
Unfortunately our stock exchange operations are dictated by FIIs who move their funds globally for arbitrage operations and our players in the market have not developed any strategy to contain the FIIs dictats.The possible reason for such a state of affairs may be the large float of liquid shares with traders, brokers,mutual funds and institutions who invest in shares only from speculative angle and not necessarily as part of prudential management of their surplus funds. The holding of shares by retailers is insignificant and this is the major cause for unrestrained volatility in our stock exchanges. It is for authorities to initiate policy measures to strengthen the retail holding of shares at least at 25 percent if not fifty percent of the issued capital and encourage retention of shares by providing loyalty bonuses . Too much of speculation adds uncertainties and retailers suffer the most. STT can also be developed as a tool to prevent undue speculation.
Dr.T.V.Gopalakrishnan
Unfortunately our stock exchange operations are dictated by FIIs who move their funds globally for arbitrage operations and our players in the market have not developed any strategy to contain the FIIs dictats.The possible reason for such a state of affairs may be the large float of liquid shares with traders, brokers,mutual funds and institutions who invest in shares only from speculative angle and not necessarily as part of prudential management of their surplus funds. The holding of shares by retailers is insignificant and this is the major cause for unrestrained volatility in our stock exchanges. It is for authorities to initiate policy measures to strengthen the retail holding of shares at least at 25 percent if not fifty percent of the issued capital and encourage retention of shares by providing loyalty bonuses . Too much of speculation adds uncertainties and retailers suffer the most. STT can also be developed as a tool to prevent undue speculation.
Dr.T.V.Gopalakrishnan
Stock Exchange for SMES
This refers to your edit A welcome move- Easier Listing for SMEs (ET Dt 21/05/10). While the measures relaxing the norms for listing of SMEs by the SEBI are welcome and encouraging, it would not be sufficient to give a boost to our SMES which have a great potential to support our economy in term of GDP growth, exports, employment and. distribution of wealth. SMEs deserve a special exchange to take care of their capital requirements, financial discipline, growth and contribution to the economy.
An exclusive exchange will help the investing public particularly retail investors As it is, retail investors keep themselves away from capital market as allotment through IPOs is uncertain to all applicants and operating through secondary market is costly,risky and often unaffordable. Volatilty is vey high these days in the capital market and it is risky for retail investors to operate in capital market. In case a separate stock exchange is created for SMEs the involvement of retailers will be very high and capital formation will be easier. Allocation to institutions like banks ,mutual funds and other investors can be earmarked keeping a larger portion for retail investors .Such an arrangement will give a boost to the SME sector .
Dr T.V.Gopalakrishnan
(An edited version of this appeared in Economic Times dt 24.05/10)
An exclusive exchange will help the investing public particularly retail investors As it is, retail investors keep themselves away from capital market as allotment through IPOs is uncertain to all applicants and operating through secondary market is costly,risky and often unaffordable. Volatilty is vey high these days in the capital market and it is risky for retail investors to operate in capital market. In case a separate stock exchange is created for SMEs the involvement of retailers will be very high and capital formation will be easier. Allocation to institutions like banks ,mutual funds and other investors can be earmarked keeping a larger portion for retail investors .Such an arrangement will give a boost to the SME sector .
Dr T.V.Gopalakrishnan
(An edited version of this appeared in Economic Times dt 24.05/10)
Tuesday, May 18, 2010
Regulate raters
This refers to your edit Reform Credit Rating( ET,May 15,2010). The rating agencies performance needs to be evaluated and an unbiased and fair rating of the industry, issuer of the product and the economyneeds to be encouraged. This is possible only where rating agencies are funded from a general pool and they are made accountable. The present system of funding by the issuer will have only biased rating and investors cannot trust fully on such ratings.
The general pool can be funded by investors as and when IPOS are open and alloted, Regulators like SEBI, IRDA, NSE and Stock Exchanges and by issuers of securities. Even a contribution from the Government as and when they raise funds from market through borrowings or disinvestment can be considered which will help to enforce transparability and accountability from the rating agencies.
The rating agencies' have to be evaluated by some regulator preferably by SEBI and the rating given to them need to be publicised. Even a recompense Clause can be thought of in case the rating agencies' rating shows drastic variance from actuals later on and they should be made to pay a penalty and this money should also go to the general pool. What is required is reliability in rating and the method of rating . This will ensure allround stability in financial market.
Dr.T.V.Gopalakrishnan
(An edited version of this appeared in ET dt 18/05/10).
The general pool can be funded by investors as and when IPOS are open and alloted, Regulators like SEBI, IRDA, NSE and Stock Exchanges and by issuers of securities. Even a contribution from the Government as and when they raise funds from market through borrowings or disinvestment can be considered which will help to enforce transparability and accountability from the rating agencies.
The rating agencies' have to be evaluated by some regulator preferably by SEBI and the rating given to them need to be publicised. Even a recompense Clause can be thought of in case the rating agencies' rating shows drastic variance from actuals later on and they should be made to pay a penalty and this money should also go to the general pool. What is required is reliability in rating and the method of rating . This will ensure allround stability in financial market.
Dr.T.V.Gopalakrishnan
(An edited version of this appeared in ET dt 18/05/10).
Thursday, May 13, 2010
Rain of Capital
Rain of Capital
This refers to your edit on Rain of capital( Business Line, May 11,2010). Compared to US economy, European economy and all other Asian economies including China, India’s position to attract capital from global investors is highly favourable, justifiable and logical.
There is political stability and the economy shows signs of high potential for fast growth, with booming confidence.
Financial system is comparatively sound and chances of its going astray are limited. Avenues are plenty for fresh investments and opportunities to develop and prosper are unlimited for overseas investors.
The economy needs heavy long term investments, technology and research support for development of its physical and social infrastructure. This is an ideal time to encash the goodwill the country enjoys.
It is the best opportune moment to remove all legal and administrative hurdles that prevent flow of funds. The inflows will have their own adverse impact on inflation and exchange rate but the long term benefits the economy can accrue should never be lost sight of while framing policies.
The economy is well placed to attract funds and that needs to be fully exploited.
Dr T.V.Gopalakrishnan
(This appeared on The Hindu Business Line on 13/05/10)
This refers to your edit on Rain of capital( Business Line, May 11,2010). Compared to US economy, European economy and all other Asian economies including China, India’s position to attract capital from global investors is highly favourable, justifiable and logical.
There is political stability and the economy shows signs of high potential for fast growth, with booming confidence.
Financial system is comparatively sound and chances of its going astray are limited. Avenues are plenty for fresh investments and opportunities to develop and prosper are unlimited for overseas investors.
The economy needs heavy long term investments, technology and research support for development of its physical and social infrastructure. This is an ideal time to encash the goodwill the country enjoys.
It is the best opportune moment to remove all legal and administrative hurdles that prevent flow of funds. The inflows will have their own adverse impact on inflation and exchange rate but the long term benefits the economy can accrue should never be lost sight of while framing policies.
The economy is well placed to attract funds and that needs to be fully exploited.
Dr T.V.Gopalakrishnan
(This appeared on The Hindu Business Line on 13/05/10)
Sunday, May 9, 2010
Need for a General Grievances Forum
Need for a General Grievances Forum
Of late, the markets are flooded with several financial institutions / companies and products and it is impossible even for educated people to verify the genuineness of the finance companies and the products they market.
There are some finance companies offering mutual fund products, insurance products, running chit funds and offering varieties of brokerage and other services in and around all cities.
Even many of the new generation banks offer varieties of insurance and mutual fund products in their premises. It is practically difficult to come out of a new generation bank without being trapped for some investments in their insurance/mutual fund products.
They have many subsidiaries operating from the bank premises and it is embarrassing to ask whether the subsidiaries are licensed or authorised to do business from bank branch premises.
As scams and frauds occur every now and then even in well regulated institutions / Companies, it is high time vigilance is kept on all types of finance companies and public are suitably warned from being duped. In the case of banks offering insurance products, it should be widely publicised by IRDA that what are the types of products they have authorised the banks’ subsidiaries to deal with and what type of charges they can levy from customers. It should also be made clear to the public that whether banks are offering the products or their subsidiaries are offering the products.
The extent of the liability that the bank bears on behalf of their subsidiaries also should be made clear to public before they are made to invest.
The canvassing of business keeping the image of the bank and that too in banks premises by banks own subsidiaries without making the charges transparent to the investors is nothing but trapping the gullible customers.
The finance companies / institutions should indicate their regulator and their full address in all their forms prominently for investors benefit when they canvass business.
The Reserve Bank and SEBI should also have the moral responsibility to bring to public knowledge in these days of liberalisation as to what type of products and what sort of control they have on various institutions they regulate and to what extent public are safe in investing their hard earned savings.
Similarly, IRDA has to periodically come out with the information relating to institutions dealing with insurance products, their collaborations, and the type of products and the general nature of risks customers have to understand, the charges to be borne by the customers and the lock in period of investments etc.
Several insurance products are in the market and they are all mostly marketed as investment products and customers are at a loss to understand fully what is in store for them till they get the policy and in case they take the pains to read the fine print.
Marketing has been aggressive these days by private institutions in particular and contacting persons in these institutions has been virtually difficult as the business is practically carried out virtually through computerised system and information technology.
The State Governments also should publicise once in a while the list of companies they have authorised to function and offer financial services. There should be a reference point for public to verify the genuineness of the institution and the products they offer.
A general grievances forum to refer cases of doubtful nature should be thought of jointly by all regulators for the benefit of public, regulators and institutions / companies as well.
The caution that Customers have to be cautious and the products they buy are subjected to market risks will not alone be sufficient to keep the institutions/ companies away from indulging in all sorts of marketing gimmicks and canvassing business.
The image of the economy, the regulator and the institution and ultimately the customer has to be well taken care of by proper rules, regulations and control.
The presence of Ombudsman who takes care of basically grievances arising from deficiency of service to customers may not be of much use in respect of issues referred to above.
Dr.T.V.Gopalakrishnan
( This Write-up appeared in Business Line dt 10/05/10)
Of late, the markets are flooded with several financial institutions / companies and products and it is impossible even for educated people to verify the genuineness of the finance companies and the products they market.
There are some finance companies offering mutual fund products, insurance products, running chit funds and offering varieties of brokerage and other services in and around all cities.
Even many of the new generation banks offer varieties of insurance and mutual fund products in their premises. It is practically difficult to come out of a new generation bank without being trapped for some investments in their insurance/mutual fund products.
They have many subsidiaries operating from the bank premises and it is embarrassing to ask whether the subsidiaries are licensed or authorised to do business from bank branch premises.
As scams and frauds occur every now and then even in well regulated institutions / Companies, it is high time vigilance is kept on all types of finance companies and public are suitably warned from being duped. In the case of banks offering insurance products, it should be widely publicised by IRDA that what are the types of products they have authorised the banks’ subsidiaries to deal with and what type of charges they can levy from customers. It should also be made clear to the public that whether banks are offering the products or their subsidiaries are offering the products.
The extent of the liability that the bank bears on behalf of their subsidiaries also should be made clear to public before they are made to invest.
The canvassing of business keeping the image of the bank and that too in banks premises by banks own subsidiaries without making the charges transparent to the investors is nothing but trapping the gullible customers.
The finance companies / institutions should indicate their regulator and their full address in all their forms prominently for investors benefit when they canvass business.
The Reserve Bank and SEBI should also have the moral responsibility to bring to public knowledge in these days of liberalisation as to what type of products and what sort of control they have on various institutions they regulate and to what extent public are safe in investing their hard earned savings.
Similarly, IRDA has to periodically come out with the information relating to institutions dealing with insurance products, their collaborations, and the type of products and the general nature of risks customers have to understand, the charges to be borne by the customers and the lock in period of investments etc.
Several insurance products are in the market and they are all mostly marketed as investment products and customers are at a loss to understand fully what is in store for them till they get the policy and in case they take the pains to read the fine print.
Marketing has been aggressive these days by private institutions in particular and contacting persons in these institutions has been virtually difficult as the business is practically carried out virtually through computerised system and information technology.
The State Governments also should publicise once in a while the list of companies they have authorised to function and offer financial services. There should be a reference point for public to verify the genuineness of the institution and the products they offer.
A general grievances forum to refer cases of doubtful nature should be thought of jointly by all regulators for the benefit of public, regulators and institutions / companies as well.
The caution that Customers have to be cautious and the products they buy are subjected to market risks will not alone be sufficient to keep the institutions/ companies away from indulging in all sorts of marketing gimmicks and canvassing business.
The image of the economy, the regulator and the institution and ultimately the customer has to be well taken care of by proper rules, regulations and control.
The presence of Ombudsman who takes care of basically grievances arising from deficiency of service to customers may not be of much use in respect of issues referred to above.
Dr.T.V.Gopalakrishnan
( This Write-up appeared in Business Line dt 10/05/10)
Friday, April 30, 2010
Interest on Savings
Interest Rate on Savings
This refers to your edit on Not One More Committee ( Et dt,24/04/10).It has been the experience that committees after committees get appointed to study certain issues before any final decision is taken and implemented. As rightly pointed out three committees have already studied and come out with their recommendations more or less on the same lines to replace administered rates of interest with market linked rates on small savings and there is delay on the part of the Government in coming out with its decision. This delay does not augur well either for the economy or for the savers.
The inflation keeps on going up and there is no talk of real interest rate these days. Even the market rates both on savings and lendings do not reflect the inflation. Unfortunately there is no central rate of interest or bench mark rate of interest in our system on which other rates revolve around. It is time to free rates from the clutches of administratin and see that all savings rates are linked to market rates for the benefit of savers and to give a semblence of continuity of reforms. There should be real rate of interest to induce savings. Savings will also contribute to bing down demand driven inflation.No economy can prosper without an inducement for real savings.
Dr.T.V.Gopalakrishnan
This refers to your edit on Not One More Committee ( Et dt,24/04/10).It has been the experience that committees after committees get appointed to study certain issues before any final decision is taken and implemented. As rightly pointed out three committees have already studied and come out with their recommendations more or less on the same lines to replace administered rates of interest with market linked rates on small savings and there is delay on the part of the Government in coming out with its decision. This delay does not augur well either for the economy or for the savers.
The inflation keeps on going up and there is no talk of real interest rate these days. Even the market rates both on savings and lendings do not reflect the inflation. Unfortunately there is no central rate of interest or bench mark rate of interest in our system on which other rates revolve around. It is time to free rates from the clutches of administratin and see that all savings rates are linked to market rates for the benefit of savers and to give a semblence of continuity of reforms. There should be real rate of interest to induce savings. Savings will also contribute to bing down demand driven inflation.No economy can prosper without an inducement for real savings.
Dr.T.V.Gopalakrishnan
Monday, April 26, 2010
Monetary Policy
A soft monetary policy
This refers to the Article on ' a soft Monetary Policy( Business Line dt 23/4/10).The monetary policy has rightly pleased the market banks and borrowers, but is not an answer to ever increasing inflation faced by common man. The food inflation has touched 17.65% and by any reckoning it can only increase in the coming months.The projection of whole sale Price index at 5.5 Percent by March 2011 has not been well justified or explained by RBI. The Government's expectation is still below 5.5% . As per the paper reports , there is a move to further increase the fuel prices when the damage done to inflation by an earlier increase through budget has not yet been removed by any administrative measures particularly by state governments.
The present inflation is both on account of supply constraints and demand driven.The measures by RBI are basically to contain inflation from demand side and from this angle the steps as rightly pointed out in the article do not measure upto expectations as CRR increase of 0.25 % is insignificant in view of high liquidity surplus and easy monetary conditions in the system. There are no other measures to compel the banks to make money dearer particularly for borrowers engaged in speculative activities . Repo and and reverse repo rates have their own limitations.It is high time the Reserve bank introduces some innovative measures or revive the Bank Rate suitably to influence credit flows particularly speculative credits affecting inflation.
Edited version appeared in Business Line Dt26/04/10
Dr. T.V Gopalakrishnan
This refers to the Article on ' a soft Monetary Policy( Business Line dt 23/4/10).The monetary policy has rightly pleased the market banks and borrowers, but is not an answer to ever increasing inflation faced by common man. The food inflation has touched 17.65% and by any reckoning it can only increase in the coming months.The projection of whole sale Price index at 5.5 Percent by March 2011 has not been well justified or explained by RBI. The Government's expectation is still below 5.5% . As per the paper reports , there is a move to further increase the fuel prices when the damage done to inflation by an earlier increase through budget has not yet been removed by any administrative measures particularly by state governments.
The present inflation is both on account of supply constraints and demand driven.The measures by RBI are basically to contain inflation from demand side and from this angle the steps as rightly pointed out in the article do not measure upto expectations as CRR increase of 0.25 % is insignificant in view of high liquidity surplus and easy monetary conditions in the system. There are no other measures to compel the banks to make money dearer particularly for borrowers engaged in speculative activities . Repo and and reverse repo rates have their own limitations.It is high time the Reserve bank introduces some innovative measures or revive the Bank Rate suitably to influence credit flows particularly speculative credits affecting inflation.
Edited version appeared in Business Line Dt26/04/10
Dr. T.V Gopalakrishnan
Thursday, April 8, 2010
Capitalising on Cheap Funds
This refers to your editorial on 'capitalising on cheap funds' (Business Line dt,3rd March,2010). It is the best opportune time to bring in funds from international markets to give support for our economic growth targeted beyond 9 percent. Raising money from domestic market will become costly as the Reserve Bank has already signalled through its recent policy measures in increasing CRR,REPO and Reverse REPO rates. Further tightening is in the offing as per the indications. In view of the huge market borrowings envisaged by the Central Government, the chances of comfortable funds position for private sector's borrowings are being ruled out in the near future.
Since the international funds are cheap compared to domestic funds, it is advisable to encash the opportunity by corportes. Though the increase in inflows may have its own adverse impact on forex rate and inflation, still the advantages, the economy derive from huge productive investments and growth are very many and can certaily offset the disadvantages in the long run. What the economy now requires is huge resources for producive investments and when these are available at a cost affordable, why not take advantage ? As rightly pointed out in the editorial the confidence level in our Economy has gone up in international markets and capitalising the same for a good cause can only boost the confidence further.
Dr.T.V.Gopalakrishnan
Since the international funds are cheap compared to domestic funds, it is advisable to encash the opportunity by corportes. Though the increase in inflows may have its own adverse impact on forex rate and inflation, still the advantages, the economy derive from huge productive investments and growth are very many and can certaily offset the disadvantages in the long run. What the economy now requires is huge resources for producive investments and when these are available at a cost affordable, why not take advantage ? As rightly pointed out in the editorial the confidence level in our Economy has gone up in international markets and capitalising the same for a good cause can only boost the confidence further.
Dr.T.V.Gopalakrishnan
Working Autonomy
RBI The Sovereign Scapegoat:
This refers to the article on RBI : The Sovereign Scapegoat (Business Line dt,1/04/10). The very title speaks volumes of the so called autonomy or independence enjoyed by the Reserve bank of India, the monetary authority of the country and the regulator of the financial system. The institution originally set up as a shareholders bank in 1935 was nationalized in 1949 and since then has been functioning as an independent institution but owned fully by the Central Government with adequate overruling powers in terms of The Reserve Bank of India Act 1934.
Political agenda of the ruling party will always override the economic agenda and the institutions like RBI in a democratic set up cannot expect to have the full freedom as some of the central banks of the world enjoy perhaps. With all the limitations , the Reserve Bank has done an excellent job and successfully completed 75 years managing the economy and the financial system well and earned a reputation as one of the well run central banks of the world only indicates how independently the Governors carry out their responsibilities although they are appointed by the Central Government. The working autonomy is achieved and not defined anywhere. This is where RBI and its Governors can be proud of.
Dr T.V.Gopalakrishnan
This refers to the article on RBI : The Sovereign Scapegoat (Business Line dt,1/04/10). The very title speaks volumes of the so called autonomy or independence enjoyed by the Reserve bank of India, the monetary authority of the country and the regulator of the financial system. The institution originally set up as a shareholders bank in 1935 was nationalized in 1949 and since then has been functioning as an independent institution but owned fully by the Central Government with adequate overruling powers in terms of The Reserve Bank of India Act 1934.
Political agenda of the ruling party will always override the economic agenda and the institutions like RBI in a democratic set up cannot expect to have the full freedom as some of the central banks of the world enjoy perhaps. With all the limitations , the Reserve Bank has done an excellent job and successfully completed 75 years managing the economy and the financial system well and earned a reputation as one of the well run central banks of the world only indicates how independently the Governors carry out their responsibilities although they are appointed by the Central Government. The working autonomy is achieved and not defined anywhere. This is where RBI and its Governors can be proud of.
Dr T.V.Gopalakrishnan
Thursday, April 1, 2010
Banking Challenges
Both The Reserve Bank and the banking system deserve kudos for their mighty performance and demonstrating to the world Financial system as to how to survive the varieries of risks banks are exposed to in these days of liberalisation, emergence of exotic products and linkages with various markets. This should not, however, make them complacent and sit on laurels. The challenges ahead are different and they have to be prepared with different skills,knowledge and dynamism to continue to perform better and remain sound and healthy.
The major challenge would be in the area of operational risk and risks arising from international markets involving liquidity, interest and forex risks. Asset -Liability mismatch will be another area of serious concern for Indian banks to deal with. In the absence of adequate attention to develop the human resources to meet the challenges ahead, any sound regulatory system will not prove to be of any help. Human Resources management particularly in Public Secor banks needs a boost and this itself will be a challenge as the cost to train and retain them would be something enormous.The advantages of being in public sector cannot be expected to remain so in a competitive atmosphere and should not be so to provide a level playing field to the private sector.
Dr.T.V.Gopalakrishnan
An edited version of this appeared in Business Line Dt,30/03/10
The major challenge would be in the area of operational risk and risks arising from international markets involving liquidity, interest and forex risks. Asset -Liability mismatch will be another area of serious concern for Indian banks to deal with. In the absence of adequate attention to develop the human resources to meet the challenges ahead, any sound regulatory system will not prove to be of any help. Human Resources management particularly in Public Secor banks needs a boost and this itself will be a challenge as the cost to train and retain them would be something enormous.The advantages of being in public sector cannot be expected to remain so in a competitive atmosphere and should not be so to provide a level playing field to the private sector.
Dr.T.V.Gopalakrishnan
An edited version of this appeared in Business Line Dt,30/03/10
Eternal Vigilance
Eternal Vigilance
Dr.T.V.Gopalakrishnan
Edited Version of this appeared in ET 29/03/10
This refers to your edit 'So far so good' (ET,27 March 2010). Though Indian Banking System as rightly pointed out is largely healthy, it requires continuous monitoring and remedial action to withstand unexpected shocks and dangers. Holding huge amounts of restructured loans which are potential Non performing assets and financing of infrastructure projects with short term deposits consisting of whole sale and bulk institutional deposits would create Asset- Liability mismatch. In the absence of suitable take out finance and with the presence of more and more new products including the derivatives in a vast and fast growing financial market with international linkages, the risks faced by the system are unpredictable. The confidence level presently enjoyed by the system,(70% being in the public sector) cannot guarantee business success and security for ever which require, skill, expertise, knowledge, dependable system and procedure and above all efficient regulatory and supervisory environment. The banking system has to be dynamic, proactive and vigilant to keep it safe and healthy.
Dr.T.V.Gopalakrishnan
Edited Version of this appeared in ET 29/03/10
Thursday, March 18, 2010
Inflation and Poverty
Inflation Index
The inflation has risen to 16 month high at 9.89 percent and the contributory factors are higher prices of fuel, supply problems due to draught conditions and increase in demand for the limited supplies caused on account of disproportionate and unequal level of incomes in the society. The steep rise in Minimium Support Prices may be one of the factors as the food inflation remains extra ordinarily high at 17.79 percent. The immediate cause for sudden increase in prices is because of the fuel price increase effected trough the budget which could have been avoided for the present although,the prices need to reflect the market trend and oil companies deserve relief. The timing was not favourable and inclusion of diesel price increase which had a cascading effect could have been intelligently postponbed.
Fighting inflation is fighting poverty and this requires altogother a different approach. The policy to contain inflation has to factor in among other things,the level of poverty in the economy, the consumtion pattern of majority of population, income levels,cost of production,distribution of products involving transportation,marketing,storage facilities,intervention of middlemen who take a major share of the profit at the cost of producers particulary farm products producers. Comparing global level of price trends,although ,needed in these days of interlinkages of economies, will not mean anything to a common man when he finds difficult to survive and make both ends meet.
It is time to have a relook on inflation index and the components which account for high inflation in an economy which has all the potential to perform well particulary on the inflation front.The economy should go in for two sets of inflation index one exclusively to take care of the poorest of the poor and the other to reflect the general price level for all. Poor peoples'needs and non-poor peoples'wants differ and the inflation index cannot be same for both categories.
Dr.T.V.Gopalakrishnan
The inflation has risen to 16 month high at 9.89 percent and the contributory factors are higher prices of fuel, supply problems due to draught conditions and increase in demand for the limited supplies caused on account of disproportionate and unequal level of incomes in the society. The steep rise in Minimium Support Prices may be one of the factors as the food inflation remains extra ordinarily high at 17.79 percent. The immediate cause for sudden increase in prices is because of the fuel price increase effected trough the budget which could have been avoided for the present although,the prices need to reflect the market trend and oil companies deserve relief. The timing was not favourable and inclusion of diesel price increase which had a cascading effect could have been intelligently postponbed.
Fighting inflation is fighting poverty and this requires altogother a different approach. The policy to contain inflation has to factor in among other things,the level of poverty in the economy, the consumtion pattern of majority of population, income levels,cost of production,distribution of products involving transportation,marketing,storage facilities,intervention of middlemen who take a major share of the profit at the cost of producers particulary farm products producers. Comparing global level of price trends,although ,needed in these days of interlinkages of economies, will not mean anything to a common man when he finds difficult to survive and make both ends meet.
It is time to have a relook on inflation index and the components which account for high inflation in an economy which has all the potential to perform well particulary on the inflation front.The economy should go in for two sets of inflation index one exclusively to take care of the poorest of the poor and the other to reflect the general price level for all. Poor peoples'needs and non-poor peoples'wants differ and the inflation index cannot be same for both categories.
Dr.T.V.Gopalakrishnan
Wednesday, March 3, 2010
Budget 2010-11
The budget for 2010-11 is neither growth oriented nor imaginative. It also lacks direction in which the economy is expected to move. The positives of the budget are the tax benefits passed on to income tax payers,some social security measures and minor concessions here and there in some areas which can at best take care of increases in costs on account of inflation. The negatives in the budget particularly the increase in excise duties on petroleum products, however ,offsets the positives and will have adverse impact on the economy in the form of inflation because of its cascading effect all around.
The expected budget deficit and containment of Government borrowings are only expectations and in the absence of any incentives/motivation to attract long term investments in the areas of industry,agricultural and exports how far they are achievable is a major question without any answer in the budget. The steps to contain the present and future inflation are not figuring in the budget.On the contrary the inflation can further move up with more money in the hands of tax payers, increase in fuel prices and not so impressive support system for growth in agricultural and industrial production provided in the budget.
Dr.T.V.gopalakrishnan
(Edited version of this appeared in Business Line dt27/02/10)
The expected budget deficit and containment of Government borrowings are only expectations and in the absence of any incentives/motivation to attract long term investments in the areas of industry,agricultural and exports how far they are achievable is a major question without any answer in the budget. The steps to contain the present and future inflation are not figuring in the budget.On the contrary the inflation can further move up with more money in the hands of tax payers, increase in fuel prices and not so impressive support system for growth in agricultural and industrial production provided in the budget.
Dr.T.V.gopalakrishnan
(Edited version of this appeared in Business Line dt27/02/10)
Tuesday, February 23, 2010
Wealth from Waste Management
Wealth from Waste Management
It is time to have some innovative research in the area of waste management and initiate follow up action to realize the Economy’s dream of becoming the super economic power of the world.
Men, Material, Money and Time are the factors contributing to production and creation of wealth in any economy. The optimum use of these resources in an economy depend on the educational standards, quality of people, competence of management and conducive environment in the form of political stability, governance standards, physical ,financial and social infrastructure. How far the resources are utilized without allowing wastage beyond a tolerable level will reflect on the awareness of people in general and management at various organizations’ and institutions’ levels in particular about the economic value of each and every resource. Wastage of all resources does occur often knowingly and very often unknowingly in the economy particularly in production and services areas.
Non-performing Resources are like Non performing assets in the Banking system and they only help to tax the nation and the people ultimately. It is time some serious attention is paid to Waste Management and initiate appropriate measures to convert waste into productive resources of the economy and bring in wealth for the nation and welfare for its people.
Management of MEN( Human resources):
This is the richest wealth of our economy and the prospects of India’s achieving the super economic power of the world in a few decades is basically based on taking advantage of the demographic dividend the country is blessed with. It is the responsibility of the nation to introspect and find out whether these human resources are well developed or provided with opportunities for their full development. Potential of our human resources is identified but attention paid to exploit the potential seems to be inadequate.
Waste of human resources or under utilization of the resources at Macro level i.e. at national level and Micro level i.e. at various organizations both public and private is enormous and needs a separate study by itself to arrive at the loss of wealth to the economy and individual institutions. Providing employment and fully benefiting from employment are two totally different aspects and this is an area where waste management needs to concentrate in all undertakings particularly in Government and public sector.
Management of Materials : Management of Materials in the form of fixed assets and current assets used in the production of goods and services in the economy leaves a lot to be desired. Waste of electricity, water, petroleum products and all sorts of assets and inventories that go into production of wealth is a well acknowledged truth, but efforts to quantify the loss to the economy and the exchequer and remedial measures to contain the waste or convert the waste into wealth have been rare and far between. The reasons for such waste are to a great extent avoidable.(For example waste of petrol and diesel due to octroi / checks on interstate movements of goods and toll levies at various places cost a fortune to the nation and are definitely avoidable or can be minimized with some innovative plans using Information Technology).
Similarly the country has vast stretches of waste lands and unused lands which can be put to productive uses and give a boost to our sagging agriculture and agro based industries or leased out to industrialists for manufacturing activities. Both land and unemployed human resources can be employed gainfully. Examples of under utilization / non utilization of these resources are aplenty and call for specialized attention.
Management of Money : This is a crucial area requiring professional approach to ensure that every rupee that is invested fetches some return. Whether it is allocation of resources under National Rural Employment Programme or investments made for development of infrastructure or provision of utility services or whatever may be the objectives of investments they should be subjected to review to ensure that money does not go down the drain. The concept of asset liability management and risk management is not followed( except perhaps in banks) where ever investments are made and returns seldom assessed/or assessed perfunctorily. Wastage of money through different means such as corruption, delay in the execution of projects, frauds and embezzlements, keeping the funds idle, investing surplus cash without adequately assessing safety, liquidity and return go often unnoticed and the nation bears the loss directly or indirectly ultimately.
Management of time: The concept of time management does not seem to have been understood in the area of investments particularly under government and public sector. Delay in the execution of projects and cost overrun are regular features in the economy and the loss on this account alone is enormous to wipe out our deficit partially if not fully. The loss on account of delays in getting justice alone will amount to huge wastage of resources in our economy and legal reforms are long overdue. Time consciousness is generally missing all over the country and conscious efforts are needed to create the awareness that time is wealth and no one at least for those engaged in the economic activities of the nation has the right to take extra time for granted.
The economy needs monetary resources to live up to the expectations of the world to emerge as super economic power. The economy has all the resources at its command in terms of men material money and time but it requires a very conscious approach to put into these resources for optimum use without allowing any waste anywhere. The simple suggestion is to have a Research wing in all universities to study the loss of wealth on account of non utilization of the resources / under utilization of the resources/ mis-utilization of the resources. A budgetary support specifically to have a research in the area of waste management can never go waste. The results of the research should enable to initiate action towards creation of wealth through effective waste control management.
India has among other things enterprising entrepreneurs, good quality natural resources, worldly acclaimed ITreasonably sound and stable banking system and several unknown strengths to support any venture and as such it is for the Government to identify the areas of wastage and create wealth from waste. A momentum is called for in this direction which will work wonders for the economy.
Dr.T.V.Gopalakrishnan.
It is time to have some innovative research in the area of waste management and initiate follow up action to realize the Economy’s dream of becoming the super economic power of the world.
Men, Material, Money and Time are the factors contributing to production and creation of wealth in any economy. The optimum use of these resources in an economy depend on the educational standards, quality of people, competence of management and conducive environment in the form of political stability, governance standards, physical ,financial and social infrastructure. How far the resources are utilized without allowing wastage beyond a tolerable level will reflect on the awareness of people in general and management at various organizations’ and institutions’ levels in particular about the economic value of each and every resource. Wastage of all resources does occur often knowingly and very often unknowingly in the economy particularly in production and services areas.
Non-performing Resources are like Non performing assets in the Banking system and they only help to tax the nation and the people ultimately. It is time some serious attention is paid to Waste Management and initiate appropriate measures to convert waste into productive resources of the economy and bring in wealth for the nation and welfare for its people.
Management of MEN( Human resources):
This is the richest wealth of our economy and the prospects of India’s achieving the super economic power of the world in a few decades is basically based on taking advantage of the demographic dividend the country is blessed with. It is the responsibility of the nation to introspect and find out whether these human resources are well developed or provided with opportunities for their full development. Potential of our human resources is identified but attention paid to exploit the potential seems to be inadequate.
Waste of human resources or under utilization of the resources at Macro level i.e. at national level and Micro level i.e. at various organizations both public and private is enormous and needs a separate study by itself to arrive at the loss of wealth to the economy and individual institutions. Providing employment and fully benefiting from employment are two totally different aspects and this is an area where waste management needs to concentrate in all undertakings particularly in Government and public sector.
Management of Materials : Management of Materials in the form of fixed assets and current assets used in the production of goods and services in the economy leaves a lot to be desired. Waste of electricity, water, petroleum products and all sorts of assets and inventories that go into production of wealth is a well acknowledged truth, but efforts to quantify the loss to the economy and the exchequer and remedial measures to contain the waste or convert the waste into wealth have been rare and far between. The reasons for such waste are to a great extent avoidable.(For example waste of petrol and diesel due to octroi / checks on interstate movements of goods and toll levies at various places cost a fortune to the nation and are definitely avoidable or can be minimized with some innovative plans using Information Technology).
Similarly the country has vast stretches of waste lands and unused lands which can be put to productive uses and give a boost to our sagging agriculture and agro based industries or leased out to industrialists for manufacturing activities. Both land and unemployed human resources can be employed gainfully. Examples of under utilization / non utilization of these resources are aplenty and call for specialized attention.
Management of Money : This is a crucial area requiring professional approach to ensure that every rupee that is invested fetches some return. Whether it is allocation of resources under National Rural Employment Programme or investments made for development of infrastructure or provision of utility services or whatever may be the objectives of investments they should be subjected to review to ensure that money does not go down the drain. The concept of asset liability management and risk management is not followed( except perhaps in banks) where ever investments are made and returns seldom assessed/or assessed perfunctorily. Wastage of money through different means such as corruption, delay in the execution of projects, frauds and embezzlements, keeping the funds idle, investing surplus cash without adequately assessing safety, liquidity and return go often unnoticed and the nation bears the loss directly or indirectly ultimately.
Management of time: The concept of time management does not seem to have been understood in the area of investments particularly under government and public sector. Delay in the execution of projects and cost overrun are regular features in the economy and the loss on this account alone is enormous to wipe out our deficit partially if not fully. The loss on account of delays in getting justice alone will amount to huge wastage of resources in our economy and legal reforms are long overdue. Time consciousness is generally missing all over the country and conscious efforts are needed to create the awareness that time is wealth and no one at least for those engaged in the economic activities of the nation has the right to take extra time for granted.
The economy needs monetary resources to live up to the expectations of the world to emerge as super economic power. The economy has all the resources at its command in terms of men material money and time but it requires a very conscious approach to put into these resources for optimum use without allowing any waste anywhere. The simple suggestion is to have a Research wing in all universities to study the loss of wealth on account of non utilization of the resources / under utilization of the resources/ mis-utilization of the resources. A budgetary support specifically to have a research in the area of waste management can never go waste. The results of the research should enable to initiate action towards creation of wealth through effective waste control management.
India has among other things enterprising entrepreneurs, good quality natural resources, worldly acclaimed ITreasonably sound and stable banking system and several unknown strengths to support any venture and as such it is for the Government to identify the areas of wastage and create wealth from waste. A momentum is called for in this direction which will work wonders for the economy.
Dr.T.V.Gopalakrishnan.
Friday, January 29, 2010
Subsidy and GDP
Subsidy and GDP
This refers to your edit Investment,not subsidy(ET Jan,26).It is shocking to observe that the subsidy under various heads had touched a staggering figure of Rs,2,19,582 crore ie from 1.4% of GDP in 1999-2000 to 4.1% of GDP in 2008-09.
The subsidy to help the poorest of poor is understandable and needs to be provided and met provided the benefit reaches the beneficiaries directly and without any leakage . Other than food subsidy,all other subsidies presently extended need a re look and deserve to be taken out of budgetary provisions and investments to that extend need to be augmented in the same areas to improve the production,reduce the cost and benefit the consumers and producers alike.
As rightly indicated reforms in the area of investment and subsidy are the only way out to improve the situation and reduce the budgetary expenditure towards subsidies. The benefits that accrue to the economy in general and the weakest sections of the society in particular should be the considerations in arriving at the subsidy and cost to the exchequer. Perhaps food subsidy and kerosene subsidy which are intended for the people below BPL can continue for some more time till the inclusive growth become a reality.Even in these areas transparency in accounting is essential and transfer of benefits directly will bring in tangible benefits.The data relating to people below BPL need to be realistically arrived at so that there is no scope for any leakage.
Dr.T.V.Gopalakrishnan
This refers to your edit Investment,not subsidy(ET Jan,26).It is shocking to observe that the subsidy under various heads had touched a staggering figure of Rs,2,19,582 crore ie from 1.4% of GDP in 1999-2000 to 4.1% of GDP in 2008-09.
The subsidy to help the poorest of poor is understandable and needs to be provided and met provided the benefit reaches the beneficiaries directly and without any leakage . Other than food subsidy,all other subsidies presently extended need a re look and deserve to be taken out of budgetary provisions and investments to that extend need to be augmented in the same areas to improve the production,reduce the cost and benefit the consumers and producers alike.
As rightly indicated reforms in the area of investment and subsidy are the only way out to improve the situation and reduce the budgetary expenditure towards subsidies. The benefits that accrue to the economy in general and the weakest sections of the society in particular should be the considerations in arriving at the subsidy and cost to the exchequer. Perhaps food subsidy and kerosene subsidy which are intended for the people below BPL can continue for some more time till the inclusive growth become a reality.Even in these areas transparency in accounting is essential and transfer of benefits directly will bring in tangible benefits.The data relating to people below BPL need to be realistically arrived at so that there is no scope for any leakage.
Dr.T.V.Gopalakrishnan
Bad Loans
Bad Loans.
This refers to your Edit 'Elementary Watson',Easy Money ,Bad loans (ET dt,28/01/10). The observation that easy money made available by the banks to borrowers to go in for non viable business ventures is also a reason, among other things, for the increase observed in the Gross non-performing assets of banks is hard to digest. On the contrary, Non performing loans generally arise largely on account of high interest rates when banks are tempted to lend ignoring the risks and viability of projects. The present increase in NPAs is largely on account of economic slow down.
NPA s are inevitable in banking business as banks deal in money and with human resources entangled in business and economic activities which are part of fast changing business cycles. The only permanent solution to contain formation of NPAs and minimise the damages that they can cause to all stake holders of banks including borrowers is to have a fund built up within the banks by making the borrowers to contribute based on their performance rating. The banks and if necessary the Regulator and the Government can also contribute towards this fund which will emerge as a cushion to discipline borrowers and at the same time strengthen the banks' balance sheet. The Government can avoid contributing to the capital of banks which they often do.
The problem of NPAs has been there since the evolution of banking and the solution for it has to come from bankers and the borrowers themselves.
Dr.T.V.Gopalakrishnan
This appeared in ET,30/01/10 (edited version)
This refers to your Edit 'Elementary Watson',Easy Money ,Bad loans (ET dt,28/01/10). The observation that easy money made available by the banks to borrowers to go in for non viable business ventures is also a reason, among other things, for the increase observed in the Gross non-performing assets of banks is hard to digest. On the contrary, Non performing loans generally arise largely on account of high interest rates when banks are tempted to lend ignoring the risks and viability of projects. The present increase in NPAs is largely on account of economic slow down.
NPA s are inevitable in banking business as banks deal in money and with human resources entangled in business and economic activities which are part of fast changing business cycles. The only permanent solution to contain formation of NPAs and minimise the damages that they can cause to all stake holders of banks including borrowers is to have a fund built up within the banks by making the borrowers to contribute based on their performance rating. The banks and if necessary the Regulator and the Government can also contribute towards this fund which will emerge as a cushion to discipline borrowers and at the same time strengthen the banks' balance sheet. The Government can avoid contributing to the capital of banks which they often do.
The problem of NPAs has been there since the evolution of banking and the solution for it has to come from bankers and the borrowers themselves.
Dr.T.V.Gopalakrishnan
This appeared in ET,30/01/10 (edited version)
Monday, January 25, 2010
Budget boost to growth
Budget boost to growth
The Finance Minister has to create an environment where tax
Compliance is easy, avoidance is difficult and evasion is impossible
This year’s annual budget proposed to be presented on 26th Feb, 2010 assumes greater importance than usual as the economy shows signs of recovery and requires further boost to register double digit growth.
The Finance minister faces a formidable challenge as he has to initiate measures to exit the stimulus package liberally introduced in 2007-08 to save the economy from the disaster caused due to international financial crises triggered by sub-mortgage crisis in US financial system and at the same time find new innovative measures to give a stimulus to the economy to perform better in the midst of raising inflationary pressures, ever widening fiscal deficit and expectations and aspirations of people suffering from acute poverty, illiteracy and large scale unemployment. The task is stupendous, but manageable provided he introduces some harsh and simple measures through the budget.
Pending implementation of Direct Tax code proposals, FM can consider simplifying the direct tax administration particularly income tax. The middle class and the rich in the economy have multiplied manifold over a period and it is doubtful whether all are brought under the tax net.
Traders, dealers, brokers, small business people, contractors of different categories and self employed people including professionals earn a lot and may or may not have PAN numbers ,may be filing or may not be filing returns or may be paying or may not be paying income tax or may be paying less tax than what is due.
The FM has to necessarily create an environment where tax compliance is easy, avoidance is difficult and evasion is impossible. The following measures if introduced can create such an environment gradually if not in the immediate future.
Ensure that no individual or family remains without a bank account. Financial inclusion being talked about/ attempted so far has sought to give the poor access to savings and minimum credit facilities, but the real Financial inclusion is to ensure that no one in the economy irrespective of his economic or social status remains without a bank account.
Self employed people including retailers engaged in varieties of activities such as scrap dealers, furniture merchants, contractors vendors ,etc, do not seem to have bank accounts or even if they have one they prefer to deal in cash only. Reluctance to receive cheque or draft in urban/metropolitan centre is very common and many seem to be scared to have the funds credited to bank accounts. The banking habit even among literate and well to do people is not wide- spread.
Dr.T.V.Gopalakrishnan
This appeared in The Hindu-Business Line Dt 26/01/10
The Finance Minister has to create an environment where tax
Compliance is easy, avoidance is difficult and evasion is impossible
This year’s annual budget proposed to be presented on 26th Feb, 2010 assumes greater importance than usual as the economy shows signs of recovery and requires further boost to register double digit growth.
The Finance minister faces a formidable challenge as he has to initiate measures to exit the stimulus package liberally introduced in 2007-08 to save the economy from the disaster caused due to international financial crises triggered by sub-mortgage crisis in US financial system and at the same time find new innovative measures to give a stimulus to the economy to perform better in the midst of raising inflationary pressures, ever widening fiscal deficit and expectations and aspirations of people suffering from acute poverty, illiteracy and large scale unemployment. The task is stupendous, but manageable provided he introduces some harsh and simple measures through the budget.
Pending implementation of Direct Tax code proposals, FM can consider simplifying the direct tax administration particularly income tax. The middle class and the rich in the economy have multiplied manifold over a period and it is doubtful whether all are brought under the tax net.
Traders, dealers, brokers, small business people, contractors of different categories and self employed people including professionals earn a lot and may or may not have PAN numbers ,may be filing or may not be filing returns or may be paying or may not be paying income tax or may be paying less tax than what is due.
The FM has to necessarily create an environment where tax compliance is easy, avoidance is difficult and evasion is impossible. The following measures if introduced can create such an environment gradually if not in the immediate future.
Ensure that no individual or family remains without a bank account. Financial inclusion being talked about/ attempted so far has sought to give the poor access to savings and minimum credit facilities, but the real Financial inclusion is to ensure that no one in the economy irrespective of his economic or social status remains without a bank account.
Self employed people including retailers engaged in varieties of activities such as scrap dealers, furniture merchants, contractors vendors ,etc, do not seem to have bank accounts or even if they have one they prefer to deal in cash only. Reluctance to receive cheque or draft in urban/metropolitan centre is very common and many seem to be scared to have the funds credited to bank accounts. The banking habit even among literate and well to do people is not wide- spread.
Dr.T.V.Gopalakrishnan
This appeared in The Hindu-Business Line Dt 26/01/10
Monday, January 11, 2010
Right Compensation
This refers to your edit "Be pragmatic, SEBI (ET,31/12/09).As rightly indicated,SEBI has to ensure that Perpetrators of Fraud do not go scot free and make money exploting the illiteracy of investors or the system and procedure for IPOs prescribed by SEBI.
It needs to be made compulsory for all companies going for IPOs to keep a minimum margin say 0.05 % out of the subscription money towards The Investor Protection Fund and in case the company does not adhere to the prescibed standards of SEBI , the investors should be compensated. The compensation should not exceed the subscrition money.
Dr.T.V.Gopalakrishnan
(This appeared in ET Dt,2/01/10
This refers to your edit "Be pragmatic, SEBI (ET,31/12/09).As rightly indicated,SEBI has to ensure that Perpetrators of Fraud do not go scot free and make money exploting the illiteracy of investors or the system and procedure for IPOs prescribed by SEBI.
It needs to be made compulsory for all companies going for IPOs to keep a minimum margin say 0.05 % out of the subscription money towards The Investor Protection Fund and in case the company does not adhere to the prescibed standards of SEBI , the investors should be compensated. The compensation should not exceed the subscrition money.
Dr.T.V.Gopalakrishnan
(This appeared in ET Dt,2/01/10
This refers to your edit Mittal's Frustrations (Et,Jan9,2010). The problems investors facing in India have been well brought out and solutions suggested therein .But the mindset and administrative hurdles continue to remain a major stumbling block as the reforms in vogue since 1991 in the economy have not touched the bureaucracy and the land management.
It is high time to have professionals with a pro active mindset to understand issues and arrive at solutions early to attract investments and facilitate fast economic progress. India has vast resources of land, labour and raw materials and entrepreneurs.the best and easy solution to attract huge investments in India and achieve the economic growth targetted at double digits is to have Land Bank both at central and state levels and make it avalable for investors.
Dr.T.V.Gopalakrishnan
(This appeared in ET dt,11/01/10)
It is high time to have professionals with a pro active mindset to understand issues and arrive at solutions early to attract investments and facilitate fast economic progress. India has vast resources of land, labour and raw materials and entrepreneurs.the best and easy solution to attract huge investments in India and achieve the economic growth targetted at double digits is to have Land Bank both at central and state levels and make it avalable for investors.
Dr.T.V.Gopalakrishnan
(This appeared in ET dt,11/01/10)
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