This refers to your edit “No excuses left for Centre” (April 18). The Reserve Bank of India’s (RBI’s) monetary policy measure of effecting a sharp reduction in the repo rate by 50 basis points sends out a clear message to the government that it has to initiate action on several fronts to stimulate growth and give the much-needed sentiment boost to the investor community. No doubt, RBI has surprised the market and shocked theorists by demonstrating that monetary policy can deviate from fundamental requirements and adopt a different approach if the situation demands it. The economy has been lagging for the past three years and the government has failed to show any fiscal discipline despite several bold measures from the central bank. Though the rate cut may have an adverse impact on inflation, if RBI’s gamble pays off, renewed economic growth may have some softening effect on prices.
T V Gopalakrishnan Mumbai
(This appeared in Business Standard dated 19/04/12).
Showing posts with label RBI. Show all posts
Showing posts with label RBI. Show all posts
Thursday, April 19, 2012
Wednesday, April 18, 2012
Is RBI right in cutting the interesr rate by 0.5%
Dr.T.V.Gopalakrishnan , Mumbai , says: The RBI's cutting interest rate is influenced more by market sentiments than economic fundamentals. It suits the market and satisfies the Govt. But purely from a Central bank's monetary point of view the action carries no conviction and cut could have been better avoided. A token cut of 0.25% would have satisfied the market. However, it is a very clear message for the Govt that it has to perform its role in taking appropriate action on the fiscal and administrative front to give a boost to the GDP growth or else will have to face the criticism from all corners. RBI has exonerated itself by its bold action though not fully justifiable based on the economic fundamentals.
18 Apr 2012, 1553 hrs IST
(This is in response to an opinion poll by the ET dated 17/04/12).
18 Apr 2012, 1553 hrs IST
(This is in response to an opinion poll by the ET dated 17/04/12).
Friday, April 6, 2012
Expectations from RBI and the Economy
The article has brought out well about the need for RBI not to fall prey to the pressures of politicians,industrialists, and top Govt officials to reduce the policy rates. The economy is in fact in reverse gear and in case the RBI decides to change the policy rates as wanted by all including the bankers, neither the economic growth nor the price stability can be achieved. It will worsen the situation and damage control will become a difficult tasklater on and more than anybody the masses will suffer.The inflation, the ccurrent account deficit, the fiscal deficit, the GDP growth, the severe fall in exchange rate, poor flow of both FDI and FII funds, loss of confidence in attracting foreign funds thanks to retrospective changes proposed in some of policies relating to tax on international investments etc are not favourable for investment and growth in the near future, the Reserve Banks' policy is the only hope left to put the economy on right and growth track. Will RBI heed to the requirement?
from: Dr.TV. Gopalakrishnan
(This comment is in response to an article in ET dated 6/04/12)
Posted on: Apr 5, 2012 at 22:28 IST
from: Dr.TV. Gopalakrishnan
(This comment is in response to an article in ET dated 6/04/12)
Posted on: Apr 5, 2012 at 22:28 IST
Friday, March 16, 2012
RBI and Policy Rates
Dr.T.V.Gopalakrishnan , Mumbai , says: RBI has no option but to keep the policy rates unchanged taking into account the pressures on inflation,Govt's reluctance to act on fiscal front effectively and other uncertainities from external sector.RBI alone cannot find measures to the ills of the economy is a fact which needs to be recognised by the Govt.
(This appeared in ET dated 16/03/12
(This appeared in ET dated 16/03/12
Thursday, March 15, 2012
RBI's Policy Review on 15/03/12
The Reserve Bank kept all the rates unchanged and this move was on expected lines.Normaally,the Reserve bank's review follows the annual budget of the Govt and the Bank gets to know the move of the Govt and and a full feel of the economy based on Economic survey and buget indications.The sharp cut effected by the Bank in CRR a week ahead of the review was quite unexpected and surprising as it gave the message to the market that the Reserve Bank fully recognises the liquidity constraints in the system and action is called for.However,the inflation pressures suppressed under the uncertainities of the oil price increases and containment of fiscal deficit cannot be overlooked by the Reserve Bank for effecting policy rate cuts although, the industrial growth demands a steep cut.The present position is that the Reserve Bank and the GOVT are in opposite directions and there is an inevitable need for them to come together to frame monetary and fiscal policies.Perhaps,the budget to be announced on 16th would pave way for that.
Wednesday, March 14, 2012
Wiil RBI go for a rate cut on 14th in its policy review?
Dr.T.V.Gopalakrishnan , Mumbai , says: The RBI cannot afford to effect any rate cut in its policy review due on 15th for the simple reason that the review comes just before the budget.Further,RBI would like to have an idea about the Govt's approach to contain fiscal deficit.The inflationary pressures continue to persist in the economy and it is too early for the RBI to take a call on rate cut although manufacturing side needs a boost by reduced interest rate. In all probability, the Reserve Bank would prefer to revise the rate downwards in its annual policy review in April.
14 Mar 2012, 1747 hrs IST
(This appeared in ET in response to their Opinion Poll on RBI Rate cut)
14 Mar 2012, 1747 hrs IST
(This appeared in ET in response to their Opinion Poll on RBI Rate cut)
Tuesday, February 7, 2012
Cash Deposit Ratio continues to be still High
Is the Cash Deposit Ratio of Indian Scheduled Commercial Banks very high?
The Cash -Deposit ratio of scheduled commercial Banks in India (Cash in hand and Balances with RBI as percentage of Deposits) is observed to be high at 8.2% for all scheduled Commercial Banks as at end march 2011. The ratio ranges between 6.9% (old Private Sector banks) and 9.2% (New generation Private sector banks). This includes the Cash Reserve Ratio of 6 percent statutorily required to be maintained with the Reserve Bank in terms of the Reserve Bank Act 1934 which has since been brought down to 5.5 % in the recent credit policy review held in January 2012. The need for such a high cash deposit ratio ratio, in these days when plastic cards, inter-net payments, electronic funds transfer etc are on the increase is surprising and needs to be viewed seriously in the context of efficiency and profitability of banks. In fact the ratio which remained at 7.1% in March 2002 has gone up to 8.2% in March 2011.
Since the culture of ATMs has been spreading fast, no doubt the banks need to maintain hard cash to meet the demands of customers. There are 74505 ATMs functioning all over the country as at end March 2011.The public preference for hard cash continues to be strong perhaps indicating lack of spread of banking habit in its fullest sense, the persistence of corruption, prevalence of black money, high level of inflation and general insistence for cash payments for commodities like gold and silver in particular. The high level of cash transactions in the economy necessitates more physical notes in circulation adding responsibilities to the Reserve Bank and increasing the Seignorage cost. This has been well evidenced in the increase in Bank notes in circulation by 18.7% i.e. from Rs.7, 88,299 crores in March 2010 to Rs. 9, 35,856 crores in March 2011.
Banks have been provided with currency chests to improve their cash management. The Reserve Bank through its 18 issue offices, one sub office and a wide net work of 4248 currency chests carries out the issue of notes and management of currency and helps the banking system to improve its funds management.
The cash deposit ratio of late, seems to have its importance it had in the good old days. With the implementation of prudential norms as per Narasimham Committee’s recommendations on Financial System and Banking sector reforms and also Basel I and Basel ii guidelines for improving banks’ efficiency, productivity and profitability, the attention paid in the maintenance of cash and the cost it adds to banks’ overall cost of funds seems to have been somewhat missing affecting adversely the profitability of banks among other things. The old private sector bank maintains the best cash deposit ratio (at 6.9%) and their cost of borrowings is comparatively the lowest (at 2.2%) as on March 2011 among all the bank groups.
Position of Cash Deposit Ratio* of All Commercial Banks
As at end March
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
7.1 6.3 7.2 6.4 6.7 7.2 9.7 7.3 7.7 8.2
• Cash in hand and balances with RBI as percentage of Deposits.
Position of ATMs of Scheduled Commercial Banks:
(As at end March 2011)
Sl. No. Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks All Scheduled Commercial Bank
1 2 3 4 5 6 7
1. On-Site ATMs 29,795
(23,797) 2,641
(2,266) 8,007
(6,337) 286
(279) 40,729
(32,679)
2 Off-Site ATMS 19,692
(16,883) 1,485
(1,124) 11,518
(8,720) 1,081
(747) 33,776
(27,474)
3 Total No.of ATMs 49,487
(40,680) 4,126
(3,390) 19,525
(15,057) 1,367
(1,026) 74,505
(60,153)
Figures in brackets relate to March 2010
Source: Report on Trend and Progress of Banking in India 2010-11.
Payment and settlement system has been well strengthened over a period to facilitate smooth functioning of financial markets in particular and the economy in general. Both paper based like Express cheques clearing and grid based cheques truncation system and electronic payments like electronic clearing service, electronic funds transfer systems have been very well developed to ensure fast, efficient and well secured payment and settlements not only to obviate the need for physical movement of cash but also to bring in efficient funds management among banks. The Reserve Bank has thus streamlined the process flow in credit push systems like National Electronic Funds transfer, Real Time Gross Settlement, Electronic Credit System (credit) and National Electronic Clearing Service systems and banks are in a position to credit beneficiaries account without any hassles.
With all these facilities, the cash held at banks has been found to be very high and needs to be reviewed and fine tuned for improved efficiency. The cost of funds of banks at 4.7% and the cost of borrowings observed at 2.3% for all scheduled commercial banks as at end March 2011 can be further brought down by minimizing cash balances and related costs. Since the funds management leaves much to be desired, the banks can do a lot by improving the banking habit, spreading the card culture, enhancing the use of cheque and electronic payment systems and putting into optimum use of currency chest facilities.
There is ample scope to reduce the physical handling of cash at branches and banks and save all related expenditures. The cash and bank balances have to be considerably brought down taking advantage of the improved telecommunication system and facilities provided by the Reserve Bank. The asset liability management of the banks will also improve in the process. The Govt and the Reserve Bank can also bring in policy changes by insisting on payments beyond a cutoff point say Rs 5000 by means of instruments like cheque or plastic cards or through electronic payment systems. Payments of cash to organized and unorganized sector where ever possible and feasible should be made only through banks and banking instruments. This will help to reduce the cost and other administrative hassles faced by the Reserve Bank in the issue of currency notes. Less cash in circulation is also an indicator of economic development in general and banking development in particular is a fact which cannot be underestimated by policy makers. Such an approach will also facilitate strengthening Financial and Banking inclusion.
T.V.Gopalakrishnan
(This article appeared in Business Line dated 7/02/12).
The Cash -Deposit ratio of scheduled commercial Banks in India (Cash in hand and Balances with RBI as percentage of Deposits) is observed to be high at 8.2% for all scheduled Commercial Banks as at end march 2011. The ratio ranges between 6.9% (old Private Sector banks) and 9.2% (New generation Private sector banks). This includes the Cash Reserve Ratio of 6 percent statutorily required to be maintained with the Reserve Bank in terms of the Reserve Bank Act 1934 which has since been brought down to 5.5 % in the recent credit policy review held in January 2012. The need for such a high cash deposit ratio ratio, in these days when plastic cards, inter-net payments, electronic funds transfer etc are on the increase is surprising and needs to be viewed seriously in the context of efficiency and profitability of banks. In fact the ratio which remained at 7.1% in March 2002 has gone up to 8.2% in March 2011.
Since the culture of ATMs has been spreading fast, no doubt the banks need to maintain hard cash to meet the demands of customers. There are 74505 ATMs functioning all over the country as at end March 2011.The public preference for hard cash continues to be strong perhaps indicating lack of spread of banking habit in its fullest sense, the persistence of corruption, prevalence of black money, high level of inflation and general insistence for cash payments for commodities like gold and silver in particular. The high level of cash transactions in the economy necessitates more physical notes in circulation adding responsibilities to the Reserve Bank and increasing the Seignorage cost. This has been well evidenced in the increase in Bank notes in circulation by 18.7% i.e. from Rs.7, 88,299 crores in March 2010 to Rs. 9, 35,856 crores in March 2011.
Banks have been provided with currency chests to improve their cash management. The Reserve Bank through its 18 issue offices, one sub office and a wide net work of 4248 currency chests carries out the issue of notes and management of currency and helps the banking system to improve its funds management.
The cash deposit ratio of late, seems to have its importance it had in the good old days. With the implementation of prudential norms as per Narasimham Committee’s recommendations on Financial System and Banking sector reforms and also Basel I and Basel ii guidelines for improving banks’ efficiency, productivity and profitability, the attention paid in the maintenance of cash and the cost it adds to banks’ overall cost of funds seems to have been somewhat missing affecting adversely the profitability of banks among other things. The old private sector bank maintains the best cash deposit ratio (at 6.9%) and their cost of borrowings is comparatively the lowest (at 2.2%) as on March 2011 among all the bank groups.
Position of Cash Deposit Ratio* of All Commercial Banks
As at end March
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
7.1 6.3 7.2 6.4 6.7 7.2 9.7 7.3 7.7 8.2
• Cash in hand and balances with RBI as percentage of Deposits.
Position of ATMs of Scheduled Commercial Banks:
(As at end March 2011)
Sl. No. Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks All Scheduled Commercial Bank
1 2 3 4 5 6 7
1. On-Site ATMs 29,795
(23,797) 2,641
(2,266) 8,007
(6,337) 286
(279) 40,729
(32,679)
2 Off-Site ATMS 19,692
(16,883) 1,485
(1,124) 11,518
(8,720) 1,081
(747) 33,776
(27,474)
3 Total No.of ATMs 49,487
(40,680) 4,126
(3,390) 19,525
(15,057) 1,367
(1,026) 74,505
(60,153)
Figures in brackets relate to March 2010
Source: Report on Trend and Progress of Banking in India 2010-11.
Payment and settlement system has been well strengthened over a period to facilitate smooth functioning of financial markets in particular and the economy in general. Both paper based like Express cheques clearing and grid based cheques truncation system and electronic payments like electronic clearing service, electronic funds transfer systems have been very well developed to ensure fast, efficient and well secured payment and settlements not only to obviate the need for physical movement of cash but also to bring in efficient funds management among banks. The Reserve Bank has thus streamlined the process flow in credit push systems like National Electronic Funds transfer, Real Time Gross Settlement, Electronic Credit System (credit) and National Electronic Clearing Service systems and banks are in a position to credit beneficiaries account without any hassles.
With all these facilities, the cash held at banks has been found to be very high and needs to be reviewed and fine tuned for improved efficiency. The cost of funds of banks at 4.7% and the cost of borrowings observed at 2.3% for all scheduled commercial banks as at end March 2011 can be further brought down by minimizing cash balances and related costs. Since the funds management leaves much to be desired, the banks can do a lot by improving the banking habit, spreading the card culture, enhancing the use of cheque and electronic payment systems and putting into optimum use of currency chest facilities.
There is ample scope to reduce the physical handling of cash at branches and banks and save all related expenditures. The cash and bank balances have to be considerably brought down taking advantage of the improved telecommunication system and facilities provided by the Reserve Bank. The asset liability management of the banks will also improve in the process. The Govt and the Reserve Bank can also bring in policy changes by insisting on payments beyond a cutoff point say Rs 5000 by means of instruments like cheque or plastic cards or through electronic payment systems. Payments of cash to organized and unorganized sector where ever possible and feasible should be made only through banks and banking instruments. This will help to reduce the cost and other administrative hassles faced by the Reserve Bank in the issue of currency notes. Less cash in circulation is also an indicator of economic development in general and banking development in particular is a fact which cannot be underestimated by policy makers. Such an approach will also facilitate strengthening Financial and Banking inclusion.
T.V.Gopalakrishnan
(This article appeared in Business Line dated 7/02/12).
Sunday, January 29, 2012
January 29, 2012:
Kudos to the Reserve Bank for having come out with a bold measure of releasing liquidity to the funds-starved market through reduction of CRR by 50 basis points from 6.0 per cent to 5.5 per cent.
This measure alone should help the banking system take care of partially the gaps in the credit needs of the manufacturing sector to augment investment and production, although the cost of funds is comparatively higher as policy rates have not been changed.
The Reserve Bank is fully justified in keeping the repo rate and reverse repo rate unchanged in the background of persisting high level of headline inflation which averaged at 9.7 per cent (y-o-y) during April-October 2011 and ever increasing fiscal deficit expected to be far more than the budgeted figure of 4.6 per cent.
Thus, the repo rate and the reverse repo rate will continue to be at 8.5 per cent and 7.5 per cent respectively. This has been done perhaps keeping in view the RBI's continued apprehension, and justifiably so, in containing the inflation and inflation expectations.
Comfort to liquidity
The relaxation in CRR is to provide comfort to the liquidity constraints, of late, faced by the banking system. The borrowings of banks from the Reserve Bank have been exceeding the limits and often much higher than the RBI's comfort level of Rs 60,000 crore.
These borrowings add to the cost of funds whereas banks do not get any return on their cash reserves kept with Reserve Bank out of their costly deposits. The reduction in CRR is expected to release funds to the tune of Rs 32,000 crore and this can be used to expand the credit particularly to the manufacturing sector. This should also help the banks to reduce the rate of interest to the borrowers to the extent they save on their borrowings from the Reserve Bank.
The banks got partially what they want but they also have got a lot to do in the economy taking into account the fiscal, monetary and economic conditions of the country. They have a major role to play to make inclusive growth a reality by taking advantage of financial and banking inclusion through innovative methods as a great business opportunity.
Improved offerings
The potential to increase deposits is manifold and the tendency of people to go in for other types of investments, particularly in gold and real estate, needs to be curbed by offering improved savings products. The NIM continues to be high in banks and this needs to be checked and brought down by improving the credit portfolio and recycling of funds.
The Asset-Liability management needs fining and cost of funds need to be brought down further. The Reserve Bank has been liberal with the banks by deregulating the SB NRI deposits rates and permitting them to restructure the sticky loans to improve their competitiveness and project a better balance-sheet.
The Reserve Bank has, however, moderated the GDP growth at 7 per cent as against 7.6 per cent projected earlier in its October 2011 review of credit policy. Considering, the external and domestic factors, even the 7 per cent growth is good enough to keep the confidence level high and to better the performance further in the next fiscal.
The need of the hour is the development of infrastructure which impedes the growth of the economy. Making available quality coal at reasonable price to the power sector through all possible means i.e. by rail and road will itself go a long way to give a boost to the economic growth.
The ease of doing business by removing administrative and legal bottlenecks, facilitating FDI investments in infrastructural developments, improving productivity both in agricultural and industrial areas without too much of interference by the Government and bringing in efficiency in the marketing and distribution of products, particularly agricultural products, need urgent attention which only the Government can provide. There is also an imperative need to activate and coordinate all rural development related agencies to give a facelift to the rural economy which requires more freedom for State Governments to take initiative.
Now, it is the turn of the Central Government to do its bit to contain fiscal deficit, improve supply constraints and provide the much needed infrastructure to give a boost to GDP growth and bring down inflation.
On the fiscal front, the Reserve Bank has made its message explicitly clear to the Government by saying that “considering the egregious implications of large fiscal deficits, which are well known , there is an urgent need for decisive fiscal consolidation, which will shift the balance of aggregate demand from public to private, and from consumption to capital formation. This is critical to yielding the space required for lowering rates without the imminent risk of resurgent inflation. The fourth coming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way.”
Hope the Government does its part fast and the economy will flourish.
Dr.T.V.Gopalakrishnan
(This article appeared in The Hindu-Business Line dt29/01/12).
Kudos to the Reserve Bank for having come out with a bold measure of releasing liquidity to the funds-starved market through reduction of CRR by 50 basis points from 6.0 per cent to 5.5 per cent.
This measure alone should help the banking system take care of partially the gaps in the credit needs of the manufacturing sector to augment investment and production, although the cost of funds is comparatively higher as policy rates have not been changed.
The Reserve Bank is fully justified in keeping the repo rate and reverse repo rate unchanged in the background of persisting high level of headline inflation which averaged at 9.7 per cent (y-o-y) during April-October 2011 and ever increasing fiscal deficit expected to be far more than the budgeted figure of 4.6 per cent.
Thus, the repo rate and the reverse repo rate will continue to be at 8.5 per cent and 7.5 per cent respectively. This has been done perhaps keeping in view the RBI's continued apprehension, and justifiably so, in containing the inflation and inflation expectations.
Comfort to liquidity
The relaxation in CRR is to provide comfort to the liquidity constraints, of late, faced by the banking system. The borrowings of banks from the Reserve Bank have been exceeding the limits and often much higher than the RBI's comfort level of Rs 60,000 crore.
These borrowings add to the cost of funds whereas banks do not get any return on their cash reserves kept with Reserve Bank out of their costly deposits. The reduction in CRR is expected to release funds to the tune of Rs 32,000 crore and this can be used to expand the credit particularly to the manufacturing sector. This should also help the banks to reduce the rate of interest to the borrowers to the extent they save on their borrowings from the Reserve Bank.
The banks got partially what they want but they also have got a lot to do in the economy taking into account the fiscal, monetary and economic conditions of the country. They have a major role to play to make inclusive growth a reality by taking advantage of financial and banking inclusion through innovative methods as a great business opportunity.
Improved offerings
The potential to increase deposits is manifold and the tendency of people to go in for other types of investments, particularly in gold and real estate, needs to be curbed by offering improved savings products. The NIM continues to be high in banks and this needs to be checked and brought down by improving the credit portfolio and recycling of funds.
The Asset-Liability management needs fining and cost of funds need to be brought down further. The Reserve Bank has been liberal with the banks by deregulating the SB NRI deposits rates and permitting them to restructure the sticky loans to improve their competitiveness and project a better balance-sheet.
The Reserve Bank has, however, moderated the GDP growth at 7 per cent as against 7.6 per cent projected earlier in its October 2011 review of credit policy. Considering, the external and domestic factors, even the 7 per cent growth is good enough to keep the confidence level high and to better the performance further in the next fiscal.
The need of the hour is the development of infrastructure which impedes the growth of the economy. Making available quality coal at reasonable price to the power sector through all possible means i.e. by rail and road will itself go a long way to give a boost to the economic growth.
The ease of doing business by removing administrative and legal bottlenecks, facilitating FDI investments in infrastructural developments, improving productivity both in agricultural and industrial areas without too much of interference by the Government and bringing in efficiency in the marketing and distribution of products, particularly agricultural products, need urgent attention which only the Government can provide. There is also an imperative need to activate and coordinate all rural development related agencies to give a facelift to the rural economy which requires more freedom for State Governments to take initiative.
Now, it is the turn of the Central Government to do its bit to contain fiscal deficit, improve supply constraints and provide the much needed infrastructure to give a boost to GDP growth and bring down inflation.
On the fiscal front, the Reserve Bank has made its message explicitly clear to the Government by saying that “considering the egregious implications of large fiscal deficits, which are well known , there is an urgent need for decisive fiscal consolidation, which will shift the balance of aggregate demand from public to private, and from consumption to capital formation. This is critical to yielding the space required for lowering rates without the imminent risk of resurgent inflation. The fourth coming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way.”
Hope the Government does its part fast and the economy will flourish.
Dr.T.V.Gopalakrishnan
(This article appeared in The Hindu-Business Line dt29/01/12).
Monday, January 16, 2012
Why not a Joint review of Monetary and Fiscal policy ?
The economy needs a morale boost and this can come only if the Government and the RBI jointly initiate measures to revive the confidence of the investors.
January 15, 2012:
The Indian economy, which till a couple of years back was going strong and raising expectations of overtaking even China and other strong economies, has turned weak.
The US financial crisis of 2008, which brought down many economies, did not affect the domestic economy as the crisis was well managed both by the Government and the Reserve Bank of India.
In terms of broad parameters such as GDP growth, inflation, financial stability, exchange rate stability, and so on, the economy was doing well. But the situation changed since 2009.
Erosion of confidence
Many scams, one after another, were detected, revealing governance deficit. Corruption and black money attracted much attention and affected decision making at various levels.
Inflation raised its ugly head and continued to remain unabated. Industrial production declined, with hike in interest rates being cited as one of the major reasons for it. Infrastructure development did not get the priority it deserved.
Favourable monsoon did not bring down food inflation as supply chain constraints and periodical increases in fuel prices affected the marketing and distribution of food products at reasonable prices.
The trade gap widened due to increased imports and reduced exports. And exchange rate fluctuations added fuel to fire. The rupee depreciated by around 17 per cent since August 2011.
Administrative policies were not implemented as expeditiously as the economic conditions of the country demanded. Investments, especially FDI, slowed. And FIIs started pulling out their investments, creating volatility in the stock market.
The downgrading of the US economy and the European crisis have aggravated the situation.
Inflation focus
The Reserve Bank took a series of measures, basically to contain inflation. The approach was to make money dearer and reduce the purchasing power. The RBI raised the repo rate 13 times since March 2010, and brought it to 8.5 per cent in October 2011. The reverse repo was revised to 7.5 per cent and the Marginal Standing Facility was fixed at 9.25 per cent.
Interest rate on savings bank and NRE accounts was deregulated. And sensing the mood of the investing community against further interest rate hikes and seeing some respite in inflation, the RBI decided to keep the rates unchanged in its policy review in December 2011.
But production costs have increased, not only because of the hike in interest rates but also because of input costs going up, reducing thereby the profit margins and fresh investments.
The fiscal policies have not been moving in tune with monetary policies. The general opinion is that the RBI alone is taking action and the Government has been keeping quiet on various fronts.
Direct and indirect tax revenues, which are directly linked to GDP growth, have not been keeping pace with Budget expectations, and the Government is falling behind in achieving the disinvestment targets due to poor market and other conditions.
Infrastructure required for industrial production, particularly energy, has not picked up for want of fresh administrative policies and proper implementation of existing ones.
Fresh impetus
The economy needs a morale boost and this can come only from the Government. To start with, the Government and the RBI should jointly review the monetary and fiscal policies pursued so far and initiate measures to revive the confidence of the investors.
Since food inflation has started declining and the overall inflation is expected to fall to around 7 per cent by March 2011, the RBI can consider effecting some reductions in its policy rates.
Dr.T.V.Gopalakrishnan
(This article appeared in The Hindu-Business Line dt16/01/12)
January 15, 2012:
The Indian economy, which till a couple of years back was going strong and raising expectations of overtaking even China and other strong economies, has turned weak.
The US financial crisis of 2008, which brought down many economies, did not affect the domestic economy as the crisis was well managed both by the Government and the Reserve Bank of India.
In terms of broad parameters such as GDP growth, inflation, financial stability, exchange rate stability, and so on, the economy was doing well. But the situation changed since 2009.
Erosion of confidence
Many scams, one after another, were detected, revealing governance deficit. Corruption and black money attracted much attention and affected decision making at various levels.
Inflation raised its ugly head and continued to remain unabated. Industrial production declined, with hike in interest rates being cited as one of the major reasons for it. Infrastructure development did not get the priority it deserved.
Favourable monsoon did not bring down food inflation as supply chain constraints and periodical increases in fuel prices affected the marketing and distribution of food products at reasonable prices.
The trade gap widened due to increased imports and reduced exports. And exchange rate fluctuations added fuel to fire. The rupee depreciated by around 17 per cent since August 2011.
Administrative policies were not implemented as expeditiously as the economic conditions of the country demanded. Investments, especially FDI, slowed. And FIIs started pulling out their investments, creating volatility in the stock market.
The downgrading of the US economy and the European crisis have aggravated the situation.
Inflation focus
The Reserve Bank took a series of measures, basically to contain inflation. The approach was to make money dearer and reduce the purchasing power. The RBI raised the repo rate 13 times since March 2010, and brought it to 8.5 per cent in October 2011. The reverse repo was revised to 7.5 per cent and the Marginal Standing Facility was fixed at 9.25 per cent.
Interest rate on savings bank and NRE accounts was deregulated. And sensing the mood of the investing community against further interest rate hikes and seeing some respite in inflation, the RBI decided to keep the rates unchanged in its policy review in December 2011.
But production costs have increased, not only because of the hike in interest rates but also because of input costs going up, reducing thereby the profit margins and fresh investments.
The fiscal policies have not been moving in tune with monetary policies. The general opinion is that the RBI alone is taking action and the Government has been keeping quiet on various fronts.
Direct and indirect tax revenues, which are directly linked to GDP growth, have not been keeping pace with Budget expectations, and the Government is falling behind in achieving the disinvestment targets due to poor market and other conditions.
Infrastructure required for industrial production, particularly energy, has not picked up for want of fresh administrative policies and proper implementation of existing ones.
Fresh impetus
The economy needs a morale boost and this can come only from the Government. To start with, the Government and the RBI should jointly review the monetary and fiscal policies pursued so far and initiate measures to revive the confidence of the investors.
Since food inflation has started declining and the overall inflation is expected to fall to around 7 per cent by March 2011, the RBI can consider effecting some reductions in its policy rates.
Dr.T.V.Gopalakrishnan
(This article appeared in The Hindu-Business Line dt16/01/12)
Wednesday, December 21, 2011
NPA Menace
Time for the Govt and the Reserve Bank to come out of the morass caused by Non Performing Advances ( NPAs) in Banking and the Economy.
The NPA menace which was kept under some check for a few years has again been raising its ugly head disturbing the peace of mind of authorities i.e. the Govt and the Reserve Bank. More NPAs mean, more resources the banks have to find to maintain capital adequacy. As long as lending remains an inevitable function of banking and banks have to deal with human beings as borrowers, this problem will continue to haunt the banks. Further, the changes in economic scenario which gets influenced by several micro and macro economic factors that include both domestic and international such as declining GDP growth, high inflation, financial instability, exchange and interest rate volatility, monsoon conditions etc where the management of banks have no control whatsoever, also affect the working of banks adversely and resulting in increased level of NPAS. The present approach by the regulator to expect the banks to make good the loss on account of NPAs by charging to banks' profit and loss account at the cost of all stakeholders of banks viz; depositors, borrowers, shareholders, employees and even customers is neither ethical nor prudential by any reckoning. Further the loss to the economy on account of NPAs is unfortunately made to bear by tax payers as the Govt loses its revenues on account of reduction of GDP because of non performance of assets and also is made to contribute to capital through budgetary provisions to enable the banks to maintain the capital adequacy standards as per Basle norms. The position of Public Sector Banks NPAs vis-a-vis advances, deposits and investments for the period 1993 to 2011 is given below.
( Amount in Rs Crores)
Year Advance NPA NPA as % of Total Advances Deposit CD Ratio Investment Investment Deposit Ratio
1993 1,69,340 39,253 23.2 2,63,315 58.5 99,889 37.9
1994 1,65,621 41,041 24.8 3,03,392 48.4 1,32,810 43.7
1995 1,97,352 38,385 19.5 3,48,938 50.9 1,50,432 43.1
1996 2,31,321 41,661 18.0 3,90,820 53.1 1,62,667 41.6
1997 2,44,214 43,577 17.8 4,49,329 49.0 1,91,058 42.5
1998 2,84,971 45,653 16.0 5,31,723 48.9 2,27,102 42.7
1999 3,25,328 51,710 15.9 6,36,810 46.7 2,76,802 43.5
2000 3,80,077 53,294 14.0 7,37,280 47.8 3,33,414 45.2
2001 4,42,134 54,773 12.4 8,59,376 48.2 3,94,107 45.9
2002 5,09,368 56,473 11.1 9,68,623 52.6 4,54,509 46.9
2003 5,77,813 54,090 9.4 10,79,393 53.5 5,45,668 50.6
2004 6,61,975 51,541 7.8 12,29,462 53.8 6,26,176 50.9
2005 8,77,825 48,399 5.5 14,20,750 61.8 6,60,674 46.5
2006 11,34,724 41,358 3.6 16,22,481 69.9 6,33,557 39.0
2007 14,64,493 38,968 2.6 19,94,199 73.4 6,64,645 33.3
2008 18,19,074 40,595 2.2 24,53,868 74.1 7,99,841 32.6
2009 22,83,473 45,156 2.0 31,12,748 73.4 10,12,666 32.5
2010 27,01,019 57,301 2.1 36,91,802 73.2 12,05,783 32.7
2011 33,05,632 71,047 2.2 43,72,985 75.6 13,28,534 30.4
Source : Trend and Progress of Banking various issues.
It is gratifying to observe that the gross NPAs as percentage of gross advances have drastically come down from 23.2% in March 1993, (when the concept of NPA was first introduced in terms of Financial Sector Reforms) to 2.2 % in March2011. Working of banks got further streamlined based on banking sector reforms introduced in 1998. The results are very encouraging. In the decade 2000 to 2010s, Banks could bring down considerably its NPAs. Many factors have come to the rescue of banks in keeping the NPAs down. The banks were identifying the NPAs through manual process all these years and it was humanly impossible to assess the correct position of NPAs. The banks could manage to keep many NPAs under the carpet and the hidden NPAs were difficult to be identified as banks had umpteen ways to camouflage NPAs. The boom in real estate prices came handy for banks to bring pressure on borrowers who also found it advantageous to sell off their assets and come out of banks' clutches. Further, Debt Recovery tribunals, Lok Adalats, implementation of SURFAESI Act 2002 for recovery of dues, improved performance of the economy and bank's own performance in terms of better profitability on account of enhanced efficiency, productivity, competition, better return out of investments and diversification of operations greatly contributed to bring down NPAs. Huge write offs of NPAs again at the cost of shareholders who include the Govt, effective regulation and supervision of the Reserve Bank had also played an important and effective role in keeping down the level of NPAs. The provisioning requirements of the Reserve Bank in particular compelled banks to be vigilant in minimising the NPAs. Added to this, the permission granted by the Reserve Bank in August 2008 to restructure some of the accounts (though strictly need to be classified as NPAs) and treat them as standard assets if found viable, limited the growth of gross NPAs. The gross NPAs of public Sector banks with all aforesaid adjustments stood at Rs 71047 crores as at end March 2011 are still staggering and causing concern. The steep increase in advances since 2005 onwards (CD ratio increased from 61.8 in 2005 to 75.6 in 2011) is something abnormal and how much of this would turn out to be NPAs is worth watching. With the recent switch over to computerised system to identify the NPAs, the position has been moving from bad to worse. The high interest rate regime, persisting inflationary and near recessionary conditions in the domestic economy, and discouraging economic scenario in US and Europe, the chances of generation of more NPAs in coming months cannot be ruled out. The fact that NPAs affect the economy in general and all stakeholders of banks in particular adversely and finally lead to bail out of banks with budget allocations has been the trend, has to be recognised and this approach to manage NPAs needs a final go-bye.
Time has come to give a serious thought to this NPA menace and a lasting solution to put up with NPAs and at the same time discipline the borrowers without jeopardising the interests of other stake holders has to be attempted. Since only banks and borrowers do figure in the generation of NPAs, the only and ideal way to come out of this ever greening problem is to have a built in mechanism to liquidate NPAs by means of creating a fund under the nomenclature Precautionary Margin Reserve Fund (PMR) involving all borrowers and banks themselves. This has to be done on a systematic and scientific basis. Over a period this fund will be more than the formation of NPAs, and this approach can strengthen the vitally missing credit discipline among the borrowers.
There is a saying that all truth passes through three stages. First it is ridiculed. Second it is violently opposed. Third it is accepted as being self evident( Arthur Scapenhauer). The suggestion to remedy the NPA menace through creation of fund i.e. PMR should not be similar to that and kept aside. Bankers and borrowers will ridicule the suggestion first and oppose it as it affects them directly. Banks will have to tighten the monitoring of accounts on a continuous basis to rate the borrowers, discipline them and levy the contribution towards the PMR fund based on borrowers' rating. Bankers are generally inclined to satisfy the borrowers and do not want to incur any displeasure by being strict and vigilant with them for fear of losing the account when the going is good. Borrowers will oppose creation of this fund as it adds initially to their cost of funds and expects them to adhere to strict credit discipline though they can derive the benefit in the long term. Besides, the rating will have reputation risk with attendant consequences.
It is for the Govt and the Reserve Bank to seriously view the NPA menace and introduce a solution perhaps acceptable to all stakeholders of banks other than borrowers. This suggestion developed through a statistical model has been found workable resulting in disciplining the borrowers and making the balance sheet of the banks strong. The Govt is the major beneficiary in case the solution is introduced.
(Views are personal).
Dr.T.V.Gopalakrishnan
(Edited Version of this write up appeared in The Hindu-Business Line dated 19/12/11)
The NPA menace which was kept under some check for a few years has again been raising its ugly head disturbing the peace of mind of authorities i.e. the Govt and the Reserve Bank. More NPAs mean, more resources the banks have to find to maintain capital adequacy. As long as lending remains an inevitable function of banking and banks have to deal with human beings as borrowers, this problem will continue to haunt the banks. Further, the changes in economic scenario which gets influenced by several micro and macro economic factors that include both domestic and international such as declining GDP growth, high inflation, financial instability, exchange and interest rate volatility, monsoon conditions etc where the management of banks have no control whatsoever, also affect the working of banks adversely and resulting in increased level of NPAS. The present approach by the regulator to expect the banks to make good the loss on account of NPAs by charging to banks' profit and loss account at the cost of all stakeholders of banks viz; depositors, borrowers, shareholders, employees and even customers is neither ethical nor prudential by any reckoning. Further the loss to the economy on account of NPAs is unfortunately made to bear by tax payers as the Govt loses its revenues on account of reduction of GDP because of non performance of assets and also is made to contribute to capital through budgetary provisions to enable the banks to maintain the capital adequacy standards as per Basle norms. The position of Public Sector Banks NPAs vis-a-vis advances, deposits and investments for the period 1993 to 2011 is given below.
( Amount in Rs Crores)
Year Advance NPA NPA as % of Total Advances Deposit CD Ratio Investment Investment Deposit Ratio
1993 1,69,340 39,253 23.2 2,63,315 58.5 99,889 37.9
1994 1,65,621 41,041 24.8 3,03,392 48.4 1,32,810 43.7
1995 1,97,352 38,385 19.5 3,48,938 50.9 1,50,432 43.1
1996 2,31,321 41,661 18.0 3,90,820 53.1 1,62,667 41.6
1997 2,44,214 43,577 17.8 4,49,329 49.0 1,91,058 42.5
1998 2,84,971 45,653 16.0 5,31,723 48.9 2,27,102 42.7
1999 3,25,328 51,710 15.9 6,36,810 46.7 2,76,802 43.5
2000 3,80,077 53,294 14.0 7,37,280 47.8 3,33,414 45.2
2001 4,42,134 54,773 12.4 8,59,376 48.2 3,94,107 45.9
2002 5,09,368 56,473 11.1 9,68,623 52.6 4,54,509 46.9
2003 5,77,813 54,090 9.4 10,79,393 53.5 5,45,668 50.6
2004 6,61,975 51,541 7.8 12,29,462 53.8 6,26,176 50.9
2005 8,77,825 48,399 5.5 14,20,750 61.8 6,60,674 46.5
2006 11,34,724 41,358 3.6 16,22,481 69.9 6,33,557 39.0
2007 14,64,493 38,968 2.6 19,94,199 73.4 6,64,645 33.3
2008 18,19,074 40,595 2.2 24,53,868 74.1 7,99,841 32.6
2009 22,83,473 45,156 2.0 31,12,748 73.4 10,12,666 32.5
2010 27,01,019 57,301 2.1 36,91,802 73.2 12,05,783 32.7
2011 33,05,632 71,047 2.2 43,72,985 75.6 13,28,534 30.4
Source : Trend and Progress of Banking various issues.
It is gratifying to observe that the gross NPAs as percentage of gross advances have drastically come down from 23.2% in March 1993, (when the concept of NPA was first introduced in terms of Financial Sector Reforms) to 2.2 % in March2011. Working of banks got further streamlined based on banking sector reforms introduced in 1998. The results are very encouraging. In the decade 2000 to 2010s, Banks could bring down considerably its NPAs. Many factors have come to the rescue of banks in keeping the NPAs down. The banks were identifying the NPAs through manual process all these years and it was humanly impossible to assess the correct position of NPAs. The banks could manage to keep many NPAs under the carpet and the hidden NPAs were difficult to be identified as banks had umpteen ways to camouflage NPAs. The boom in real estate prices came handy for banks to bring pressure on borrowers who also found it advantageous to sell off their assets and come out of banks' clutches. Further, Debt Recovery tribunals, Lok Adalats, implementation of SURFAESI Act 2002 for recovery of dues, improved performance of the economy and bank's own performance in terms of better profitability on account of enhanced efficiency, productivity, competition, better return out of investments and diversification of operations greatly contributed to bring down NPAs. Huge write offs of NPAs again at the cost of shareholders who include the Govt, effective regulation and supervision of the Reserve Bank had also played an important and effective role in keeping down the level of NPAs. The provisioning requirements of the Reserve Bank in particular compelled banks to be vigilant in minimising the NPAs. Added to this, the permission granted by the Reserve Bank in August 2008 to restructure some of the accounts (though strictly need to be classified as NPAs) and treat them as standard assets if found viable, limited the growth of gross NPAs. The gross NPAs of public Sector banks with all aforesaid adjustments stood at Rs 71047 crores as at end March 2011 are still staggering and causing concern. The steep increase in advances since 2005 onwards (CD ratio increased from 61.8 in 2005 to 75.6 in 2011) is something abnormal and how much of this would turn out to be NPAs is worth watching. With the recent switch over to computerised system to identify the NPAs, the position has been moving from bad to worse. The high interest rate regime, persisting inflationary and near recessionary conditions in the domestic economy, and discouraging economic scenario in US and Europe, the chances of generation of more NPAs in coming months cannot be ruled out. The fact that NPAs affect the economy in general and all stakeholders of banks in particular adversely and finally lead to bail out of banks with budget allocations has been the trend, has to be recognised and this approach to manage NPAs needs a final go-bye.
Time has come to give a serious thought to this NPA menace and a lasting solution to put up with NPAs and at the same time discipline the borrowers without jeopardising the interests of other stake holders has to be attempted. Since only banks and borrowers do figure in the generation of NPAs, the only and ideal way to come out of this ever greening problem is to have a built in mechanism to liquidate NPAs by means of creating a fund under the nomenclature Precautionary Margin Reserve Fund (PMR) involving all borrowers and banks themselves. This has to be done on a systematic and scientific basis. Over a period this fund will be more than the formation of NPAs, and this approach can strengthen the vitally missing credit discipline among the borrowers.
There is a saying that all truth passes through three stages. First it is ridiculed. Second it is violently opposed. Third it is accepted as being self evident( Arthur Scapenhauer). The suggestion to remedy the NPA menace through creation of fund i.e. PMR should not be similar to that and kept aside. Bankers and borrowers will ridicule the suggestion first and oppose it as it affects them directly. Banks will have to tighten the monitoring of accounts on a continuous basis to rate the borrowers, discipline them and levy the contribution towards the PMR fund based on borrowers' rating. Bankers are generally inclined to satisfy the borrowers and do not want to incur any displeasure by being strict and vigilant with them for fear of losing the account when the going is good. Borrowers will oppose creation of this fund as it adds initially to their cost of funds and expects them to adhere to strict credit discipline though they can derive the benefit in the long term. Besides, the rating will have reputation risk with attendant consequences.
It is for the Govt and the Reserve Bank to seriously view the NPA menace and introduce a solution perhaps acceptable to all stakeholders of banks other than borrowers. This suggestion developed through a statistical model has been found workable resulting in disciplining the borrowers and making the balance sheet of the banks strong. The Govt is the major beneficiary in case the solution is introduced.
(Views are personal).
Dr.T.V.Gopalakrishnan
(Edited Version of this write up appeared in The Hindu-Business Line dated 19/12/11)
Sunday, September 18, 2011
Petrol Politics, Inflation and Indian masses
This is in response to the write up on "For petrol, Indians shell out the most in the world". The link is here
The only explanation for high prices of oil in India is the total mismanagement of the economy and utter disregard for the concern of the people's suffering. It is a solid example that pricing in india is not based on any rationale.The tax,wastage, extravaganza of companies who deal in petroleum products, maldistribution and wrong method of transportation and excessive cost on tranportation will account for the mismanagement. Black money, corruption and other mal practices like adulteration also add to the cost to the ultimate consumer. Governance is literally absent and accountability is virtually missing. People are helpless and they silently suffer. This is one of the major reasons for continued persistence of high inflation and the Reserve Bank has its own limitations in such matters like pricing of essential consumable items having inflationary impact.
Dr.T.V.Gopalakrishnan
The only explanation for high prices of oil in India is the total mismanagement of the economy and utter disregard for the concern of the people's suffering. It is a solid example that pricing in india is not based on any rationale.The tax,wastage, extravaganza of companies who deal in petroleum products, maldistribution and wrong method of transportation and excessive cost on tranportation will account for the mismanagement. Black money, corruption and other mal practices like adulteration also add to the cost to the ultimate consumer. Governance is literally absent and accountability is virtually missing. People are helpless and they silently suffer. This is one of the major reasons for continued persistence of high inflation and the Reserve Bank has its own limitations in such matters like pricing of essential consumable items having inflationary impact.
Dr.T.V.Gopalakrishnan
Thursday, August 25, 2011
Issue of Banking Licence to Corporate Sector
Dr.T.V.Gopalakrishnan (Fort worth, Texas.)
25 Aug, 2011 09:00 AMThe editorial is very apt and to the point. The Governor's concern on the issue of banking Licences to corporates is genuine and justifiable. As it is, the banking sysytem in India is fairly sound, healthy and competitive. Ownershipwise, banks are reasonably well distributed and owned by government, public and private sector, private sector and Cooperative sector and their working has been by and large satisfactory catering to all segments of the economy. In case corporate sector steps in, it may distort the functioning and the present laws will not be adequate to regulate it effectively. Besides, in case Corpo rate sector enters the field,Financial inclusion which has not taken off well in the absence of active involvement of private sector,will become a major casuaty and agricultural sector will continue to suffer further. Tax payers money will have to come to the rescue of many segments if corporates enter banking . Prevention is better than cure should be the approach. Hope wisdom will prevail. The Govt cannot afford to ignore the lessons from past history of banking in the 1960s and the compulsions for nationalisation of banks in !969 and 1980. Let us not experiment again by allowing corporates to set up banking.
(This appeared in ET,dated 25/08/11)
25 Aug, 2011 09:00 AMThe editorial is very apt and to the point. The Governor's concern on the issue of banking Licences to corporates is genuine and justifiable. As it is, the banking sysytem in India is fairly sound, healthy and competitive. Ownershipwise, banks are reasonably well distributed and owned by government, public and private sector, private sector and Cooperative sector and their working has been by and large satisfactory catering to all segments of the economy. In case corporate sector steps in, it may distort the functioning and the present laws will not be adequate to regulate it effectively. Besides, in case Corpo rate sector enters the field,Financial inclusion which has not taken off well in the absence of active involvement of private sector,will become a major casuaty and agricultural sector will continue to suffer further. Tax payers money will have to come to the rescue of many segments if corporates enter banking . Prevention is better than cure should be the approach. Hope wisdom will prevail. The Govt cannot afford to ignore the lessons from past history of banking in the 1960s and the compulsions for nationalisation of banks in !969 and 1980. Let us not experiment again by allowing corporates to set up banking.
(This appeared in ET,dated 25/08/11)
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