Banking & RBI

"The decline in the states' own tax revenues is a matter of concern," said the RBI in its study titled State Finances ¬ A Study of Budgets of 2009-10.

On the non-tax front, the states' non-tax revenue at around 10 per cent of the total revenue receipts appears to be low by international standards, it said.

"The states may, there- fore, make efforts to increase their reliance on non-tax revenues by levying appropriate user charges such as time-bound revision of water supply tariffs, introduction of user charges in health, education and veterinary services and cost recovery from social and economic services," the RBI said.

The RBI study said states may also rein in tax expenditure, which is revenue fore- gone because of preferential provisions of the tax structure, including exemptions, deductions, credits, deferrals and reduced tax rates to arrest the fall in tax receipts.

It further said state governments might consider strengthening their tax ad- ministrations through measures such as computerisation of commercial taxes, online registration and online filing of returns and computerisation of land records.

"These measures may help the states to augment their revenue bases in the medium and long run," RBI has said.

The National Electronic Fund Transfer (NEFT), which allows bank customers to transfer funds electronically, has been a highly successful service ever since it was launched in late 2005.

In a circular to the chiefs of all member-banks providing the NEFT service, the RBI has asked the banks to take necessary measures to "strengthen the NEFT system in terms of availability, convenience, efficiency and speed" from March 1

According to the RBI, if a company wants to be classified as IFC, it should have a minimum of 75 per cent of its total assets deployed in infrastructure loans and it should have net owned funds of Rs 300 crore or above. It should have a minimum credit rating ‘A’ or equivalent by rating agencies. The capital adequacy ratio (CRAR) should be 15 per cent (with a minimum Tier I capital of 10 per cent). Apart from IFCs, the other thre categories of NBFCs are asset finance companies (AFCs), loan companies (LCs) and investment companies (ICs).

The RBI has extended several sops to IFCs in lending. IFCs can exceed the concentration of credit norms to any single borrower by ten per cent of its owned fund and single group of borrowers by 15 per cent of its owned fund. In the case of group lending and investing (loans/investments taken together), it can exceed the limit of five per cent of its owned fund to a single party and ten cent of its owned fund to a single group of parties.

Systematically important non-deposit taking non-banking finance companies, engaged predominantly in the infrastructure financing, had earlier requested the RBI that there should be a separate category of infrastructure financing NBFCs in view of the critical role played by them in providing credit to the infrastructure sector. In another notification issued today, the Reserve Bank has linked the risk weight of banks’ exposure to infrastructure finance companies to their credit rating assigned by external credit assessment institutions (ECAIs). Further, with a view to encouraging larger flow of funds to infrastructure, the exposure of a bank to infrastructure finance companies has been enhanced up to 20 per cent of its capital funds.

The latest RBI move has come at a time when bankers urged the central bank to include infrastructure loans in the category of priority sector advances and exempt infrastructure bonds from mandatory cash requirements, as they struggle to finance long-term projects.

The Reserve Bank of India (RBI) has hiked the daily ceiling for banking transactions through mobile phones to Rs 50,000--a significant jump from the present cap of Rs 15,000. Mobile banking, as defined by RBI, refers to the facility, which enables bank customers to access their accounts using an application on their mobile phone.

Mobile banking applications enable payments made from customer's account's through debit/credit on the basis of funds transfer instruction received over the mobile phones. The RBI had capped daily funds transfer to Rs 5,000 and transactions involving purchase of goods or services to Rs 10,000. This limit is now consolidated into a single daily limit of Rs 50,000.

Speaking in a Ficci seminar in December, RBI deputy governor KC Chakrabarty had said that banks had complained that the limit of Rs 5,000 does not permit transactions like purchase of airline tickets and thus this limits needs to hiked.

On Thursday, RBI also said that transaction up to Rs 1,000 can be facilitated by banks without end-toend encryption. However, banks will have to ensure that the risk aspects involved in such transactions is addressed through adequate security measures. At the seminar, Mr Chakrabarty had said that banks had complained that the current requirement of endto-end encryption makes implementation of mobile banking costly and that RBI should do away with this requirement.

Source: Economic Times RBI ups daily ceiling on mobile banking

The apex bank said certain scheduled commercial banks are extending short-term loans of tenure ranging from six months to one year to HFCs, and classifying the same as priority sector advances. Since, the housing loans are generally medium to long term taken by individuals, short-term loans with tenor of six months to one year granted by banks to HFCs for onlending purposes would not be same as the loans taken by the individuals. "The banks should accordingly note that if the tenor of such loans granted by them to HFCs is not co-terminus with the onlending of HFCs.... they will not be eligible for classification under priority sector lending," it said in a notification

"The RBI should review this matter and re-formulate the norms governing credit card services with a view to providing the much-needed relief to the general public," the committee said in its report. Most companies charge interest rates of nearly 3% a month on credit card outstanding, which on annualizing works out to more than 40% per annum.

In its report the committee notes: "Banks have been given complete freedom to charge rate of interest regardless of their benchmark prime lending rates, thereby enabling them to charge exorbitant and usurious interest."

Credit card companies argue that the rate of interest charged is high because the credit is totally unsecured, carrying the highest risk. The high interest charged covers up for the risk for the greater default in the case of credit card lending.

Source: Economic Times Credit card maths riles House panel

The Reserve Bank of India (RBI) has told banks to focus on lending for the short and medium term rather than lock themselves in long-term loans. This follows concerns that banks are running huge asset-liability mismatches by extending very longterm project loans even as their funding comes from short-term deposits.

"This was an issued that was raised by a deputy governor in a recent meeting with bank chiefs," said the chairman of a public sector bank on the condition of anonymity. In the meeting, RBI told banks that since the average liability on the books of banks was is in the range of one to two years, they would be better positioned to lend projects for short to medium term (three years). This, is turn, will help banks in improving their asset-liability mismatches. Banks can lend long-term projects only if they have long-term liabilities on their books. As of now, the share of deposits maturing over five years is 9% of total deposits while the share of one to two years deposits have risen from 26.5% in 2006 to 40% in 2008. Banks have been lobbying with RBI to allow them to issue tax-free, long-term bonds to enable them to raise funds for long-term projects.

RBI is of the view that banks should finance a project in the initial stage of implementation and these loans could be then taken over by longer term financiers. Following which banks could provide working capital loans while term-financing institutions could focus on long-term loans. Take-out financing is a mechanism wherein originator enters into an agreement to sell loan to another lender at a mutually agreed price in future date. Here the originator holds the loan in his books for the initial years while the buyer of the loan retains its till maturity. In a last credit policy, RBI has said that it is very close to finalising the guidelines on take-out financing.

Source: Economic Times Bank On Short-Term Loans In Line With Deposit Trend: RBI

This will benefit sectors such as aviation, telecom and infrastructure, which employ a large number of expats, making it easier for them to attract talent from abroad. Earlier, expats could take only 75% of their salaries abroad.

The central bank has changed the regulations under the Foreign Exchange Management Act (Fema) in this regard. The decision will give flexibility to companies in structuring the salary packages of expats without bothering about forex laws. Indian citizens employed by foreign companies abroad but on deputation to India will also benefit from this move.

"This is a very positive move from RBI. ... However, the expatriates have to ensure that they pay proper Indian taxes and any non-compliance will expose them to penal provisions of Indian tax laws and exchange control laws," said Amitabh Singh, partner at Ernst & Young.

* No word on pay restructure yet

Source: Economic Times RBI to let expats enjoy entire fruits of labour

All payments to merchants that did not involve transfer of funds to nodal banks should be effected within a maximum of T+2 settlement cycle. (T is defined as the day of intimation regarding the completion of transaction), RBI said in directions issued to banks tonight. It also said all payments to merchants involving nodal banks should be effected within a maximum of T+3 settlement cycle.

The central bank also said banks should convert the existing accounts used to collect payments for electronic transactions (payment) into internal accounts within three months. At present, the payments made by customers (for settlement of e-commerce/m-commerce/bill payment transactions), are credited to the accounts of intermediaries. These funds are then transferred to the accounts of the merchants in final settlement.

Any delay in the transfer of the funds by the intermediaries to the merchants’ account will entail risks to the customers and the merchants. It would also adversely impact the payment system, RBI said.

Funds maintained in these accounts would be treated as outside liability of the bank and the balances in these accounts taken into account for computing net demand and time liabilities of the bank. Banks shall subject these accounts to concurrent audit. They should also give a certificate every quarter to the effect that these accounts are operated in accordance with these directions.

All persons authorised to operate the payment system for issuing prepaid payment instruments and card schemes should comply with these directions, RBI has said.

The move will benefit public sector NBFCs such as Power Finance Corporation, Rural Electrification Corporation and private sector ones, including Srei Infrastructure Finance and L&T Finance, helping increase the flow of funds to the sector.

 “These companies will now be able to raise overseas debt from multiple agencies,” a government official said.

NBFCs lending largely to the infrastructure sector were allowed to access foreign debt in January 2008 from multilateral agencies such as KfW and World Bank as part of the stimulus package given to insulate the Indian economy from the global financial meltdown.

However, the move did not help these NBFCs as most of the multilateral organisations found it easier to lend directly to infrastructure projects. These NBFCs had petitioned to both the government and the RBI, seeking flexibility to raise ECBs from multiple entities.

 These NBFCs would be able to raise foreign debt only after securing prior approval from the central bank. However, they would be subject to prudential guidelines of the central bank.

“This would make it easier and faster for NBFCs to raise funds and thereby help improve the flow of funds to the infrastructure sector,” said Sanjay Hegde, executive director, PwC.

The RBI had earlier relaxed the condition that borrowings by these firms from multilateral and regional agencies should always be a third of their total direct lending to infrastructure companies in India.

A month on, the rates have actually gone down. A top-rated Indian company could have availed of a six-month loan at 8 per cent or so a month ago; today it can do so at a rate that is 100-150 basis points lower.

Similarly, the cost of one-year loans has declined by about 100 basis points to 7-9 per cent over the last four weeks, while loans for five years, which cost 10 per cent, have become 50-75 basis points cheaper.

Within days of the policy, State Bank of India (SBI) and Punjab National Bank (PNB), the two largest in the public sector domain, lowered its deposit rates by 25-50 basis points, besides extending special home loan schemes for few more months.

Axis Bank followed suit and offered home loans at 8 per cent for the first year. A few days ago, HDFC Bank lowered the interest rate on used car loans, while PNB reduced auto loan rates by 50 basis points. The National Bank for Agriculture and Rural Development, too, lowered their refinance rate, while Punjab & Sind Bank cut interest rates on farm loans.

“One of the main reasons for softening of interest rates is weak credit demand. Also, there is adequate liquidity in the system. A bulk of the lending is happening for the short-term,” said Partha Mukherjee, president (Credit), Axis Bank.

Source: Business-standard Bank rates go down in spite of RBI signal

INDIA is taking its first significant step to ward off a surge in foreign capital flows that may threaten the stability of the financial system by drawing up new rules that will make overseas loans costlier for companies.

The government is finalising plans to auction corporate entitlements to borrow abroad, a pre-emptive move relaying the message that the country is determined not to allow unruly capital flows to disrupt the incipient economic recovery.

A senior finance ministry official told ET that the government is crafting a mechanism for the auction of external commercial borrowing (ECB) rights after being asked to do so by the Reserve Bank of India (RBI).

RBI has said several times in the past few weeks that it is concerned about the impact of volatile capital flows on India, which may have to exit from its expansionary monetary policy sooner than other countries because of inflationary pressures. But the central bank has so far not been in favour of auctioning ECB rights, arguing that quotas will be hard to administer and may crowd out smaller borrowers.

Source: Economic Times By Deepshikha Sikarwar India Inc may have to bid for overseas loan quotas

In its report on `Payment Systems in India: Vision 2009-12', the RBI said it would look into the concept of a domestic payment card (India Card) and a PoS (point of sale) switch network for issuance and acceptance of payment cards. "The need for such a system arises from two major considerations the high cost borne by the Indian banks for affiliation with international card associations (like Visa and Mastercard) in the absence of a domestic price setter and the connection with international card associations resulting in the need for routing even domestic transactions, which account for more than 90 per cent of the total, through a switch located outside the country," it said.

As per the RBI Annual Report, the value of credit card transactions were Rs 65,356 crore in 2008-09, a 100 per cent jump in the last three years. This means almost Rs 60,000 crore was settled outside India through Visa and Mastercard which act as the payment link on behalf of the bank, merchant and card holder last year. Debit card transactions amounted to Rs 18,547 crore in 2008-09. The Indian Banks Association is also in favour of setting up a payment card.

The RBI is also planning to implement a 24-hour fund transfer system. The bank would pursue the suggestion to consider the need to extend NEFT (National Electronic Fund Transfer) to function on a 24x7 basis seamless fund transfer without any break or to develop a new system akin to the Faster Payments Service in the UK which operates on a 24x7 basis. The existing NEFT system operates during weekdays from 9 am to 5 pm and on Saturdays from 9 am to 12 noon. This will enable stock exchanges to extend trading hours and align their operations with other countries.

Source: The Indian Express RBI plans to play own card against Visa, MasterCard

Foreign banks may not be allowed to open more branches in the country until the Reserve Bank of India (RBI) completes an assessment of their risk-management capability and transparency in financial affairs.

The banking regulator is running a detailed assessment of all foreign banks operating in India to ensure that they do not pose any systemic risk to the banking system in the aftermath of the global financial crisis, a senior RBI official told ET.

India has committed to allow 12 new branches of foreign banks a year, but has been more liberal so far. There are 32 foreign banks operating in India through close to 300 branches. This has resulted in a relatively high presence of foreign banks in India.

“Our WTO commitment allows us to deny licences to foreign banks once their share in the total assets of the banking system exceeds 15%. Though the actual share of these banks has far exceeded that limit long time back, India never evoked the clause to provide licence,” the RBI official said, requesting anonymity.

Source: Economic Times RBI to audit foreign bank ops before allowing new branches

Banks will now have to set aside 1% of a loan given to commercial real estate as a provision, up from 0.4% now. RBI governor D Subbarao has categorised such loans as those given to builders for construction of commercial properties like offices, malls, entertainment zones and hotels.

OP Bhatt, chairman, State Bank of India, said the interest rate on such loans would go up marginally. Most banks are disbursing loans to builders at prime lending rate (PLR) or at a spread over the PLR.

Chanda Kochhar, CEO of ICICI Bank, said: “There is no issue of asset bubble as such. The provisioning of loans extended to commercial real estate was high previously. Subsequently, the credit flow to this sector fell, which impacted its activity. Now that the activity has picked up in this sector, RBI has raised provisioning requirement back to the old levels. But banks’ exposure towards commercial real estate sector is low. NBFCs and mutual funds are more active in this space.”

The provisioning for such loans was reduced from 1% to 0.4% after the collapse of Lehman Brothers caused credit lines across banks (globally) to freeze.

Source: Economic Times Banks asked to make higher provisions on bad loans