RBI Notifications

Jul, 18, 2019

Bimal Jalan Committee on RBI’s reserves

News

  • The Bimal Jalan Committee on treatment of Reserve Bank of India’s reserves is likely to recommend a transfer of a specified quantum of RBI reserves to the government.

Bimal Jalan Committee and its Terms of Reference

  • The committee was to keep in mind the statutory mandate under the RBI Act that the profits of the RBI be transferred to the government after it made provisions ‘which are usually provided by the bankers’.
  • Against this background, the committee was tasked with reviewing the status, need, and justification of the various provisions, reserves and buffers currently provided for by the RBI.
  • It was also tasked to review the global best practices followed by central banks in making provisions for the risks that central bank balance sheets are subject to.
  • The committee was also tasked with suggesting an “adequate level” of risk provisioning that the RBI should maintain, and determining whether the RBI’s current reserves were surplus of this or lower.
  • If they are surplus, then the committee also had to come up with a suitable profits distribution policy.

Quick recap: Issue over transfer of RBI surplus

  • The government and the RBI have been at loggerheads over the issue of how much of the central bank’s reserves can be transferred to the Centre.
  • The government view has been that the RBI’s reserves constitute 27% of its total assets, a much higher proportion than the global norm of 14%.
  • As a means to reach a resolution on the issue, the central bank, in December, constituted a committee under former RBI Governor Bimal Jalan.

Why govt. needs RBI money?

  • The treatment of the RBI’s reserves is a matter of great importance at a time when the central government has committed to a fiscal deficit target of 3.3% in financial year 2019-20, and a further tightening to 3% the next year.
  • With tax revenues falling short of expectations, any off-Budget receipts from the RBI will be welcomed by the Centre.

What are the key contentious issues?

  • First and foremost is the issue of transferring past reserves including unrealized gains in gold and currency revaluation accounts.
  • Most committee members favoured a reduction in the RBI’s excess reserves in a phased manner over 3 to 5 years, without any substantial additional annual transfer to the government.
  • It is not immediately clear how much excess capital has the committee identified that can be shared with the government.
  • The other big issue pertains to RBI’s profits.

What next?

  • Many economists and expert committees have in the past argued that the RBI is holding much higher capital that required to cover all its risks and contingencies.
  • Former CEA Arvind Subramanian said in Economic Survey 2016-17 that the RBI is already exceptionally highly capitalized.
  • The recommendations will be submitted to the central bank “very soon”.
  • The report is also expected to reflect the differences among the panel members over the treatment of RBI’s excess reserves.
Jul, 09, 2019

Utkarsh 2022

News

Utkarsh 2022

  • The Reserve Bank of India (RBI) board has finalised a three- year roadmap to improve regulation and supervision, among other functions of the central bank.
  • This medium term strategy — named Utkarsh 2022 — is in line with the global central banks’ plan to strengthen the regulatory and supervisory mechanism.
  • Worldwide, all central banks strengthen the regulatory and supervisory mechanism; everybody is formulating a long-term plan and a medium-term plan.
  • So, the RBI has also decided it will formulate a programme to outline what is to be achieved in the next three years.
  • While around a dozen areas were identified by the committee, some board members felt that areas could be filtered and lesser number of areas can be identified for implementation in the next three years.

Why such move?

  • The idea is that the central bank plays a proactive role and takes preemptive action to avoid any crisis.
  • We are very much aware of the IL&FS debt default issue and the crisis of confidence the non-banking financial sector faced in the aftermath.
Jun, 25, 2019

RBI introduces Complaint Management System (CMS)

News

  • The RBI has launched a Complaint Management System (CMS) by providing a single window on Reserve Bank’s website for lodging complaints against any regulated entity.

Complaint Management System

  • Members of public can access the CMS portal at the central bank’s website to lodge their complaints against any of the entities regulated by RBI.
  • CMS provides auto-generated acknowledgements and enabling them to track the status of their complaints and file appeals online against the decisions of Ombudsmen, where applicable.
  • Complainants can voluntarily share feedback on their experience in obtaining redressal.
  • CMS can generate various reports for monitoring and managing complaints pertaining to each entity.
  • The CMS has self-help material (in video format) to guide the users of the portal; videos on safe banking practices; and on the regulatory initiatives of RBI.

Resolution under CMS

  • CMS facilitates the regulated entities to resolve customer complaints received through CMS by providing seamless access to their Principal Nodal Officers/Nodal Officers.
  • The complaint would be directed to the appropriate Office of the Ombudsman/ Regional Office of the RBI.
  • The benefit to the financial system will accrue from seamless access of CMS to the nodal officers of banks and financial service providers (FSPs).

Benefits

  • Customer awareness is an enabling tool for strengthening customer protection.
  • An alert and aware customer can effectively guard against the risks of mis-selling, cheating, frauds and such other threats.
Jun, 14, 2019

Jalan panel defers report on RBI surplus funds

News

  • A committee under former RBI governor Bimal Jalan considering guidelines for transfer of the central bank’s surplus funds to the government delayed submitting its report after lack of consensus.

Bimal Jalan Committee

  • The committee was appointed in December 2018 to review the Economic Capital Framework (ECF) for the RBI after the Finance Ministry advised the central bank to transfer surplus funds to the government.
  • The RBI has over Rs 9.6 lakh crore surplus capitals.
  • The panel has been entrusted with the task of reviewing the best practices followed by central banks worldwide in making assessment and provisions for risks.

Issue over surplus transfers

  • The government and the RBI under its previous governor Urjit Patel had been at loggerheads over the Rs 9.6 lakh crore surplus capital with the central bank.
  • The finance ministry was of the view that the buffer of 28 per cent of gross assets maintained by the central bank is well above the global norm of around 14 per cent.

What is Economic Capital?

  • Banks and financial institutions are faced with long-term future uncertainties that they intend to account for.
  • Economic capital (EC) is the amount of risk capital that a bank estimates in order to remain solvent at a given confidence level and time horizon.
  • The concept of economic capital has gained significance especially after the global financial crisis in 2008.
  • The crisis exposed many central banks in the world to multiple risks, which forced many of them US Federal Reserve, Bank of England and European Central Bank to pump in liquidity.
  • They tempted to buy securities and expand their balance sheets to boost confidence in the financial system and to ensure that critical institutions did not collapse.

Balance sheet of Central Banks

  • The balance sheet of central banks is unlike that of the institutions that it regulates or supervises.
  • They are not driven by the aim of boosting profits given their public policy or public interest role.
  • Their aim is primarily ensuring monetary and financial stability and maintaining confidence in the external value of the currency.
  • Central banks do make money or the profits earned by issuing currency which is passed on to the owner of the central bank, the government.
  • But they are typically conservative and the crisis prompted a review of the capital buffers that central banks and commercial banks needed.

Potential Risks to Central Banks

  • Traditionally, central banks have been factoring in risks such as credit risk when there could be a potential default by an entity in which there has been an investment or exposure.
  • There is also interest rate risk when interest rates either move up or slide, depending on the price of which securities or bonds held by a central bank or banks can be impacted.
  • Besides, there is operational risk when there is a failure of internal processes.
  • To measure these risks, both quantitative and qualitative methods are typically used.

The RBI proposal

  • RBI holds a huge pile of foreign exchange reserves, and as the lender of last resort it described as contingent risks arising from its public policy role in fostering monetary and financial stability.
  • In 2015, the RBI discussed this and put in place a draft Economic Capital Framework, or ECF.
  • The rationale for such a capital framework was that there were increased risks to its balance sheet.
  • RBI sought for an adequate capital buffer, critical not only to achieving its objectives, but also to ensuring the credibility of the central bank.

Concerns of RBI

  • RBI pointed out that a weak balance sheet could force the central bank to rely more on excessive seigniorage (profit made by issuing currency) income, which would run in conflict to its price stability mandate.
  • A compelling reason for RBI to build large capital buffers is to try and preempt a situation where they have to approach their governments for putting up their capital for recapitalization.
  • That is seen by them as an erosion of their operational independence.
  • The sovereign governments themselves are under fiscal strain.
  • This strengthens the case for ex-ante capitalization (based on forecasts) than ex-post capitalization i.e. better to build a capital framework way ahead of a crisis.
Jun, 07, 2019

[op-ed snap] Eye on growth

CONTEXT

As was expected, the monetary policy committee (MPC) of the Reserve Bank of India delivered its third consecutive rate cut of 25 basis points, citing significant weakness in growth impulses.

Background

  • The repo rate now stands at 5.75 per cent. Significantly, all six members of the MPC, including Viral Acharya and Chetan Ghate who had earlier voted against monetary easing, opted not only for a loose monetary policy, but also a shift in stance from neutral to accommodative, opening the door for more rate cuts in the future.
  • The message is clear: Inflation remains contained, while the slowdown in economic activity is deeper than what was believed.

Inflation Front

  • On the inflation front, recent data points towards a broad-based pick up in prices of several food items, increasing the prospects of higher retail inflation in the coming months.
  • However, the MPC isn’t perturbed, as it expects a larger reversal in prices during autumn and winter.
  • Further, with demand weakening, core inflation has moderated, as have households expectations of three months ahead inflation.
  • The RBI now expects retail inflation at 3-3.1 per cent in the first half of FY20, rising thereafter to 3.4-3.7 per cent in the second half, well within the 4 (+/-2) per cent band.

Reasons to worry

  • In the economy though, there is reason to worry.
  • In February, the RBI had projected the economy to grow at 7.4 per cent in FY20.
  • It then lowered its forecast to 7.2 per cent in the April, and has now cut it to 7 per cent.
  • But with the underlying drivers of growth sputtering, private consumption, investment and export growth remain subdued, and with limited fiscal space, achieving even this may be difficult.

Does transmission work?

Questions –

  •  Will cuts in the repo rate translate to lower lending rates?
  • Will it boost consumption and investment demand?
  • In the policy document, the RBI noted that while the transmission of the previous two repo cuts was 21 bps to the lending rate on fresh rupee loans, the lending rate on outstanding loans increased by 4 bps as “past loans continue to be priced at higher rates”.

Optimistic notion –

  • Perhaps, with liquidity moving into surplus mode — liquidity in the system turned into an average daily surplus of Rs 66,000 crore after being in deficit in April and most of May — transmission will improve.
  • The decision to review the liquidity management framework by constituting an internal working group is a positive signal.

Conclusion

The dovish tone of the policy increases the likelihood of another rate cut in August, presumably once concerns over fiscal slippage are addressed after the budget is presented, and greater clarity emerges on the monsoon. Further rate cuts though will depend on the extent of the growth slowdown and the trajectory of inflation.

Jun, 07, 2019

RBI has cut lending rates for the third consecutive time

News

  • The RBI has reduced the repo rate by 25 basis points (bps) to 5.75 per cent in the second bi-monthly monetary policy meet of the financial year 2019-20 (FY20).
  • It was a third straight interest rate cut by the RBI’s monetary policy committee (MPC).

What is Repo Rate?

  • REPO denotes Re Purchase Option – the rate by which RBI gives loans to other banks.
  • In other words, it is the rate at which banks buy back the securities they keep with the RBI at a later period.
  • Bank gives loan to the public at a higher rate, often 1% higher than REPO rate, at a rate known as Bank Rate.
  • RBI at times borrows from banks at a rate lower than REPO rate, and that rate is known as Reverse REPO rate.

Why has RBI cut repo rate

  • The RBI was widely expected to go for an interest rate cut amid dismal gross domestic product (GDP) growth, subdued investment and slowdown in consumption space.
  • Last week, government data showed GDP growth slowed to a five-year low of 5.8 per cent in the fourth quarter (Q4) of FY19.
  • Weak growth amid benign CPI inflation had created room for the Monetary Policy Committee to cut the repo rate by 50-75 bps through FY20E, beginning in June 2019.

Concern over the cut

  • The big concern is whether the transmission of the cut takes place adequately, in the sense of banks passing in the rate cut to customers.
  • This has not happened sufficiently in the case of the previous cuts.

Back2Basics

Monetary Policy Committee

May, 16, 2019

Reserve Bank proposes 24×7 NEFT money transfer

News

  • The RBI has proposed to examine the possibility of extending availability of National Electronic Funds Transfer (NEFT) round-the-clock on all the seven days of the week — 24×7 basis — to facilitate beyond the banking hour fund transfer.
  • Besides, the central bank will also examine the possibility of extending the timings for Real Time Gross Settlement (RTGS) transactions.

What are NEFT and RTGS?

I. NEFT

  • NEFT is an electronic funds transfer system maintained by the Reserve Bank of India (RBI).
  • Started in November 2005, the setup was established and maintained by Institute for Development and Research in Banking Technology (IDRBT).
  • NEFT enables bank customers in India to transfer funds between any two NEFT-enabled bank accounts on a one-to-one basis. It is done via electronic messages.
  • Unlike Real-time gross settlement (RTGS), fund transfers through the NEFT system do not occur in real-time basis.

II. RTGS

  • RTGS are specialist funds transfer systems where the transfer of money or securities takes place from one bank to any other bank on a “real time” and on a “gross” basis.
  • Settlement in “real time” means a payment transaction is not subjected to any waiting period, with transactions being settled as soon as they are processed.
  • “Gross settlement” means the transaction is settled on one-to-one basis without bundling or netting with any other transaction.
  • “Settlement” means that once processed, payments are final and irrevocable.

What are the current limits?

  • Customers can transfer anywhere between Rs 1 and Rs 25 lakh via NEFT (for HDFC Bank; varies from bank to bank) through net banking in a day.
  • Through RTGS, they can transfer between Rs 2 lakh and Rs 25 lakh through net banking in a day.
  • However, as of now, these online transactions are not available on Sundays, on the second and fourth Saturdays of every month and on bank holidays.
  • On working days, NEFT is available between 8 am and 7 pm (varies from bank to bank) except on working Saturdays (8 am and 1 pm) and hence they restrict customers’ ability to carry out such transactions.
  • Online RTGS transactions are available for lesser hours. It can be done till 4 pm (varies from bank to bank).

Current options available

  • Customers can currently transfer money through Immediate Payment Service (IMPS) round the clock but the maximum amount allowed is Rs 2 lakh.
  • If RBI makes NEFT 24×7, it will not only ease the fund transfer for customers round the clock but will also take some load-off the bank branches for executing such transactions.
Apr, 30, 2019

[op-ed snap] Regulator’s Role

CONTEXT

The Supreme Court  has told the regulator that it is duty bound to disclose the list of defaulters and also make public its annual inspection reports of banks and financial institutions.

Background

  • IT is a fraught time for India’s central bank.
  • After a much publicised conflict between the government and the RBI, which finally led to the exit of Governor Urjit Patel and a knock to its institutional reputation, it has been dealt another blow by the Supreme Court.
  • The SC, while stating that the RBI had committed contempt of court, has warned the regulator that non-compliance of its order would be taken seriously as the bank had been refusing to provide information on all these under the RTI Act, citing its disclosure policy.
  • The other legal test the RBI faces is the unprecedented case of a regulated entity — the Kotak Bank — taking it to court over a regulatory ruling on lowering the shareholding of the original promoter of the bank.

Reasons for non- disclosure

1. Protecting Banking Secrecy – For long, the RBI has resisted disclosure of defaulters on the ground that it would violate banking secrecy laws while justifying holding back information and inspection reports of its supervisory teams on individual banks on fears of a weakening of trust among depositors and the impact on the financial markets and stocks of listed banks.

2. Low levels of financial Literacy – There is some truth to this argument in a country with low levels of financial literacy given that in the past, the country’s finance minister and the RBI were forced to publicly assure depositors and investors of a private bank that their money was safe after a run on the bank, fuelled by rumours.

3.Damages due to different interpretations –Similarly, realising the potential damage which could arise because of the interpretation of a provision in the Financial Resolution and Deposit Insurance Bill on protection of deposits, the government had to step in last year to assuage concerns.

Arguments in favour of disclosure

That does not, however, mean non-disclosure in perpetuity.

Based on regulatory Findings

  • One approach could be to provide this information after the RBI and the bank or an institution and its board have achieved closure and taken action based on regulatory findings, to limit any damage.
  • This could be preferably to Parliament, which could help strengthen prudential supervision.

Conclusion

  • As successive RBI governors and bankers have indicated, the pile up of bad loans in India is also because of judicial delays.
  • India’s two-year-old insolvency law has been a signature reform, but at the end of last year in over 30 per cent of the cases, the 270-day deadline had been breached.
  • It is with good reason that after the 2008 financial crisis, governments worldwide are focussed on financial stability. Any hasty step which endangers that mandate may prove costly.
Apr, 29, 2019

RBI extends ombudsman scheme to non-deposit taking NBFCs

News

  • The RBI has extended the coverage of Ombudsman Scheme for non-banking financial companies (NBFCs) to eligible non deposit taking non-banking financial companies (NBFC-NDs) having asset size of Rs 100 crore or above with customer interface.

What is NBFC?

  • A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities.
  • It does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
  • A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company.

About the Ombudsman Scheme

  • The scheme was launched on February 23, 2018 for redressal of complaints against NBFCs registered with the RBI under Section 45-IA of the RBI Act, 1934 and covered all deposit accepting NBFCs to begin with.
  • It provides a cost-free and expeditious complaint redressal mechanism relating to deficiency in the services by NBFCs covered under the scheme.
  • The offices of the NBFC Ombudsmen are functioning in four metro centres — Chennai, Kolkata, Mumbai and New Delhi — and handle complaints of customers in the respective zones.
  • The scheme also provides for an appellate mechanism under which the complainant/ NBFC has the option to appeal against the decision of the Ombudsman before the Appellate Authority.

Who are excluded under the scheme?

However, non banking financial company-infrastructure finance company (NBFC-IFC), core investment company (CIC), infrastructure debt fund-non-banking financial company (IDF-NBFC) and an NBFC under liquidation, are excluded from the ambit of the scheme.

Apr, 27, 2019

Supreme Court directs RBI to alter disclosure policy

News

  • The Supreme Court gave the RBI “a last opportunity” to withdraw a November 2016 Disclosure Policy to the extent to which it stonewalls revelation of every other kind of information under the Right to Information Act, including the list of willful defaulters and annual inspection reports.

Last warning to RBI

  • The policy was found to be directly contrary to the court’s judgment of December 2015 that the Reserve Bank could not withhold information sought under the RTI Act.
  • The 2015 judgment had rejected the RBI’s argument that it could refuse information sought under the RTI on the grounds of economic interest, commercial confidence, fiduciary relationship or public interest.
  • The court had observed that there was “no fiduciary relationship between the RBI and the financial institutions”.
  • The court, in 2015, reminded the RBI that it had the statutory duty to uphold the interests of the public at large, the depositors, the economy and the banking sector.

Why did RBI refuse?

  • The RBI had refused to provide information to the petitioner, claiming “fiduciary relationship” between itself and the banks in question.
  • Such information, the regulator had then said, was exempted from being revealed under Section 8(1) (d) and (e) of the RTI Act.
  • Section 8 allows the government to withhold from public some information in order to “guard national security, sovereignty, national economic interest, and relations with foreign states”.
  • The information to the petitioners was denied by the RBI despite orders from the Central Information Commissioner (CIC) to do so.
Apr, 27, 2019

RBI divests entire stake in NHB, NABARD

News

  • The RBI has divested its remaining stake in the National Bank for Agriculture and Rural Development (NABARD) and National Housing Bank (NHB) in February and March this year.
  • The government now fully owns these two financial institutions.
  • The RBI once held 100 per cent shareholding in NHB, which was divested on March 19, 2019.

About NABARD

  • NABARD is an apex development financial institution in India, headquartered at Mumbai with regional offices all over India.
  • It is India’s specialised bank in providing credit for Agriculture and Rural Development in India.
  • The Bank has been entrusted with “matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India”.
  • It was established on the recommendations of B.Sivaraman Committee on 12 July 1982 to implement the NABARD Act 1981.
  • NABARD supervises State Cooperative Banks (StCBs), District Cooperative Central Banks (DCCBs), and Regional Rural Banks (RRBs) and conducts statutory inspections of these banks.

About National Housing Bank

  • NHB is an All India Financial Institution (AIFl), set up in 1988, under the National Housing Bank Act, 1987.
  • The National Housing Policy, 1988 has envisaged the setting up of NHB as the Apex level institution for housing.
  • It is an apex agency established to operate as a principal agency to promote housing finance institutions both at local and regional levels.
  • It aims to provide financial and other support incidental to such institutions and for matters connected therewith.
Apr, 04, 2019

Ways and Means Advances

News

  • RBI may trigger fresh floatation of market loans when Government utilizes 75% of the WMA limit.
  • The interest rate on WMA will be Repo Rate and overdraft will be 2% above the Repo Rate.

Ways and means advances (WMA)

  • The Reserve Bank of India gives temporary loan facilities to the centre and state governments as a banker to government.  This temporary loan facility is called Ways and Means Advances (WMA).
  • It is a mechanism to provide to States to help them tide over temporary mismatches in the cash flow of their receipts and payments.
  • It was introduced on April 1, 1997, after putting an end to the four-decade old system of adhoc (temporary) Treasury Bills to finance the Central Government deficit.
  • This facility can be availed by the government if it needs immediate cash from the RBI. The WMA is to be vacated after 90 days.
  • Interest rate for WMA is currently charged at the repo rate. The limits for WMA are mutually decided by the RBI and the Government of India.
Mar, 28, 2019

Regulatory Sandbox for Fintech firms

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Regulatory Sandbox

Mains level: Challenges to India as a growing fintech market


News

  • The RBI is set to issue guidelines for a ‘regulatory sandbox’ for financial technology (fintech) firms within two months.

What is Regulatory Sandbox?

  • A sandbox approach provides a secure environment for fintech firms to experiment with products under supervision of a regulator.
  • The concept of a regulatory sandbox or innovation hub for fintech firms was mooted by a committee headed by then RBI executive director Sudarshan Sen.
  • The panel, which submitted its report in November 2017, had called for a regulatory sandbox to help firms experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.
  • If the product appears to have the potential to be successful, it might be authorised and brought to the broader market more quickly.
  • The sandbox will enable fintech companies to conduct live or virtual testing of their new products and services.

Why such move?

  • Fintech or financial technology companies use technology to provide financial services such as payments, peer-to-peer lending and crowdfunding, among others.
  • According to NITI Aayog, India is one of the fastest growing fintech markets globally, and industry research has projected that $1 trillion, or 60% of retail and SME credit, will be digitally disbursed by 2029.
  • The Indian fintech ecosystem is the third largest in the world, attracting nearly $6 billion in investments since 2014, the think tank said.
  • A global survey ranked India, with 1,218 fintech firms, second in terms of fintech adoption, with an adoption rate of 52 per cent.

Issue of Data Privacy

  • The risks for fintech products may arise from cross-border legal and regulatory issues where confidentiality and customer protection are major areas that needed to be addressed.
  • The proposed Personal Data Protection Bill, 2018, had categorised all financial data as “sensitive personal data”, which is not the case for many European countries.
Mar, 25, 2019

Ind AS (Indian Accounting Standard)

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Ind AS

Mains level:  Accounting Standards of RBI


News

  • The Reserve Bank of India (RBI) has deferred the implementation of the new accounting norms, Ind AS, indefinitely, as necessary amendments to the relevant law are yet to be made.
  • The move will bring huge relief to the banks which are yet to recognise stressed assets and make necessary provisions as that would require higher capital.

Ind AS

  • Indian Accounting Standard is the Accounting standard adopted by companies in India and issued under the supervision of Accounting Standards Board (ASB) which was constituted as a body in the year 1977.
  • ASB is a committee under Institute of Chartered Accountants of India (ICAI) which consists of representatives from government department, academicians, other professional bodies viz. ICAI, representatives from ASSOCHAM, CII, FICCI, etc.
  • Ind AS governs the accounting and recording of financial transactions as well as the presentation of statements such as profit and loss account and balance sheet of a company.

Why IndAS?

  • For long, there has been a heated debate about Indian companies moving to the globally accepted International Financial Reporting Standards (IFRS) for their accounts.
  • But firms have resisted this shift, stating that this will lead too many changes in the capture and reporting of their numbers.
  • Ind AS has been evolved as a compromise formula that tries to harmonize Indian accounting rules with the IFRS.

Causes for delay

  • The implementation of IndAS for public sector banks requires an amendment to the Banking Regulation Act, 1949.
  • The schedule in Banking Regulation Act relating to financial statement disclosures needs to be changed to the IndAS format.
  • The other thing is the balance sheet format, for which some changes in the Act are required.
Mar, 22, 2019

Voluntary Retention Route (VRR) Scheme of RBI

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: FDI, FPI, VRR

Mains level: Liquidity management policy in India


News

  • The RBI’s decision to infuse rupee liquidity through long term foreign exchange swap, a first of its kind in liquidity management policy, is likely to boost investments by foreign portfolio investors under the voluntary retention route (VRR).

Voluntary Retention Route (VRR)

  1. RBI had announced a separate scheme called VRR to encourage Foreign Portfolio Investors (FPIs) to undertake long-term investments in Indian debt markets.
  2. Under this scheme, FPIs have been given greater operational flexibility in terms of instrument choices besides exemptions from certain regulatory requirements.
  3. The details are as under:
  • The aggregate investment limit shall be ₹ 40,000 crores for VRR-Govt and ₹ 35,000 crores for VRR-Corp.
  • The minimum retention period shall be three years. During this period, FPIs shall maintain a minimum of 75% of the allocated amount in India.
  • Investment limits shall be available on tap for investments and shall be allotted by Clearing Corporation of India Ltd. (CCIL) on ‘first come first served’ basis.

Benefits of VRR

  • The RBI will conduct dollar-rupee buy/sell swap action of $5 billion for a three-year tenor.
  • Such a swap route has been explored by various emerging market economies as an effective tool to manage liquidity.
  • Apart from liquidity infusion, the move will boost the country’s foreign exchange reserves and is likely to support the exchange rate.

Back2Basics

FDI and FPI

FDI and FPI in India, External Commercial Borrowings, Foreign Exchange Reserves in India

Mar, 11, 2019

A SWIFT response could have saved banks : RBI

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: SWIFT

Mains level: RBI’s move preventing bank fraud


News

  • Much before the scam came that to light at the PNB in 2018, the RBI had earlier cautioned the banks about the possible misuse of the SWIFT infrastructure and directed them to implement safeguards.

Society for Worldwide Interbank Financial Telecommunication

  • The SWIFT infrastructure is the global messaging software that enables financial entities to send and receive information about financial transactions in a secure, standardised and reliable environment.
  • In order to use its messaging services, customers need to connect to the SWIFT environment.
  • Messages sent by SWIFT’s customers are authenticated using its specialised security and identification technology.
  • Messages remain in the protected SWIFT environment, subject to all its confidentiality and integrity commitments until they are safely delivered to the receiver.
  • It does not facilitate funds transfer, rather, it sends payment orders, that must be settled by correspondent accounts that institutions have with each other.
  • On receiving this message through SWIFT, banks abroad, mostly branches of domestic banks abroad provide funds to the company.

RBI fines banks for non-compliance

  • Even the PNB scam failed to wake up banks was mainly due to people and process failure not so much a technology failure.
  • Despite repeated warnings, the PNB fraud, touted to be among the biggest in the industry, happened. This prompted the banking regulator to again remind banks about the possible misuse of SWIFT.
  • The RBI came down heavily on the banks, imposing monetary penalty on 36 banks, including the SBI, ICICI Bank and the Yes Bank — to name a few.
  • These banks failed to implement the safeguard which was mainly integrating the SWIFT infrastructure with Core Banking Solution (CBS) within a time frame.
  • The Banking Regulation Act allows the RBI to impose a maximum penalty of Rs. 1 crore for a single breach.

Now, what is Core Banking Solution?

  • Core Banking Solution (CBS) is networking of branches, which enables Customers to operate their accounts, and avail banking services from any branch of the Bank on CBS network.
  • It is regardless of where he maintains his account.
  • The customer is no more the customer of a Branch. He becomes the Bank’s Customer.

Why such move?

  • One of the main reason is for not maintaining the timeline though many of them have complied with the norms now.
  • Another is, since the CBS was required to be integrated with SWIFT, the question is whether CBS was equipped for this.
  • It means compliance was required from third-party vendors and their lack of readiness also could have led to delays.
  • Third, even if the third-party software was ready, the bank may not have used it effectively.
  • And, finally, there could be some small banks who may be not have started the process.
Mar, 11, 2019

White Label ATM

Image Source

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: WLAs and other types of ATMs

Mains level: RBI guidelines for currency handling and cyber-security framework


News

  • The RBI has relaxed norms for white label ATM (WLA) operators.
  • All guidelines, safeguards, standards and control measures applicable to banks relating to currency handling and cyber-security framework for ATMs shall also be applicable to the WLA operators, the RBI said.

Who are the White Label ATM Operators?

  • Automated Teller Machines (ATMs) set up, owned and operated by non-bank entities are called WLAs.
  • They provide the banking services to the customers of banks in India, based on the cards (debit/credit/prepaid) issued by banks.
  • Non-bank entities that set up, own and operate ATMs are called “White Label ATM Operators” (WLAO).
  • The WLAO’s role is confined to acquisition of transactions of all banks’ customers by establishing technical connectivity with the existing authorized, shared ATM and Card Payment Network Operators.

Relaxed norms by RBI

  • The RBI has been decided to allow WLAs to buy wholesale cash, above a threshold of 1 lakh pieces (and in multiples thereof) of any denomination, directly from the RBI.
  • The RBI also permitted WLA operators to source cash from any bank, including cooperatives and regional rural banks.
  • They are also being allowed to source cash from any scheduled bank, including cooperative banks and regional rural banks and to offer bill payment and Interoperable Cash Deposit services, subject to technical feasibility and certification by the National Payments Corporation of India (NPCI).
  • RBI has also allowed WLA operators to display advertisements pertaining to non-financial products or services anywhere within the WLA premises, including the ATM screen, except the main signboard.
Feb, 20, 2019

[op-ed snap] Interim bailout: RBI surplus to govt

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Role of RBI & various functions performed by it

Mains level: Issue of transfer of surplus reserves and various factors associated with it and need for institutionalisation of such transfer.


NEWS

CONTEXT

The central board of the Reserve Bank of India decided to transfer an interim surplus of ₹28,000 crore to the Centre.

Background

  • Together with the ₹40,000-crore final surplus share for 2017-18, which the Centre received in the first half, the total receipts from the RBI this fiscal will be a tidy ₹68,000 crore.
  • Government strapped for finances and struggling to meet the revised fiscal deficit target of 3.4% of GDP, the RBI’s largesse will be handy.
  • The total surplus received by the Centre for 2018-19 is substantially higher than the ₹50,000 crore it got from the RBI in 2017-18, and this is the second successive year the central bank is making an interim transfer: last year it transferred ₹10,000 crore.

Concerns With Such an Arrangement

  • Though there is nothing wrong in a shareholder demanding an interim dividend payout, the fact is that the Centre is advancing a receipt from the next fiscal to bail itself out in the current one.
  • Should the RBI decide not to repeat this practice, the government’s revenues will suffer because as much as ₹82,911 crore has been budgeted on this count for the next fiscal.
  • the government’s revenues will suffer because as much as ₹82,911 crore has been budgeted on this count for the next fiscal.
  • Again, the central bank is not like a corporate enterprise, nor can the government compare itself with a company shareholder.
  • The RBI’s income and surplus growth cannot be measured in commercial terms since a large part of it comes from statutory functions it has to perform as a regulator.

Recent Changes in Surplus Transfers and dividend receipts

  • The large payout this fiscal is bound to raise eyebrows, especially because of the recent history of conflict between the RBI and the Centre over the sharing of the former’s accumulated reserves as a dividend with the Centre.
  • Though the practice of an interim payout started under Mr. Patel, there are inevitable questions over whether there was pressure from the Centre now for the transfer of a higher sum than last year.
  • Centre had in the Interim Budget bumped up receipts under this head from the central bank, nationalised banks and other financial institutions to ₹74,140 crore from the original estimate of ₹54,817 crore made in the 2018-19 Budget.

Way Forward

  • There will, hopefully, be a system and a structure in place once the committee under former RBI Governor Bimal Jalan, that is now reviewing the economic capital framework for the RBI, submits its report.
  • It was constituted to de-personalise and institutionalise a system for the sharing of the RBI’s surpluses with the government.
Jan, 09, 2019

RBI forms Nandan Nilekani-led digital payments panel

Note4students

Mains Paper 3: Economy | Mobilization of resources, Banking

From UPSC perspective, the following things are important:

Prelims level:  Panel and its terms of references

Mains level: Promotion of Digital Payments


News

Panel on Digital Payments

  • The RBI has constituted a high-level committee headed by former chairman of the UIDAI Nandan Nilekani to set up a robust digital payments ecosystem in the country.

Terms of Reference

  1. Aim: To undertake cross country analyses with a view to identify best practices that can be adopted in our country to accelerate digitization of the economy and financial inclusion through greater use of digital payments.
  2. The committee has been asked to review the existing status of digitization of payments, identify gaps in the ecosystem and suggest ways to plug them.
  3. The panel has to suggest a medium-term strategy for deepening digital payments, and measures to strengthen safety and security.
  4. It shall submit its report within a period of 90 days from the date of its first meeting.
  5. The panel has also been tasked with the responsibility of increasing customer confidence and trust while they access financial services through digital modes.

Why such move?

  1. The promotion of digital payments has been one of the primary agendas of the government in the past four years.
  2. Payments through all electronic forms such as debit and credit cards, mobile wallets, real-time gross settlement (RTGS), national electronic funds transfer (NEFT) and UPI has seen a huge rise.
  3. The newest mode of digital payments, UPI, which was launched in 2016, has witnessed an over 300% rise in transaction volumes in the last year and the growth is seen continuing in the near term.
  4. A/c to National Payments Corporation of India (NPCI) , a record 620.17 million UPI transactions worth just over ₹1 trillion were conducted in December 2018.
Jan, 02, 2019

[op-ed snap] Signs of a turnaround: on RBI's Financial Stability Report

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: RBI financial stability report, Prompt corrective action.

Mains level: NPA problem and solution


Context

  1. According to the recently released Financial Stability report, The fog of bad loans shrouding the banking sector appears to be lifting after a long period of sustained stress.

Signs of turnaround

  1. The Reserve Bank of India’s Financial Stability Report reveals the first half-yearly decline in the ratio of gross non-performing assets (GNPA) to advances since September 2015.
  2. The ratio across all scheduled commercial banks has eased to 10.8% as of end-September 2018, from 11.5% in March, with both public sector and private sector lenders posting drops in the key indicator of bad loans.
  3. A stress test for credit risk at banks that models varying levels of macro-economic performance shows that for the baseline assumption, the GNPA ratio would narrow to 10.3% by March 2019.
  4. According to the FSR, among the broad sectors, the asset quality of industry sector improved in September 2018 as compared to March 2018 whereas that of agriculture and retail sectors deteriorated

Concerns

PSB still have higher level of bad loans

  1. State-owned banks continue to have higher levels of bad loans than their private sector peers and are projected to show slower improvements over the second half of the fiscal.
  2. The GNPA ratio for public sector banks (PSBs) is posited to only inch lower to 14.6% by March, from 14.8% in September.
  3. One reason is that PSBs have a disproportionately higher share of bad loans from among large borrowers, who accounted for almost 55% of loans advanced by all banks as of September. The GNPA ratio for this category at PSBs was 21.6%, compared with just 7% at private banks.

PSB may still fail to maintain the PCA

  1. Despite projections of a recovery, 18 SCBs, including all public sector banks under the prompt corrective action (PCA) framework, may fail to maintain the required capital adequacy ratio under a two SD (standard deviation) shock to the GNPA ratio, unless capital infusion takes place and banks improve their performance, according to RBI’s analysis.
  2. One SD shock equals approximately a two-percentage point increase in the GNPA ratio.
Dec, 28, 2018

Economic Capital Framework Committee of RBI

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Economic Capital of RBI

Mains level: Debate regarding the independence of RBI and Fiscal Strain on Govt.


News

A new Committee to decide on EC

  1. The Central Board of RBI in consultation with the Govt. of India has constituted an Expert Committee to review the extant Economic Capital Framework of the RBI.
  2. The RBI has named former RBI governor, Bimal Jalan to head the Framework committee.
  3. Expert committee on economic capital framework will have to give its report within 90 days from its first meeting.

Mandate of the Committee

  1. Review status, need and justification of various provisions, reserves and buffers presently provided for by the RBI.
  2. Review global best practices followed by the central banks in making assessment and provisions for risks which central bank balance sheets are subject to.
  3. To suggest an adequate level of risk provisioning that the RBI needs to maintain.
  4. To determine whether the RBI is holding provisions, reserves and buffers in surplus / deficit of the required level of such provisions, reserves and buffers.
  5. To propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding less provisions than required.
  6. Any other related matter including treatment of surplus reserves, created out of realised gains, if determined to be held.

Past Committees Recommendations

  1. In the past, the issue of the ideal size of RBI’s reserves was examined by three committees — V Subrahmanyam (1997), Usha Thorat (2004) and Y H Malegam (2013).
  2. While the Subrahmanyam committee recommended that contingency reserve should be built up to 12 per cent, the Thorat committee had said the reserve adequacy should be maintained at 18 per cent of the total assets.
  3. The RBI board did not accept the recommendation of the Thorat committee and decided to continue with the recommendation of the Subrahmanyam panel.
  4. The Malegam committee recommended that adequate amount of profits should continue to be transferred each year to contingency reserves.
Nov, 28, 2018

RBI can transfer Rs 1-lakh crore to govt: report

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Debate regarding the independence of RBI


News

  • The Reserve Bank of India has “more than adequate” reserves and that it can transfer over Rs 1-lakh crore to the government after a specially constituted panel identifies the “excess capital”.

Background

  1. Multiple reports had claimed that the government is eyeing the extra cash which will help it in the run-up to the elections.
  2. This comes amidst falling GST collections and little borrowing window left for the government, as it has already used up close to 96 percent of borrowings as of end October.
  3. By taking the money from the RBI, the government will only increase its fiscal deficit, as it will have to issue bonds to the central bank.
  4. The government for the second year in a row has pegged fiscal deficit at 3.3 per cent of GDP this fiscal year.

Excess Capital from RBI

  1. The proposed committee on the RBI’s economic capital framework (ECF) to identify Rs 1-3 lakh crore which is 0.5-1.6 per cent of GDP as excess capital.
  2. As per its stress tests, the central bank can transfer Rs 1-lakh crore to the government if the transfer is limited to passing excess contingency reserve.
  3. It can go up to Rs 3-lakh crore if the total capital is included.
  4. It further said this level will be 75 per cent higher than the average of BRICS economies, excluding India.

Statutory Provisions for Transfer

  1. The statutes do not prohibit transfer of excess capital to the government, pointing out that the RBI Act places no bar as long as government maintains Rs 5 crore of reserve funds under Sec 46 of the RBI Act.
  2. While Section 47 enjoins the RBI to credit its annual surplus to the national exchequer, after provisions, it does not place any restrictions on further transfers.
  3. The RBI’s contingency reserves at 7 percent are higher than the BRICS (excluding India) average of 2 per cent.
Oct, 29, 2018

[op-ed snap] Protecting the central bank’s independence

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: RBI roles, MPC

Mains level: Debate regarding the independence of RBI


Context

RBI deputy governor’s recent speech

  1. Reserve Bank of India (RBI) deputy governor Viral Acharya’s A.D. Shroff Memorial Lecture was the second occasion within a month when he chose to deliver a strong message
  2. This time, it was on the importance of the central bank’s independence
  3. His earlier remarks at the Indian Institute of Technology, Bombay, were focused on the prompt corrective action (PCA) framework

At the right time

  1. Acharya’s comments on the importance of the independence of central banks are timely as the issue is being widely debated globally
  2. US President Donald Trump has often criticized the Federal Reserve for raising interest rates
  3. European Central Bank president recently raised the issue of the threat to central banks’ independence from governments
  4. The most recent example of what can happen when the government obstructs the central bank is Turkey where government interference led to significant overheating in the economy and now requires painful adjustments

Difference in approaches

  1. The basic difference between the approach of a government and central bank is that the latter is not bound by short-term targets
  2. The government will always want the economy to grow at a faster rate
  3. But it’s the job of the central bank to have the “punch bowl” removed when the party starts warming up so that the economy remains on a sustainable growth path
  4. Use of its powers of money creation and setting the cost of money for short-term benefits can be disastrous for the economy

The importance of independence

  1. It is important that central banks have the institutional wherewithal to take independent decisions in order to be able to maintain price and financial stability
  2. It is also in the interest of the government that the central bank is seen as taking independent decisions as it may be able to reap the benefits of convincing voters about the importance of investing in macroeconomic stability
  3. Macroeconomic stability can only be attained by allowing the central bank autonomy in decision-making and delivery of its core functions

MPC framework & its results

  1. The present government got the legislation passed to make RBI an inflation targeting central bank with a monetary policy committee (MPC)
  2. The experience so far of adopting the flexible inflation targeting framework is encouraging
  3. If the MPC manages to keep inflation around the 4% mark in the medium term, it will significantly benefit the economy
  4. It will not only strengthen macroeconomic stability but will also lower borrowing cost with a reduction in inflation risk premium
  5. RBI has also done well by not diluting the mechanism for resolution of stressed assets and the PCA framework

Way forward

  1. Since they have become more powerful, and their decisions have wider implications for the public at large, central banks should be prepared to answer more questions
  2. They will have to constantly explain their position and convince financial markets that what they are doing is right for the economy, especially at a time when the basic premise of conducting monetary policy is being questioned
Mar, 17, 2018

[op-ed snap] Is the Reserve Bank of India toothless?

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Recently, the governor’s speech on 14 March at the Gujarat National Law University, Gandhinagar, highlights significant issues about the difference in regulation of public and private sector banks. The newscard talks about those issues briefly.


News

Context

  1. There are some issues raised by the RBI governor regarding the Indian Banking System

First: Dual control over banks based on ownership

  1. This issue is not specific to public sector banks
  2. Even in case of the cooperative banks, dual control was a festering issue
  3. However, in the case of public sector banks, the problem of dual control is even deeper
  4. In addition to ownership and governance-level control, there is also significant operational control that the Union finance ministry exercises
  5. This control bypasses the boards. That is why one cannot hold the board residually responsible for the performance of the bank
  6. A programme like the Pradhan Mantri Jan Dhan Yojana (PMJDY) is operationally guided by the ministry and bypasses the board-directed strategy
    This issue is not present in private banks
  7. This is control on the banks through the tyranny of circulars, which doesn’t affect private banks
  8. Comparing the PMJDY numbers of private banks and their public sector peers is sufficient to make the point
  9. So, having identified that the framework for regulating public sector banks is different, can the governor cry victim, and does this let the RBI off the hook?
  10. The RBI by suo motu can recommend corrective action to the government
  11. The government may not accept it, as it has not been accepting many of the recommendations of the central bank, but it would have at least done its duty

Second: Blame on limited powers of the RBI

  1. Very much like the government exercising control through the board and through circulars, even the RBI has a board position in each public sector bank
  2. Further, the RBI representative is on the management committee (that approves loans beyond a certain ticket size), the audit committee, the committee of directors (for reviewing vigilance cases) and the remuneration committee of each of these banks
  3. So, not only does the RBI have regulatory oversight, it has board and sub-committee presence in each public sector bank,
  4. which should give the RBI much greater insights than it would get into a private bank
    Powers related to the appointments
  5. Also, the RBI is party to the selection of the whole-time directors of the bank through the selection committee and through its membership on the Banks Board Bureau
  6. The RBI has powers to remove the non-official directors appointed by the Union government as well as the shareholder directors if they do not fulfil the fit-and-proper criteria
    (section 3AB and 3B of the Banking Companies (Acquisition and Transfer of Undertakings) Act)
  7. Moreover, the RBI has powers to appoint an additional director as per section 9A of the above Act
  8. Theoretically, the RBI has a significant say in the constitution of the board of a public sector bank

The way forward

  1. While there is a great deal of reform to be undertaken in the governance and management of public sector banks, the line that the governor has taken, of inadequate powers to act, may be untenable
  2. The framework for the exercise of powers in private sector banks is different from the framework for public sector banks
  3. This has to be recognized
Mar, 16, 2018

{op-ed snap] Credit tangle

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: LoUs, Letters of Comfort, etc.

Mains level: Possible effect of the banning of LoUs by the RBI.


News

RBI’s notification on LoUs

  1. The Reserve Bank of India has decided to ban such instruments as well as letters of comfort issued by bankers to businesses for international transactions
  2. This is the first major step by the central bank on the banking fraud issue,
  3. apart from asking banks to ensure there are no slip-ups between their core banking systems and the SWIFT mechanism used for international money transfers

Why is the industry unhappy with the decision?

  1. Industry is unhappy with the RBI decision as this would raise the cost for importers, who will now need to rely on more expensive instruments such as bank guarantees and letters of credit
  2. The move will also impact the competitiveness of exporters who import raw materials for their products
  3. Ban of LoUs will impact the $85 billion buyers’ credit market that was mostly conducted in accordance with the law of the land

RBI’s argument against the RBI’s inability to detect the fraud

  1. RBI’s governor stressed that the RBI didn’t have adequate powers to regulate public sector banks, and
  2. it could not remove any of their directors or liquidate such a lender, as it can in the case of private sector banks
  3. He made an eloquent demand that the owner of public sector banks (that is, the government) must consider making the RBI’s powers over banks ‘ownership-neutral’ and say what could be done with these banks
  4. The RBI’s stance is valid, as is its discomfort with knee-jerk reactions and the blame games since the fraud came to light

The way forward

  1. Perhaps the RBI could have tightened the norms for LoUs and introduced safeguards based on the latest learnings
  2. It is still not too late to do that

Back2basics

Letter of Comfort (LoC)

  1. A Letter of Comfort (LoC) is a letter issued to a lending institution by a stakeholder of the company acknowledging support of the attempt for financing asked by that company
  2. A letter of comfort does not imply that the parent company guarantees repayment of the loan being sought by the subsidiary company
  3. It merely gives reassurance to the lending institution that the parent company is aware of the credit facility being sought by the subsidiary company, and supports its decision
Mar, 16, 2018

‘RBI norms may push power projects worth Rs. 2.5 lakh crore into bankruptcy’

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Possible effect, of the decision, on stressed power projects.


News

Possible effect of scrapping loan restructuring programmes by the RBI

  1. According to experts, more than 50,000 MW of stressed power projects, worth more than Rs. 2.5 lakh crore, with bank exposure of more than Rs. 1.75 lakh crore, are likely to face bankruptcy proceedings
  2. As the RBI had scrapped all loan restructuring programmes in February

Government’s reaction on the RBI’s decision

  1. The government has called for a high-level meeting of all the stakeholders, including public and private sector power firms, lenders, coal suppliers and railways to discuss the gravity of the situation

Background

  1. The RBI had recently scrapped all loan restructuring programmes and it’s recent guidelines on ‘Resolution of Stressed Assets’
  2. Revised Framework’ mandates the banks to classify even a day’s delay in debt servicing as default
Mar, 07, 2018

RBI may pay interim dividend of Rs. 10,000 cr.

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential

From UPSC perspective, the following things are important:

Prelims level: Provision under the act

Mains level: The newscard talks about an important financial relationship between the government and the RBI.


News

Interim dividend from the RBI

  1. The government is likely to receive an interim dividend of Rs. 10,000 crore from RBI this month
  2. According to the sources, the government expects the RBI to pay a total dividend of about Rs. 45,000 crore for financial year 2017-18

Provision under the RBI Act, 1934

  1. Under the Act, the central bank is required to pay the government its surplus, after making provisions for bad and doubtful debts, depreciation in assets, and contribution to staff and superannuation fund, among others
Mar, 06, 2018

[op-ed snap] RBI to inject extra liquidity of Rs. 1 lakh cr.

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read b2b

Mains level: Reason behind this injection of liquidity.


News

RBI’s announcement

  1. The RBI would inject additional liquidity of Rs. 1 lakh crore in banks
  2. How: Through longer tenor instruments
  3. The RBI will conduct four variable rate term repo auctions of Rs. 25,000 crore each in March 2018
  4. Why: To enable flexibility towards meeting banks fund needs
  5. Note: This will be in addition to normal Liquidity Adjustment Facility (LAF) operations

RBI’s statement

  1. The RBI said in order to address additional demand for liquidity
  2. And with a view to providing flexibility to the banking system in its liquidity management towards March-end, it was “prepared to inject adequate additional liquidity using a combination of appropriate instruments”

Back2basics

Liquidity Adjustment Facility (LAF) 

Feb, 23, 2018

Currency circulation in India at 99% of pre-demonetisation level: RBI data

Note4students

Mains Paper 2: Governance | Issues relating to development and management of Social Sector/Services relating to Health, Education, Human Resources.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: One of the aims behind the demonetization was to make India a less-cash society. But it is not achieved, as shown by the data released by RBI.


News

Latest RBI data on currency circulation

  1. According to the RBI, currency in circulation in India stood at Rs17.78 trillion as on 16 February, reaching 98.94% of the pre demonetisation level
  2. On 4 November 2016, the currency with the public was Rs17.97 trillion
  3. Subsequently, it dropped to a low of Rs8.98 trillion as on 6 January 201

Government’s aim behind demonetisation

  1. The demonetisation, aimed at countering tax dodgers and counterfeiters, sucked out 86% of the currency in circulation
  2. The government had then also pointed out to relatively lower levels of currency with the public as a success
Feb, 10, 2018

No RBI decision on implementing IndAS yet: deputy governor N.S. Vishwanathan

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the IndAS

Mains level: Importance of the IndAS


News

Implementation of the IndAS

  1. According to the RBI, it has not yet taken a decision on implementing the new accounting standards, IndAS
  2. This hints at a possibility of missing the 1 April deadline

Requirements for the implementation of the IndAS

  1. The implementation of IndAS for public sector banks requires an amendment to the Banking Regulation Act. Section 29 of the BR Act deals with the accounts and balance sheets of public sector banks
  2. Private sector banks are covered by the Companies Act, which is based on the new accounting standards

Why is IndAS important?

  1. The transition to IndAS is expected to see a significant jump in bad-loan provisions
  2. Under the current rules, banks set aside money to cover loans that have turned bad
  3. Under IndAS, they must make provisions after assessing the expected loss from the time a loan is originated rather than waiting for a trigger event
  4. These norms were designed to avoid credit shocks like those seen in the aftermath of the global financial crisis in 2008

Back2basics

IndAS

  1. Indian Accounting Standard (abbreviated as Ind-AS) is the Accounting standard adopted by companies in India and issued under the supervision and control of Accounting Standards Board (ASB), which was constituted as a body in the year 1977
  2. ASB is a committee under Institute of Chartered Accountants of India (ICAI) which consists of representatives from government department, academicians, other professional bodies viz. ICAI, representatives from ASSOCHAM, CII, FICCI, etc.
  3. The Ind AS are named and numbered in the same way as the corresponding International Financial Reporting Standards (IFRS)
  4. National Advisory Committee on Accounting Standards (NACAS) recommend these standards to the Ministry of Corporate Affairs (MCA)
  5. MCA has to spell out the accounting standards applicable for companies in India. As on date MCA has notified 41 Ind AS
  6. This shall be applied to the companies of financial year 2015-16 voluntarily and from 2016-17 on a mandatory basis
  7. Based on the international consensus, the regulators will separately notify the date of implementation of Ind-AS for the banks, insurance companies etc.
  8. Standards for the computation of Tax has been notified as ICDS in February 2015
Dec, 23, 2017

PCA only to improve banks’ health, says RBI

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: What is the PCA?

Mains level: Motive behind the implementation of the PCA


News

Clarification from the RBI

  1. The RBI has once again clarified that prompt correction action (PCA) is imposed to encourage banks to improve their financial health
  2. The reiteration comes in the wake of rumours on social media that some of the banks that are under PCA could be closed down

Motive behind the PCA

  1. he PCA framework is intended to encourage banks to eschew certain riskier activities and focus on conserving capital so that their balance sheets can become stronger

What is Prompt Corrective Action?

  1. To ensure that banks don’t go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled
  2. The process or mechanism under which such ac tions are taken is known as Prompt Corrective Action, or PCA.

Why the need for PCA?

  1. The 1980s and early 1990s were a period of great stress and turmoil for banks and financial in  stitutions all over the globe
  2. In USA, more than 1,600 commercial and savings banks in sured by the Federal Deposit Insurance Corporation (FDIC) were either closed or given financial assis tance during this period. The cumulative losses incurred by the failed institutions exceeded US $100 billion
  3. These events led to the search for appropriate supervi sory strategies to avoid bank failures as they can have a destabilising effect on the economy
Dec, 09, 2017

RBI survey shows consumer confidence, perceptions of employment prospects at multi-year lows

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: What is Consumer Confidence Index?

Mains level: Possible reasons behind the fall


News

Falling Consumer Confidence Index

  1. RBI’s Consumer Confidence Index has slipped to 91.1 in November 2017, the lowest level in the last four years
  2. A reading of above 100 denotes optimism, while one below 100 indicates pessimism
  3. The RBI survey is conducted in the six metropolitan cities of Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi

Reason behind this fall

  1. One of the main reasons for consumer confidence to be so low is the perception on employment prospects
  2. Clearly, demonetisation and the goods and services tax have had an adverse impact on employment

Back2basics

  1. Consumer confidence is a key driver of economic growth and is widely considered a leading economic indicator of household spending on consumption
  2. Consumers tend to increase consumption when they feel confident about the current and future economic situation of the country and their own financial conditions
  3. In economies such as India and the US, where personal consumption accounts for more than 60% and 70% of GDP respectively, consumer confidence has a particularly significant impact on the economy
  4. Measuring it can provide critical insight into the economy’s growth prospects
  5. Consumer sentiment indices are essential tools used by global investors and will be an immense aid to individual and institutional investors in India
Nov, 13, 2017

RBI remains net buyer of U.S. dollars

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Good for Foreign Reserves of India


News

India is a net buyer of U.S. dollars

  1. According to the latest RBI data, continued to remain a net buyer of U.S. dollars after it bought $1.259 billion in September from the spot market
  2. In September, the central bank had bought $3.788 billion, while it sold $2.529 billion in the spot market

Why RBI intervenes in the Foreign Market?

  1. The RBI intervenes in the foreign market to contain volatility in the rupee and not to set a price band
Nov, 04, 2017

[op-ed snap] Fixing Accountability

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Rising trend Electronic Banking Transactions can be seen as result of Digital India initiative.


News

Context

  1. The article talks about the ways of countering frauds in electronic baking transactions

RBI on electronic bank transactions

  1. The RBI has from time to time issued guidelines to strengthen systems and procedures for electronic banking transactions, internet banking and mobile banking
  2. The RBI has recently instructed through a circular all banks to put in place effective systems to ensure secure electronic banking transactions

Objective

  1. The objective is clear: Customers must feel safe about carrying out electronic banking transactions

What should be done to achieve this objective?

  1. Banks must put in place robust and dynamic fraud detection and prevention mechanisms plugging gaps in the existing systems
  2. And reporting of unauthorised transactions by customers to banks with 24×7 access through multiple channels ensuring that complaints are resolved within 90 days
  3. Banks shall formulate transparent, non-discriminatory customer relations policy for customer protection
  4. And fraud investigation function must be owned by the bank’s CEO, audit committee of the board and the special committee of the board and nominate a general manager for submitting fraud returns

RBI’s clarification on Audit Committee

  1. The RBI has made it clear that in banks where the board of directors is chaired by a non-executive chairman
  2. And there will not be any restriction if she or he is also nominated to the audit committee of the board of directors (ACB )
  3. The ACB has to “oversee the internal inspection, statutory audit, inter-branch and inter-bank accounts, balancing of books, major areas of house-keeping, etc.”
  4. And focus on monitoring of frauds and taking preventive and corrective actions on frauds

Suggestions from other agencies

  1. The chief vigilance commissioner has also emphasised that there must be effective monitoring of frauds at the highest level
  2. The CBI director insisted that the board of the PSB banks must monitor fraud cases
  3. The ACB must monitor all the cases of fraud
  4. The committee is required to identify the systemic lacunae that caused perpetration of the fraud and review the efficacy of the remedial action taken to prevent recurrence of frauds

The way forward

  1. Despite the mother of all instructions for fraud detection, prevention, control, monitoring and periodical reporting to the RBI, there seems to be a laxity in implementation in different levels leading to NPAs and bank frauds
  2. These issues should be countered
Oct, 23, 2017

RBI to make LEI must for cos with over Rs 5 crore exposure

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the LEI

Mains level: Important measure to counter fraud and NPA problem in the Banking Sector.


News

RBI’s decision on Legal Entity Identifier (LEI)

  1. The RBI is set to make LEI compulsory for companies having aggregate fund-based and non-fund based exposure over Rs 5 crore
  2. Banks will be required to capture this number in the Central Repository of Information on Large Credits (CRILC) database that captures details of loan above Rs 5 crore
  3. Past decisions of the RBI on LEI: RBI has made LEI mandatory for transactions in interest rate, forex and credit derivative market

Benefits of the LEI number

  1. It will enable banks to effectively monitor debt exposure of companies having businesses in multiple sectors and dealing with large number of banks and NBFCs
  2. It will make it easier for banks to detect frauds and willful defaulters and prevent ever-greening of loans
  3. The need for such a system was felt after the 200b8 global financial crisis and global body, the Financial Stability Board, worked on the global structure of the LEI system
  4. It would also enable banks in preventing multiple loans to companies against the same collateral

Who can issue the LEI number?

  1. Firms can obtain their LEI code from Legal Entity Identifier India Ltd.(LEIL)
  2. The LEIL is a wholly owned subsidiary of Clearing Corporation India Ltd.
  3. LEIL is accredited by the Global Legal Entity Identifier Foundation (GLEIF) and recognised by RBI as issuer of LEI under the Payment and Settlement Systems Act, 2007
  4. Apart from the LEIL, any local operating unit accredited by GLEIF can issue LEI numbers.

Back2basics

What is an LEI?

  1. The Legal Entity Identifier (LEI) is a global reference number that uniquely identifies every legal entity or structure that is party to a financial transaction, in any jurisdiction
  2. It is a unique 20 digit alphanumeric code that is assigned to a legal entity

What is the purpose of an LEI?

  1. The global LEI system has been set up by regulatory authorities, including G20 and the Financial Stability Board, to address the global financial crisis
  2. The LEI is designed to enable the identification and linking of parties to financial transactions in order to manage counter party risk
  3. Its goal is to improve measuring and monitoring of systemic risk and support more cost-effective compliance with regulatory reporting requirements
Oct, 20, 2017

[op-ed snap] Regulating the disruption wave: RBI issues directions to govern P2P platforms

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Particulars of the NBFC-P2P

Mains level: The article comprehensively discusses issues related to NBFC-P2P


News

Context

  1. The article talks about the RBI’s policies on NBFC-P2P.

Recent decision of RBI on NBFC-P2P

  1. The RBI has recently classified peer to peer (P2P) lending platforms as non-banking financial companies (NBFC-P2P)
  2. Following this, RBI has issued detailed master directions governing the operation of such platforms, which raise some interesting PRELIMINARY QUESTIONS

Particulars of the NBFC-P2P

  1. As a registered NBFC-P2P, the firm can only provide a technology platform, through an online marketplace, to connect the lenders and borrowers, and related services such as loan documentation, loan recovery, etc.
  2. They are not entitled to conduct the business of lending and borrowing themselves
  3. In addition, they can provide credit assessment and risk profiling of borrowers, which is disclosed to potential lenders to make an informed decision

Question.1) Is RBI regulating a tech company as an NBFC?

  1. RBI has argued that the sector needs to be regulated and to protect participants from succumbing to unethical or coercive practices
  2. RBI can generally regulate entities operating either as banks or NBFCs
  3. P2P platforms are not banks, since there is no balance sheet lending
  4. Generally, entities with their principal business being financial activity are considered as NBFCs and required to be registered with RBI
  5. These conditions too are not satisfied by P2P platforms, since their primary source of income is commission from services
  6. However, the RBI has special powers to classify any entity as an NBFC, after consultation with the government which it has exercised to classify P2P platforms as NBFC-P2Ps
  7. The RBI has used this in the past to regulate mortgage guarantee companies and account aggregators

Question.2) Are the master directions detrimental to P2P start-ups?

  1. NBFC-P2Ps are expected to be a small subset of the various NBFCs operating in India.
  2. Due to the classification, NBFC-P2Ps are now subject to new conditions such as minimum net owned funds of Rs2 crore, leverage ratio of 2 and limited scope of activities
  3. As a result, the entry barrier for new start-ups has increased considerably, and the ability to move into ancillary business lines has been restricted
  4. For existing P2P players, while there may be initial hardship, and certain modifications required to their current business model, they already have certain aspects of the regulations coveredg

Question.3) Should investors reconsider their board strategy?

  1. For all NBFCs, approval of RBI is required if more than 30% of the directors (excluding independent directors) are changing
  2. However, for an NBFC-P2P, an additional prior approval is required if any change in shareholding gives the acquirer the right to appoint a director
  3. It is not clear why this condition has been added specifically for NBFC-P2Ps

Question.4) Will the new prudential norms affect business?

  1. RBI has restricted the aggregate exposure (across all P2P platforms) of each lender and borrower to Rs10 lakh, and limited the exposure of a single lender to a single borrower to Rs50,000
  2. These conditions will severely restrict the business potential of NBFC-P2Ps, unless they are able to bring on many more borrowers and lenders onto the platform
Oct, 13, 2017

RBI floats draft norms for setting up ETPs for fin instruments

Image Source

Note4students

Mains Paper 2: Polity | Appointment to various Constitutional posts, powers, functions and responsibilities of various Constitutional Bodies

From UPSC perspective, the following things are important:

Prelims level: ETPs

Mains level: Trading on electronic platforms is being encouraged across the world as it enhances pricing transparency, processing efficiency and risk control. It will be beneficial for the Indian Economy.


News

Electronic Trading Platforms (ETPs)

  1. The RBI today floated draft directions for setting up of ETPs for financial market instruments regulated by it
  2. It is aimed at ensuring transparency
  3. As per the draft direction, an ETP operator will be incorporated in India with full managerial and operational control exercised within India

What is an Electronic trading platform?

  1. In finance, an electronic trading platform also known as an online trading platform or electronic trading exchange, is a computer system running a software program that can be used to
    (1) place orders
    (2) store trading data and information pertaining to traded products
    (3) authenticate users and perform other operations of a trading exchange operating in electronic domain
  2. Various financial products can be traded by the trading platform, over a communication network with a financial intermediary or directly between the participants or members of the trading platform
  3. This includes products such as stocks, bonds, currencies, commodities, derivatives and others, with a financial intermediary, such as brokers, market makers, Investment banks or stock exchanges
  4. Electronic platforms provide several benefits in terms of transparency in pricing, processing efficiency in terms of transaction time and cost, improved risk controls and help in market surveillance by addressing market abuse and unfair trading practices
  5. These platforms have the potential to positively impact the market structure by broadening market access, increasing competition and reducing dependency on traditional trading methods

Draft Framework

  1. It includes detailed eligibility criteria, technology requirements and reporting standards
  2. Existing electronic trading platforms would also be required to obtain authorisation under these directions, within six months from the date of issue of these directions.
  3. The RBI has sought comments from market participants and other interested parties on its draft framework by November 10
Oct, 05, 2017

RBI panel suggests linking bank lending rates to a market benchmark

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Base rate, MCLR, lending rates, etc.

Mains level: Important suggestions to hasten monetary policy.


News

Recommendations by an RBI’s committee

  1. A committee set up by the RBI has recommended linking bank lending rates to a market benchmark
  2. Why: to hasten monetary policy transmission as well improve transparency in rate setting by lenders

Other suggestions from the committee

  1. The panel recommended that all floating rate loans advanced from April could be referenced to one of three external benchmarks
  2. The panel has suggested a risk-free curve involving rates on treasury bills, or certificate of deposits rates or the central bank’s policy repo rate
  3. It also suggested that banks migrate all existing borrowers to the external benchmarked rate without any conversion fee or other charges within one year of its introduction, i.e. March 2019
  4. These borrowers are currently charged under benchmark prime lending rates, base rates or MCLR
  5. RBI will take a final view on suggestions of the panel after taking into account public feedback received until 25 October

Back2basics

For better understanding of the issue, Click here

Sep, 05, 2017

No data on black money yet, says RBI

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: It is important to note RBI’s Statement on Demonetisation.


News

Statement in front of the Parliamentary Panel

  1. The RBI has told a parliamentary panel that it has “no information” on how much black money has been extinguished as a result of demonetisation
  2. According to the RBI, an estimated Rs. 15,280 crore in junked notes has come back “subject to future corrections based on verification process”

Other statements

  1. RBI also said it has “no information” whether demonetisation is being planned to be implemented at regular intervals
Sep, 05, 2017

RBI includes HDFC Bank in the ‘too big to fail’ list

Image Source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: D-SIBs

Mains level: One of the many steps taken by the RBI, to enhance the capability of Banking Industry in the Indian Economy.


News

HDFC is added in the list of Domestic Systemically Important Banks (D-SIBs)

  1. The RBI has added HDFC Bank in the list of D-SIBs
  2. It is the second largest private sector lender of the country
  3. Also, RBI has clarified, the State Bank of India and ICICI Bank will continue to be in this category

Background of the D-SIBs

  1. Following the global financial crisis of 2008, it was observed that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system
  2. And it  negatively impacted the real economy
  3. It was decided to identify such institutions and prescribe them higher capital requirements
  4. RBI had started listing D-SIBs from August 2015
  5. SBI and ICICI Bank were identified as D-SIB both in 2015 and 2016, respectively
Aug, 31, 2017

99% of demonetised notes returned: RBI

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Much awaited data on demonetized notes.


News

Returned Notes

  1. Data in the annual report, of the RBI, showed that only 89 million pieces of Rs. 1,000 were not deposited
  2. As of March 2016, there were 6,326 million pieces of Rs. 1,000 banknotes in circulation

Is this the final figure?

  1. The final deposit figures could still rise
  2. Since on June 20, 2017, the government allowed District Central Cooperative Banks to deposit the withdrawn notes that had been accepted by them from customers between November 10-14

Demonetized notes from Nepal

  1.  The central bank is also in discussion with the government whether to accept the demonetised notes held by citizens and financial institutions in Nepal
Aug, 18, 2017

[op-ed snap] Economic Graffiti: Don’t be cautious, RBI

Decrease In Repo Rate: More Savings On Home Loan

Image source

Note4students

Mains Paper 3: Economy | Mobilization of resources

Op-ed discusses about the impact of repo rate change on common man and it also gives, reasons why RBI should cut repo rate more.

Once you are done reading this op-ed, you will be able to attempt the below.

Discuss the impact of change in repo rate on common man? why it is said that RBI should be more aggressive in cutting the repo rate?

From UPSC perspective, the following things are important:

Prelims level: Repo rate, reverse repo

Mains level: Monetary policies of RBI and its impacts on economy


News

Context

  1. The Reserve Bank of India recently decided to lower the repo rate by 25 basis
  2. Ordinary citizens treat this as an abstruse topic, of no concern to them. In reality, the lives of ordinary citizens are greatly affected by it

Why this is important?

  1. The repo rate is the interest rate at which banks can borrow money from RBI for short durations
  2. If this is lowered, banks can lend to their borrowers at lower rates.
  3. This is the reason why changing this rate usually influences interest rates across the economy 
  4. Raising the repo rate lowers inflation but also restrains growth, while lowering it pushes up the growth rate but fuels inflation.

 Why RBI should be more aggressive in cutting the repo rate?

  1. There is no indication of rapid, generalised inflation in India.
  2. In an emerging economy, it is good to have an inflation rate of around 3 to 4 per cent. This makes the labour market more flexible and facilitates job creation.
  3. As a result of the liquidity crunch associated with demonetisation, GDP growth in India is now down to 6.1 per cent per annum. Some additional liquidity could partially offset this.
  4. Drop in the amount of investment taking place in the country. India’s investment-to-GDP ratio had risen since 2003 and was steady at above 35 per cent. This has now dropped to 28 per cent.

Global scenario

  1. The world is today caught in a low-interest rate regime. The European Central Bank cut its overnight deposit facility rate to below zero; and this prompted central banks in other countries — Sweden, Denmark, Switzerland, Japan, Hungary — to cut policy rates and enter negative territory.
  2. Such extreme low rates are, far from boosting consumption, making people save more since they are worried about not having enough money at the time of their retirement.
  3. Even the US Fed is more cautious about raising rates, because it would increase demand for dollars and cause the dollar to appreciate and hurt American exports.

Increase interest rate?

  1. If one country raises interest rates, money will flow into the country from the other economies in order to earn the higher return.
  2. As more players try to buy this country’s currency to invest in it, the currency will appreciate, causing exports to suffer.

India’s experience 

  1. By holding on to high interest rates, it is attracting capital flows into the country, as evidenced by the large foreign exchange reserve held by RBI.
  2. This is causing the rupee to be stronger than it should be and this is, in turn, stunting exports, and growth
Aug, 08, 2017

Loan-pricing systems: For better transmission, RBI in search of yet another benchmark

Image result for Monetary transmission India RBI

Image source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Base rate system, Mumbai inter-bank offer rate (Mibor), Libor, MCLR

 Mains level: MCLR System, issues and way forward.


News

Context:

  1. In 1994 Reserve Bank of India (RBI), announced a landmark decision to fully deregulate interest rates on advances above Rs 2 lakh.
  2. Since then, the RBI has introduced four benchmark lending rates for proper pricing of loans and transmission of rates. However, these rate structures have been found to be ineffective for various reasons. 
  3. The RBI has now formed a committee to formulate market-determined benchmarks to ensure a better transmission of interest rates.

What is Monetary transmission?

  • Monetary transmissionrefers to the process by which a central bank’s monetary policy decisions are passed on, through financial markets, to businesses and households.

Base rate system

  1. It included all those elements of the lending rate that are common across all categories of borrowers.
  2. Banks are allowed to determine their actual lending rates on loans and advances with reference to the base rate and by including such other customer-specific charges as considered appropriate.
  3. While all categories of loans are required to be priced only with reference to the base rate, transmission of the RBI rate cuts moved at snail’s pace

Banks and markets also briefly experimented with the Mumbai inter-bank offer rate (Mibor) on the lines of London’s Libor

Mumbai inter-bank offer rate (Mibor)

  1. It is a major global interest rate indicator
  2. In June 1998, the National Stock Exchange had developed and launched the Mumbai inter-bank bid (Mibid) rate and Mibor for the overnight money market.
  3. However, banks found it difficult to use external benchmarks for pricing their loan products, as the available external market benchmarks (Mibor, G-Sec) are mainly driven by liquidity conditions in the market, and do not reflect the cost of funds of the banks

 MCLR was experiment which was kicked off when Raghuram Rajan was the RBI Governor.

MCLR System

  1. RBI Governor Urjit Patel said experience with the MCLR system, introduced in April 2016 for improving the monetary policy transmission, has not been entirely satisfactory
  2. Banks have been selective in their rate cuts in aggressive segments such as home and auto loans, but in many other segments, borrowers are still tied to the base rate, where they can ease more.
  3. RBI’s rate cuts have not been passed on to borrowers in many segments of the economy.
  4. The base rate of some banks after the introduction of MCLR has moved significantly less than MCLR.
  5. The RBI says that the rigidity of the base rate is a matter of concern for an efficient transmission of monetary policy to the real economy
  6. MCLR failed to bring any cheers to old customers who were stuck with BPLR or base rate-linked rates.

The RBI is likely to come up with another benchmark lending rate for borrowers, speeding up the transmission of rate cuts to the customers.

Dec, 03, 2016

Centre takes steps to drain excess cash

  1. What: The Centre has decided to increase the limit of bonds that can be issued under a market stabilisation scheme (MSS)
  2. Reason: To mop up excess liquidity from the banking system arising out of its demonetisation move

Note4students:

This news is of minor importance, just make sure you understand terms such as bonds and market stabilisation scheme.

Back2basics:

The MSS scheme was launched in April 2004 to strengthen the RBI’s ability to conduct exchange rate and monetary management. The bills/bonds issued under the MSS would have all the attributes of the existing treasury bills and dated securities. However, unlike regular bonds, these are not issued to meet the government’s expenditure and the funds raised are kept in a separate cash account. As a result, their issuance will have a negligible impact on the fiscal deficit of the government.

Nov, 21, 2016

Sharia banking: RBI proposes ‘Islamic window’ in banks

  1. The RBI has proposed opening of “Islamic window” in conventional banks
  2. Reason: For “gradual” introduction of Sharia-compliant or interest-free banking in the country
  3. Both the Centre and RBI are exploring the possibility of introduction of Islamic banking for some time
  4. This is to ensure financial inclusion of those sections of the society that remain excluded due to religious reasons
  5. Due to the complexities of Islamic finance and various regulatory and supervisory challenges involved in the matter, it will be introduced gradually
  6. Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam
  7. In its annual report for 2015-16, the RBI had said that some sections of Indian society have remained financially excluded for religious reasons
Oct, 07, 2016

RBI to be divested of debt management role in 2 years

  1. Centre has finally decided to set up an independent agency to mange its debt after years of discussions with the RBI
  2. As a precursor, the Finance Ministry will soon set up the Public Debt Management Cell (PDMC) in the Budget Division
  3. This interim arrangement will allow separation of debt management functions from RBI to the Public Debt Management Agency (PDMA) in a gradual and seamless manner, without causing market disruptions
  4. The cell will be converted to a statutory authority in about two years’ time
Sep, 19, 2016

A background to FDMC tussle- I

  1. Context: RBI is opposed to the idea of Financial Data Management Centre as it will reduce the independence of regulators
  2. RBI’s push-back comes at a time when the central bank is facing mounting pressure to reveal data that can be used to track illicit money flows and the names of loan defaulters
  3. On 11 August 2016, the SIT on black money had written to RBI to share information on foreign exchange transactions and create a mechanism to track illicit flow of funds with the enforcement agencies
  4. Conflict of views: While RBI maintains an internal database for foreign exchange transactions, the SIT said the data it has been given showed that there are gaps in monitoring trade flows
Sep, 19, 2016

RBI, govt at odds over proposed data warehousing body

  1. What? RBI has raised concerns over a proposed data warehousing body, the Financial Data Management Centre (FDMC)
  2. Independence: It will reduce the independence of regulators
  3. How? If a statutory body is created, then the regulators would not be independently in the position to collect raw data in its original format
  4. Also RBI’s ability to take corrective measures in case of systemic issues or market manipulation would be hampered
Mar, 04, 2016

Bank customers can use post-office ATMs soon

  1. Context: India Post proposed to RBI for allowing ATMs of India Post to work on the platforms of all other banks
  2. This is the first step towards the proposed Postal Bank
  3. Benefit: Soon people will be able to withdraw money from any bank account – private or PSU through ATMs of India Post
  4. Current context: Only those with accounts in postal department can use the service
Feb, 25, 2016

Banks warned on asset sales

  1. Context: RBI has warned banks to be cautious about the entities to which they sell assets acquired on account of loan defaults
  2. Caution: promoters of companies acquired by banks may be using shell entities to buy back these assets at much lower prices
  3. It would also allow black money stashed by Indian businessmen overseas to come back into India
  4. Why the diligence? Because prospective buyers in a number of cases are coming from relatively unknown backgrounds and banks need to be sure that there is no foul play
Feb, 24, 2016

FII cap in state-run banks may increase to 49 per cent

  1. Why? Public sector banks(PSBs) need equity capital while their stocks have taken a hammering after reporting huge losses due to a sharp rise in non-performing assets(NPAs)
  2. Relevance: PSBs will also require capital to comply with the Basel-III norms
  3. Context: Valuations of public sector banks are subdued, so increase in FII cap will certainly attract portfolio investment
  4. Present regulations: Single non-banking institution can’t hold more than 10 % in a bank while one bank can hold maximum 5 % stake in another bank
  5. What’s Constraint? PSBs are constrained to raise equity capital from markets as most of them are trading at a significant discount to their book value
Feb, 23, 2016

Strategic debt restructuring initiated: Sinha

  1. Context: Govt. effort to reduce the rising bad loans in the banking system
  2. News: The govt has initiated strategic debt restructuring in few cases comprising bad loans worth Rs 1 lakh crore
  3. How? Govt. has given banks the freedom to fix the projects that were causing bad loans through strategic debt restructuring
  4. Banks were given the option of even replacing the promoters of the project, if need arises
Feb, 20, 2016

Small saving schemes and monetary transmission

  1. Context: Govt. decision to partially deregulate interest rates on such instruments with less than 5 years maturity
  2. Why? Higher rates divert deposits away from banks towards such schemes resulting in inability of banks to cut deposit rates
  3. Transmission: banks are thus unable to transmit RBI rate cut to lending rates
  4. But this may not help as one, deregulation affects only ⅓ of total small saving deposits
  5. Banks’ inability to mobilize rural deposits due to limited number of bank branches in rural areas
  6. Way ahead: Reduce interest rates further and make all small saving rates compatible with bank rates
Feb, 16, 2016

Not desirable to use exchange rate to spur economic growth, says Rajan

15TH_BU_RAJAN_2738258f


  1. Context: RBI and the government don’t favour undervaluation of the exchange rate as a means to spur economic growth
  2. Relevance: Problems with undervaluing the exchange rate and some of these are reflected in economic condition that countries find themselves
  3. Concern: Health of the world economy and dwindling investor confidence in PM Modi’s ability to push through economic reforms
  4. Rajan’s advice: Sustained undervaluation over a long period of time is not a feasible or desirable strategy
  5. The exchange rate should to be reasonably predictable and reasonably stable
  6. What MSMEs can do? Act as a means of social empowerment where disadvantageous sections of society can be empowered with money and wealth
  7. Problems for MSMEs: Lack of infrastructure and logistics, access to marketing, difficulty and the expense in acquiring land and financing
Feb, 15, 2016

Reserve Bank can’t drop guard on inflation

  1. Context: Retail inflation data showed that RBI had met its Jan 2016 target of slowing the price gains to under 6%
  2. Background: In 2015, RBI entered into a historic agreement with the govt on an inflation targeting monetary framework
  3. Future: The next milestone is of 5% by March 2017, which is likely to challenge monetary policy makers
  4. Challenge: Implementation of 7th pay commission recommendations, deficient monsoon may also exert pressure on food inflation
Feb, 12, 2016

Banks’ balance sheet clean-up imperative for growth, says Raghuram Rajan

  1. Context: RBI had conducted an asset quality review (AQR) of banks and identified specific accounts, which banks have to identify as non-performing
  2. Result: Bad loans have hit banks’ profitability in the third quarter with most of them posting heavy losses
  3. Why clean-up? Profitability of banks may be impaired in the short-run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way
  4. Rajan said: The ongoing clean-up of bank balance sheets will help spur economic growth and improve the lenders’ profitability
Feb, 11, 2016

Reserve Bank tells banks to set aside more for stressed loans

  1. Context: RBI Governor’s drive to clean up banks’ balance sheets by March 2017
  2. RBI Direction: Banks will have to accelerate provisioning requirement, from April 1, for the existing stock of restructured loans that are showing signs of stress.
  3. How? – Lenders have to increase provisioning by 2.5% every quarter starting April 1
  4. This will take provisioning to the level of 15% by March 31, 2017, in line with sub-standard accounts
  5. Impact on Banks? – Banks are facing profitability pressure due to higher provisioning for bad loans
Feb, 03, 2016

With an eye on budget, Rajan holds interest rates

Going ahead in 2016-17, RBI said growth is expected to strengthen gradually, notwithstanding significant headwinds and projected the GVA growth for the next fiscal at 7.6 per cent.

  1. The RBI left the key policy rate unchanged at 6.75 per cent, as widely expected, ahead of the union budget.
  2. Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest CAD and commitment to fiscal rectitude.
  3. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened.
  4. The government is targeting a fiscal deficit of 3.9 per cent for the current financial year and 3.5 per cent for FY17.
Jan, 30, 2016

Rajan warns against straying from fiscal consolidation path

During global turmoil, macroeconomic stability should not be risked.

  1. RBI Governor Raghuram Rajan cautioned against deviation from the fiscal consolidation path, which could hurt macroeconomic stability.
  2. The growth multipliers on government spending at this juncture are likely to be much smaller, so more spending will probably hurt debt dynamics.
  3. Brazil’s experience suggests, the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies.
  4. We should be very careful about jeopardising our single most important strength during this period of global turmoil – macroeconomic stability.
  5. Taking the fiscal deficits of the Centre and states, the consolidated fiscal deficit for the country rose last year to 7.2 per cent from 7 per cent.
  6. Deviation from the fiscal consolidation path could push up government bond yields.
Jan, 29, 2016

We should be careful about how we measure GDP: Rajan

New GDP series, in effect for a year now, has been criticised by economists.

  1. RBI Governor has raised doubts over the new methodology used to calculate the country’s gross domestic product (GDP).
  2. He cited the example of two mothers who babysit each other’s kids, and said there is a rise in economic activity as each pays the other, but the net effect on the economy is questionable.
  3. The country’s GDP numbers were revised with the base year of 2011-12 from the earlier 2004-05.
  4. The methodology of calculating GDP was changed as the new methodology takes GDP at market prices into account, which includes indirect taxes and excludes subsidies.
  5. Governor indicated that country needed policies to incentivise job creation and rued that we have policies directed towards capital subsidies alone.
Jan, 26, 2016

Divest to Fund Capital Expenditure aka Asset swap

Asset sales are the way for government to protect credibility while avoiding procyclical fiscal stance .

  1. Amid concerns of a slowdown, fiscal-consolidation would make fiscal policy procyclical and potentially suboptimal.
  2. Deviating from the fiscal path again is not without risks.
  3. First, it could impinge upon hard-earned credibility.
  4. Second, a larger-than-expected borrowing programme will push up private-sector borrowing costs and risk some crowding-out of private investment.
  5.  Finally, with nominal GDP growth moderating sharply and approaching the same level as the cost of government borrowing, public-sector debt dynamics have become less favourable.
  6. But does asset sale make sense when public sector commodity stocks are down?
  7. To the extent that resources are ploughed into public investment, the cost of building infrastructure is also commensurately cheaper when commodities collapse. So there is a price hedge.
  8.  Think of disinvestment as an “asset swap” on the government’s balance sheet rather than an “asset sale”.
Jan, 22, 2016

Central Fraud Registry set up by RBI

RBI has also issued guidelines to detect frauds related to loan accounts.

  1. Borrowers indulging in fraud typically take advantage of the lack of information with banks.
  2. Thus, RBI has put in place a central fraud registry – a searchable database to help banks detect instances of fraud by borrowers early on.
  3. Frauds of 1L – 5Cr will be monitored by the respective regional office of the RBI and above 5 Cr will be monitored by the Central Fraud Monitoring Cell (CFMC) of RBI.
  4. Given the incessant rise in bad loans since the last 2 years and most of these arising out of fraudulent behaviour.
  5. RBI has been urging banks to detect such cases at an early stage to avoid a big hit later on their books.
Jan, 18, 2016

Be tight-fisted

The ‘tight fiscal, easy monetary’ policy mix can better address problems that plague private investment.

  1. First, the debt to GDP ratio would remain under control.
  2. Second, finance minister would maintain his credibility.
  3. The decision to stick to the path of the announced fiscal targets is good not just in the long run but also in the short term.
  4. Immediately it will create space for monetary policy easing
  5. Unlike, say, in Europe, where there is no scope for cutting the policy rate that is near zero, in India, there is ample scope to cut it.
  6. Reduction in the interest burden could possibly prevent more companies from going towards bankruptcy, thus helping banks and overall economy .
Jan, 09, 2016

RBI Dy Governor Patel gets second term

  1. Urjit Patel, Deputy Governor of RBI, in-charge of the monetary policy department, has been re-appointed for a term of 3 years.
  2. Earlier, he was head of a committee to review the monetary policy framework.
  3. The committee proposed inflation targeting as the central bank’s prime objective.
  4. It changed the main gauge for inflation to consumer price index based inflation.
  5.  It was probably the first committee which explicitly said that govt should not intervene in the functioning of public sector banks.
Jan, 02, 2016

RBI tells banks to replace defective 1,000-rupee notes

  1. Recently, a govt-owned printing presses of had printed 300 million defective banknotes.
  2. RBI has asked banks to replace such notes with them, when found.
  3. Currency experts said that the checking of notes is done at the press-level.
  4. The banking regulator is not involved with checking each and every banknote.
  5. Notes of denominations of Rs 500 & Rs 1,000 together accounted for approx. 85% of the total value of banknotes in circulation at end- March 2015.
Dec, 29, 2015

Interest subvention should be phased out: central bank panel

The government must do away with the interest subvention scheme and plough back the subsidy into a universal crop insurance scheme for small and marginal farmers.

  1. The move can transform the agriculture sector and promote financial inclusion, according to the panel headed by Deepak Mohanty, executive director, RBI.
  2. Digitisation of land records for clear titles and credit linkage are necessary to establish evidence of cultivation.
  3. There is a specific purpose of subvention where farmers receive loans at a lower cost with the government paying the balance.
  4. In order to ensure actual credit supply to the agricultural sector, the committee recommended introduction of Aadhaar-linked mechanism for Credit Eligibility Certificates.
  5. The Mohanty panel noted significant financial exclusion continue to persists in the north-eastern, eastern and central states to achieve near-universal access.
Dec, 22, 2015

Reserve Bank of India to prune NBFCs for effective regulation

  1. RBI is working towards harmonising regulations for NBFCs to reduce the number of categories in the sector.
  2. RBI will continue to approve of new kinds of NBFCs if the economy requires them.
  3. The business model of NBFCs is inherently risk-prone because of weaker underwriting standards, enhanced risk-taking capabilities and increased complexities of their activities.
  4. NBFCs are also exposed to key risks emanating from regulatory gaps, arbitrage and contagion effects.
Oct, 31, 2015

RBI opens National Pension System as investment option for NRIs

RBI has taken this decision in consultation with Union Government to appease NRIs.

  1. RBI has allowed non-resident Indians to subscribe to the NPS enabling them access old age income security.
  2. NPS will act as an investment option for NRIs under Foreign Exchange Management Act (FEMA), 1999.
  3. NRIs may subscribe to the NPS through normal banking channels and the person is eligible to invest as per the provisions of the PFRDA Act, 2013.
  4. NPS is governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA), launched in 2004.
  5. It was extended for all citizens of the country from 1 May 2009 including the unorganised sector workers on voluntary basis.
Oct, 23, 2015

What is the neutral real interest rate?

The real policy rate in India is close to the neutral real interest rate, reinforces the view that RBI will desist from further rate cuts until the end of next year

  1. The RBI has said that the neutral real interest rate in India should be 1.5-2% for this stage of economic recovery.
  2. This measure is the rate at which desired savings equal desired investments or the rate at which growth is close to potential and inflation is stable.

Why is it important?

As Nomura economists point out, summing up observations from a recent RBI staff working paper, if projected inflation is higher than the inflation target, then the actual real rates must be higher than the neutral real rate to ensure than monetary policy is anti-inflationary.

Oct, 05, 2015

RBI actions to bring annual FPI funds of Rs.48,000 crore

  1. The recent monetary policy review could attract an average annual flow of Rs.48,000 crore in govt. bonds from overseas investors for the next few years.
  2. This gradually augmented demand for govt. bonds will have a sustained, salutary impact on bond prices or sustained decline in yields.
  3. The limits for FPI investment in govt. securities will be increased in phases to 5% of the outstanding stocks by March 2018.
  4. The measure to enhance participation in state development loans by bringing the FPI investment to 2% by March 2018, are likely to enhance the market appetite.
  5. The rating agency- India Ratings, expects the rupee to outperform most emerging market currencies.
Sep, 05, 2015

RBI crisis fund short of target

For the last two years, the RBI has made no transfers to its Contingency Fund or its Asset Development Fund.

  1. Contingency funds with the Reserve Bank of India (RBI), used in case of unforeseen shocks, have fallen to 8.4 per cent of total assets, against a target of 12 per cent, as shown in its Annual Report for 2014-15.
  2. For the last two years, the RBI has made no transfers to its Contingency Fund(CF) or its Asset Development Fund(ADF). The balance in these funds, therefore, has barely changed since 2013, when they made up 10.1 per cent of total assets.
  3. “The wider the area of responsibilities of a central bank, greater the risks and, hence, higher the requirement of capital,” the report said.
  4. “A central bank may require recapitalisation, precisely at a time when the fiscal position is under strain, say, due to a financial crisis,” it added.
  5. The annual report also showed that the RBI had been transferring 99.9 per cent of its profits to the government, without keeping any amount for itself. This is a sharp increase from the 40-50 per cent it had transferred in the 2010-13 period.
  6. In 2015, the Bank of England transferred a mere 93 pounds to the government while the U.S. Federal Reserve is required by law to transfer most of its profits to the government.

Let’s check what purpose served by RBI’s CF and ADF?

Jul, 11, 2015

RBI releases final guidelines for PPI MTS

  1. What’s that?
  2. Prepaid Payment Instruments for Mass Transit System (PPI-MTS).
  3. Enabling the issuance of a separate category of semi-closed prepaid payment instruments for mass transit systems.
  4. This means that all Mass Transit System operators like the Indian Railways and even local buses can now issue their own prepaid cards.
  5. This move will provide considerable ease to commuters.
  • Subscribe

    Do not miss important study material

18
Leave a Reply

Please Login to comment
0 Comment threads
0 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
0 Comment authors
Recent comment authors
  Subscribe  
newest oldest most voted
Notify of