Bank Should Not Extend any Service Free of Charge

  

Free electronic fund transfer not viable, says Chakrabarty

http://www.thehindubusinessline.com/industry-and-economy/banking/article3581618.ece?homepage=true&ref=wl_home

                                                                                                                                                                 MUMBAI, JUNE 28: 

The Reserve Bank of India’s Deputy Governor, Dr K.C. Chakrabarty, has ruled out the possibility of providing e-transactions free of cost given the viability issues.

Earlier this month, the Finance Ministry had asked the banking regulator to work out a framework under which funds could be transferred electronically free of charge from one account to the other.

“Anything (product and services) that is offered free of charges can never be scaled up…It cannot be commercially viable and viability is the key,” Dr Chakrabarty said at a Banking Tech summit organised by the Confederation of Indian Industry here on Thursday.. He added that with greater use of technology the cost of transactions come down and customers should bear just the incremental cost.

At present, banks charge between Rs 5 and Rs 55 for electronic transfer of funds up to Rs 1 lakh from an account of one bank to another through National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS).

CUSTOMER IS THE KEY

According to Dr Chakrabarty, there is no standardisation amongst banks even with regard to account numbers and customers have to learn, unlearn and re-learn banking operations with each bank.

Dr Chakrabarty called for greater customer focus by providing suitable cost-effective technology and efficient multi-channel delivery model; standardisation of systems, customised products and services to reach out to small and marginalised customers; efficient business models that are viable but not exploitative; data integrity with cost and speed; comprehensive MIS and increased information literacy for everyone while also making the quality of information better.

On a lighter note, he said, “Innovation is about providing risk-free returns but technology today has collapsed and is providing return free risks.”

Amid some criticism levelled upon the RBI, Dr Chakrabarty observed that, “There is a thin line of demarcation between what can be called an ‘innovation’ and a ‘violation’. Our purpose is to stop the latter.” He further said it was the RBI’s job to reduce negative outcomes of technology and innovation while retaining the benefits.

‘I do not go to an ATM’

The RBI Deputy Governor, Dr K.C. Chakrabarty, brought the house down saying that he never used ATMs after hearing the number of complaints made by customers.

While the ATM machine was one of the greatest innovations in the last 50 years in terms of technology products, it did have drawbacks. “It facilitates faster dispensation of cash provided the transaction is successful. Though there have been 98 per cent successful ATM transactions, there have been no failed transactions at a branch. So where is the evolution?” he exclaimed.

“The problem faced by the aam aadmi today is ‘terrorisation of ATMs’. Some (ATM machines) will swallow your cards, some require only swiping; some require keys and some do not, some provide cash on the tray while some do not, and some do not return money…,” he quipped.

Govt asks RBI to work on making electronic fund transfers free

PTI     New Delhi   Last Updated: June 13, 2012  | 17:06 IST

 The government has asked the Reserve Bank of India (RBI) to work out a framework under which funds could be transferredelectronically free of charge from one account to the other.

The suggestion was made by Finance Minister Pranab Mukherjee in his address at a meeting with chief executives of the public sector banks, which among others, was also attended by RBI Deputy Governor K C Chakrabarty.

At present, banks charge between Rs 5 to Rs 55 for electronic transfer of funds from account of one bank to another through National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS).

"I would also urge upon Reserve Bank of India (RBI) to proactively work on this front and to see that all electronic banking transactions should be possible without any charges being levied," Mukherjee said.

Cost free electronic transaction would encourage customers to use this medium for inter-bank as well as intra-bank fund transfer across the country.

SPECIAL: How to best manage your savings

The move would also help reduce cash movement and cash transaction, a senior official of a public sector bank said.

For outward transactions under RTGS mechanism, banks charge Rs 30 for electronic transfer of Rs 2 lakh to Rs 5 lakh and Rs 55 for amounts above Rs 5 lakh.

On the other hand, under NEFT the charges range between Rs 5 and Rs 25.

Citing example of Oriental Bank of Commerce, which has waived all charges for electronic transactions up to Rs 1 lakh, Mukherjee had said, "I am confident that all the public sector banks would follow this excellent initiative."

Financial System Stability Report

Financial system risk rising: RBI

Stress tests show banking crisis unlikely; deteriorating asset quality is the most critical concern

http://www.livemint.com/2012/06/28223415/Financial-system-risk-rising.html?atype=tp

Risks to the Indian financial system have increased over the past six months, the Reserve Bank of India (RBI) said in its fifth Financial Stability Report released on Friday. It said, however, that stress tests showed a banking crisis was unlikely.

While the financial system “remains robust”, there are threats to financial stability from issues such as the global sovereign debt crisis as well as domestic issues such as the growing fiscal deficit, the widening current account deficit, and structurally high food inflation. Falling global oil prices and the prospects of a good monsoon are positives.

While the call on the monsoon may be a bit premature, the message in RBI’s report is one that has been aired with increasing consistency in recent times: India’s financial institutions look solid, but its macroeconomy doesn’t.

Indeed, RBI governor D. Subbarao said the report “is being released against a backdrop of worrisome global and domestic macroeconomic developments” and added that “despite some negative indicators, particularly on asset quality, the Indian financial sector has remained sound and resilient. 

Banks continue to be well capitalized with leverage at healthy levels”.

Stress tests that measure the ability of domestic banks to withstand economic shocks show that while asset quality may deteriorate under extreme conditions—including economic growth at 3.5% by March 2013, inflation at 12.2%, and a fiscal deficit of 7.9% of gross domestic product—the capital held by Indian banks will still be above the regulatory minimum. The stress tests essentially suggest that India is not likely to see a domestic banking crisis even if economic conditions deteriorate sharply.

RBI sounded a note of caution on the risks to the financial system because of the rapid growth in algorithmic high-frequency trading. “There have been many instances of extreme volatility and disruptions witnessed in Indian stock markets, resulting from various causes which can be directly or indirectly attributed to the increasing use of algorithmic high-frequency trading,” the central bank said. However, it pointed out that these types of trades accounted for only 17% and 11% of the cash market turnover on the National Stock Exchange (NSE) and BSE, respectively, which is relatively modest compared to developed markets in the US and Europe.

India’s stock market regulator, the Securities and Exchange Board of India (Sebi), too, has raised concerns over such trading. On 20 April, futures contracts of the Nifty, the 50-share index of NSE, crashed about 300 points in a few seconds, after an algorithmic trade without any specified sell price got triggered. NSE later said it was investigating the matter and will submit a report to the markets regulator.

The RBI report said risk that the failure of a large bank could ripple through all parts of the financial system has increased because of greater interconnections between diverse financial intermediaries such as banks, insurance companies and mutual funds. The largest net lenders in the system were the insurance companies and asset management companies, while the banks were the largest borrowers.

“The random failure of a bank which has large borrowings from the insurance and mutual funds segments of the financial system may have significant implications for the entire system,” the report said.

Risks arising from relationships or transactions between banks are also on the rise. The RBI analysis showed that the maximum potential loss to the banking system due to the failure of the “most connected” bank has risen during 2011.

“These trends would need to be carefully monitored, through rigorous microprudential supervision of the ‘more connected’ banks,” the central bank said.

“The concerns raised by the Reserve Bank are important, particularly with regard to the interconnectedness between financial institutions and worsening asset quality,” said Gaurav Kapur, India economist at Royal Bank of Scotland NV (RBS).

“RBI has been cautious in assessing the rising dependency between systemically important financial institutions in India in the aftermath of the 2008 global financial crisis. In times of stress, this can have adverse impacts on the system in the form of severe liquidity pressure,” Kapur said.

However, stress is rising in the banking system owing to bad asset quality as well as the lack of liquidity.

Not only have Indian banks been borrowing an average of close to Rs.1 trillion in the last few days, indicating a lack of domestic liquidity, but overseas liquidity is also constrained as European banks are tightening their pursestrings, making availability of money a problem.

However, the most critical worry right now in the banking system continues to be the deteriorating asset quality.

“An increase in slippage ratios, a rise in the quantum of restructured assets, and a high rate of growth in non-performing assets (NPAs) relative to credit growth implied that the concerns on asset quality of banks remain elevated,” the report noted.

S. Raman, chairman, Canara Bank, said, “The bad debt problem is a nagging issue, but banks do restructuring keeping in view the future cash flow of companies. In that sense, even if bad debts pile up for now, we are hopeful that they will be made good given that Indian companies are largely domestic demand driven.”

The gross NPA ratio for scheduled commercial banks rose to 2.9% end March against 2.4% a year ago. The growth in NPAs continued to outpace credit growth by a wide margin. While NPAs grew 43.9% in the year to March, credit growth was only 16.3%, according to the report.

The divergence in the growth rates has widened recently, which could put further pressure on asset quality in the near term.

The slippage ratio, or fresh bad debt accretion, increased to 2.1% at the end of March from 1.6% in March 2011 and 1.9% in September 2011.

Power, especially state electricity boards, and airlines were stressed sectors posing a threat to banks’ asset quality. Banks’ exposure to the power sector was close to Rs.5 trillion at the end of March, RBI said. Nearly three quarters of the more than Rs.1 trillion of exposure to the airline sector was either impaired or restructured, it said.

“The central bank is clearly concerned with the fact that the quality of assets of Indian banks may not be in good shape,” Madan Sabnavis, chief economist at CARE Ratings. “This, if not checked, could develop into a major concern for the overall stability of the banking system. In a way, RBI is cautioning the banks as it doesn’t expect the economy to do well in the near term.”

Rating agency Crisil Ltd has estimated that restructured loans in the banking system may cross Rs.2 trillion by the end of this fiscal year. Bad debts in the banking system crossed Rs.1 trillion in September. RBI officials have repeatedly warned about the risk of asset quality deterioration.

Bad loan concerns have been stoked by economic uncertainty in the euro zone resulting from the continent’s debt crisis, slumping demand for Indian goods overseas, and companies putting off investments in new projects amid slowing economic growth.

Morgan Stanley said on Wednesday after a meeting with the management of State Bank of India (SBI), the nation’s largest lender, that the bank’s “asset quality pressures will intensify” in the fiscal year ending 31 March 2013, while the “flow of bad loans will be lumpy”.

SBI reported a fall in its bad debt in the quarter ended 31 March. The bank’s gross NPAs had peaked at Rs.40,098 crore at the end of December, but fell in the following three months to Rs.39676crores or 4.4% of assets

RBI warned against the rapid rise of gold loan companies, saying the exponential growth in their balance sheets coupled with the rapid rise in the price of the metal “could be a cause of concern”, as these firms are highly dependent on the banking system for their resources, which could pose risks to the banks.
Banks are also getting increasingly dependent on high-cost deposits to make good their shortfall in retail deposits.


The deleveraging by European banks is having some impact on the cost of borrowing of Indian firms and banks.


“The problem in Europe is a bad news for the Indian banking system only to the extent that the European banks will not subscribe to bond issuances of Indian banks,” said Raman of Canara Bank. “They are major buyers of our bonds and the shrinkage in their balance sheet spells trouble for our overseas funding requirement.”


The RBI report said any change in India’s external rating could have “cliff effects”, impacting both the availability and the cost of foreign currency borrowing for Indian banks and firms.


The effect will not have any impact on domestic credit availability even as specialized types of financing such as structured long-term finance, project finance and trade finance could be impacted, the central bank said.

RBI And MINISTRY OF FINANCE Silent on High Value Bank Scam

RBI Mute On The Biggest Bank Scam
The apex bank hushes up the FEMA violations that took place during the sale of forex derivatives by banks, leading to a loss of Rs 25 lakh crore. Bibhuti Pati, in a follow up to one of the biggest bank frauds, reveals the haplessness of the victims

(Collected From Tehelka.com )

DERIVATIVES are products invented by the West to fleece the rest of the world. More rightly pointed out by Warren Buffett, these are nothing but financial instruments of mass destruction. More than 90 per cent of these products originate from the five big Wall Street banks. Greece is a standing example of how even a country can go bankrupt by signing a derivative agreement with a Wall Street bank, in this case, Goldman Sachs.

Also, as pointed out by Randall Dodd of the International Monetary Fund, during the financial crisis of 2007-08, these derivative products came in handy for US to transmit the crisis to several emerging market economies resulting in loss of a whopping $550 billion to developing countries including India.

Forex Derivative Consumers’ Forum (FDCF) president Raja M Shanmugam said, “It was during the first half of 2007 when there was a steep appreciation of the rupee against the US dollar whereby rupee fell to 39 per dollar from 46 per dollar within a short span of time. During that time, several banks approached the exporters claiming that they had sophisticated derivative products that would save the exporter by making profits which would offset the loss suffered on account of rupee appreciation. The promise made by the banks was that they would look after the fluctuation part of the deal and take care of it so that there are no losses in transactions.”

However, by the end of FY2007-08, several exporters across the country started facing huge mark-to-market losses when the bankers started quoting the global financial crisis as the reason behind the fallout. During that time, several Indian exporters, who suffered losses on account of this exotic forex derivative, joined hands and started a movement called FDCF whose principal objective is to save the exporters who suffered exorbitant losses due to these exotic currency derivatives.

http://www.tehelka.com/story_main52.asp?filename=Fw050412RBI.asp

“Initially we approached the executive establishment of the Government of India by meeting the higher ups in the RBI and the finance ministry including the then finance minister. But the response we got was that this is just a bilateral contractual issue between two parties thereby washing their hands off the issue,” said Raja.

“Only due to the intervention of the Orissa High Court did all these issues come to limelight, whereby the country came to know that the loss projected by the RBI on a particular date was around Rs 31,700 crore,” added Raja.

P Moghan, a garment exporter, said, “As exporters, we generally use Plain Vanilla Forward Contracts to hedge our currency risk due to export business. But in 2007, we were approached by several banks stating that it is time we switched over to more sophisticated hedge instruments such as exotic derivative products to effectively deal with currency risk.”

“The banks came to our doorsteps stating that there was no need for any collateral securities or NOCs – just a signature in the ISDA master agreement would suffice and they would take care of the rest. Also, they promised that they had a well equipped treasury department that would take care of the fluctuation part of the contract so that there will be no loss to our account.”

“As an exporter making garments for the European Union, we have little exposure to these complex products. We entered into these contracts purely on the advice of the banks that sold them. But we were shocked to find that the banks absolved themselves from any responsibility when losses in crores of rupees started to accumulate. They changed their stance, saying, ‘you have signed the contract, so you have to bear the losses’.”

“The unique feature about all these exotic contracts is that when profits arise, they would be only in small amounts say $10,000, but when losses surface, they would run into crores of rupees. In many cases, the maximum to actual profit ratio works out in the range of 1:50 or 1:100. No prudent exporter would go for such highly skewed contracts if properly advised by the banks. But subsequently, we realised that we were taken for a ride by these banks, who thoroughly misled the risk profile of these contracts purely with an eye on the margins they can make out of these contracts,” said Moghan.

S Dhananjayan, adviser of FDCF, said, “In my opinion, the forex derivative scam is the biggest banking scam in the history of independent India – much bigger than scale and implications than the Harshad Mehta scam.”

“It is highly disheartening that the government has shirked the responsibility on the pretext that these are private contractual disputes without analysing the systemic impact of this scam. We have appealed to the finance ministry to establish an enquiry committee with a view to find out the root cause of such a catastrophe, but no action has been taken yet.”

The RBI earlier stated that exporters were equally at fault as the bankers. However, when pinned down by the Orissa High Court, they came out with facts that ‘Serious irregularities/ FEMA violations have taken place in the sale of forex derivatives by banks’. Also in April, 2011, they also attempted to hush up the issue by levying paltry penalty on the erring banks.

Now, each and every arm of the banking establishment of the country is ganging up before the Supreme Court – to stall the CBI probe as ordered by the Orissa High Court. The Special Leave Petition before the Supreme Court was originally filed by the Fixed Income Money Market and Derivatives Association, but subsequently all other limbs of the banking establishment, namely, Foreign Exchange Dealers Association of India (FEDA), Indian Bankers Association (IBA) and RBI, joined the battle with a view to scuttle the attempt of the CBI to carry out a thorough investigation. It seems fishy why so many public institutions are going to the extent of engaging all big legal luminaries of the country and spending enormous amount of public money in an attempt to stall an unbiased investigation by the apex investigation agency of the country. If there is nothing to hide, then there should be no attempt to stall a probe on the issue – what is now being done is an attempt to jeopardise the process of the law in an attempt to scuttle the investigative process that would reveal the truth as to who is responsible for this mess. “We also feel that there is much more to this iceberg. There is talk of an international conspiracy to fleece the emerging market economies in which our banks might have played cat’s paw. There is also a possibility that bank officials might have pocketed enormous profits leaving the banks to bear the loss on account of counter-party defaults thereby causing loss of public money,” said Dhananjayan. “All that we want is natural justice for every citizen of this country and not just to those mighty institutions with unlimited access to public money. There must be a thorough probe by an independent investigative agency,” he demanded. Questions the apex bank ought to answer 1. AS PER figures submitted by the RBI before the Orissa High Court, the notional principal outstanding in respect of derivative contracts as on December 31, 2008, is $2,435 billion. Since the country’s annual aggregate of exports and imports has not exceeded $500 billion, the derivative outstanding figure of $2,435 billion, which is almost five times of the country’s aggregate exim turnover, signifies that there is rampant fraud through currency derivatives taking place right under the nose of the apex bank. 2. THE OCTOBER 13, 2008 circular of RBI specifies that derivative losses should be taken into account for borrowerwise NPA classification norms, whereas the October 29, 2008 circular specifies that derivative losses should be taken in a separate account and not to be considered for borrower-wise NPA classification. Why this sudden reversal of policy? Was it in acknowledgement of the wrongs committee in the mis-sale of derivative products by banks? 3. THE RBI penalised 19 banks on April 26, 2011 for violating the guidelines regarding sale of derivative products to customers. Why did the RBI refuse to give the details and documents relating to levy of penalty when requested under the RTI? Is it trying to shield the erring banks? 4. THE APEX bank washed its hands from the issue by penalising the banks that indulged in violations in derivative trade. It is in no way a relief to exporters who suffered enormous losses. What are the measures taken by the RBI to strengthen its monitoring mechanism in order to get early warning signs of such violations so that preventive measures could be taken before such a catastrophic damage is done to the industry? 5. WHY DID the RBI join hands with FIMMDA, IBA and others in the case before the Supreme Court in order to scuttle a thorough CBI probe on the entire derivative fiasco? Is the bank an independent regulator or just an extended arm of these erring banks?