Economy
4 indicators to watch after a new RBI governor joins
After September 2016, there would be a new Governor at the Reserve Bank of India (RBI) following the decision of incumbent Dr Raghuram Rajan to not to continue after his terms gets over. In this scenario, there are four indicators to watch for after the new Governor joins. This includes, tapping of RBI's excess funds for capitalisation of public sector banks (PSBs), operation of stressed asset funds, treatment of restructuring and asset quality review (AQR), and rate cuts, says a research note.
 
In the report, Religare Capital Markets Ltd says, there are certain ramifications of changes in these four key regulatory areas if the new Governor diverges from Dr Rajan's stance. 
 
Here is the analysis from Religare about the four key regulatory areas and its impact...
 
1. Tapping RBI’s excess funds for PSU bank capitalisation
The Economic Survey 2015-16 (pages 19 & 20) highlighted that the RBI’s capital adequacy ratio at 32% is much higher than the median 16% ratio of all other central banks. The government has stated that even if the RBI brings down capital adequacy to 16%, it will free up Rs3-4 lakh crore for capital infusion into PSU banks and/ or the creation of a bad bank to resolve bad loans. 
 
"The government has budgeted only Rs70,000 crore for capital infusion over four years. Considering the huge gap between the capital required and that budgeted, the new governor may agree to use the RBI’s capital for banks. In our view, this creates a clear moral hazard, but proponents of such a move see nothing wrong with the government tapping its own funds for a one-time capital injection under Basel III," Religare says.
 
2. Operation of stressed asset funds
The RBI, Indian Banks’ Association (IBA) and banks are in the last stage of finalising norms for the operation of stress asset funds in India. As per media reports, the central bank is against allowing banks to own a majority stake in distressed funds. Also, the RBI believes banks should not contribute meaningfully to stressed funds in the form of debt, as this will do nothing to alter their risk. Additionally, such contributions could involve opaque asset pricing. However, banks are aggressively pushing to be allowed to contribute and/or own stakes in stressed funds. 
 
Religare says, "If permitted by the new governor, this will be negative for the sector as it will mask the true value of write-offs or haircuts required on such assets and prolong the uncertainty over NPAs."
 
3. Treatment of restructuring and AQR norms
Banks are pitching hard to the RBI for further relaxation of the recently announced restructuring norms and the upgrade of certain borderline cases that were classified as NPA under the RBI’s AQR. 
 
"Though we agree with certain procedural relaxations or changes, any measures which merely push the problem down the road will be negative for the sector," the research report says.
 
4. Policy and lending rates
Religare feels that if the new governor cuts policy rates more aggressively than Dr Rajan, banks will have to lower lending rates. 
 
"We do not rule out further changes to marginal cost of funds based lending rate (MCLR) or base rate norms for better transmission of policy rates. If lending rates come off aggressively, banks’ margins will reduce. The correlation between lower rates and higher loan growth or NPAs is very weak," Religare concluded.

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COMMENTS

P L Despande pawar

5 months ago

It is the owners' responsibility to capitalise the Banks & not of the Regulator(RBI). As Governor Rajan has said recently, RBI capitalising Banks would lead to moral hazard.
Similarly, it will not be proper to allow Banks to involve themselves much less in a big way in ARCs.

IF NEW GOVERNOR SUCCUMBS TO PRESSURE FOR EASY OPTIONS IT WILL BE THE BEGINNING OF THE END & THE ULTIMATE SUFFERERS WILL BE THE PUBLIC AT LARGE.

B. Yerram Raju

5 months ago

Stressed assets, digital banking, customer service and banks' excessive interest in cross-selling are all the unfinished agenda of Rajan that the next Governor has to grapple with. It is not interest so much as risk management that matters.

MG Warrier

5 months ago

The fallacy in the Economic Survey 2016 observation about RBI holding 32 per cent capital has been pointed out earlier. Any reader who can reconcile the position taken in the Economic Survey 2016 (RBI is having 32 per cent capital) and the real position reported in the RBI Annual Report 2014-15 (Percentage of RBI’s capital and reserves to assets base has come down from 11.9 in 2009 to 8.4 in 2015) may kindly come out with facts and figures.
Long back, RBI had taken a conscious decision to augment its reserves (Contingency Reserves + Assets Development Reserves) to a level of 12 per cent of the Bank’s balance sheet total. The Bank almost managed to almost touch this level in 2009. The following table indicates the progressive deterioration in the reserves position, since then:
Balances in Contingency Fund (CF) and Asset Development Fund (ADF)(Crore)
June 30 CF ADF CF+ADF As%to total assets
2009 153392 14082 167474 11.9
2010 158561 14632 173192 11.3
2011 170728 15866 186594 10.3
2012 195405 18214 213619 9.7
2013 221652 20761 242413 10.1
2014 221652 20761 242413 9.2
2015 221614 21761 243375 8.4

Source: RBI Annual Reports

RBI’s capital since inception has remained at Rs 5 crore. There is no clarity about the components reckoned for computing the RBI’s capital and capital-like reserves at 32 per cent of balance sheet total. The Survey obviously has depended on the computation of figures by some external agency(the graph given in the Survey is attributed to BIS) instead of quoting from RBI’s Annual Reports.

To meet the internal capital expenditure and make investments in its subsidiaries and associate institutions, the Reserve Bank had created a separate ADR in 1997-98 with the aim of reaching one per cent of the Reserve Bank’s total assets within the overall indicative target of 12 per cent of the total assets set for CF and ADF taken together, accepted by the Bank earlier.
Obviously, the practice of transferring the entire ‘surplus income’ to government when the reserves position of the central bank shows a continuous declining trend(as a percentage of total assets) in the context of the present growth rate of Bank’s asset size, needs a review. Considering the size of RBI’s balance sheet, and remembering that the Bank’s share capital(5 crore) has not been augmented since inception, the reserves position needs to be raised to healthier levels. It is in this context and in view of the internal and external pressures on its income generating capabilities in recent times, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank to augment its reserves at least to the level of 12 per cent of total assets which was accepted by the Bank decades ago.
The accounts presented in the RBI Annual Report 2014-15 (Chapter XI-Introductory) shows that the balance sheet size of the Reserve Bank increased by 10.09 per cent for the year ended June 30, 2015 primarily due to increase in foreign currency assets on the asset side which rose by 21.50 per cent and increase in notes in circulation and deposits which rose by 9.57 per cent and 37.60 per cent respectively on the liability side. While gross income for the year 2014-15 increased sharply by 22.66 per cent, the total expenditure increased by 11.92 per cent. The year ended with an overall surplus of `65,896 crore as against `52,679 crore in the previous year, representing an increase of 25.09 per cent. The entire surplus has been passed on to central government. This is based on a review of reserves position made by an internal panel headed by one of the Bank’s directors Mr Y H Malegam which concluded in 2014 that the level of reserves then available was adequate to meet the needs for the next three years.

Monsoon starts on a weak note but should catch up: Nomura
As expected, the Monsoon is off to a slow start. So far, in June, cumulative rainfall stood at 16% below normal, but there is a forecast to improve in coming months. Indeed, in four of the last seven years rains improved in Jul-Sep after a weak start in June 2009, 2010, 2012, 2014. Therefore, the likelihood of a catch-up seems fairly decent, says Nomura in a note.
 
 
According to the research report, the monsoon season has begun on a weak note and the spatial distribution of rains has been uneven. The slow start of rainy season has affected sowing. "However, we expect rains to recover in July and likely to result in higher food output," it added.
 
Spatial distribution of rains has been uneven: 
Region-wise, Central India (-30% below normal) and North East India (-24%) have witnessed the highest rain deficiency. South India, on the other hand, has received good rains. The deficient regions (Central & North-East) together account for about 45% of India’s crop production. A production weighted rainfall deviation for each crop shows that areas growing jute, oilseeds, pulses and cotton have witnessed the largest rainfall deficiency.
 
Bigger states reporting deficient or scanty rainfall, such as Gujarat, Madhya Pradesh, Maharashtra and Rajasthan have a higher share in the production of pulses, oilseeds, coarse cereals and cotton, which could be at risk, if rains do not improve, Nomura says.
 
 
Crop sowing lags; reservoir levels worryingly low: 
With monsoon rains slow to start, sowing has taken a hit. Total sown area stood at 11.7% of normal sowing area as on 24 June, lower than 15.4% in 2015. Reservoir levels (at 15% of the live storage capacity) are at worryingly low levels. 
 
 
Rains to recover in July; food output to rise: 
Even as June rains have disappointed, Nomura says it is not worried, as July rains matter more for crop output and there is a forecast in improvement. "Assuming rains recover in July, we expect kharif production growth to rise to 3.2% y-o-y in 2016 compared with -3.2% in 2015). This, coupled with a weak base, should push up agriculture gross value added (GVA) growth to 3.6% in FY17 from 1.2% in FY16, adding about 30 basis points (bps) to headline gross domestic product (GDP) growth," it added.
 
 
Food price inflation elevated; should trend lower in Q4: 
Food price inflation rose sharply in May but Nomura estimates that it has moderated in June. Going forward, although good monsoons are a positive for production, they do not guarantee low food price inflation. Despite that, it expects food price inflation to ease from current levels owing to relatively stable rural wage growth and favourable base effects in Q4 2016.
 
 

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Smartphone apps putting Indians' privacy at risk: Norton by Symantec
Nearly one in two Indians have granted access to contacts and mobile data in exchange for free apps and close to 40% have granted access to their camera, revealed global leader in cyber security Norton by Symantec on Tuesday.
 
Commissioned with 1,005 Indian smartphone and tablet users aged 16 and above, the findings from the Norton Mobile Survey shed light on the security gaps and the privacy risks smartphone and mobile applications (apps) present. 
 
The most concerning security issues for the Indian mobile users were virus/ malware attacks (34%), followed by threats involving fraudulent access or misuse of credit card or bank account details (21%) and hacking or leaking of personal information (19%). 
 
"Humans are their own enemies. Nearly 65% of Indians now access the internet more often on a mobile device than on a personal computer. So consumers' usage behaviour is one of the major reason why people in India are so vulnerable," Ritesh Chopra, Country Manager (India), Norton by Symantec, told IANS.
 
"Close to 50% Indians have over 20 apps on their smartphones or tablets and 36% of people grant the access to mobile data because the app they downloaded 'looked cool', regardless of its origin or reputation. Only 8% reject the request to access the data on their smartphones," Chopra added. 
 
According to the report, nearly 40% have granted permission to access their camera, bookmarks and browser history and close to 30% have granted permission to apps for tracking their geolocation.
 
Talking about the new trends in India, Chopra said that e-commerce apps (76%) along with mobile banking (67%) and mobile wallets (62%), rank amongst most popular apps, preceded only by social networking (86%) and messaging apps (78%).
 
When asked about steps to be taken to beef up smartphone security to avoid fatal privacy damage, he said among many solutions, consumers in India need to pause and take stock of how they may be compromising their security and privacy in return.
 
"First of all, people need to be educated about the attacks and how to secure themselves from the vulnerabilities. Consumers should use strong passwords and lock screen patterns. Also, use different passwords for different apps and change them often," Chopra told IANS.
 
"Keeping your phone or tablet's software updated is important, as is the case with your computer. If your mobile device is not regularly updated, it is vulnerable to threats. Download apps from official app stores and use a reputable mobile security solution," he added. 
 
Norton Mobile Insight protects against Android apps that leak personal information/content from devices, change settings, place ads in the notification bar, and require high battery or data usage.
 
When asked what Norton has done to secure its customers, Chopra replied: "Norton has made the best and lightest antivirus solution for smartphones that has won many accolades globally." 
 
Talking about the upcoming trends, he said that attacks would occur where money is involved.
 
"Our survey said 52% of users believe their mWallet has come under threat and an average users find it safe to hold over Rs19,000 across their mWallet accounts at any given time. So attacks on such app where money is involved is one of the major trends in 2016," the Norton official noted.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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