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On most of the significant policy issues—implementation of Basle III, NBFC regulation, gold loan companies, securitisation guidelines, etc, all that we have in the policy are datelines for policies to be announced by the RBI. There is more in the offing than we have in the policy, reducing the much-awaited policy to be trailer for a movie to hit the screens
The financial markets in general anxiously wait for this—the Reserve Bank of India’s (RBI) Monetary Policy. The market looks for signals towards policy making by the RBI. However, but for the reduction in policy rates by 50 basis points (bps), on most of the significant issues where banks would like to see direction of policy by the RBI, the policy says—“to be announced”. On most of the significant policy issues—implementation of Basel III, NBFC regulation, gold loan companies, securitisation guidelines, etc, all that we have in the policy are datelines for policies to be announced by the RBI. Therefore, there is more in the offing than we have in the policy, reducing the much-awaited policy to be trailer for a movie to hit the screens.
The Nair Committee’s far-reaching recommendations about priority sector treatment, particularly putting a limit of 5% to bought deals, securitisation and on-lending by banks to the priority sector, has not yet been accepted by the RBI. The policy says that the report has been placed on website of the RBI for comments, and that the RBI will take an action after examining feedback. If there was an immediate prospect of the report being adopted, usually, the policy would have said so. Therefore, it seems, though it may be a pure speculative thought, that the immediate prospect of the report being adopted and implemented, is thin.
Abolition of pre-payment penalty on floating rate home loans:
Contrary to practices in international markets, most home loans in India are on a floating rate basis and it is surprising to many that Indian home lenders continued to charge pre-payment penalties on home loans over the years. Pursuant to the Damodaran Committee recommendations, the policy now declares that in case of floating rate loans, there will not be any pre-payment penalties.
This will usher in two things—first, the home loan market will become far more transparent than it is today. Second, banks will also possibly have some temptation to offer fixed rate loans products, and seek to compensate themselves with a pre-payment penalty. Regrettably, the fixed rate loan market has been completely absent in India. There is a separate mention of constitution of a working group for fixed rate products.
Detailed guidelines about pre-payment penalties are to be issued by the RBI shortly.
Basel III implementation:
By end of April 2012, the RBI will come up with a schedule for implementation of Basel III in the country.
It is notable that Basel III makes several significant modifications over the present approach of Basel II. First of all, apart from the stance of Basel II which is on capital adequacy, Basel III introduces liquidity requirements too—both on short run as well as medium run. In addition, Basel III introduces a counter-cyclicity buffer as also redefines Tier 1 capital.
By end-May 2012, the RBI will also publish its guidelines on liquidity risk management by banks, in tune with Basel standards on liquidity risk management.
Measures pertaining to NBFCs:
The securitisation guidelines have been on the anvil for almost two years now—in the meantime, two drafts have been issued.
The policy says that by end of April, the guidelines will be finalised. We have already commented on the likely shape of the new guidelines—our comments may be found at Microfinance Focus.
(Vinod Kothari is internationally recognised as an author, trainer and expert on specialised areas in finance, including securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments, microfinance, etc.)