After taking over charge as governor, Rajan said RBI actions will be at measured pace given the current market turmoil
Raghuram Rajan has assumed charge as the 23rd Governor of the Reserve Bank of India (RBI) from D Subbarao. "This is not an easy time; the economy faces challenges. Our actions will be at measured pace given the current market turmoil,” Rajan said after assuming charge.
The duo shook hands warmly and hugged after Rajan signed the 65-year-old scroll, made of toughened paper that bears the signatures of all governors and deputy governors of RBI.
Speaking with reporters after assuming charge, Rajan said the central bank would push for more settlements in rupee. He said the government would look to reduce investments by banks in government bonds ‘in a calibrated manner’. RBI would work together with the government and the market regulator to steadily liberalise markets, Rajan added.
Rajan also outlined several measures to support the Indian rupee. A major part of the new governor's speech was also focused on shoring up investors' confidence, which will undoubtedly boost market sentiments.
He said RBI would come out with his first policy statement on 20th September, adding that besides inflation control, the central bank's mandate is inclusive growth and development and financial stability.
Speaking about new banking licences, the new governor said, RBI would set up a panle chaired by former governor Bimal Jalan to screen applications. He hoped the RBI to issue new banking licences by 2014.
Prior to being appointed a RBI governor, Rajan was the chief economic advisor, ministry of finance and the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School. Between 2003 and 2006, Dr Rajan was the chief economist and director of research at the International Monetary Fund (IMF).
Here is the statement issued by Raghuram Rajan on taking office on Wednesday
Good Evening. I took charge this afternoon as the 23rd Governor of the Reserve Bank of India. These are not easy times, and the economy faces challenges. At the same time, India is a fundamentally sound economy with a bright future. Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets. I have every confidence we will succeed in doing that. Today I want to articulate some first steps, concrete actions we will take, as well as some intentions to take actions based on plans we will formulate.
Before I turn to specifics, let me repeat what I said on the day I was appointed. The Reserve Bank is a great institution with a tradition of integrity, independence, and professionalism. I congratulate Dr. Subbarao on his leadership in guiding the Bank through very difficult times, and I look forward to working with the many dedicated employees of the RBI to further some of the important initiatives he started. I have been touched by the warmth with which the RBI staff have welcomed me.
To the existing traditions of the RBI, which will be the bedrock of our work, we will emphasise two other traditions that become important in these times: transparency and predictability. At a time when financial market are volatile, and there is some domestic political uncertainty because of impending elections, the Reserve Bank of India should be a beacon of stability as to its objectives. That is not to say we will never surprise markets with actions. A central bank should never say “Never”! But the public should have a clear framework as to where we are going, and understand how our policy actions fit into that framework. Key to all this is communication, and I want to underscore communication with this statement on my first day in office.
We will be making the first monetary policy statement of my term on September 20. I have postponed the originally set date a bit so that between now and then, I have enough time to consider all major developments in the required detail. I will leave a detailed explanation of our policy stance till then, but let me emphasize that the RBI takes its mandate from the RBI Act of 1934, which says the Reserve Bank for India was constituted
“to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage;”
The primary role of the central bank, as the Act suggests, is monetary stability, that is, to sustain confidence in the value of the country’s money. Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures. I have asked Deputy Governor Urjit Patel, together with a panel he will constitute of outside experts and RBI staff, to come up with suggestions in three months on what needs to be done to revise and strengthen our monetary policy framework. A number of past committees, including the FSLRC, have opined on this, and their views will also be considered carefully.
I talked about the primary role of the RBI as preserving the purchasing power of the rupee, but we have two other important mandates; inclusive growth and development, as well as financial stability.
As the central bank of a developing country, we have additional tools to generate growth – we can accelerate financial development and inclusion. Rural areas, especially our villages, as well as small and medium industries across the country, have been important engines of growth even as large company growth has slowed. But access to finance is still hard for the poor, and for rural and small and medium industries. We need faster, broad based, inclusive growth leading to a rapid fall in poverty.
The Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision making. The RBI will shortly issue the necessary circular to completely free bank branching for domestic scheduled commercial banks in every part of the country. No longer will a well-run scheduled domestic commercial bank have to approach the RBI for permission to open a branch. We will, of course, require banks to fulfil certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, and we will restrain improperly managed banks from expanding until they convince supervisors of their stability. But branching will be free for all scheduled domestic commercial banks except the poorly managed.
There has been a fair amount of public attention devoted to new bank licenses. The RBI will give out new bank licenses as soon as consistent with the highest standards of transparency and diligence. We are in the process of constituting an external committee. Dr. Bimal Jalan, an illustrious former governor, has agreed to chair it, and the committee will be composed of individuals with impeccable reputation. This committee will screen licence applicants after an initial compilation of applications by the RBI staff. The external committee will make recommendations to the RBI governor and deputy governors, and we will propose the final slate to the Committee of the RBI Central Board. I hope to announce the licences within, or soon after, the term of DG Anand Sinha, who has been shepherding the process. His term expires in January 2014.
We will not stop with these licences. The RBI has put an excellent document on its website exploring the possibility of differentiated licences for small banks and wholesale banks, the possibility of continuous or “on-tap” licensing, and the possibility of converting large urban co-operative banks into commercial banks. We will pursue these creative ideas of the RBI staff and come up with a detailed road map of the necessary reforms and regulations for freeing entry and making the licensing process more frequent after we get comments from stakeholders.
India has a number of foreign owned banks, many of whom have been with us a long time and helped fuel our growth. They have been in the forefront of innovation, both in terms of improving productivity, as well as in terms of creating new products. We would like them to participate more in our growth, but in exchange we would like more regulatory and supervisory control over local operations so that we are not blindsided by international developments. The RBI will encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near national treatment. We are in the process of sorting out a few remaining issues so this move can be made.
Finally, our banks have a number of obligations that pre-empt lending, and in fact, allow what Dr. Rakesh Mohan, an illustrious former deputy-governor, called “lazy banking”. One of the mandates for the RBI in the Act is to ensure the flow of credit to the productive sectors of the economy. In this context, we need to reduce the requirement for banks to invest in government securities in a calibrated way, to what is strictly needed from a prudential perspective.
This cannot be done overnight, of course. As government finances improve, the scope for such reduction will increase. Furthermore, as the penetration of other financial institutions such as pension funds and insurance companies increases, we can reduce the need for regular commercial banks to invest in government securities.
We also subject our banks to a variety of priority sector lending requirements. I believe there is a role for such a mandate in a developing country – it is useful to nudge banks into areas they would otherwise not venture into. But that mandate should adjust to the needs of the economy, and should be executed in the most efficient way possible. Let us remember that the goal is greater financial access in all parts of the country, rather than meeting bureaucratic norms. I am asking Dr Nachiket Mor to head a committee that will assess every aspect of our approach to financial inclusion to suggest the way forward. In these ways, we will further the development mission of the RBI.
Some see financial markets as competition to banks. They are that, but they are also complementary. Too many risks in the Indian economy gravitate towards commercial banks even when they should be absorbed by arm’s length financial markets. But for our financial markets to play their necessary roles of providing risk absorbing long term finance, and of generating information about investment opportunities, they have to have depth. We cannot create depth by banning position taking, or mandating trading based only on well-defined “legitimate” needs. Money is fungible so such bans get subverted, but at some level, all investment is an act of faith and of risk taking. Better that investors take positions domestically and provide depth and profits to our economy than they take our markets to foreign shores.
Together with the government and regulators such as SEBI, we will steadily but surely liberalise our markets, as well as restrictions on investment and position taking. Given the current market turmoil, our actions will have to be at a measured pace, but as a symbolic down payment, we will do the following:
Rupee internationalization and Capital Inflows
This might be a strange time to talk about rupee internationalization, but we have to think beyond the next few months. As our trade expands, we will push for more settlement in rupees. This will also mean that we will have to open up our financial markets more for those who receive rupees to invest it back in. We intend to continue the path of steady liberalisation.
The RBI wants to help our banks bring in safe money to fund our current account deficit.The Reserve Bank of India has been receiving requests from banks to consider a special concessional window for swapping FCNR deposits that will be mobilised following the recent relaxations permitted by the Reserve Bank of India. We will offer such a window to the banks to swap the fresh FCNR (B) dollar funds, mobilised for a minimum tenor of three years and over, at a fixed rate of 3.5 per cent per annum for the tenor of the deposit.
Further, based again on requests received from banks, we have decided that the current overseas borrowing limit of 50 per cent of the unimpaired Tier I capital will be raised to 100 per cent and that the borrowings mobilised under this provision can be swapped with Reserve Bank of India at the option of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market.
The above schemes will be open up to November 30, 2013, which coincides with when the relaxations on NRI deposits expire. The Reserve Bank reserves the right to close the scheme earlier with due notice.
Finance thrives when financial infrastructure is strong. The RBI has been working hard to improve the financial infrastructure of the country – it has made tremendous advances, for example, in strengthening the payment and settlement systems in the country. Similarly, it has been working on improving information sharing through agencies such as credit bureaus and rating agencies. I propose to carry on such work, which will be extremely important to enhance the safety and speed of flows as well as the quality and quantity of lending in the country.
On the retail side, I particularly want to emphasise the use of the unique ID, Aadhaar, in building individual credit histories. This will be the foundation of a revolution in retail credit.
For small and medium firms, we intend to facilitate Electronic Bill Factoring Exchanges, whereby MSME bills against large companies can be accepted electronically and auctioned so that MSMEs are paid promptly. This was a proposal in the report of my Committee on Financial Sector reforms in 2008, and I intend to see it carried out.
Finance is not just about lending, it is about recovering loans also. We have to improve the efficiency of the recovery system, especially at a time of economic uncertainty like the present. Recovery should be focused on efficiency and fairness – preserving the value of underlying valuable assets and jobs where possible, even while redeploying unviable assets to new uses and compensating employees fairly. All this should be done while ensuring that contractual priorities are met. The system has to be tolerant of genuine difficulty while coming down hard on mismanagement or fraud.
Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures.
Most immediately, we need to accelerate the working of Debt Recovery Tribunals and Asset Reconstruction Companies. Deputy Governor Anand Sinha and I will be examining the necessary steps.
I have asked Deputy Governor Dr. Chakrabarty to take a close look at rising NPAs and the restructuring/recovery process, and we too will be taking next steps shortly. RBI proposes to collect credit data and examine large common exposures across banks. This will enable the creation of a central repository on large credits, which we will share with the banks. This will enable banks themselves to be aware of building leverage and common exposures.
While the resumption of stalled projects and stronger growth will alleviate some of the banking system difficulties, we will encourage banks to clean up their balance sheets, and commit to a capital raising programme where necessary. The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed.
We will also follow the FSLRC suggestion of setting up an enhanced resolution structure for financial firms. The working group on resolution regimes for financial institutions is looking at this and we will examine its recommendations and take action soon after.
Everyone has a right to a safe investment vehicle, to the ability to transfer remittances to loved ones, to insurance, to obtain direct benefits from the government without costly intervening intermediaries, and to raise funding for viable investment opportunities. In addition, access to credit to smooth consumption needs or to tide over emergencies is desirable, especially for households in the lower income deciles, when it does not impose unserviceable debt loads. The Reserve Bank will continue to play its part in making all this possible.
In particular, I want to announce a number of specific actions:
First, households have expressed a desire to be protected against CPI inflation. Together with the government, we will issue Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by end- November 2013.
Second, we will implement a national giro-based Indian Bill Payment System such that households will be able to use bank accounts to pay school fees utilities, medical bills, and make person to person transfers electronically. We want to make payments anywhere anytime a reality.
Third, only banks are currently allowed to deploy Point-of-Sale terminals, and these are largely set up by a few banks in urban areas. As announced in the Annual Monetary Policy statement, we will facilitate the setting up of “white” POS devices and mini ATMs by non-bank entities to cover the country so as to improve access to financial services in rural and remote areas.
Fourth, currently holders of pre-paid instruments issued by non-bank entities are not allowed to withdraw cash from the outstanding balances in their pre-paid cards or electronic wallets. Given the vast potential of such instruments in meeting payments and remittance needs in remote areas, we intend to conduct a pilot enabling cash payments using such instruments and Aadhaar based identification.
Finally, there is substantial potential for mobile based payments. We will set up a Technical Committee to examine the feasibility of using encrypted SMS-based funds transfer using an application that can run on any type of handset. We will also work to get banks and mobile companies to cooperate in rolling out mobile payments. Mobile payments can be a game changer both in the financial sector as well as to mobile companies.
This is part of my short term time table for the Reserve Bank. It involves considerable change, and change is risky. But as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted. The RBI has always changed when needed, not following the latest fad, but doing what is necessary. I intend to work with my excellent colleagues at the Reserve Bank, the senior management of which is represented around this table, to achieve the change we need.
Finally, a personal note: Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook “likes”. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism – Rudyard Kipling put it better when he mused about the requirements of an ideal central banker in his poem “If”:
If you can trust yourself when all men doubt you, But make allowance for their doubting too:
Kipling’s reference to “men” only dates these lines, but his words are clear.
We will fill in details of what we have announced shortly, and lay out a broader roadmap of reforms soon after. Appropriate notifications will be issued shortly. As this is underway, we will turn to preparing the mid quarter policy statement.
Customers of some of the biggest names in the Indian broking fraternity who aggressively sold NSEL’s borrowing-lending racket are staring at large outstanding in NSEL. Clients of Anand Rathi Commodities stand exposed to over Rs600 crores while those of Indian Infoline stand to lose over Rs300 crore
The National Spot Exchange Ltd (NSEL) scam is starting to take an ugly turn for retail investors and high net worth individuals (HNIs) who had ‘invested’ through member-brokers into the borrowing-lending racket being run by the Exchange. As is now known, NSEL was an operation to channel money from investors through member-brokers, to a small group of 24-odd NSEL members-borrowers. For this “assured return” scheme, the brokers were collecting a juicy 5%-6% as brokerage, fees and commission. Neither the brokers, nor the investors, had done enough of due diligence and therefore, to their misfortune, found themselves to be lenders without any security, instead of investors in an assured return scheme that their brokers aggressively sold them.
Apart from channelling money from “investors” these member-brokers had also put in some of their own money into the scheme. The borrowers now owe as much as Rs5,380.53 crores in unsettled dues. But which member-brokers were on the other side of the racket, that is, which of the brokers were most aggressive in channelling the money? The biggest was Indian Bullion Markets Association Ltd (IBMA), a group company of Financial Technologies (India) Ltd, the promoter and 99.5% shareholder of NSEL. It is not yet clear, who the “clients” of IBMA were. Who were the other brokers?
They are some of the most prominent names of Indians stockbroking such as Anand Rathi Commodities, India Infoline Commodities and Geojit Comtrade. These people were being actively wooed by FT-MCX group in creating volumes in its various exchanges. While the names of members-borrowers who have defaulted are known, the list of member-brokers who funnelled the money for the borrowing-lending racket at 16%-18% fixed return has not been published so far. Here is the list of top 25. The complete list of those who owed money as well as those who were owed money from the NSEL system in early August, can be accessed at the end of this piece.
|Top 25 Members-brokers Owed To||Amount owed (Rs Cr)||Paid so far (Rs Cr)||Still owed (Rs Cr)|
|Indian Bullion Markets Association||1159.55||24.94||1134.61|
|Anand Rathi Commodities||629.21||13.46||615.75|
|India Infoline Commodities||326.23||6.98||319.25|
|Motilal Oswal Commodities||262.88||5.62||257.26|
|Purvag Commodities & Derivatives||132.58||2.83||129.75|
|JM Financial Commtrade||83.62||1.78||81.84|
|Arihant Futures and Commodities||55.88||1.19||54.69|
|RR Commodity Brokers||49.02||1.04||47.98|
|Nirmal Bang Commodities||46.64||0.99||45.65|
|India Nivesh Commodities||37.92||0.81||37.11|
|Suresh Rathi Commodities||37.7||0.80||36.9|
|Chimanlal Popatlal Commodities Broker||37||0.79||36.21|
|Rainbow Commodity and Derivatives||35.91||0.76||35.15|
|Ludhiana Commodities Trading Services||34.64||0.74||33.9|
Interestingly, among the names are two public sector companies Projects and Equipment Corporation and Metals and Minerals Trading Corporation. What business did these people have to invest in NSEL? Are their boards and respective ministries asking them any questions?
As of now there is a very slim chance of the member-brokers and their clients getting back much money.
On 14 August, NSEL had posted a detailed schedule of pay-in and pay-out from and to its members-borrowers in which it owed Rs5,380.53 to its member-brokers (top 25 disclosed above) while it had to retrieve Rs5,574.35 from other members. Moneylife analysed the payout numbers released by NSEL and compared it with the total amount that NSEL had to settle. We found out that only a total of Rs119 crore, or just 2% of the total dues have been paid out to members, in three pay-out instalments so far. In the three settlements, NSEL has paid just Rs92.12 crore, RsRs12.60 crore and Rs15.36 crore to members from the pay-in proceeds, on 20 August, 27 August and 3 September respectively. But as per the settlement schedule, by now it should have received Rs524.16 crore from those who owe NSEL and paid the same amount to members.
“Investors” who were lured into investing in NSEL’s racket by Anand Rathi, India Infoline and others, have every reason to be worried about not getting back their money in full. While NSEL expects to settle its entire dues by 11 March 2014, this seems unlikely. Are the brokers liable to pay their investors? Given how these brokers operate, they will neither own moral or actual responsibility to pay back their investors. It was just another product they had sold for fat commission.
RBI has taken away the last funding resource from developers, which may lead to cracking of the realty sector that is holding on to inventory since past few years
Reserve Bank of India (RBI)'s latest warning to banks about not lending money to builders or developers under the 80:20 or 75:25 schemes is most likely to crack the realty sector. Over the past few years, developers have been holding on to prices due to availability of finances. And when funding from other sources dried, developers came out with these new innovative schemes in collaboration with banks and financial institutions.
According to Pankaj Kapoor, the managing director of realty research firm Liases Foras, it (the RBI move) will add to the woes of the developer who are facing a cash crunch. “Advance disbursement through 80:20 was a cheaper way to organise finance. In the absence of this too, the liquidity crunch may force the developer to reduce the price to stimulate sales,” he said.
Obviously, developers are aggrieved with the new notification from the RBI. In a statement, Lalitkumar Jain, chairman of the Confederation of Real Estate Developers' Associations of India (CREDAI), said, "Abruptly issuing such circulars, advising bank against established practices only harm the sentiments and disrupts business plans. This at the end creates a setback for projects, affecting end-consumers."
In its notification, RBI has cautioned banks and prospective home-loan customers about the pitfalls of ‘innovative loan schemes’ entailing upfront disbursal of individual housing loans to builders in case of incomplete, under-construction and green-field housing projects. "In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project or houses and upfront disbursal should not be made in cases of incomplete and under-construction or green field housing projects," the central bank notification said.
Moneylife has been pointing out that high property values and interest rates, coupled with a lower loan- to-value ratio, are
becoming serious obstacles for average homebuyers.
A number of banks and housing finance companies are promoting home loan products such as the 80:20 or 75:25 schemes, which involve tripartite agreements involving lenders, developers and property buyers. The basis of this move is that though these schemes do invariably mention the financial implications to the consumer in the fine print, many consumers are evidently unable to decipher the fine print.
"This move by the RBI is aimed at protecting the interest of property buyers who are not aware of the long-term financial implications of such and similar schemes. It is definitely meant to advance the cause of greater transparency in the Indian real estate sector, and also to protect the financial institutions that provide funding in it," said Shobhit Agarwal, managing director for capital markets at Jones Lang LaSalle India.
What are 80:20 or 75:25 schemes?
Usually builders come up with various schemes during the festive season to sell high-priced apartments to take advantage of the surge in spending. However, flats are not selling and the inventory is increasing. Though builders have tried to keep prices artificially high for over the past few years, they buckled under pressure and launched lucrative schemes to push sales in the residential segment. Among their tactics was making a 80:20 or 75:25 offer.
Under these schemes, a buyer has to pay 20% or 25% of a flat's cost upfront. The rest is funded by the bank after signing a tripartite agreement between buyer, developer and the lender. The developer, who receives full amount, sometimes even before starting construction, offers to pay the equated monthly instalments (EMI) on the loan till he completes the construction. This is contrary to the normal practice in a bank home loan, where the lenders link disbursals to developers depending upon various stages of construction of housing project.
"Even though such schemes look great, buyers should take precaution as they are being offered for under-construction projects. The completion risks of these projects remain and one must check the builders' track record and financial strength before jumping in," a real estate expert had told Moneylife, preferring anonymity.
RBI said such housing loan products are likely to expose banks as well as their home loan borrowers to additional risks. For e.g. in case of disputes between individual borrowers and developers or builders, default or delayed payment of interest and EMI by the developer or builder during the agreed period on behalf of the borrower, non-completion of the project on time. "Further, any delayed payments by developers or builders on behalf of individual borrowers to banks may lead to lower credit rating or scoring of such borrowers by credit information companies (CICs) as information about servicing of loans gets passed on to the CICs on a regular basis. In cases where bank loans are also disbursed upfront on behalf of their individual borrowers in a lump-sum to builders or developers without any linkage to stages of construction, banks run disproportionately higher exposures with concomitant risks of diversion of funds," the central bank said.
Capitalmind.in also calls such schemes as hugely risky (for buyers). "The builder has the full amount, without having constructed anything. They get financing in your name, and get to pay a lower interest because YOU are the one taking the loan (individuals get a lower home loan rate than developers, a distinction I totally disagree with – if anything, individual home loans should be charged a higher rate). If they don’t construct the building, the bank now has no collateral. But since its your loan, you have to repay anyway. This can be a disaster since you don’t have a property now for which you have a loan," says Deepak Shenoy in the report. (http://capitalmind.in/)
Are 80:20 or 75:25 schemes innovative?
No. These schemes are neither new nor innovative. Earlier, during September-October 2012, Mumbai-based builders who turned desperate to sell flats and were offering steep discounts have to their credit a more innovative scheme like 90:10! However, the '90:10' scheme was available only for affluent buyers whose budget was between Rs2 crore to Rs5 crore. Indiabulls introduced the '10:90' scheme for a project located in central Mumbai. For this scheme, it had tied up with HDFC and ICICI Bank to provide loans to customers at that time.
In another option at that time, builders were offering highly discounted rates to those who come up with cash up front. In one case, a posh apartment in central Mumbai was available for Rs16,000 per square foot for full cash-down payment - against the going rate of Rs40,000 per sq ft.
In the past, several developers were offering to pay pre-EMI on a home loan, provided that the borrowers take the advance disbursal facility (ADF). Under the ADF, the entire loan amount is disbursed to the developer and the buyer has to immediately start paying EMIs, even before the construction is complete or before taking possession.
Realty investment through PMS?
Yes. During 2010, asset management companies (AMCs) were offering real-estate scheme cobbled together under its portfolio management scheme (PMS). Investor's money was invested in residential projects under construction with builders, presumably at some agreed price. When the builder sells out the project, the profits were shared between the builder and the financier (the PMS scheme).
The investors are asked to ‘commit’ amounts, 20% or so paid up front. The upfront amount depends on the investment projects identified by the AMC. As they identify more investment opportunities, they make further demands from within the committed amounts. As and when any project is exited, the AMC distributes the money to the investors.