Money & Banking
RBI asks banks not to accept post-dated cheques

Here is another surprise move from the RBI for stopping acceptance of post-dated cheques. PDCs are preferred by lenders as it is considered a “safe instrument” while banking public feels at ease with its usage

The Reserve Bank of India (RBI) while extending the deadline for issuing new chequebooks based on the cheque truncation system (CTS) signalled the end of post-dated cheque (PDCs) era.

 

In a notification issued on 18th March, the central bank said the system of post-dated cheques and payment via equated monthly instalment (EMI), in either the old or the new format, would be banned from now wherever electronic debit facilities are available. “Lending banks shall make all efforts to convert existing PDCs in such locations into electronic clearance service (ECS) or regional ECS (RECS) for debit by obtaining fresh mandates from the borrowers,” the RBI said.

 

Lenders across the country are sitting on a pile of huge number of PDCs worth thousands of crore of rupees. Most are them are reluctant to call the borrower, take a mandate for ECS and return all the PDCs. This is not only a time-consuming process but also increases the workload on bank employees.  

 

While on paper the idea looks good, there are several hurdles for implementing these changes. PDCs are the most favoured system by lenders across the country, as it is considered “fail-safe”, in case the borrower defaults. In case of default in repayment through PDC, the borrower can be tried under Section 138/142 of the Negotiable Instruments Act, 1881. Section 138 aims to promote better compliances in terms of honouring cheques and discharging liabilities by imposing a penalty for any default committed in this respect. It is a medium of speedy remedy provided for the protection of the holder/payee of the cheque, where the debtor seeks to discharge his obligation through cheque but does not intend to honour it.

 

Even the Supreme Court, in a recent judgement, has ruled that stop payment of PDCs issued by a person to discharge his debt or liability could amount to penal offence. A bench comprising Justice MB Shah and Justice Arun Kumar said, “A post-dated cheque will lose its credibility and acceptability if its payment can be stopped routinely.”

 

Another issue with the RBI's new directive is at present, there are 81 centres or locations that offers local ECS, while there are just nine centres, which offer RECS across the country. National ECS, on the other hand is operated at Mumbai and facilitates the coverage of all core-banking enabled branches located anywhere in the country.

 

Though our banking system is developing fast, the access to banking today is not available to one-third of our population and ramifications of a hasty decision to penalise usage of cheques will be too catastrophic for a nation like ours, which requires social up-liftment and inclusive banking before forcing technology on our people.

 

Earlier, while speaking at Chennai in December 2012, Dr KC Chakrabarty, deputy governor of the RBI had said, “Technology has the potential to act as a force multiplier in our financial inclusion efforts, provided it is implemented in a planned manner. There is, however, an increasing realization that mere reliance on technology-enabled non-face to face channels alone would not be sufficient to meet our goal of creating an inclusive financial system. There is a need for opening more brick-and-mortar outlets as delivery points, both as a control mechanism for business correspondents (BCs) and to gain the trust and acceptability of the masses.”

 

Before asking banks to stop accepting PDCs, the RBI needs to first educate the banking public about using ECS/RECS facility and incentives its usage, if needed.

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COMMENTS

Debasish Saha

3 years ago

In the present scenario the ECS is more reliable than PDC system. But option for depositing PDC should be there if it is convenient to the customer.
Dr. D.Saha

dipi

3 years ago

I feel that the outgoing RBI Governor was responsible for this. The reasons of an outgoing Governor favoring the banks, spoiling the Bank-Client relationship, can be interpreted in only one way. Vested Interest?

dipi

3 years ago

This favors banks,removes/damages the bank-client relationship. It seem now that the RBI chief was leaving and reasons only pointing to advantage to banks and not to clients shows that the intentions of the outgoing RBI chief are questionable.

My bank used to collect installments or I would deposit every month. They started to charge 2 check bounce charges every month when there was no check bounce and they were in way adding interest if payment was after due date.

S BHASKARA NARAYANA

4 years ago

When the same status of NI Act sec.138 is available to ECS on par with a Cheque, why not go an innovative Technology based speedy clearance concept.

nagesh kini

4 years ago

First and foremost, the post dated cheques or PDCs are not legal. They are not worth the scrap of paper they are written on. They spring to life only on the date mentioned thereon and not earlier. The RBI is seen to be sanitizing them for no valid reason

nagesh kini

4 years ago

First and foremost, the post dated cheques or PDCs are not legal. They are not worth the scrap of paper they are written on. They spring to life only on the date mentioned thereon and not earlier. The RBI is seen to be sanitizing them for no valid reason

PATTABHI

4 years ago

I fully agree.. it is very premature to go for this step at this stage where the payment systems covers only a percentage of bank branches. Also, there is human element in tne bank-borrower relationship where there is an appreciation of the problems and suitable adjustements made. The cash management at Companies, particularly in thew SME sector involves a fine matching of payable and receivables and when the Companies suffer because of non-payment of their bills/dues by Govt Departments etc. the Banker needs to take a realistic view and make necessary adjustments to the schedules. Perhaps it will work with the Housing, Car laons etc granted to salary earners, but in such cases there will be ECS even otherwise. This step indicates RBI is not fully appreciative of the nitty-gritties of day-to-day banking and the other ground realities.

Governor Stein’s Doubts - II: Risks of quantitative easing

In the first part of this two-part article we discussed overheating in credit markets. We now take a look at were the problems exist. Like the Junk Bond ETFs the duration mismatch is not an issue. But if investors began to question the safety of WMPs and stopped buying them, then the whole scheme might explode

Governor Stein’s three factors set the stage for a financial crisis but there is one more aspect that can change some bad credit decisions into a disaster. Bad credit decisions in and of themselves would not cause problems. What makes the issue systemic are poor determinations of risk combined with maturity mismatches. The obvious example is the asymmetry of the banking industry. If a bank’s depositors were locked into the same maturities as its debtors, there would never be any runs on banks. But banks often get funding from short-term sources and lend it out for much longer maturities. When the loans become questionable, it is the investor or depositor who can convert their claims into cash first who wins: a bank run. A rush for the exit creates a fire sale of illiquid assets that often tramples the good with the bad.

 

The example that governor Stein chose as having a high possibility of having a systemic impact are Junk Bond ETFs. He is right to be worried. Junk Bond ETFs have grown enormously. Their assets have grown from $300 million in 2007 to $32 billion. The reason why they are so popular is simple: yield. The most vulnerable of investors, retail investors, have invested in Junk Bond ETFs. With the Federal Reserve suppressing interest rates, many retail investors, often retirees living on income, see Junk Bond ETFs as a safe way to get a decent yield while investing in a diverse pool of assets.

 

But they are not that safe. Junk bonds do not trade on a regular basis. They are often illiquid and obscure. The largest Junk Bond ETFs are coupled with the iBoxx High Yield Index which is screened for liquidity. Still the very size of these products would make it difficult for the ETFs to adjust if there was even a slight change in expectations. The trigger could be a sign that the American economy is getting healthier. This would eventually lead to an inevitable rise in interest rates. With Junk bond yields at record lows, they would be one of the first things that investors would sell. A dramatic run for the exits in an illiquid product is exactly the type of situation that could result in a systemic collapse.

 

The issue is not academic. Investments in ETFs can be both short and long. Shorting Junk bond ETFs enables investors to protect their portfolios from an unexpected move in interest rates which is always a possibility since those rates are set by institutional and not market forces. With some doubts, thanks in part to governor Stein’s remarks, short interest in the two largest Junk bond ETFs hit their highest level since October 2007, the last time American equity markets were this high. Although both of the large Junk bond ETFs did survive the 2008 meltdown, they were about a hundred times smaller.

 

The Federal Reserve Board of Governors are meeting next week and they are presented with a dilemma of their own making. It appears from recent numbers that employment in the US is getting better, but there are areas of weakness. So they might either keep trying to suppress interest rates in the hope that continued stimulus will attempt encourage more hiring.

 

There are risks. If they continue the programme, more money will continue to flow into Junk Bond ETFs and other risky investments. Money flows into junk bond mutual funds have hit their highest rates this year. The larger the funds, the higher risks whenever the Fed eventually has to end its programme. 

 

In the alternative the Fed could announce a slowing or termination of the QE program. This will slow or stop money into ETFs, but it might provoke a sharp correction. The question is whether they will try to take the risk now or later. Either way they may find that deflating a balloon is much harder than blowing one up.

 

But there is one example that governor Stein did not discuss although it fits his description perfectly: China. The three factors in governor Stein’s analysis (financial innovation, change in regulations and a prolonged period of easy money) all exist in China. China, like other central banks throughout the world has been flooding its economy with money since 2009. The recent difference has been where the money is coming from. Up until 2012 it came mostly from loans from state-owned banks, but there has been a change in regulations.

 

In attempt to reform its financial system, the Chinese regulators have been far more tolerant of different financial products. Usually the Chinese banking system has been insulated by captive depositors. These depositors had few other choices. So if the state banks chose to pay low interest rates to increase profits in order cover loans losses, there was little the depositors could do. There weren’t many alternatives, until now.

 

As the regulations changed, so did the financial products. Rather than straight deposit accounts, Chinese banks could offer Wealth Management Products (WMPs). WMPs were originally tolerated, but not sanctioned. So a vast shadow banking system grew up. Since the exact numbers are not available it exactly represents an example of governor Stein’s fears about the tip of an iceberg.

 

The one thing that we do know is that it is a very large iceberg. It is estimated to be about Rmb 13.6 trillion ($2 trillion) or nearly 50% of GDP. The backbone of this system are trusts, which were allowed as a way to increase lending to municipalities and real estate developers with loans that are off the bank’s balance sheets. These trusts had over Rmb 3 trillion ($1 trillion) under management at the end of the third quarter of 2012. This is a 54% increase since 2011 and a 500% increase since 2009.

 

When regulators started to restrict trust activities, Chinese agents did what all financial agents do. They went around them. They started moving money into brokerage houses that passed them on to other borrowers. By the beginning of this year Chinese brokerages had Rmb 2 trillion ($320 billion) of entrusted funds. This is a seven-fold increase since the beginning of 2012. They received Rmb 1 trillion in the fourth quarter alone. 

 

So the shadow banking system created new financial products helped by an era of changing regulations in an environment of cheap money. All of the ingredients according to governor Stein save one: maturity mismatch. But this exists as well.

 

The new financial landscape allowed banks to funnel money to trusts often through brokerage firms. The trusts make high yield loans to companies such as property developers are considered too risky for regular bank loans. Besides the developers are off the banks’ direct loan approved list, because the Chinese government is trying to cool an overheated real estate market. These loans are not short-term. They are multi year. But the WMPs sold to investors are. The durations are for just one to three months. Like the CDOs supported by sub-prime loans, they are considered very safe investments.

 

Like the Junk Bond ETFs the duration mismatch is not an issue. As long as there is a continuing demand for WMPs to pay off the maturing ones, just like a Ponzi scheme, there will not be any problem. But if investors began to question the safety of WMPs and stopped buying them, then the whole scheme might explode.

 

When and whether Junk Bond ETFs or Chinese WMPs cause a new collapse will be clear probably within a few months. Whether there is a general meltdown from these or other products, governor Stein’s warning is clear and simple. Government policies and regulations have three very real limits. First, the limitations arise because of inherent fallibility of regulation as a tool in a world of regulatory arbitrage. Second, the scope of regulations cannot foresee all the ways that its effects will change the financial system. Finally, regulations may ultimately be destructive because risk taking is structured in ways that are not clear. So by the time the elements of a collapse are obvious it is already too late. 

 

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)

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RTI Judgement Series: PIO erred in judgement without malafide intention

The PIO of IIT Delhi could not provide complete information, but the CIC said it was without any reasonable cause or any malafide intention. This is the 60th in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application

 
The Central Information Commission (CIC), while allowing an appeal, asked the Public Information Officer (PIO) of Indian Institute of Technology, Delhi (IIT-D) to provide the information about appraisal reports and confidential reports of faculty members and staff.
 
While giving this important judgement on 29 September 2009, Shailesh Gandhi, the then Central Information Commissioner said, “The PIO’s contention that the data is voluminous and that the appellant must carry out an inspection is completely unjustified. However, the Commission does not see this as denial of information without any reasonable cause or any malafide in denial. The Commission sees this as an error of judgment by the PIO.”
 
New Delhi resident Dr R Kumar, on 17 April 2009, sought information from the PIO of IIT-D. Here is the information he sought and the reply given by the PIO on 14 May 2009...
 
1. How many staff and faculty members of IIT, Delhi, have not submitted their annual appraisal in time for the year the 2003-2004 to till 2008 in the table form?  All the details i.e. Name, Name of the Department/Centre/Unit, etc.  Arrange the required data in the table from year wise i.e. 2003 till 2008.
a. Sr. No.
b. Name of the Faculty/Staff Member
c. Name of the Dept./Centre/Unit
d. No. of Months/Days delayed
e. No. of reminder issued during the year to them
f. Present status
g. Action Taken by the competent Authorities
 
2. The copes of the reminder issued by the respective competent authorities for submission of their annual appraisal report.
 
3. The copy of the note/order sheet, etc. wherein weight age/importance of annual appraisal is issued by the director/competent authorities.
 
PIO’s reply—1,2,3
The Institute has nearly 500 employees in cadre A and over 1,000 employees in B, C, D Cadre. Information sought for the period 2003-2008 in the desired format will require disproportionate long man hours as it requires looking into nearly 1,500 employees’ files. Hence is not possible to provide the information. However, you are requested to specify few specific references so that information can be provided or else you may visit Establishment I and II units with prior appointment for inspection of record, charges for which shall be applicable as per Right to Information (RTI) Act.
 
4. What is the minimum and maximum period for a faculty/staff member to serve under the competent authority for raising the annual appraisal?
PIO’s reply—The period for a faculty/staff member to serve under the competent authority for raising the annual appraisal is three months.
 
5. A copy wherein for the objectivity and all fairness the annual appraisal report of the Staff and Faculty Members raised by the reporting officer has been to review by the superior that is the Reviewing Officer.
PIO’s reply—Copy of the appraisal report/CR form for B, C, D is enclosed.
 
On 3 June 2009, Dr Kumar submitted some clarification to the PIO. He said, “had asked only for specific cases of staff and faculty members who have not submitted their annual appraisal in time for the year 2003-2008 and not for all the staff and faculty members of the Institute. However, the PIO may initially provide the information for the year 2005-2007.”
 
In response, the PIO in a letter on 10 June 2009 stated that, “There is no separate record about staff/faculty members who have not submitted their appraisal report. Total number of staff and faculty members i.e. nearly 1,500.  To provide the information for the period 2003 to 2008 means reaching out personal files/ service books of all employees. This requires un-proportionate resource and hence unable to provide the information as per clause 7 (9) of the Act.  However, you may visit the respective section with prior appoints for inspection of records.”
 
Not satisfied with the reply, Dr Kumar filed his first appeal. He stated, “The plea of the PIO that un-proportionate resources are required and that according to Section 7(9), he is unable to provide the information is wrong. According to Section 4 (1) (a) a public authority is required to maintain the information, duly catalogued and indexed.  The Institute has appointed various APIO who can help to provide/ assimilate the information. The information should be provided in the form it has been requested for.”
 
The First Appellate Authority (FAA) in its order said that the reply given by the PIO is complete.
 
Not satisfied with the reply, Dr Kumar then approached the CIC with his second appeal. In the appeal, he stated that, “…(the) PIO should have sent the RTI Application to the Director, Deputy Directors and Registrar’s office to provide information instead of asking the appellant to visit each section separately. The IIT is giving misleading and incomplete information since they have neither followed the instruction issued by the Government of India for the Officer Procedure nor complying with the obligation of Public authority as defined in Para 4 (1) of the RTI Act, 2005.”
 
During the hearing, the PIO reiterated that it would be difficult for the Institute to give the information sought by the appellant since this information is not maintained in the particular format as sought by Dr Kumar. 
 
“...the institute (IIT-D) was unable to give information about how many people have not submitted their annual appraisal or how many people's confidential reports have not been received for the period for up to three to four years. This appears to be very disturbing for IIT Delhi to claim that it does not have a record of how many faculty numbers have not submitted appraisal forms is a very serious and sad matter,” said Mr Gandhi, the then CIC.
 
“The PIO’s contention that the data is voluminous and the appellant must carry out an inspection is completely unjustified,” he added.
 
During the hearing the PIO stated that there is an appraisal system for faculty and Group-A staff and for staff of Groups B, C and D there is a system of annual confidential reports. He also state that the records of the annual confidential reports are in a sealed room and therefore some time is required to obtain these. 
 
Mr Gandhi, said, “The Commission sees a reasonable position taken by the PIO which the Commission does not uphold. However the Commission does not sees this as denial of information without any reasonable cause or any malafide in denial. The Commission sees this as an error of judgment by the PIO.”
 
While allowing the appeal, the CIC then directed the PIO to provide the information for the faculty before 15 October 2009 and for staff before 30 October 2009.
 
 
CENTRAL INFORMATION COMMISSION
 
Decision No. CIC/SG/A/2009/001925/4970
http://www.rti.india.gov.in/cic_decisions/SG-29092009-17.pdf
Appeal No. CIC/SG/A/2009/001925
 
 
Appellant                                                : Dr R Kumar
                                                                     New Delhi-110075
 
Respondent                                            : Vivek Ramen
                                                                     Public Information Officer
                                                                     Indian Institute of Technology Delhi
                                                                     Hauz Khas, New Delhi-110016 
 

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COMMENTS

A K Dasgupta

4 years ago

Why RTI should be limited to Govt or Public sector institutions alone? Are the Private sectors above corruption or enjoy immunity? It is the CEO's and top officials of Public companies who refuse to talk to Indian Public and are more responsible for their harassment. I have found that CEO's of Bharati Axa and Ford and Grievance official of Vodafone never bothered to respond to my genuine concerns.Same is true for Private Banks , why RTI should not cover these institutions and make them answerable to Indian people otherwise let them do business elsewhere.

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