TRANSI TION TI MES SEASON -2 (please do not make

corrections after u receive it from me)

15
TH
SEPTEMBER TO 20
TH
SEPTEMBER
ATM transactions not free for banks, says
Raghram Rajan
Second authentication for small value payments through credit cards can be reduced subject to
conditions
Reserve Bank of India (RBI) governor Raghuram Rajan said that while there has been criticism about reducing
free ATMtransactions from five to three, it was necessary since it was free for the customers but not to the
bank.

After requests from banks to consider capping the number of free transactions, the banking regulator decided
to cap them. Banks had said that they incurred high costs by the benefit of repeated free transactions that were
being availed of, by their customers.

The governor said that if one five transactions it costs the bank about Rs 75-100. "There is no such thing as a
free lunch, which we tend to forget sometimes. If your bank has to pay some other bank for those transactions,
it has to collect it from somewhere. It collects it by increasing some other fee on customers. It passes the cost
back to customers," he said.

Rajan said that to the extent that everybody does five transactions free and everybody incurs the same cost, that
cost is passed back to customers.

They are neither better off nor worse off, they are paying in a disguised way. But he said that this creates
distortions, since cone doing five transactions get best benefits while others doing one or no transactions do not
get any benefits.

"Should we mandate such cross subsidy and subsidying people in use of cash?," he asked. Hence, he said that
there has been a partial withdrawal of the mandates whereby number of free ATM transactions will be three
from November in six metros with maximum number of ATMs.

RBI has reduced the number of free transactions per month for customers at any non-home bank ATM to three
from five earlier. This will be effective from November in the six metro cities of Mumbai, Delhi, Kolkata,
Chennai, Bangalore and Hyderabad.

He also clarified that they are not telling banks that they have to charge, but are telling them you can charge.
"Banks can choose to still subsidize. Overall, this will reduce the hidden cross subsidy and make it more
transparent," he said.

RBI has a two-step authentication process for credit card transactions, which Rajan said that would continue to
be mandated. He added that some firms are bypassing this and indeed clearing transactions abroad, thereby
contravening a number of rules that are on the book.

"The immediate pushback was that RBI was against innovation. Whatever is the innovation, you have to
follow rules. If there is a rule on the book, we don't allow it to be violating simply because the innovation is
cool," he said.

With this authentication, Rajan said that the security of the transactions has been improved. He also added that
RBI is looking at how to adapt to innovation by allowing easy use for small value payments.

Under this, they are looking at reducing second authentication for low value payments provided the card
provider has systems to protect against misuse and they would bear costs beyond a certain point if the card is
misused.

The governor also raised some questions regarding the priority sector. Rajan said that one needs to keep asking
as to why should some sectors get easier credit than others. He said that for example, we subsidise in priority
sector student loans for study abroad.

"Are students studying abroad the most needy in the country or is most important? I am not saying that this is
bad but we should ask questions," he opined
Loan scams: Rajan warns banks on outsourcing
key internal jobs
Says better project evaluation through improved internal skills is needed
As concerns mount over rising bad loans and scams at banks, the Reserve Bank today asked lenders to
improve project evaluation skill internally instead of depending on external agencies, and to set up automated
monitoring systems.

"We need better project evaluation through improved internal skills, not through intermediaries. A problem
that has emerged in recent years and the recent scandals is the fact that the loan evaluation process has been
outsourced," Reserve Bank Governor Raghuram Rajan said addressing an industry summit here.

Underlining the need for a rigorous assessment system, he said the "loan evaluation process is so central to
banking that it is impossible to outsource. It has to be brought back in-house and competencies generated. We
have to move towards engaged, informed banking and not getting done by engaging outside intermediaries."

Banks are the main source of funding for infrastructure projects and that will increase as the economy regains
its lost momentum, Rajan said.

He also warned them that further forbearance to deal with non-performing assets (NPAs) or bad loans is not an
option and the answer lies in dealing with the problem upfront by raising more capital.

"We have to make sure that we don't give so much forbearance that we really don't know whether the asset is
functioning or not...It creates enormous ever-greening and the end result is that bank balance-sheets have no
meaning. The regulatory requirement is to make sure that banks' balance sheets continue to be informative,"
Rajan said.

"The true answer over time is raise more capital, to tide over the capital crunch of banks which have been
getting depleted over the years," he added.

Asked during an interaction whether restructuring can be provided on project loans, Rajan warned that such a
move could have serious implication on banks' balance sheets and investor perception.

Rajan said: "Ultimately, if the account is stressed it can be restructured. There is nothing that stand in the way
of restructuring. But there will be implications on provisions and capital. If we start showing forbearance on
that, then it runs the risk of diluting the entire balance sheet."

According to estimates, recast loans at about Rs 3.5 trillion (Rs 3.5 lakh crore) constitute nearly 6 per cent of
the total banking system.

Ahead of policy, Rajan rules out repo rate cut
Says there was no point in cutting interest rates to see inflation pick up again

The wholesale price index (WPI) for August may have shrunk to a five-year low, but Reserve Bank of India
Governor Raghuram Rajan is still unmoved.

Just two weeks ahead of the monetary policy review, Rajan said on Monday that inflation was still high and
there was no point in cutting interest rates to see it (inflation) pick up again.

Speaking at a banking conference in Mumbai, Rajan said he had "no desire to keep interest rate higher than
what they should be even for a second longer than needed.

The interest rates will be brought down when we have won the fight against inflation." The conference was
organised by the Federation of Indian Chambers of Commerce and Industry and the Indian Banks' Association.

RBI-watched consumer price index (CPI) inflation eased slightly to 7.8% in August from 7.96% recorded in
July, and Rajan said the downward trend in inflation was "consistent with RBI forecasts."

Rajan's statements suggest that the repo rate will be kept unchanged at 8% on September 30 when RBI reviews
the policy.

On economic growth, Rajan said the recovery was still "uneven" though the country was doing better than a
few months ago. Industrial production rose just 0.5% in July, lower than expectations of a 2% growth and
down from a 3.9% expansion in June. Rajan said strong export data and accelerating car sales growth suggest
the economy could be gaining momentum, but "it's still way before we are out of the woods".
Rajan showed concerns on the sluggish investment growth.

"Investment growth is yet to pick up. When we look at investment growth, we also look at credit numbers
which have not picked up as strongly as yet. Probably the reason may be that large corporate are tapping the
financial markets as bond issuances have been significant in the last few months," he said.

On the recent dip in oil prices, the Governor said the government must take advantage of the lowest oil prices
in a year to free up fuel prices and reduce subsidies. Brent crude has fallen 14% since June to $96.38 per
barrel.

"We need to seize this moment to eliminate diesel subsidies completely. We can of course wait but the
moment will leave us and we may be back to subsidizing," Rajan said.
The RBI governor noted how the differentiation in the interest rate cycle in the world's largest economies was
a large question mark looming over India's future. It may bring some respite to India in the coming months, but
it may also make the global environment more perilous for emerging economies.
"We are probably reaching closer to the initiation of interest rates increases in the US, probably a long time
still for Japan and the euro area," Rajan said. "There will be differentiated situations across the world, which
may be a blessing, may be their own source of turmoil as exchange rates move significantly differently based
on who starts first and who starts later."
Rajan said that banks will have to continue to finance infrastructure projects because, "fortunately or
unfortunately", there were no other entities to do long-term financing. But he also asked bankers to become
better in evaluation of projects.

"We need better evaluation, which cannot be outsourced. We need early recognition of projects and quick and
effective project restructuring for distressed projects," Rajan said.

He also touched upon the recent incidents of corruption in public sector banks and said the banking system
needed to use its strengths by weeding out "bad apples" from the system.
"Public sector banks have to have the freedom to make commercial decisions. They are not extensions of
government any longer. Government mandates should be backed by financial payments. We are taking up this
issue with the government, let's see how it works," Rajan said.
Referring to the Jan Dhan Yojana, Rajan said it was a good one provided banks did not just focus on adding
numbers that could lead to duplicate accounts or accounts opened for people who are not the targeted
beneficiaries.
Rajan said the political class in the country had to understand that waiving loan repayments did not help the
poor. "Waiving loans is an unhealthy activity. Every time a waiver is done, it diverts access to credit and
shrinks credit availability. In 1989-90 and again in 2009, agriculture credit dropped just after a big loan
waiver," he said.
RBI has mandated banks to maintain 60% liquidity coverage ratio (LCR) from January 1, 2015. It has also
suggested the ratio be increased to 100% by January 1, 2019, in a phased manner.

"We have to make sure that we have to fulfill the purpose of liquidity requirement, that is to have liquid assets
to the extent that they are built over and above the existing liquid assets that you have for other purposes like
statutory liquidity ratio (SLR) requirements," Rajan said.

IMPORTANT QOUTES-

"Inflation is still high and there is no point in cutting interest rates to see it (inflation) pick up again"

"Investment growth is yet to pick up. We also look at credit numbers which have not picked up as strongly as
yet"

"It's still way before we are out of the woods (on economic recovery)"

"We need to seize this moment to eliminate diesel subsidies completely"

Growing digitization is a warning to cash: BCG
Says about 30-40% of cash in circulation now will be replaced with digital transactions
With customers are increasingly opting for electronic mode for transactions, a recent study by Boston
Consulting Group (BCG) said about 30-40% of cash in circulation will be replaced by digital transactions,
going ahead.
The report said, in 2012-13, 29% of the number of transactions in the banking system was cash driven where
as 22% was cheque.
By the last financial year the number of cash transactions in the system has already come down to 26% and
cheque transactions have also come down to 19%.

"Paper money, that has dominated transactions for centuries, could be on its way out. We see the warning to
cash. There is a clear possibility of 30-40% substitution of cash in circulation in India with digital
transactions," said the report.

Banks have been working at making the branches and the back end functions more digital. Experts believe that
this will not only boost productivity but proper use of technology can also be a important factor in trimming
the increasing bad loans that the banking sector has been battling with.

"By digitising processes end-to-end, engaging customers on digital channel for sales and transactions, and
collectively working towards eradication of cash, banks can achieve up to 30% jump in sales productivity,
reduce administrative staff by 10-15% and improve back office staff productivity by 20%," added the report.

ICICI Bank - the country's largest private sector lender said lower use of cash will improve the cost to income
ratio for the bank.

"For instance we introduced tablet banking and it helped us by giving a much larger share in the current
account and savings account deposits (Casa) by improving the overall efficiency and productivity," Chanda
Kochhar, MD & CEO, ICICI Bank said.

Bankers also believe that apart from making the process of customer acquisition more cost -effective,
improving the technology has also helped in risk management by making the process more standardised.

"With the use of technology we can minimize the error rate and it can also lead to better risk control and fraud
management," said Shikha Sharma, MD & CEO, Axis Bank. BCG believes that banks that have a strong
control over the payments system in the industry will be more successful in the process of digitisation. This is
because going ahead most of the payments growth is likely to be on the digital channel such as internet,
mobile, POS, ECS etc. Going ahead these channels are expected to serve specialised purposes and the global
consulting firm sees it as a "tectonic paradigm shift."

Banks believe that apart from making the transaction process more digital even customer acquisition and cross-
sell can be done through this medium "We are always looking at engaging more on this medium. But here the
challenge is not only technology but also content management. One needs to continuously innovate," said
Arundhati Bhattacharya, Chairman, State Bank of India.

Foreign lenders that can only open a restrictive number of bank branches believe that digitization has helped
them bridge the gap with the other lenders.

"With less number of branches taking the digital routes is a survival issue for us. In order to reach out to more
people and to improve the customer acquisition process we have had to take the digital route," said Pramit
Jhaveri, CEO-India, Citibank.

The report points out that the competitiveness of PSBs can further decline until and unless concerns like talent
constraints and overarching control in terms of decision making is addressed. In fact, BCG believes that the
smaller public sector banks are at a greater risk.

"The smaller public sector banks are at a particular risk of rapid decline given their poor investment in
transformation. They lag significantly on virtually every dimension of digital preparedness. In our view, this
should be a primary consideration in the blue print for consolidation of public sector banks in India," stated the
report.

Bankers ask RBI to cut interest rate to spur loan
growth
Loan growth has fallen below 11% as compared to 16.8% a year ago

As the credit growth of the banking system has slowed down to December 2009 levels, bankers have asked the
Reserve Bank of India (RBI) to cut the repo rate or the rate at which banks borrow from RBI.

Today the governor and the deputy governors had a meeting with representatives from bank treasury
departments, fund houses, primary dealers and micro-finance institutions. According to latest data, loan growth
has fallen below 11% for the year ended August 22 as compared to 16.8% a year ago. Deposit growth was
13.6% during the period.

The repo rate currently stands at 8% has been kept unchanged since the first bi-monthly monetary policy
review held in April. Just two weeks before the monetary policy review, RBI governor Raghuram Rajan on
Monday said inflation was still high and there was no point in lowering interest rates to have inflation picking
up again.
According to sources RBI also took feedback from various market participants on payment banks and small
banks. RBI is likely to issue final guidelines on small and payments banks soon, paving the way for corporates
to enter these two segments. Yesterday RBI deputy governor R Gandhi said that RBI has received comments
on small and payment banks draft guidelines that it had introduced in July. "the public comments have
received and we are factoring that in and soon we will come out the final guidelines on these two," Gandhi
said.
Besides that banks have also urged the regulator that the database across credit bureaus should be shared
among all the credit bureaus as this shall facilitate better decision making for banks towards credit approvals.
In recent times banks have been reeling under the impact of bad loans. Microfinance institutions have also put
forward this point to RBI that under Priority Sector Lending (PSL) whether banks are directly granting loans to
the PSL categories or indirectly through microfinance institutions, both should be considered as a part of PSL.

Market participants have also demanded RBI that Liquidity Adjustment Facility (LAF) should be conducted
even on Saturdays. Currently these are held from Monday to Friday. Besides that banks have also demanded
for relaxation in the daily Cash Reserve Ratio (CRR) requirement. Currently banks have to adhere to a cash
reserve ratio (CRR) requirement of 95% daily and 100% on a fortnightly basis. According to bankers these
moves shall help in better liquidity management for banks.


Final norms for on tap bank license this fiscal:
RBI
Presently, bank licenses are given only during a particular timeframe as specified by the regulator

Reserve Bank of India would be coming out with guidelines for differentiated bank licence that will be given
on tap in this financial year itself, said R Gandhi, Deputy Governor, RBI.
"We are working towards issuing guidelines for full service banks on tap. I cannot give you a timeline, but it
will be in this fiscal year," said Gandhi. On-tap licensing means th eRBI will be granting banking permits on a
continuous basis.

Till now, bank licenses are given only during a particular timeframe as specified by the regulator. For example,
last year after releasing the final norms on bank licences, three months time was given for filing application.
He also added that RBI has received comments on small and payment banks draft guidelines that it had
introduced in July. "the public comments have received and we are factoring that in and soon we will come out
the final guidelines on these two," added Gandhi.
He also stated that the regulator has also made some suggestions on improving the corporate governance norm
in the public sector banks.
"Based on various committees, including the Nayak Committee recommendation we have made certain
suggestions to the government for corporate governance for public sector banks. These recommendations
include the chairman and managing director position should be segregated and we should have a separate
committee to appoint various directors on the boards of public sector banks. We have forward such
suggestions to the government for discussion and they are taking up the final decision."
The PJ Nayak committee report had made several recommendations on removing several hindrances in the
governance of Public sector banks that included review of the regulatory compliance requirement of the boards
of banks, regulatory guidelines on bank ownership/concentration, and an examination of board compensation
guidelines among others.
No free lunch: Rajan on ATM transactions
Second authentication for small value payments through credit cards can be reduced subject to
conditions
Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday said while there was criticism on
reducing the number of free transactions at non-home bank automated teller machines (ATMs) from five to
three a month, this was necessary, as banks had to pay for such transactions.

There is no such thing as a free lunch; we tend to forget this sometimes. If your bank has to pay some other
bank for those transactions, it has to collect it from somewhere. It does this by increasing some other fee on
customers. It passes the cost back to customers, he said, adding five such transactions cost a bank Rs 75-100.

The RBI chief said to the extent that everybody carried out five ATM transactions free and everybody incurred
the same cost, the cost was passed to customers. But this led to distortions, as those carrying out five
transactions benefited, while carrying out one or no transactions didnt, he added.

Should we mandate such cross-subsidy and subsidising people in use of cash? he asked. The answer, he said,
was a partial withdrawal of the mandate from November, the number of free ATM transactions at non-
home bank ATMs in six metros (Mumbai, Delhi, Kolkata, Chennai, Bangalore and Hyderabad) would be three
a month.

Rajan clarified RBI wasnt directing banks to charge for such transactions, but merely telling them that they
could. Banks can choose to subsidize. Overall, this will reduce the hidden cross-subsidy and make it more
transparent.
For credit card transactions, RBI has a two-step authentication process. Rajan said this would continue. He
added some were bypassing this and clearing transactions abroad, contravening a number of rules. The
immediate pushback was RBI was against innovation. Whatever the innovation, you have to follow rules. If
there is a rule in the book, we dont allow it to be violated simply because the innovation is cool, he said.

Such authentication, Rajan said, had strengthened security of transactions. He added now, RBI was
considering how to innovate and allow easy small-value payments. It was mulling reducing second
authentications for low-value payments, provided the card provider had systems to protect against misuse, he
said, adding they would bear costs beyond a certain point in case a card was misused.

The governor raised questions related to the priority sector. One had to ask why some sectors secured credit
more easily than others, he said, adding for instance, priority sector student loans were subsidised for study
abroad, too. Are students studying abroad the neediest in the country, or the most important? I am not saying
this is bad, but we should ask questions.

Mulling linking number of cards issued by a
bank to its POS machines: H R Khan
H R Khan, deputy governor of RBI said the idea is to reduce the number of cash transactions in the
country
To boost the growth of Point of Sales (POS, enabling electronic retail transactions) machines, the Reserve
Bank of India is thinking of whether to link the number of cards issued by a bank to the PoS machines it puts
up.

We just have 1.1 million machines and need much more. Only a few banks are putting the PoS machines. So,
one thought, and not a final view, that when you are issuing a certain number of cards, additional issuances
will be linked to the PoS machines you are putting up, so that there is acceptance in the infrastructure,
particularly in the rural and semi-urban areas where more Kisan Credit Cards are becoming plastic cards, said
H R Khan, deputy governor of RBI.

He said the idea is to reduce the number of cash transactions in the country. With an increased spread of PoS
terminals, this can be done significantly. It would also help banks cut on cash handling and management fees.

With the national financial inclusion plan and the number of RuPay cards being distributed, the regulator
believes there will be an increased number of cards in the system and infrastructure is needed to support this.

Meanwhile, State Bank of India, the countrys largest lender, has asked RBI to increase the cash withdrawal
limits from PoS machines to Rs 5,000.

The average withdrawal at ATMs is Rs 3,654. Therefore, we believe that Rs 5,000 (at a PoS) will be an
adequate amount. We wrote to RBI last month to increase the transaction limit, said S K Mishra, deputy
managing director.

SBI has been steadily expanding its PoS network and in this financial year, plans to add about 100,000 such
terminals. Mishra said they were at number four position in the PoS market but believed theyd be able to
clinch the first position by March 2016.
RBI asks banks to stay vigilant against
smurfing, money mulling
Smurfing is a practice by which cash is broken into smaller deposits of money to defeat suspicion of
money laundering
The Reserve Bank of India's (RBI) executive director P Vijaya Bhaskar on Friday asked banks to stay vigilant
against smurfing and money mulling.

Smurfing is a practice by which cash is broken into smaller deposits of money to defeat suspicion of money
laundering and avoid anti-money laundering reporting requirements.

Money mulling, on the other hand, occurs when money launders use someone else's bank account to deposit
and transfer money. Bashkar was speaking at a conference organized by the Confederation of Indian
Industry(CII) in Kolkata.

He also added that lenders should have a single information sharing system that will allow them to scrutinize
customers' information and prevent money launders from opening multiple accounts with different banks using
different identity documents. He declined to offer any comments on monetary policy actions.

"There was one point in the introduction, which said I should also speak about monetary policy. That is the last
thing I will do because September 30 is the day (when RBI will announce its next bi-monthly monetary
policy)...So on that I will keep meaningful silence," he said.


RBI tells banks to be careful about Jan Dhan
Yojana
Says banks should have a single information sharing system by which this possible misuse could be
stopped
The Reserve Bank today warned the banks to be more careful while opening accounts under the Jan- Dhan
Yojana, saying that a single individual could open multiple accounts in the lure of Rs 1 lakh insurance cover.

"There are some caveats when the banks are implementing the financial inclusion scheme under the recently
launched Jan-Dhan programme," RBI Executive Director P Vijay Bhaskar said at a CII seminar here today.

He said people could open accounts in different banks using different identity documents like PAN card,
Aadhar among others in the lure of getting insurance cover of Rs 1 lakh from all the banks.

The banks should have a single information sharing system by which this possible misuse could be stopped.

Another possible threat was 'smurfing', the RBI official said.

In this case, hawala operators would spilt the whole amount into several small units beyond the threshold using
several bank accounts and send money overseas.

The last was 'money mules' by which an individual would operate through another person's bank account.

Talking about the north-eastern region, he said the SLBCs and the SLCCs should take steps to improve the
credit-deposit ratio of the region as the CD ratio was much lower than the national average.

Earlier this week, RBI Governor Raghuram Rajan had cautioned banks on the risks involved in just hunting for
numbers with regards to Jan Dhan scheme, asking them not to compromise on core objectives of the
programme.

"When we roll out the scheme, we have to make sure it does not go off the track. The target is universality, not
just speed and numbers," Rajan had said.

The scheme can be a "waste" if it leads to duplication of accounts, if no transaction happens on the new
accounts and if the new users get bad experiences, he had added.


Govt may borrow Rs 2.48 L-cr in second half of
FY15
The fiscal deficit for the current financial year has been pegged at 4.1% of the gross domestic product
The central government borrowing in the second of this financial year (October 1-March 31) is seen at Rs 2.48
lakh-crore, in line with the markets expectations.

The government was scheduled to borrow Rs 2.32 lakh crore in the second half but that in the first half was
trimmed by Rs 16,000 crore. The year's scheduled total was kept unchanged.

The cancelled amount during the first half will be part of the auction calendar. Whether the government will
borrow that amount during the year or not is a different issue, said Suyash Choudhary, head, fixed income,
IDFC Mutual Fund.

He said the impact on bond yields would not be much because the market is aligned to the view that this
borrowing was to be done in the second half.

The first half borrowing was trimmed after the Reserve Bank of India (RBI) transferred a surplus amounting to
Rs 52,679 crore for the year ended June to the government. It was the highest ever given, 60 per cent more
than what was transferred the previous year. A welcome gift for the government, battling to keep its fiscal
deficit under check. The deficit for the current financial year has been pegged at 4.1 per cent of gross domestic
product (GDP).