MSC Banks Shikhar Training & Research Institute

(FOR INTERNAL CIRCULATION ONLY)

EXECUTIVE BRIEF

ISSUE I

VOL I

22 JUNE 2011

Dear Colleagues, I am happy to place in your hands the first issue of SHIKHAR EXECUTIVE BRIEF, an abridged and condensed compilation of latest events, news, quotes, policy initiatives, photos etc. from banking industry. I hope you will patronise this and make suggestions for its betterment. Pramod Karnad Managing Director

1.

INDIAN BANKING: FINALLY OPENING UP?

June 20, 2011 1:22 pm by James Fontanella-Khan

Indias banking sector is in for a long-awaited overhaul. The Reserve Bank of Indias long-standing opposition to allowing conglomerates into the lucrative banking sector will be scrapped soon after it publishes draft guidelines outlining the rules to enter the club. The move will bolster competition in an industry dominated by inefficient and antiquated state-owned banks. But the process will not be smooth. Thats because the entry of big business into retail banking will face strong opposition from Indias increasingly vocal civil society, angered by a string of corruption scandals that have engulfed the worlds largest democracy. What is about to change? When the RBI issues new banking licenses industrial conglomerates like Reliance Industries, Tata Group and Mahindra & Mahindra, will be allowed to apply for the licenses, something they have not been able to do since former Prime Minister Indira Gandhi nationalised all privately owned banks in 1969. Who wants to enter the sector? Anil Ambani, the billionaire behind Reliance group, brothers Malvinder and Shivinder Singh, who control Religare, and the founders of Mahindra & Mahindra, have confirmed their interest in applying for a licence. Who would benefit from their entry? The conglomerates would be the major winners. Moreover, an overwhelming majority of Indias 1.2 bn population has no access to basic banking services, which means that there is ample space of expansion for anyone entering the sector. Margins in financial services in India are high and competition gentle, leaving wide opportunity for competitive private provision as shown by ICICI Bank, Some new private sector banks have proved an overnight success, quickly gaining a reputation for innovation and eye-catching branding. Indias middle class is also likely to be a winner. There is, however, an on-going debate over whether the entry of the conglomerates will help achieve one of the most important political goals for the ruling Congress party: financial inclusion. Shri. Venugopal Reddy, Governor of the RBI between 2003 and 2008, told that new banks might want to focus more of servicing the up-and-coming urban population rather than opening branches in rural areas, where more than 70 per cent of the population lives.

When will all this happen? The RBIs report should come out any time within the next few weeks but it will take sometime before conglomerates will start opening branches around the country. In the last year India has been hit by a number of corruption scandals that have raised serious questions about the rising influence of big business over the political sphere. Civil society in the country is likely to oppose conglomerates entry into the sector as they fear that the risks will overcome the benefits of their entry. Once the RBI draft guidelines are published it is likely that the government will wait for the noise surrounding the corruption scandals to quieten down before they move ahead with implementing new rules and start issuing licenses. Predicting when it will happen is impossible. Whats the bottom line? Indias is finally moving towards opening up the retail banking sector to the benefit of a big chunk of the population and more so of the family-owned conglomerates. This is a very big step for a nation that tends to move slowly when it comes to reforms. However, it will take a while before well see the changes taking place. This is just the prologue of a new chapter in Indias banking sector.

2. White Label ATMs

White Label ATMs are the ATMs which are not tied to any bank in the country, the customers from any bank can deposit or withdraw money from White Label ATMs. Their banks then pay for the service. These ATMs are generally run by private ATM service providers. IDBI bank is planning to create a separate entity in partnership with private ATM service providers for running such ATMs, with prior approval of RBI.

3.

Provision Coverage Ratio ( PCR )

PCR is the ratio of provisioning to gross NPAs and indicates the extent of funds bank has kept aside to cover loan losses. RBI has asked Scheduled Commercial Banks to create special buffers to be used for making specific provisions for bad loans during system wide downturns. The cushion also called the counter-cyclical provisioning buffer is to be set up out of any surplus available after complying with the stipulated 70% Provision of Coverage Ratio of the gross NPAs as on September 2010.

4. One per cent interest subsidy on Housing Loans

Honble Union Finance Minister had liberalised the existing scheme a 1% subvention on housing loans up to Rs.15 lakh where the cost of house did not exceed Rs. 25 lakh. The RBI has directed the banks to ensure that the guidelines are implemented immediately.

5. Deficit economies should economies spend more

save

more

and

surplus

The global rebalancing will require shared understanding on conducting macroeconomic policies to minimise disruption is to the Macroeconomic stability. Dr D Subbarao Governor RBI opines surplus economies will need to save less and spend more and shift from external to domestic demand for sustainable growth. While the deficit economies will have to save more and consume less while depending more on external demand.