RBI's Draft Guidelines on New Banking Licences

The Reserve Bank of India wants amendments in the Banking Regulation Act before a decision on the issue of the new policy on grant of licenses to banks. The draft guidelines for new banking licences are expected to come shortly, but amendments to the Act would take time.

There has been a discussion on allowing corporate houses in banking, and there have been persuasive arguments both for and against the proposal. By far the biggest trepidation is about self-dealing, i.e. that companies might use the bank as a private pool of readily available funds. While there were rules that have been suggested against such "self dealing," there are gaps in those regulations that needed to be plugged. For instance, if a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing. The Banking Regulation Act prohibits banks from lending to directors and to entities in which they are interested. Regulations also prohibit lending to relatives of directors without prior approval or knowledge of the board.

It has also been discussed during the public debate on the discussion paper that it is not easy for supervisors to prevent or detect self-dealing, as banks can hide related party lending behind complex company structures or through lending to suppliers of promoters and their group companies.

Though international experience on this issue is varied, the strongest point in favour of allowing corporate presence is that it can bring in capital and also business experience and managerial competence.

The government has been more particular or more concerned about the growth factor involved. It is more concerned about the capital required in the banking system and the scarcity of the same. If a large part of that capital has to come from the public sector banking, then it will go back to government’s coffers to make arrangements for that kind of capital. Hence, capital needed for the banking companies was a critical question before the government.

However, the Reserve Bank of India has to look at the stability. So, a balance needs to be struck between the two sets of ideologies; economic growth on one side, and stability, which is key to ensure the deposit holders interest.

Damodaran Committee Report!

What is it about:

The RBI constituted a committee under the chairmanship of former SEBI chairman M. Damodaran, last year. It was given the task of looking into banking services rendered to retail and small customers, including pensioners. Its report was tabled last month and made public last week. Some of the recommendations of the report include:

• System to block a stolen ATM card through an SMS
• to raise the insurance on bank deposits to Rs. 5 lakhs
• a single common toll free call number for all banks
• zero liability against loss in ATM and online transactions
• creation of a single common toll free call number for customer services for all banks
• banks to compulsorily get their deposits insured from Deposit Insurance and Credit Guarantee Corporation (DICGC)
• setting up of a third party Know Your Customer (KYC) data bank
• proper prescription of service charges for basic services
• provision of floating rate housing loans on a non-discriminatory basis

What are the reasonable recommendations:

All borrowers should be told upfront, rather than piecemeal, about the various documents required to be produced for processing their loan applications, customers should be given more choice and better services, etc.

And the unreasonable ones:

To suggest that the banks must recognise the socio-economic importance of funding projects  especially in the north-east, while determining the various parameters and not strictly interpret and implement sectoral exposure caps, makes the banks a commercial entity rather than arms of the government. Moreover, the committee's repetitive call for levy of 'reasonable' charges is a little unreasonable, too. It may not put a lot of pressure on the affluent class, but might be a bit too severe for the common man.

How can things be implemented for the best:

The recommendations can have the best results through competition, empowered customers and a watchful regulator, not through a stringent fiat. The financial literacy and awareness of customers should be developed. These recommendations might help satisfy the whole lot of customers who currently feel discriminated against and dissatisfied with the banking system on certain aspects.

The Debt Deal!

President Barrack Obama signed a legislation to raise the country's debt ceiling in exchange for cuts in government spending, after Congress voted in favour of a bipartisan compromise deal. It raises the debt limit by up to $2.4tn (£1.5tn) from $14.3tn, and makes savings of at least $2.1tn in 10 years.

The U.S. thus avoided a disastrous default on the American debt. Without legislation in place it was feared that the Treasury would run out of cash needed to pay all its bills which in turn  could interrupt payments to investors in Treasury bonds, recipients of Social Security pension checks, anyone relying on military veterans' benefits and businesses that do work for the government. This would consequentially severely damage the economy.

Even after the legislation has been implemented, there are fears that the last-minute sparring could shake rating agencies' confidence and harm the country's Triple-A credit rating. Furthermore, even though the compromise deal has been passed, it has deeply angered both conservative Republicans and liberal Democrats. They contend that the bill still would cut too little from federal spending.

President Obama will also turn his to other measures required to prevent the US economy from hitting back into recession. These could include an extension of a payroll tax cut and approval of stalled trade deals with Panama, Colombia and South Korea. The bitter fight over raising the debt ceiling has already damaged the standing of Obama and lawmakers.

Americans further have to be convinced about the need for more tax revenue, and that it would be better to raise taxes on wealthier Americans to preserve the social safety net. Obama has already criticized the tax cuts by former President Bush saying that they were to no avail. For such measures a bipartisan congressional committee has been created under the debt deal to recommend ways to cut the deficit by the end of the year. Increased tax revenues are anticipated to emerge from the recommendations of the committee. They point to some proposals for raising taxes that have already been floated by a bipartisan group of senators.

The law puts forth significant cuts to U.S. federal spending and hence is expected to buoy global investors and reduce the chances of the Treasury bonds undergoing a credit downgrade. This would increase the cost of borrowing for the government and the consumers.

Though the deal may not bring tremendous startlingly tremendous benifits to the US economy, a total disaster has been avoided!!!

National Land Acquisition and Rehabilitation and Resettlement Bill

The Union Ministry of Rural Development unveiled a draft National Land Acquisition and Rehabilitation and Resettlement (LARR) Bill. Once implemented, LARR could bring an end to the  potentially end to the arbitrary land acquisitions under the Land Acquisition Act of 1894.

The 1894 Act, with its ill-defined “public purpose” clause did not allow this to happen because of constant state intervention. In past years, judicial interventions saw to it that justice was meted to those whose land had been acquired. Furthermore, many state governments have abused the urgency clause that has led to tremendous violations of the power of eminent domain.

The new Bill envisages an end to all such contentions. Apart from the good points, the bill might have a few defects as well. Firstly, the issue of the cost at which land is to be taken over. According to LARR, the compensation scheme requires land acquisition at six times the market value in rural areas and twice the market rate in urban areas. While the 1894 Act led to landowners being paid a very small amount, LARR takes a wild swing in the other direction. This will lead to serious distortions in the market. Because of this industries that have the power to generate employment—the small and medium enterprises—will be pushed out of the land market. And those who can afford such prices—very large industrial houses—can always substitute capital for labour, finally beating the very purpose of industrialization.

Another aspect that needs to be taken notice of is that of the resettlement and rehabilitation scheme (as detailed in schedule II and III of the Bill). These benefits are quite beneficial. A  mere scanning of schedule III shows that many of the facilities that are to be provided in case of land acquisition beyond a threshold, do not exist in large parts of the country. When the government has not been able to provide these to citizens, why should these “rights” be created out of just about nothing? Schedule III reads like a list of government failures to provide basic facilities to citizens that is now sought to be imposed as a cost for industrialization and development of infrastructure. This is bound to be a deleterious step.