Thursday, September 17, 2009

RBI to issue guidelines for banks’ entry into private equity business

Addressing a banking conference in Mumbai, jointly organized by the Federation of Indian Chambers of Commerce and Industry and Indian Banks’ Association, the apex bankers’ lobby in the country, the Reserve Bank of India (RBI) deputy governor Usha Throat told that the central bank is thinking of issuing a draft discussion paper on norms for banks’ setting up and operating private equity (PE) funds.

She told that the proposed discussion paper on prudential issues in banks’ floating and managing private pools of capital will help banks in sensing about the risks involved in such activities so that they can limit such exposures adequately with their risk management and available capital.

Thorat said setting regulations for banks who want to enter the PE business will be an addition to several other steps that RBI is planning to strengthen financial regulation in the country.

Several Indian banks, including the country’s largest lender State Bank of India, have set up divisions to enter in this business. Meanwhile SBI (PE) has revealed plans to float a PE firm along with Macquarie group of Australian and International Finance Corp. or IFC, Washington, to float an infrastructure fund. The bank has also attained a 20% stake in PE firm Sage Capital Fund Management.

At present for banks there are no guidelines to regulate the operation of PE funds.

By October RBI will be putting a draft circular detailing modalities for adopting global best practices on liquidity risk management as suggested by the Basel committee in September 2008 on its website. The Basel committee is an international body that prepares accounting norms, especially for banks.

The apex bank will be providing clarification on recommendations on other international best practices to be followed by the banks, Thorat said.

Earlier in July this year, the Basel committee had issued standards for higher capital requirement for trading books and also prescribed a higher capital requirement for securitization and off-balance sheet items such as derivative products. Soon RBI will be issuing guidelines to regulate these recommendations in India, the deputy governor added.

Also additional guidelines on securitization of loans originated and purchased by banks will be issued by the RBI. The main focus of guidelines will be on a minimum lock-in period and minimum retention criteria, she added.

Thorat said that the central bank will be suggesting the sound procedures and principles being developed by the Financial Stability Board for financial institutions related to compensation packages. Earlier in April in its annual policy RBI had given hint about such a move.

Thursday, September 10, 2009

RBI ask banks to give details of interest rate swap transactions

Reserve Bank of India officials under the leadership of RBI’s financial markets division Chief General Manager P Krishnamurthy held meeting with several banks officials and told them to provide information of interest rate swap (IRS) transactions carried out with customers on the platform of the Clearing Corporation of India (CCIL).

A banker who was present in the meeting told, “So far, only inter bank transactions were routed through the CCIL”.

A swap dealer informed, “This is done to increase transparency in the IRS market”.

On the other hand banker stated they do not have any clear information on whether under International Swaps and Derivative Association (ISDA) norms banks are allowed to share client information with other entities. Also do banks have to enter any derivative contract as per ISDA norms?

Another banker present in the meeting said, “RBI said they will examine whether there is any legal issue for sharing customer information”.

Swap dealer pointed out however the central bank is trying to screen the domestic swap deals, but there is no plan to stop or control the foreign institutional investors’ approximate participation in the Indian swap market.

Swap dealer added, “There are very few domestic corporates who play in the IRS market like Reliance Industries, L&T. But, the offshore entities contribute to a lot more volume than domestic entities. RBI should clearly articulate that banks should stop offshore play”.

Earlier in May 2008, instability in the IRS market was provoked because of large offshore plays by FIIs through mostly foreign banks.

As per RBI norms banks, primary dealers and mutual funds can contribute in interest rate swaps.

Wednesday, September 2, 2009

RBI imposed restriction on ATM use to stop misuse

After April 1, this year it had become easy for the bank customers to with draw money from ATMs as with the implementation of Reserve Bank of India (RBI) new norms for the bank customers doing the transactions at other banks ATM was made free, but the bank with which the customer had the account, has to pay to the other bank for using the ATM, by its customer. But this led to the misuse of the facility by the customers.

On the proposal of Indian Banks Association (IBA), the representative organization of private and public sector banks in India RBI had imposed restriction on the amount and the number of cash withdrawals at ATMs of other banks. Speaking on payment and settlement systems at Corporation Bank head office, G Padmanabhan, chief general manager, RBI said, the recent restrictions imposed by the central bank are based on initial feedback it had received on free usage of ATM services across banks. He said the restrictions are being imposed only to stop misuse of the facility and such measures are not going to hinder normal usage.

Padmanabhan emphasizing on the need for technological improvements in India’s financial system stated, "The success of initiatives should be seen at the counters rather than merely at data centers of the Banks". He added there is a need to focus on strengthening the payment systems so as to safeguard the customer’s interest.

Banks should work hard to promote RBI’s initiatives in implementing secure and sound payment systems. RBI has taken a decision that banks will remain the intermediaries for transfer of funds irrespective of technology service provider to provide such facilities, he informed. Padmanabhan said RBI is also thinking on levying higher penalty for undue retention of customer’s funds, dispatched through electronic payment mechanism.

Padmanabhan also informed with the successful introduction of cheque truncation system, in Delhi the physical movement of cheque has totally eliminated and RBI is considering of introducing the same in Chennai.

J M Garg, chairman and managing director of Corporation Bank, told that over a period of time dramatic changes have occurred in the payment and settlement system. He stressed the settlement system should be made so efficient so that physical clearing can be switched to electronic settlement based clearing. In the beginning B R Bhat, general manager welcomed the gathering and at the end M R Nayak, general manager gave vote of thanks speech.