Banks starts reacting to rate hike by RBI

Reacting to the hike made by the Reserve Bank of India in the policy rates, several banks including Punjab National Bank announced an increment in the deposit and lending rates by up to 100 basis points.

PNB raised BPLR from 12.50 to 13.00 percent while Allahabad Bank revised BPLR from 13.25 to 13.50 percent, Punjab and Sind Bank raise the BPLR by 25 basis points to 14.25 percent.

The three banks also raised their base rates by 50 points. The banks also revised the deposit rates across various maturities and also introduced new deposit schemes.

In a statement Punjab National Bank said "in response to changing liquidity conditions in the system, inflation, other macroeconomic factors and monetary measures undertaken by the Reserve Bank".

The new rates are in effect from today itself.

RBI settles with 0.25 percent interest hike

The Reserve Bank of India announced a raise in the lending borrowing rates by 25 basis points applicable with immediate effect. Now the Repo Rate is fixed at 6.5 percent and the Reverse Repo Rate at 5.5 percent.

The Governor of Central Bank Mr D Subbarao said "Indeed we did (consider 50 basis point hike)...Its not as if it was straight-forward decision that fell out of some analytical model."

He also said , "Dilemma before Reserve Bank mainly was how to balance between concern of growth and concerns of inflation...Our challenge is to restrain demand pressures in the short term, and support supply response. So, with one monetary policy instrument how do we restrain demand and support supply, that has been the challenge."

RBI is desperately trying to curb out the inflation problem from the Indian market and it is yet another step from the Central Bank in the same direction.

RBI urges banks to keep an eye on utilization of loans

The Reserve Bank of India has outlined certain flaws in keeping a follow up of the lent money to the borrowers by some banks. The Central Bank said that some banks are not keeping a proper follow up of where the lent money is being utilized.

According to the central bank some of the banks blindly follow the Chartered Accountants reports and do not keep proper check of the work on their own.

The Central Bank said "In the context of the above, it is advised that the efficacy of the existing machinery in your bank for post-sanction supervision and follow-up of advances may please be evaluated and made robust, wherever considered necessary,"

The improper utilization of the lent money adds to the bad debt of the bank and thus deteriorates the performance of the bank. The Central Bank urged the banks to discontinue such practices and to keep a proper record of books of the account of the borrower.

RBI sets new deadline to implement OTP

The RBI has spared banks for one month more to implement the one-time user password for credit card transactions over phone. Earlier this technology has to come into effect from January 1, 2011, but now RBI has now postponed the deadline to February 1 this year .

After this system comes into effect the customers would require an additional password for telephonic credit card payment. The bank would decline the transaction if the customer would not provide one-time password (OTP) after February 1 .

The system has to come into effect from January 1, but some banks expressed their inability to complete the installation process by the due date . So after consulting the officials , RBI gave extra time of one month to the banks to comply the guidelines.

The new system will check credit card frauds, as lost credit cards could be used by anyone and was an area of deep concern for the banks . Earlier the banks made it mandatory to provide an identification proof and matching of signatures for every transaction in which credit card was to be used physically, but phone and internet banking were a lot more areas of concern in term of misuse.

The proposed OTP will be valid for a single use and would remain in effect for a period of 2 hours. The customers would need to generate a separate OTP for each IVR transaction. The password will be sent only to the registered mobile number and email address of the customer.

HDFC bank said in a circular "The date of implementation (of additional password) has been revised to February 1, 2011, as advised by RBI,"

RBI advises Co-ops to follow KYC norms

Reserve Bank of India has advised the co-operative banks to follow the Know Your Customers (KYC) norms more strictly. According to the bank it will prevent the illegal funding for terrorist and criminal activities and will be beneficial for the bank also to keep proper record of their customer.

RBI said "It has been brought to our notice that 'Money mules' can be used to launder the proceeds of fraud schemes (e.g phishing and identity theft) by criminals, who gain illegal access to deposit accounts by recruiting third parties to act as 'money mules',"

In a money mule transaction a person with a bank account is recruited to receive cheques, the person has to transfer money from his account to another account. These money mules are recruited by various methods including spam e-mails.

Many a times the account holders are found innocent but sometimes the account is found to be a fake or not up to date. That is why it becomes hard to locate such account holder. Such practices can be checked if the banks properly follow the Know Your Costumer guidelines.

In a statement RBI said to the executives of central and co-operative banks "State and central Co-operative Banks are, therefore, advised to strictly adhere to the guidelines on KYC/AML/ CFT...in order to protect themselves and their customers from misuse by such fraudsters

Hike in interest rates further expected

Reserve bank of India has warned that the inflation rate is still well above the comfort level and unveiled steps to address persistently tight liquidity, and further added that it it will maintain monetary tightening in January too.

Reserve bank of India has already raised the interest rates six times since march in order to fight rising food costs in a economy that is growing at nearly 9 % per annum..

"The very hawkish tone of today's statement has persuaded us that the next repo and reverse repo rate hike is most likely to come at the RBI's next meeting on 25 January," said Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore.

Still, bond yields and swap rates tumbled after the RBI announced steps to cut the statutory liquidity ratio (SLR) -- the minimum level of deposits banks must hold in government approved securities -- to 24 per cent from 25 per cent, and unveiled $10.6 billion worth of bond purchases over the next month.

Indian is not the only country that is dealing with this severe problem of inflation. The neighboring country china recorded inflation rate at 5.1 per cent at the end of the month of November. It was their highest in pat 28 months.

"There is a risk that rising international commodity prices will spill over into domestic inflation. Going forward, rising domestic input costs for the manufacturing sector combined with aggregate demand pressures could weigh on domestic inflation," the RBI said in a statement.

Due to tight liquidity conditions the banks are forced to borrow around 1 lakh crore per day from RBI,. This decreases their capacity to act as a inflation fighting tool. After the buyback of the bonds it is very much expected that RBI intends to infect liquidity into the system.

"RBI wants to address liquidity first and then get on to hiking rates. After these measures, we expect liquidity to come back to comfortable zones by January," said Ananth Narayan G, head of fixed income, currencies, commodities for South Asia at Standard Chartered in Mumbai.

"Earlier we were expecting liquidity to do the job for RBI and they wouldn't need to hike rates in January, but now it seems if inflation remains high, RBI may hike rates in January," he said.

Govt to review fin. Inclusion plan of banks

Indian economy is the world’s second fastest growing economy. The banking sector of the country is so well organized that even the world crisis could not effect it.

There are very few villages in the country that have banks. Most of the rural population in India is still not able to enjoy the benefits of banking.

So, the Government of India introduced financial Inclusion Plan, in order to bring financial literacy amongst the masses. The Reserve Bank of India has asked the banks to extend their services to every village above the population of 2,000. According to the top official of a private sector bank, most of the banks have already started working in this direction.

But the banks working in this direction are facing some difficulties in their mission of financial inclusion. The literacy rate amongst the people in rural India is very low. With low availability of banks in the villages people have to go for more expensive options.

As the literacy rate in the villages is low, it makes very difficult for the intermediaries to make the population aware of the financial services of the bank. It is rather not very profitable deal for the banks too, as they do not find sufficient business volumes.

As most of the villages in India still lacks in basic infrastructure, the banks find it very difficult and expensive to provide their services to the rural population.