1273580,Mukta,f1,question50:-Governance of Indian banks??

 Governance in Indian banks

In banking parlance, the Corporate Governance refers to conducting the affairs of a banking organization in such a manner that gives a fair deal to all the stake holders i.e. shareholders, bank customers, regulatory authority, society at large, employees etc.
Why corporate governance in Indian banks :
The system of corporate governance is important for banks in India because, majority of the banks are in public sector, where they are not only competing with one another but with other players in the banking system as well as in financial services system including Financial Institutions, Mutual Funds and other intermediaries, in a new environment of liberalization and globalization. Further, with restrictive support available from the Govt. for further capitalization of banks, many banks may have to go for public issues, leading to transformation of ownership.
Corporate Governance and day to day management: Corporate Governance is different from day to day management of a bank, which is the basic responsibility of the operating management i.e. team consisting of the Chief Executive & top management functionaries supported by the operating staff. Corporate governance on the other hand, is to create an environment to help the operating management to enhance the stake-holders' value.
Scope of Corporate Governance : Corporate governance covers a variety of aspects such as protection of shareholders' rights, enhancing the shareholders' value, issues concerning the composition and role of the Board of directors, deciding the disclosure requirements, prescribing the accounting systems, putting in place effective monitoring mechanism etc.
Present management structure of public sector banks in India : The present structure includes Board of Directors (having Govt., RBI and shareholders nominees), Management Committee (having Govt. and RBI nominees), Audit Committee of the Board (having responsibility of ensuring the efficacy of the entire internal control and audit functions) and other advisory committees constituted by the Board. The Chairman is assisted by one whole time director and both of them are appointed by the Govt.
Parameters to judge the standard of corporate governance: There are a number of parameters on the basis of which the level of corporate governance can be judged for a banking organisation. It includes the suggested model code for best practices, preferred internal system, recommended disclosure requirements including the level of transparency, role of Board of directors and committees, reporting system to the Board of directors, policies formulated by the Board and monitoring of performance.
Important aspects of corporate governance: The following aspects require special mention while judging the standard of corporate governance in a banking institution:
a: Constitution of the Board of directors:
b: Transparency
c: Policy formulation
d: Internal controls
e: Committees of the Board
Developments concerning Corporate Governance in Indian banking : By fixing prudential standards, the regulators can improve the corporate governance and RBI has already taken a no.

Indian Scenario

Corporate Governance of Banks

Banking regulation in India shifted from prescriptive mode to prudential mode in 1990s, which implied a shift in balance away from regulation and towards corporate governance. Banks are accorded greater freedom and flexibility to draw up their own business plans and implementation strategies consistent with their comparative advantage. This freedom necessitated tighter governance standards requiring bank boards to assume the primary responsibility and the directors to be more knowledgeable and aware and also exercise informed judgment on various strategies and policy choices. With a view to strengthen corporate governance, over a period of time, various guidelines have been issued in matters relating to the role to be played by the Board, fit and proper criteria for the directors of banks, bifurcation of the post of Chairman and Managing Director (CMD), remuneration etc.

Recognizing that ownership of banks by one or few individuals could be detrimental to the public interest, especially, depositors’ interests, it is stipulated that, in India, banks should have a diversified ownership model. To ensure that ownership and control of banks are well diversified, guidelines on ownership and governance in private sector banks were issued by the Reserve Bank in February 2005. Another important regulatory prescription in this regard is the requirement of Reserve Bank’s prior approval for any acquisition of shares in private sector banks resulting in a shareholding of 5 per cent or more of the total paid up capital of the bank.
The importance of diversified ownership is also underlined in the recent guidelines on new bank licenses wherein it is stipulated that Non-Operative Financial Holding Companies (NOFHC) which set up new banks should, after the initial lock in period of five years, bring down their equity capital of the bank from the minimum 40% while setting up to 15% within 12 years. To ensure ‘Fit and Proper’ status of the groups that would set up new banks, it is also stipulated that entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years.

1273581,Munish Kumar Sharda,F1,Q1 Permitted Currencies - What are they?

Permitted Currency

A currency that is free from legal and regulatory restrictions to be converted into another currency. A permitted currency is often a minor currency, and has a fairly active market for exchanges with major currencies.

Transactions between a major currency, such as the U.S. dollar, and a permitted currency are smoother than ones between a major currency and a tightly-controlled one because the permitted currency is more liquid. In addition, some transactions require the settlement to be made in a major currency. This terms is quite often used by RBI in forex related instructions. FEMA Regulations define it as a foreign currency which is freely convertible.

On another hand we can say that a currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly active market exists for dealings against the major currencies. Accordingly, authorised dealers may maintain balances and positions in any permitted currency. Thus each country have their rules and regulations for conversion of their currency into major reserve currency or vis-a-versa operating in the transaction of trade. The expression 'permitted currency' is used in the Foreign Exchange Manual to indicate a foreign currency which is freely convertible i.e. a currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly active market exists for dealings against the major currencies. Accordingly, authorised dealers may maintain balances and positions in any permitted currency. Authorised dealers may also maintain positions in Euro of the European Currency Area.

1273537,Gunbir Singh Saini,F1,Q22- How do banks create money?

Banks

A bank is a financial institution that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links together customers that have capital deficits and customers with capital surpluses.

How do banks create money?

Banks are businesses, they need to make money and they do this by lending money at a higher rate of interest than they borrow it. This money is borrowed from other banks or from customers who deposit money with them. They also charge customers fees for services to do with managing their accounts, and earn money from bank charges levied on overdrafts which exceed agreed limits.

How Banks Earn Money:

Banks are companies and are therefore owned by, and run for, their shareholders. Banks need to make enough money to pay their employees, maintain the buildings and run the business. There are three main ways banks make money; by charging interest on money that they lend, by charging fees for services they provide and by trading financial instruments in the financial markets.

Retail and commercial banks need lots of customers to deposit their money with them, as the banks use these deposits to earn enough money to stay in business. To encourage people to keep their money in a bank, the bank will pay them a small amount of money (interest). This interest is paid from the money the bank earns by lending out the deposited money to other customers. Banks also lend to each other on a huge scale. Most of this lending is on a short-term basis, usually no longer than three months, often just overnight. 

The banks lend money to customers at a higher rate than they pay to depositors or than they borrow it. The difference, known as the margin or turn, is kept by the bank. For example, if a bank pays 3% interest on deposits, they may charge 9% interest on loans. Lending takes the form of overdrafts, bank loans, mortgages (loans secured on property) and credit card facilities. The bank will work out the cost of making the funds to the borrower and add a profit margin. Loans approved by banks will vary in size, and may have fixed or variable interest rates but, in all cases, the bank will lend the money to the customer at a her rate than they borrow it. Deposits are the banks' liabilities. If everyone was to demand their money back at once, the bank would not be able to pay. Because they lend money out, banks are required to carry a cushion of capital so they have sufficient money to pay those customers likely to withdraw their money at any time.

Another way banks make money is through charging fees. Most retail and commercial banks will charge for specific services, for example, for processing cheques, for other transactions and for unauthorized borrowing e.g. if a client exceeds an overdraft limit.

1273577 Monika F1, Q47- IMF’s growth projection for India?

1273577   Monika F1, Q47- IMF’s growth projection for India?

Introduction-

The International Monetary Fund (IMF) is an International Organization  that was initiated in 1944 at the Bretton Woods Conference  and formally created in 1945 by 29 member countries. The IMF's stated goal was to assist in the reconstruction of the world’s international post–World War II. Countries contribute money to a pool through a quota system from which countries with payment imbalances can borrow funds temporarily. Through this activity and others such as surveillance of its members' economies and the demand for self-correcting policies, the IMF works to improve the economies of its member countries

The IMF promotes international monetary cooperation and exchange stability, facilitates the balanced growth of international trade, and provides resources to help members in balance of payments difficulties or to assist with poverty reduction.

With its near-global membership of 188 countries, the IMF is uniquely placed to help member governments take advantage of the opportunities—and manage the challenges—posed by globalization and economic development more generally.

The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties.

The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty.

The IMF has evolved along with the global economy throughout its 65-year history, allowing the organization to retain its central role within the international financial architecture

As the world economy struggles to restore growth and jobs after the worst crisis since the Great Depression, the IMF has emerged as a very different institution. During the crisis, it mobilized on many fronts to support its member countries. It increased its lending, used its cross-country experience to advise on policy solutions, supported global policy coordination, and reformed the way it makes decisions. The result is an institution that is more in tune with the needs of its 188 member countries.

• Stepping up crisis lending. The IMF responded quickly to the global economic crisis, with lending commitments reaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase in concessional lending (that’s to say, subsidized lending at rates below those being charged by the market) to the world’s poorest nations.
• Greater lending flexibility. The IMF has overhauled its lending framework to make it better suited to countries’ individual needs. It is also working with other regional institutions to create a broader financial safety net, which could help prevent new crises.
• Providing analysis and advice. The IMF’s monitoring, forecasts, and policy advice, informed by a global perspective and by experience from previous crises, have been in high demand and have been used by the G-20.
• Drawing lessons from the crisis. The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture.
• Historic reform of governance. The IMF’s member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members.

Discussion

Last Year The International Monetary Fund (IMF) on 9th July 2013 lowered India’s growth forecast for 2013-14 to 5.6% from the 5.8% it projected in April, holding that the risks of a longer downturn in emerging market economies had increased because of domestic capacity constraints, slowing credit growth and weak external demand.

In an update to its April World Economic Outlook, IMF said India’s growth would recover to 6.3% in 2014-15, marginally lower than its April forecast.

India’s economy expanded 5% in the year ended 31 March, the slowest pace in 10 years, as high borrowing costs intended to douse inflation hurt corporate investment  and consumer spending, and weak external demand curbed export growth.

The finance ministry expects growth to exceed 6% in the current financial year.

However, the projections by IMF and the finance ministry are not comparable because they use different data sets to measure economic growth.

IMF cautioned that while old risks such as a protracted recession in the euro area remain, new threats have emerged in the emerging markets because of the anticipated unwinding of monetary policy stimulus by the US, which may lead to sustained capital flow reversals.

The Fund revised down its global growth forecast to 3.1% in 2013 from 3.3% projected earlier. While the US growth estimate has been lowered to 1.7% in 2013 from 1.9% projected in April, economic output in the euro area is expected now to contract 0.6%, compared with the 0.8% contraction projected earlier.

As the US economy recovers faster than expected, risk appetite for emerging market assets will diminish, said  D.K Joshi chief economist at the rating agency  Crisil Ltd “So there will be hiccups in the short run,” he said.

IMF said growth continued to disappoint in major emerging market economies, reflecting, to varying degrees, infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices, financial stability concerns, and in some cases, weaker policy support.

The Fund said that for stronger global growth, major advanced economies should maintain a supportive macroeconomic policy mix, combined with credible plans for reaching medium-term debt sustainability. Many developing economies have to opt for structural reforms while maintaining macroeconomic stability to sail through the crisis.

“Emerging market economies have generally been hit hardest, as recent increases in advanced economy interest rates and asset price volatility, combined with weaker domestic activity have led to some capital outflows, equity price declines, rising local yields, and currency depreciation,” it said.

IMF advocated that the US continue its monetary policy stimulus until its economic recovery is well-established. “Clear communication on the eventual exit from monetary stimulus will help reduce volatility in global financial markets,” it said.

The Indian currency has been the worst performer against the dollar since the US Federal Reserve said in May that it would gradually start withdrawing monetary stimulus, starting in September, should the economic recovery continue as expected. In June alone, the currency tumbled 4.9%, making it the worst performer among 78 global currencies, according to Bloomberg  data, as investors pulled money out of Indian stocks and bonds.

In the quarter to June, the currency lost 8.6%. The rupee closed at 60.14 a dollar on Tuesday after strengthening to an intra-day high of 59.65, a sharp rebound from Monday’s intra-day record low of 61.21.

The impact of capital outflows demonstrated the extent to which India has become dependent on foreign funds that have gushed into emerging markets after the Fed embarked on an easy money policy to stimulate the US economy following the 2008 financial crisis.

Emerging markets received at least $250 billion a year between 2010 and 2012. Since 2009, foreign investors have pumped about $90 billion into Indian equities and $24 billion into bonds.

The International Monetary Fund (IMF) has bumped up India's growth forecast for the current fiscal by more than half a percentage point thanks to a normal monsoon and improved exports, virtually admitting that it may have been too pessimistic in October when it pegged the number at less than 4 per cent.

Finance minister P Chidambaram had led India's strong protests against IMF's assessment, which was made amid economic gloom and a depreciating currency.

This Year  International Monetary Fund (IMF) released its World Economic Outlook report on 21 January 2014. The IMF projected the Indian economy’s growth at 4.5 percent for 2013-14 which is much less than ASEAN countries such as Indonesia, and Philippines. IMF in its earlier report in October 2013 had projected that Indian economy would grow by 3.8 percent in 2013-14. The lower growth rate of 3.8 percent was caused due to global slowdown and domestic factors like interest rates.

However, with India receiving a favourable monsoon and higher export revenues since October 2013, the growth in the second largest economy of Asia picked up. The growth is expected to firm further on strong structural polices supporting investment. The economic growth rate can expand up to 5.4 percent and 6.4 percent in next two fiscals. The ASEAN countries Indonesia, Malaysia, Philippines, Thailand and Vietnam had grown by 5.7 percent in 2012. The Economic growth in Indonesia and the Philippines are due to strong fundamentals such as strong consumption and investment, diversified exports and low policy rates.
IMF sees growth rising to 5.4 per cent in 2014-15 and 6.4 per cent in the year after, which is lower than the respective 6.2 per cent and 7.1 per cent recovery forecast by its Bretton Woods twin, the World Bank.

The estimate for 2014-15 is marginally higher than the October forecast of 5 per cent. The fund said global activity strengthened in the second half of 2013 and expects it to gather pace thanks to a recovery in advanced economies. It sees 2014 calendar growth at 3.7 per cent against 3.6 per cent estimated earlier, which is forecast to rise to 3.9 per cent in 2015.

"The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened. The drag from fiscal consolidation is diminishing. The financial system  is slowly healing. Uncertainty is decreasing," said Olivier Blanchard, IMF chief economist. The report - Is the tide rising? - warns that "downward revisions to growth forecasts in some economies highlight continued fragilities, and downside risks remain".

Conclusion- 

India's growth potential remains high but its macroeconomic vulnerabilities – high headline inflation, an elevated current account deficit, and rising pressure on fiscal balances. The IMF projected the Indian economy’s growth at 4.5 percent for 2013-14 which is much less than ASEAN countries such as Indonesia, and Philippines. The IMF’s main goal is to ensure the stability of the international monetary and financial system. It helps resolve crises, and works with its member countries to promote growth and alleviate poverty. It has three main tools at its disposal to carry out its mandate: surveillance, technical assistance and training, and lending. These functions are underpinned by the IMF’s research and statistics. The IMF promotes economic stability and global growth by encouraging countries to adopt sound economic and financial policies. To do this, it regularly monitors global, regional, and national economic developments. It also seeks to assess the impact of the policies of individual countries on other economies.

Reference-

1. Article from Jagran Josh 

2. www.financialexpress.com IMF India Growth Forecast

3.www.thehindu.com

4.www.imf.org

1273520,Avneet singh sandhu,F1,Q13- Foreign banks on Indian Land? Your views?

      DEFINITION OF FOREIGN BANKS

Banks often open a foreign branch in order to provide more services to their multinational corporation customers. However, operating a foreign branch bank may be considerably complicated because of the dual banking regulations that the foreign branch needs to follow.

For example, suppose the Bank of America opens a foreign branch bank in Canada. The branch would be legally obligated to follow both Canadian and American banking regulations.

      FOREIGN BANKS BRANCHES IN INDIA AS ON SEPTEMBER 30, 2013

 There are a total of 43 foreign banks operating in India through 331 branches. Another 46 banks have a presence in the form of a representative office. Out of the 46 banks, Standard Chartered Bank, HSBC, Citibank and The Royal Bank of Scotland lead in terms of number of branches, with 101,  50, 42 and 31 branches respectively as of  SEPTEMBER 30, 2013

 

THE URBAN-CENTRIC FOREIGN BANKS

Till date, most of branches of foreign banks are located in metropolitan areas and major Indian cities where bulk of premium banking business is concentrated. As on March 2012, out of total 322 branches of foreign banks, 246 branches (76%) were located in metros, 61 (19%) in urban areas and the rest 15 (5%) in semi-urban and rural areas. It is distressing to note that foreign banks such as Standard Chartered Bank and BNP Paribas have not yet opened a single branch in the rural areas despite operating in India for more than 150 years.

Further, foreign banks are reluctant to serve the poor and low-income people residing in metropolitan and urban areas. There is no regulatory ban in India on foreign banks to serve the urban poor and low-income people.

       DISADVANTAGES OF FOREIGN BANKS

1.     FEAR OF FOREIGN DENOMINATION-A stated fear in the mind of central banker is that unrestricted entry of foreign banks may result in assuming dominant position in domestic market by driving out less efficient and less resourceful domestic banks. They believe that local depositors have more faith in big international banks than in smaller national banks

2.     LACK OF LOCAL COMMITMENT- The argument here is in two parts; first, under the time of local distress, foreign banks will be the first to leave the ship the reason is that for large international banks with solid financial strength it is relatively pain less to suffer the losses of shut down while it is not the case of smaller domestic banks. Secondly in the time of distress in home country the foreign banks may shut down there foreign operations in order to bring stabilization in their earnings at home.

3.     CREAM SKIMMING BEHAVIOUR- Another concern of policy makers and domestic bankers has been that foreign banks have been carve out a niche for themselves in the upper/richer end of the market and rarely extend their service outside. Consequently they cream skim the market taking a dis propionate share of best of local business away from domestic banks.

4.     CAPITAL FLIGHT- Foreign banks are often clamed for encouraging the increase in capital flight from less developed countries to high developed countries there by adds pressure to exchange rate.

5.     UNHEALTHY COMPETITION

      ADVANTAGES OF FOREIGN BANKS

1.     A BOOST TO BANKING SECTOR- In the past this has been the major controversial benefit. Countries expect the foreign banks to enter and galvanise the domestic banking sector by providing the healthy competition. Domestic banks expect to react to the foreign banks presence and compete fiercely to retain their market share there by lifting the standards of domestic banking sector.

2.     GREATER ACCESS TO INTERNATIONAL MARKET- Countries on opening their doors to foreign banks expect them to aid the development of trade and FDI. First there domestic operations will benefit local producers in particular import/export companies and MNC These companies can take the advantage of the superior performance and expertise of foreign banks. Secondly foreign banks also help in increasing the inflow of foreign currencies.

     REASONS FOREIGN BANKS LOOK TO DO BUSINESS IN INDIA:

1.     DEMAND FOR INVESTMENT BANKING SERVICES - As Indian entities have grown in size and scope, they have felt the need to tap into newer and cheaper sources of funds from overseas markets. Consequently, they have turned to foreign banks with experience and expertise in such activities. This trend is likely to continue as Indian corporations look to cost- effectively raise funds to reduce leverage and restructure their balance sheets. Foreign banks such as Citibank, which helped Indian clients raise US$18 billion from equity and debt markets and advised on M&A deals worth  US$10.4 billion during 2012-13,4 are well entrenched.

2.     GROWTH IN INTERNATIONAL TRADE - Since the opening up of the Indian economy in the early 1990s, India’s share in global exports and imports has shown considerable improvement. From a share of 0.5% and 0.7% in global exports and imports in 1990, it has more than tripled – to 1.6% and 2.6% in 2012.

  

     OBSTACLES FACING FOREIGN BANKS:

1.     NO DIFFERENTIAL LICENSING - The RBI does not encourage banks whose business model does not take into account the RBI’s objective of financial inclusion. Thus, foreign banks that are looking to offer very specialized banking services in India must apply for a universal banking license that mandates the roll-out of full-fledged banking services in the country. Consequently, giving precedence to financial inclusion may not be viable for all foreign banks entering the banking sector.

2.     FINANCIAL INCLUSION - Complying with the RBI’s guidelines on financial inclusion requires offering banking products and services to unbanked and under banked areas and customers. This involves costs that foreign banks with few branches and fewer sources of raising low- cost funds may find difficult to implement. As of 31 March 2013, out of the 331 branches of foreign banks in India, only 17 were located in the rural and semi-urban areas. Out of the total 1,261 ATMs set up by foreign banks, only 51 were in rural and semi-urban areas.

3.     SETTING UP A WHOLLY OWNED BANKING SUB- SIDIARY (WOS) - Currently, foreign banks in India operate as branches of the parent bank located overseas. However RBI has recently released guidelines for setting up wholly owned subsidiaries (WOS) by foreign banks in India. A WOS would have to be in the form of a locally incorporated entity

4.     LONGER GESTATION PERIOD - Traditionally, the RBI has been tight-fisted about issuing banking licenses. Banking licenses in the private sector were last issued in 2003; new licenses will likely be issued in 2014.