Finance Minister To Address RBI

Jaitley to address RBI board on Aug 9

NEW DELHI, JULY 26:  

Finance Minister, Arun Jaitley, will address the Reserve Bank of India board here on August 9 amid expectations that the central bank will complement government actions by reducing the rates to boost growth.

“The meeting has been scheduled for August 9 where he would be addressing the board members and talk about announcements made in the Budget to perk up growth,” a source said.

Fiscal deficit

Jaitley, who presented his maiden Budget, is likely to inform the RBI board about the steps taken to contain the fiscal deficit and may underline the need to reduce the interest rates to promote growth.

It has been a custom that the Finance Minister addresses RBI board, consisting of RBI Governor and existing three deputy governors, after the Budget.

Food inflation, deficient rains

The meeting comes in the backdrop of persistent high food inflation and deficient rains.

Food inflation is still hovering around 8 per cent. For the month ended June, it stood at 8.14 per cent against 9.5 per cent in the previous month.

“If inflation moderates and RBI agrees, which I am sure will agree, (government would like) to bring down interest rates... We want to go back to a situation of Vajpayee’s time when buying a flat becomes cheaper than taking on rent. So that instalment becomes less than rent,” the Finance Minister had said recently.

In the last policy review in June, RBI chose not to tinker with the policy rate. Thus it was the second consecutive time that RBI Governor, Raghuram Rajan, kept the interest rates unchanged.

Repo rate, CRR

The repo rate, at which the RBI lends to banks, was retained at 8 per cent and the cash reserve ratio (CRR) was kept unchanged at 4 per cent.

The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must park at the RBI, was cut by 0.5 per cent to 22.5 per cent of their net demand and time liabilities (NDTL) with effect from June 14.

GDP growth

The Reserve Bank of India (RBI) is likely to announce its second bi-monthly policy review on August 5.

As far as economic expansion is concerned, the country has witnessed GDP growth of sub-5 per cent level for past two years.

For 2013-14, the economic growth was restricted to 4.7 per cent. However, the growth is expected to improve to 5.4-5.9 per cent during the current fiscal as per the latest Economic Survey.

230 pending projects lock up ₹5-lakh cr investments: Official-Hindu Business Line

BY  G NAGA SRIDHAR

About 60% of pending projects are in power sector

HYDERABAD, JULY 25:  

About 230 major projects involving over ₹5 lakh crore of investments are pending in various stages, according to Anil Swarup, Head of the Government’s Project Monitoring Group.

“From June last year, over 150 projects have been cleared on fast track and the Government is keen on clearing the pending projects,” he told reporters on the sidelines of a review meeting on pending projects with State Government officials and industry representatives.

About 60 per cent of pending projects are in the power sector, mainly on issues in fuel supply agreements (FSA), while infrastructure and others form the rest. “The project monitoring group (PMG) at the Centre is facilitating clearances for projects which are struck through its portal on which any project involving with cost of over ₹1,000 crore could approach the PMG with a request,” the official said.

However, as many issues were also related to State Governments, the groups is now touring three days in a week in different States to hasten clearances, Swarup said.

States’ participation

As part of the endeavour, all State governments are being encouraged to set up a similar online mechanism for clearing projects with an investment ranging from ₹100 to ₹1,000 crore and so far 13 States had put the system in place, he added.

Dealing with bank failure

Burdening banks with raising capital beyond a point will hobble credit growth

The Reserve Bank of India’s move to identify domestic systemically important banks (D-SIBs) is a result of the requirement that all member countries of The Basel Committee of Banking Supervision set up a regulatory framework for banks that ‘are too big to fail’. While this needed to be done to complement the existing framework for globally important banks or G-SIBs, it is pertinent to question the merit of subjecting our big banks to capital requirements over and above that stipulated under Basel III. Big Indian banks are smaller than most of their global counterparts in both absolute and relative terms. For instance, the eight US G-SIBs have combined assets equal to 70 per cent of the country’s GDP; in India, the combined assets of the likely six D-SIBs add up to only a third of its GDP. 

Moreover, our banks mainly engage in plain-vanilla lending and have very limited inter-connected financial exposures through over-the-counter derivatives and other exotic instruments. As a result, the risk of contagion from credit defaults is substantially lower. Also, bank failures are rare in India, unlike the US or the UK, where the likes of Washington Mutual and Northern Rock have gone belly up in recent times. Public sector banks (PSBs), which have implicit state backing, make up roughly three-fourths of all deposits and advances in India. This is why there was very little panic amongst depositors when the United Bank of India reported a surge of bad loans last year.

The RBI has proposed that D-SIBs set aside additional common equity capital; the amount will depend on their risk profile. Burdening banks with too much capital is counter-productive in a country where credit needs to expand 2.5 to 3 times more than real GDP growth. Additional capital will constrain the ability to lend which, in turn, will impact overall economic growth. It is doubtful whether higher capital adequacy alone can prevent the recurrence of Black Swan events such as the 2008 global financial crisis. Bank runs have to do with public perceptions regarding safety of deposits, going beyond mere capital provisions.

This is not to understate the risk that large PSBs pose. Their proclivity for lending to risky projects stems from a combination of political pressure and the confidence of a government bailout in the event of a crisis. But the way to deal with this is to tighten prudential norms on lending and conduct stricter assessments of non-performing assets (NPAs). The RBI has done well to coerce banks into formulating credit action plans for loans overdue for more than just 60 days — that is, well before they slip into the NPA zone. All in all, the key to prevent banks from going under is prudential lending rather than providing a buffer in the form of greater capital.