Musings of a Departing Forex Market Regulator

Musings of a Departing Forex Market Regulator

 

Address by Shri. G Padmanabhan, Executive Director, Reserve Bank of India at the Foreign Exchange Dealers Association of India Conference at Brussels on April 3, 2015

 

 

 

http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=953

 

 

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Defeating Poverty: Issues and Challenges

Defeating Poverty: Issues and Challenges

 

 

Keynote Address by Shri S. S. Mundra, Deputy Governor, Reserve Bank of India at the 39th Skoch Summit in New Delhi on March 20, 2015

 

 

http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=948

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Recent Policy initiatives in Credit Information Sharing - Speech by

Recent Policy initiatives in Credit Information Sharing - Keynote Address delivered by Shri R. Gandhi, Deputy Governor on March 3, 2015 at Seventh Annual CIBIL TransUnion Credit Information Conference

 

Access full Speech below

 

http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/RPICIS03032015.pdf

 

 

 

Thanks And Regards

Raghuttam V Jamadagni

Contact no : 9986004160

The empires of the future are the empires of the mind - Winston Churchill

 

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Concerns on Financials of Payment banks

Concerns on Financials of Payment banks

The fine print reading of the payment bank guidelines has been done and  investors have raised question on the viability and profitability of payment banks. How will payment banks make moneyThe payments bank guidelines require the applicants to deposit three fourth of the investment with RBI to maintain the statutory liquidity ratio once they receive the licence.This leaves only 25% of their investment to build their operational and technological infrastructure. Investors believe this would leave the newly formed payment banks with wafer thin margins. "Out of the remaining 25% capital, maximum 15% needs to be deposited with scheduled commercial  .. This will result in just 2% to 4% profit margin," said Anuradha Ramachandran, director, Omidyar Network who have invested in payment solution providers in Africa and Indonesia.

List of entities who have applied for a payment bank license (source: RBI)

1. A Little World Private Limited, Belapur

2. Aditya Birla Nuvo Limited, Mumbai

3. Airtel M Commerce Services Limited, New Delhi

4. Calibre Financial Services Limited, Chennai

5. Cholamandalam Distribution Services Limited, Chennai

6. Citrus Payment Solutions Private Limited, Mumbai

7. Concept Technosoft Ventures Limited, New Delhi

8. Department of Posts, New Delhi

9. Eko India Financial Service Private Limited, New Delhi

10. FINO PayTech Limited, Navi Mumbai

11. Fx Mart Private Limited, Zirakpur, Mohali

12. GI Technology Private Limited, Chennai

13. Instant Global Money Transfer Private Limited, Hoshiarpur

14. Itz Cash Card Limited, Mumbai

15. Kalpataru Corporation, Mumbai

16. KKM Management Centre Private Limited, New Delhi

17. My Mobile Payments Limited, Mumbai

18. National Securities Depository Limited, Mumbai

19. Novopay Solutions Private Limited, Bengaluru

20. NSE Strategic Investment Corporation Limited, Mumbai

21. One MobiKwik Systems Private Limited, Gurgaon

22. Oxigen Services (India) Private Limited, New Delhi

23. Pay Point India Network Private Limited, Mumbai

24. Reliance Industries Limited, Mumbai

25. Resource Square Solutions Private Limited, Chennai

26. Shri Dilip Shantilal Shanghvi, Mumbai

27. Shri Kishore Laxminarayan Biyani, Mumbai

28. Shri M.G. George Muthoot & others, Kochi

29. Shri Nijay Kumar Gupta, Mumbai

30. Shri Rajib Saha, Gurgaon

31. Shri Renuka Mata MultiState Co-operative Urban Credit Society Ltd., Ahmednagar

32. Shri Vijay Shekhar Sharma, Noida

33. Smart Payment Solutions Pvt. Ltd., New Delhi

34. Suvidhaa Infoserve Private Limited, Mumbai

35. Tech Mahindra Limited, Mumbai

36. V. K. Fiscal Services Pvt. Ltd., New Delhi

37. Vakrangee Limited, Mumbai

38. Videocon d2h Limited, Mumbai

39. Vodafone m-pesa Limited, Mumbai

40. Weizmann Forex Limited, Mumbai

41. YouFirst Money Express Private Limited, Mumbai

Source : http://economictimes.indiatimes.com/industry/banking/finance/banking/rbis-payment-ecosystem-doesnt-add-up-say-investors/articleshow/46339971.cms

 

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A New Banking Landscape for New India

Important points from the  Keynote address on “A New Banking Landscape for New India”

(By Shri S. S. Mundra, DG, RBI at the Mint’s Annual Banking Conclave, 2015)

Some questions that the banking profession and the bankers would need to find answers to ensure their relevance in the emerging landscape.

(i) Can there be a possibility of account number portability on similar lines as mobile number portability? So, if an individual is not happy with the service received at one bank, he can possibly opt for shifting his banking relationship, lock, stock and barrel to another bank. Of course, there could be issues around loan contracts etc. but there is no reason to believe that such challenges cannot be surmounted and pave the way for a massive disruption in the way banking is conducted today.  

In fact one of the objectives of UCIC was to prepare ground for this. What also can be considered is to have a look at the approach taken by SEBI/NSDL and  have a central depository of banking customer records which are KYC complied something like the NDML.

(ii) How long can the banks continue increasing their retail loan portfolio? Unless some means to pool and distribute these loans to other investors in the market is created, the retail lending pipeline can get chocked quite quickly.

The issues on securitization in India by  itself is a different subject altogether and necessitates a different article. Keep watching this space for the same

(iii) How is crowd funding going to impact lending business of the banks in future? The amount of funds raised by crowd funding platforms worldwide has increased progressively from $ 1.5 bn in 2011 to $ 2.7 Bn in 2012 and further to $ 5.1 bn in 2013. I hear some of you say it is negligible in volume. The pace of growth however, is quite fast and combined with the peer-to-peer lending business this could create disruptions, at least for some of the players who operate in the same segment.

The use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new business and attract investors. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.

“The alliance between technology and finance is heading towards a new paradigm with the emergence of peer-to-peer (P2P) lending/crowd funding technology platforms (Box 3.1). While in certain regulatory jurisdictions this space is being looked at as more favorable, some other regulators have raised concerns mainly relating to distress for lenders in the event of a sudden closure of such platforms14. While these platforms are still new to India and the scale of transactions is insignificant, this is a gap which requires regulatory attention. This is all the more important since in developed markets, mainstream financial market participants and products are making an entry into this space amidst concerns over regulatory arbitrage. Recently, the Securities and Exchange Board of India (SEBI) has proposed a framework to encourage and streamline crowd funding market in India15. The proposed framework provides for ‘security based crowd funding’ in India under three routes viz. equity, debt and fund. The proposal intends to develop an additional channel for entrepreneurs to raise early stage funding and seeks to balance the same with adequate investor protection measures. RBI in its publication Financial sector regulation and infrastructure has commented”

Interesting development to watch out for. Meanwhile interesting tit bits : The kannada Film Lucia was made through crowd funding of 71 Lakhs and was sold to Udaya TV for 95 lakhs (http://www.nextbigwhat.com/kannada-film-lucia-crowd-funding-in-india-297/). This mode of funding is awaiting one big success story something like a Whatsapp or facebook .

 (iv) If Mobile Banking were to succeed, would plastic money still be needed? Basically there are two questions rolled in one. First, whether mobile banking can succeed and if that is the case what implications would it have for the future of ATMs and the debit cards that have been issued by banks. There is justifiably a growing need for reducing the reliance placed on cash by the system and hence, if more and more people moved to mobile/ internet based payments, the plastic cards and the investments made thus far, would be rendered useless unless put to more imaginative uses.

That’s also the case if bio metrics take off in  big way.

(v) What IFRS implementation would mean for the banking system? IFRS accounting could potentially overstate assets or overstate capital position. The question is how prudential regulation would exist alongside IFRS? Proposed impairment calculations under IFRS, accounting for interest income on Effective Interest Rate basis and presence of multiple systems for operations and accounting of different portfolios would mean that IT systems would have to be upgraded/realigned for IFRS migration. Banks would also need to overcome challenges around converging policies for financial accounting and tax accounting for preparation of financial statements. The banks would need to train their staff in various departments like credit, and treasury, etc. for acquiring proficiency in IFRS accounting.

IFRS is the International Financial reporting standard. These are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. The rules to be followed by accountants to maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external

(vi) Would the large corporates continue to borrow from the banks? Of late, the global markets, particularly the emerging market economies, have been flush with funds flowing in on account of variants of QEs launched by the Central Banks in the Advanced Economies. Many large corporate houses have been able to access funds at very cheap rates without needing to reach out to banks. The sustained deflationary trends in the Euro Area and Japan portend further bouts of QEs which can adversely impact the lending business of banks in the emerging markets. Further, the large corporates in developed countries normally access financial markets directly for their funding requirements rather than commercial banks. Hence, even while this time-specific event of QEs might fade away, as Indian economy and the financial markets mature, more and more large corporate could start bypassing banks for their funding requirements.

(vii) Would the pain from the loans restructured earlier return to haunt the banks? the prolonged global economic slowdown might have thrown off the projections made earlier at the time of restructuring the advances in the immediate aftermath of the crisis. As the moratorium period comes to a close, the banks would need to take a hard look at the techno-commercial viability of these projects and take the losses wherever the viability seems in jeopardy. Timely decisions, including for recall/recovery of the loan, wherever the financial prospects are unviable, would be critical.

viii) The D-SIBs(Domestic systemically important banks)  guidelines have also been announced and the list of banks considered systemically important in the domestic context would be unveiled in August 2015. Besides, being subjected to stricter capital and liquidity buffers, these banks may also be nudged to prepare detailed ‘recovery and resolution plans’. Negotiations are also on at the Financial Stability Board level for implementation of a TLAC (Total Loss Absorbency Capital) framework for the banks identified as G-SIBs(Global systemically important banks)  . The essence of all the above discussion is that the banks would need to substantially augment their capital bases to stay in the business. The question is where do you find such capital?

Banker Times updates - Regional Rural banks & FATCA

In further updates to the FATCA implementation , RBI has exempted  following categories of Regional Rural banks from registration with IRS

RRBs having  assets of less than 175 Mn

RRBs along with related entities , taken together do not have more than USD 500 Mn in total assets on their consolidated or combined balance sheet.

Such RRBs will be treated as local banks and need not register with IRS .

However this raises questions , RBI has laid down certain criteria to be fulfilled by RRBs before they are allowed to accept FCNR, NRo, NRE deposits . however none of the criterion specified includes a monetary cut off as above so effectively banks will continue to accept such deposits and still will be considered as local banks. This appears to be contradictory to the FATCA definition of a local FFI

More clarity required from RBI in this regard

Banker Times - 08 Dec 2014 - RJ - Cash to Card

Holding electronic payments hostage

Came across a interesting article in Live mint by Saurabh Tripathi. Below is a gist of the same

The number of ATMs in India has grown very rapidly from 3,000 in 2001 to 160,000 in 2014 at a compound annual growth rate (CAGR) of 36% and it is still growing. Today any bank customer can use ATM of any other bank. As soon as cash is paid out, account of the customer is debited in real time. Customer gets a reassuring instant SMS intimation. 25% of bank account holders are active users of their debit cards at the ATMs. A vibrant vendor industry has evolved to help banks rapidly set up and maintain ATMs. This happened because the network connecting ATMs of all banks in the country was designed elegantly. It ensures everyone in the system is economically sustainable and viable. The Reserve Bank of India (RBI) has intervened several times with very strong measures.

But the good news stops here. The same debit card that is used at the ATM can also be used to pay electronically at merchant shops by swiping the card on the Point of Sale (POS) device. However, in the last financial year i.e., 2013-14, in comparison to the 5 billion ATM cash withdrawal transactions, there were only 620 million debit card transactions on POS devices. As a result, compared to Rs.20 trillion cash withdrawn from ATMs, only R1 trillion was actually spent directly at merchant terminals through debit cards. All this is despite the fact that we have only 160,000 ATMs as against 110,000 POS machines. Understandably, the banks, which set up POS machines, do not find them viable. Consequently we have the lowest number of POS machines among all comparable economies.

This is surprising because there is a big win-win opportunity for all concerned in electronic transactions at merchant outlets. The customer does not have to take out cash from ATM before spending. The merchant does not have to handle cash and go to bank branch to deposit cash. The bank saves cost with fewer ATM transactions and, as a subtle (and not fully appreciated) side benefit, enjoys larger float in customer account for a longer time.

At the heart of this colossal failure is poorly designed interbank scheme, which makes it unviable for banks to set up POS units. Just contrasting the scheme of ATMs with that of POS machines is enough to spot the issue. When a customer of Bank A uses her debit card to withdraw money from ATM of Bank B, Bank A compensates Bank B. Bank B has spent money to set up the ATM and to maintain it. Bank A customer is enjoying the benefit. So Bank A pays. Now look at the absurdity of a similar transaction on a POS device. When a customer of Bank A uses her debit card to make a POS transaction at a merchant where the POS device is installed and maintained by Bank B, Bank B effectively makes a net payout to Bank A under the current arrangement. Bank B charges the merchant some money for each such transaction. This is called Merchant Discount Rate (MDR) and has recently been reduced by RBI to 0.75% for transactions upto Rs.2,000 and 1% for transaction value of more than Rs.2,000. Merchants feel uncomfortable having to pay this. They try to avoid taking payment electronically because cash is better for them. Most banks which set up POS machines (like Bank B in the example) make a loss on the business of setting up and maintaining POS machines. So, most banks are going very slow in setting up new POS machines. The situation is absurd since Bank A saves a lot of money when its customers use debit card at POS in form of avoided ATM transaction cost and higher balances in savings account.

The interbank scheme for ATMs is innovative. It is designed for India’s needs. It has an air of frugal innovation about it. It gets the economics right. Results are for all to see. The debit card scheme for POS transactions is out of sync with underlying economics. Its basic architecture is borrowed from the interbank schemes for credit card transactions. The banking industry is paying a huge price in the form of high cost ATM transactions when so much more of customer spending could have been cashless. The scheme for debit cards payment on POS devices should be along the lines of the scheme for ATMs. The Reserve Bank should make a more concerted effort for a fundamental redesign of the system. Bank CEOs should come together to change the state of affairs in their own interest.

http://www.livemint.com/Opinion/p3YRSXO2FjL8A6eLFeiygI/Holding-electronic-payments-hostage.html

This also explains why in many developed countries all payments are made in cards and cash is sparsely used. In fact most small purchases are made through cards. In India however the situation is exactly reverse and card payments is generally used only for large purchases. Also  the smaller merchants insist on a minimum transaction of say Rs 200 to accept cards or charge 2%  extra for the same thus effectively passing on the charges to customer.

Some statistics :

A large scale card based transactions has the potential to reduce the number of ATM transactions and also the perpetual issue of shortage small denominations(Chutta nai hai).

According to MasterCard, 75% of all card payments are concentrated in the top 20 cities with Delhi, Mumbai and their suburbs alone accounting for 43%.

Credit cards have a higher share in the discretionary category whereas debit cards dominate in routine expenses like utility payments.

About 30% of credit card spends are being done online. At least 10-15% of customers use their cards only online, many from smaller cities.

A Visa study reveals that people in the monthly income band of Rs 75,000-100,000 are the most prolific users of electronic cards.

Electronic payments dominate their expenses: rail/airfare (71%), durable goods (61%), rent (49%), tele/mobile (47%), medical institutions (46%), clothing/footwear (44%), beverage and refreshments (35%).

(source Economic times : Rise in credit & debit cards spending signals India's transformation into a cashless economy Malini Goyal, ET Bureau Oct 6, 2013)

So there is a huge potential for growth in non cash payments if only we are able to make it into a win-win situation for all.