First-ever microfinance ‘bank' to begin operations

From September 15, poor women in Andhra Pradesh will be able to access micro credit within 48 hours after applying for a loan.

The rate of interest to be charged is 13 per cent, half of what is being charged by the microfinance institutions at present, thanks to a new microfinance ‘bank' labelled ‘Stree Nidhi'.

The ‘bank' – which will begin operations from Thursday – is actually an apex co-operative credit society formed as a joint venture between the Government of Andhra Pradesh and the Mandal Mahila Samkhyas (MMS) of self-help groups.

“The operations of ‘Stree Nidhi' will be handled completely with the aid of technology. Mobile banking-based transactions hold the key.

The administrative costs would be limited to 10 per cent of the net return to make the loans cheaper.

As of now, four types of loans would be offered to women borrowers including funds to meet business requirements, education and health.

There is no water-tight criteria for sanctioning loans. The members of MMS, who are actually from among the same SHG community would do the due diligence and asses the need and repaying capacity.

The average size of loan is Rs 15,000 with a duration of one year in monthly repayment mode.

``They will be given a one per cent commission to do the due diligence, Including this and other costs, it is very much viable to extend loans at 13 per cent interest.

The prompt repayment will make a big difference. If the repayments are on track, the borrowers will be eligible for a nominal three per cent interest on subsequent loans.

The initial authorised capital is Rs 500 crore. “In the current financial year, Rs 1000 crore funds would be mobilised which will be increased to Rs 4,000 crore by 2014".

The objective of ‘Stree Nidhi' is to ‘lead by example' and to provide an alternative source of funds to the poor.

Infrastructure Debt Funds

Infrastructure Debt Funds is a debt instrument being set up by the finance ministry in order to channelize long term funds into infrastructure projects which require long term stable capital investment. According to the structure laid out by the finance ministry, after consultations with stakeholders, infrastructure NBGCs, market regulators and banks, an IDF could either be set up as a trust or as a company. IDFs in India: The government of India has unveiled the structure of infrastructure debt funds (IDFs), allowing local infrastructure developer’s access to money from insurance and pension funds from India and overseas, even as bank lending to roads and power projects is constrained by limits set by the central bank. IDFs are expected to provide long-term, low-cost debt for infrastructure projects. At present, banks are the main source of funding for these projects. Asset-liability mismatches and loan exposure limits to industries set by the Reserve Bank of India (RBI) have made it difficult for banks to provide long-term funding. It is here underscored that the IDF was proposed by in Budget 2011-12. The ultimate aim of the IDFs is to accelerate and enhance the flow of debt for funding the ambitious programme of infrastructure development in the country. The requirement of infrastructure in the 12th Plan has been pegged at $1 trillion. The IDF would help garner resources from domestic and off-shore institutional investors, especially insurance and pension funds. Banks and financial institutions would be allowed to sponsor IDFs. In India the IDFs could be set up by NBFCs or banks, with a minimum capital of Rs 150 crore. Such a fund would be allowed to raise resources through rupee or dollar denominated bonds of minimum five year maturity. These bonds could be traded among the domestic and foreign investors. Company based IDFs would be allowed to fund projects in public-private partnership (PPP) which have completed one year of commercial operations. Potential investors in this category, include off-shore and domestic institutional investors, high net worth individuals and non-resident Indians. If the IDFs are set up as a trust, the fund could be sponsored by a regulated financial sector domestic entity. It would have to invest 90 per cent of its assets in the debt securities of infrastructure companies or SPVs across all infrastructure sectors. Minimum investment by trustbased IDF would be Rs 1 crore with Rs 10 lakh as minimum size of the unit. The credit risks associated with underlying projects will be borne by the investors and not by IDF, but in case of company-based IDF, the fund would bear the risk.

Credit Default Swap

CDS are a financial instrument for swapping the risk of debt default. Credit default swaps may be used for emerging market bonds, mortgage backed securities, corporate bonds and local government bond. The buyer of a credit default swap pays a premium for effectively insuring against a debt default. He receives a lump sum payment if the debt instrument is defaulted. The seller of a credit default swap receives monthly payments from the buyer. If the debt instrument defaults they have to pay the agreed amount to the buyer of the credit default swap. Process: A CDS contract involves the transfer of the credit risk of municipal bonds, emerging market bonds, mortgage-backed securities, or corporate debt between two parties. It is similar to insurance because it provides the buyer of the contract, who often owns the underlying credit, with protection against default, a credit rating downgrade, or another negative “credit event.” The seller of the contract assumes the credit risk that the buyer does not wish to shoulder in exchange for a periodic protection fee similar to an insurance premium, and is obligated to pay only if a negative credit event occurs. It is important to note that the CDS contract is not actually tied to a bond, but instead references it. For this reason, the bond involved in the transaction is called the “reference obligation.” A contract can reference a single credit, or multiple credits.
CDS have the following two uses:
(a) Hedging:
 A CDS contract can be used as a hedge or insurance policy against the default of a bond or loan. An individual or company that is exposed to a lot of credit risk can shift some of that risk by buying protection in a CDS contract. This may be preferable to selling the security outright if the investor wants to reduce exposure and not eliminate it, avoid taking a tax hit, or just eliminate exposure for a certain period of time.
(b) Speculation:
The second use is for speculators to “place their bets” about the credit quality of a particular reference entity. With the value of the CDS market, larger than the bonds and loans that the contracts reference, it is obvious that speculation has grown to be the most common function for a CDS contract. CDS provide a very efficient way to take a view on the credit of reference entity. An investor with a positive view on the credit quality of a company can sell protection and collect the payments that go along with it rather than spend a lot of money to load up on the company’s bonds. An investor with a negative view of the company’s credit can buy protection for a relatively small periodic fee and receive a big payoff if the company defaults on its bonds or has some other credit event. A CDS can also serve as a way to access maturity exposures that would otherwise be unavailable, access credit risk when the supply of bonds is limited, or invest in foreign credits without currency risk.

FCRA

The central government notified the Foreign Contribution Regulation Act, 2010 and it came into force from May, 1, 2011.
Salient Features of the Act:
(a)    Any association granted prior permission or registered with the Central Government under Section 6 or under the repealed FCRA, 1976, shall be deemed to have been granted prior permission or registered, as the case may be, under FCRA, 2010 and such registration shall be valid for a period of five years from the date on which the new Act has come into force.
(b)     While the provisions of the repealed FCRA, 1976 have generally been retained, the FCRA, 2010 is an improvement over the repealed Act as more stringent provisions have been made in order to prevent misutilisation of the foreign contribution received by the associations.
(c) Any organization of a political nature and any association or company engaged in the production and broadcast of audio or audio visual news or current affairs programme have been placed in the category prohibited to accept foreign contribution.
(d)    A new provision has been introduced to the effect that no person who receives foreign contribution as per provisions of this Act, shall transfer to other person unless that person is also authorized to receive foreign contribution as per rules made by the Central Government.
(e)     Another new provision has been made to the effect that foreign contribution shall be utilized for the purpose for which it has been received and such contribution can be used for administrative expenses up to 50 per cent of such contribution received in a financial year.
(f)     No funds other than foreign contribution shall be deposited in the FC account to be separately maintained by the associations etc. Every bank shall report to such authority, as may be prescribed, the amount of foreign remittance received, sources and manner and other particulars.
(g)     Provision has been made for inspection of accounts if the registered person or person to whom prior permission has been granted fails to furnish or the intimation given is not in accordance with law.
(h)     Any person contravening the provisions of the Act shall be punishable with imprisonment for a term which may extend to five years or with fine or with both.

Self-Help Groups

The RBI has allowed urban cooperative banks (UCBs) to give loans to selfhelp groups (SHGs). This decision by the RBI is definitely going to promote financial inclusion in the nation in addition to expand the scope of UCBs. If the reach of the UCBs is expanded, it will result in promoting financial inclusion. According to the latest guidelines of the RBI, lending to SHGs and JLGs (Joint Liability Groups) would be considered as normal business activity of the bank. UCBs will be required to frame a comprehensive policy on lending to SHGs and JLGs. The maximum amount of loan to SHGs should not exceed four times of the savings of the group. With regard to loans given to JLGs, the guidelines stated that the JLGs were not obliged to keep deposits with the bank and hence the amount of loan granted to them would be based on their credit needs and the bank’s assessment of the credit requirement.
Definition of Self-Help Group:
A Self-Help Group is a small voluntary association of poor people preferably from the same socio-economic back drop. The micro-credit given to them makes hem enterprising; it can be all women group, all-men group or even a mixed group. However, it has been the experience that women’s groups perform better in all the important activities of SHGs. In other words we can define the SHGs as a group of micro entrepreneurs with homogeneous social and economic background who voluntarily come together to save small amounts regularly and mutually agree to contribute to a common fund to meet their emergency needs.
Defining Joint Liability Groups:
A Joint Liability Group (JLG) is an informal group comprising preferably of 4 to 10 individuals coming together for the purposes of availing bank loan either singly or through the group mechanism against mutual guarantee. The JLG members are expected to engage in similar type of economic activities. The management of the JLG is to be kept simple with little or no financial administration within the group. JLGs can be formed primarily consisting of tenant farmers and small farmers cultivating land without possessing proper title of their land.

Marginal Standing Facility Scheme

The Reserve Bank of India (RBI) has introduced a new Marginal Standing Facility (MSF) scheme, which was announced to be implemented in its Monetary Policy for the year 2011-12. Under the new facility, banks will borrow overnight up to 1 per cent of net demand and time liabilities (NDTL) outstanding at the end of the second preceding fortnight. The MSF will be 100 basis points above the repo rate – the rate at which banks borrow from RBI. It needs to be noted that the repo rate has now become the only independent variable policy rate, marking a shift from earlier method of calibrating various policy rates separately. The reverse repo rate — the rate at which RBI borrows – will be kept 100 basis points lower than the repo rate. All scheduled commercial banks that have current account and subsidiary general ledger (SGL) account with RBI are eligible to participate in the MSF scheme.
RBI will receive requests for a minimum amount of Rs 10 million and in multiples of Rs 10 million thereafter. The central bank has the right to accept or reject partially or fully, the request for funds under this facility.
Marginal Standing Facility will curb inter-bank lending volatility:
The Reserve Bank of India’s new Marginal Standing Facility is expected to curb volatility in the overnight lending rates in the banking system. The banks will use Marginal Standing Facility to borrow overnight money only when they have exhausted all other existing channels like collateralized borrowing and lending obligation (CBLO) and liquidity adjustment facility (LAF). Difference between Liquidity Adjustment Facility-Repo Rate and Marginal
Standing Facility Rate:
 Banks can borrow from the RBI under LAF-Repo Rate, which stands at 7.25 per cent by pledging government securities over and above the statutory liquidity requirement of 24 per cent. Though in case of borrowing from the marginal standing facility, banks can borrow funds up to one per cent of their net demand and time liabilities at 8.25 per cent. However, it can be within the statutory liquidity ratio of 24 per cent.

Merger of SBI Commercial with SBI

The Union Cabinet has approved acquisition of the State Bank of India Commercial and International Bank Ltd. (SBICI Bank Ltd.) by State Bank of India (SBI), in terms of sub-section (2) of section 35 of the State Bank of India Act, 1955. SBICI, with two branches in Mumbai, is a wholly owned subsidiary of State Bank of India (SBI) and functions as a private sector bank offering an array of financial products and services. The terms and conditions for the acquisition have been approved by board of directors of both the banks and also by the Reserve Bank of India. It is hoped that the merger would help in eliminating the cost involved in maintaining the administrative structure of SBICI as both the branches of SBICI would be easily absorbed in the operations of the main bank.
Significance of the merger by the government: In the overall analysis, continuation of SBICI in its present form would not create a sustainable organization with a separate niche, able to hold on its own in the medium term. As an independent Bank also, SBICI has had to maintain a full-fledged, elaborate administrative setup to conform to regulatory requirements. The cost of maintaining such a structure is disproportionate to the level of operations of the SBICI. The proposed merger would help in eliminating the cost involved in maintaining the administrative structure of SBICI as both the branches of SBICI would be easily absorbed in the operations of the main Bank. While no present beneficiary of the State Bank of India would be affected, the number of beneficiaries would be the clients of SBI Commercial and International Bank Ltd. who will have access to the bigger network of State Bank of India.
SBICI:
SBICI Bank Ltd. is a wholly owned subsidiary of SBI, which was set up in 1994 after taking over the Indian operations of the erstwhile Bank of Credit and Commerce International Ltd. (BCCI), which went into liquidation in 1991. SBICI Bank Ltd. has only two branches, both in Mumbai.

India to rank among top 3 life insurance market by 2020

India's insurance sector, which is witnessing a rapid growth, is likely to touch about USD 400 billion in top income by 2020, making the country one of the top three life insurance and top 15 non–life insurance markets, according to a report.

The total penetration of insurance (premium as percentage of GDP) has increased to 5.2 per cent in 2011 from 2.3 per cent in 2001, said the report titled 'India Insurance – Turning 10, Going on 20'.

In addition, there has been a rush in insurance coverage due to availability of more products like better term plan, ULIPs, whole life, maximum NAV guarantee, auto assistance, disease management and wellness, it said.

The number of life policies had increased nearly 12- fold over the past decade and health insurance nearly 25–fold.
The report suggested that for sustainable productivity, the companies need to fix the agency operating model, build strategic, long-term non-agency partnership, incubate, experiment and develop alternative channels, develop a customer-centric operating model, target customer or product white spaces and go lean.

For non–life insurers, it defined a six-point agenda like creating optimal product portfolio, innovate to target product or customer white spaces, move towards risk based pricing, develop next generation claims management processes, go direct — build alternate channels for retail products and define and enhance agency sales force operating model.

RBI norms fail to check cases of fraud in banking sector

Despite the Reserve Bank of India (RBI) adopting new measures to check cases of fraud in the banking sector, the illegal activity has witnessed a spike during the first quarter of the current fiscal.

Banks and customers have together suffered losses to the tune of Rs 1246 crore due to cases of forgery during the first three months of the current financial year.

The RBI had formed a high level committee after the Rs 400 crore banking fraud in a Gurgaon branch of Citibank, but the effort of the central bank to tackle the illegal activity seems to have fallen flat.

The recent figures of the financial year 2011-12 reveal that as many as 229 cases of banking fraud have been registered with Citibank itself. The condition is similar in other banks as well. The leading private bank of the country, ICICI has reported 1961 fraudulence cases, blocking Rs 14 crores of its customers.

The data provided by the Banking Department of Ministry of Finance reveals that in the year 2008-09, the banking sector had to suffer a loss of Rs 1880.53 crores. During this time period, 23,579 cases of banking fraud came into light.

In the year 2010-11, 19834 cases were registered which led to a loss of Rs 3799.06 crores.

Thereafter, RBI issued stern directives to tackle the fraudulent practices prevalent in government, private and international banks.

According to the new rules, the branch manager of a particular branch will be held responsible for any case related to bank forgery.

The highly placed sources in RBI claimed that banks are not following the directives issued by it.

This can be gauged from the fact that despite RBI's directive of giving compulsory off for a stipulated time period to senior officials in banks, the order has not been implemented by majority of banks. 

Notably, the directive was issued with an aim to assess the work of the official by the person who would look after his work in his absence.

Moreover, many banks do not follow banking rules while reporting banking fraud cases.

India to be third largest domestic banking sector by 2050

According to a PriceWaterhouseCoopers report titled Banking In 2050, India could become the third largest banking sector by 2050 after China and US, leaving Japan, UK and Germany behind.
According to the report, “India has particularly strong long-term growth potential.”
Indian banking sector in general and the Reserve Bank of India were applauded post financial crisis for fiscal prudence. 

India’s largest private sector bank, ICICI Bank improved its cost to income ratio from 53 per cent in 2007 to 38 per cent in 2010, owing to shift in strategy from aggressive growth to cost rationalisation.
The report includes 22 countries segregating them into G7 (US, Japan, Germany, UK, France, Italy and Canada), E7 (China, India, Brazil, Russia, Mexico, Indonesia and Turkey), other developed economies (Australia, S Korea, and Spain), newly emerging economies (Argentina, Vietnam, Nigeria, Saudi Arabia and South Africa).
According to the report the financial crisis has brought about an acceleration in the shift of economic power from the developed to the emerging economies.
China could overtake US in 2023 and India could overtake Japan in 2033. India’s domestic banking assets are expected to grow to $38,484 in 2050 from $945.