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Thursday, September 16, 2010

Man decamps with Rs 66,000

In an incident involving ingenious criminal intent, a man was robbed of Rs 66,000 near the UCO Bank premises under Paltan Bazar police station today.
Lal Mohan Singh had taken out an amount of Rs 66,000 from the bank and was about to move away on his bicycle parked nearby when a person told him that there were some currency notes on the ground which could belong to him.

Thinking it could be so, Singh’s attention was diverted from his cycle where he had kept the cash. But during those moments the unknown person picked up Singh’s cash and disappeared from the scene. Investigation is on.
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Man decamps with Rs 66,000

In an incident involving ingenious criminal intent, a man was robbed of Rs 66,000 near the UCO Bank premises under Paltan Bazar police station today.
Lal Mohan Singh had taken out an amount of Rs 66,000 from the bank and was about to move away on his bicycle parked nearby when a person told him that there were some currency notes on the ground which could belong to him.

Thinking it could be so, Singh’s attention was diverted from his cycle where he had kept the cash. But during those moments the unknown person picked up Singh’s cash and disappeared from the scene. Investigation is on.
Read more »

UCO Bank gets extension to meet provision coverage ratio

After ICICI Bank and SBI, UCO Bank has got some leeway from the Reserve Bank of India (RBI). CNBC-TV18 learns that the RBI has given the public sector lender a six-month extension, up to March 31, for achieving the 70% provision coverage ratio, reports CNBC-TV18’s Vidhi Godiawala.

Certainly good news coming in there for UCO Bank, what we are picking up from our sources in the regulator and RBI is that they have been given a six months extension to reach the 70% provision coverage ratio by March 2011, instead of September 2010.

What is provision coverage ratio? It’s the amount of money a bank keeps aside for its bad loans or its non-performing assets.

Now, UCO Bank has been given the extension till March 31, 2011 to reach this, so now they have to provide only Rs 400 crore to reach 70%. Currently, as on first quarter of FY11, their provision coverage ratio was 58.64% and their gross NPA stood at about Rs 1,929 crore. They had sought extension for one year till September 2011, but that has come in only for six months is what our sources are telling us.

Also, the bank says that more NPAs could come up through the course of the year and that Rs 400 crore could actually increase, but that will come only through the course of the year as the bad loans increase. However, the bank says that they have not received any intimation from RBI as yet on the extension provided to them.

Now let me take you back SBI has got one year extension till September 2011 and ICICI Bank has got an extension by six months till March 2011 and Laxmi Vilas Bank, which is another bank has sought extension from the RBI, but there has been no intimation. This extension for UCO Bank will only help them provide in a more systematic manner and it will be less strain on the balance sheet since these provisions come directly from the profits of the bank
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UCO Bank gets extension to meet provision coverage ratio

After ICICI Bank and SBI, UCO Bank has got some leeway from the Reserve Bank of India (RBI). CNBC-TV18 learns that the RBI has given the public sector lender a six-month extension, up to March 31, for achieving the 70% provision coverage ratio, reports CNBC-TV18’s Vidhi Godiawala.

Certainly good news coming in there for UCO Bank, what we are picking up from our sources in the regulator and RBI is that they have been given a six months extension to reach the 70% provision coverage ratio by March 2011, instead of September 2010.

What is provision coverage ratio? It’s the amount of money a bank keeps aside for its bad loans or its non-performing assets.

Now, UCO Bank has been given the extension till March 31, 2011 to reach this, so now they have to provide only Rs 400 crore to reach 70%. Currently, as on first quarter of FY11, their provision coverage ratio was 58.64% and their gross NPA stood at about Rs 1,929 crore. They had sought extension for one year till September 2011, but that has come in only for six months is what our sources are telling us.

Also, the bank says that more NPAs could come up through the course of the year and that Rs 400 crore could actually increase, but that will come only through the course of the year as the bad loans increase. However, the bank says that they have not received any intimation from RBI as yet on the extension provided to them.

Now let me take you back SBI has got one year extension till September 2011 and ICICI Bank has got an extension by six months till March 2011 and Laxmi Vilas Bank, which is another bank has sought extension from the RBI, but there has been no intimation. This extension for UCO Bank will only help them provide in a more systematic manner and it will be less strain on the balance sheet since these provisions come directly from the profits of the bank
Read more »

Fraud & fictitious offers increase in 2 years: RBI

KOLKATA: Reserve Bank of India on Friday said fraudulent and fictitious offers though e-mails, mobile phones and SMSs had increased significantly in the last two years despite public awareness by RBI.

"Such fictitious offers had increased in the last two years," RBI general manager C L Nag said here today while addressing media on steps of the central bank in this regard.

He did not give the number of complaints against such fictitious offers it has received, saying most of these were informal.

Nag said several circulars since 2000 had been issued by RBI on such offers and urged people not to be lured by them in which money is asked upfront terming as processing fee, transaction fee, tax clearance and others.
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RBI asks banks to give reasons for returning cheques

Keeping in view the larger interests of customers, the Reserve Bank of India (RBI) today asked banks to inform account holders on the reasons for a cheque being returned or dishonoured.

Banks are advised to indicate the date of return in the 'Cheque Return Memo' without fail, the RBI said in a statement.


The memo that should accompany a cheque dishonoured or returned for any reason is a critical document, more so in case recourse to legal action is necessitated, it said.

Instruments returned unpaid should have a signed objection slip on which a definite and valid reason for refusing payment must be stated, it said.

Certain instances of banks not mentioning the date of return on the cheque return memo have been brought to RBI's notice, it said.
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RBI asks banks to give reasons for returning cheques

Keeping in view the larger interests of customers, the Reserve Bank of India (RBI) today asked banks to inform account holders on the reasons for a cheque being returned or dishonoured.

Banks are advised to indicate the date of return in the 'Cheque Return Memo' without fail, the RBI said in a statement.


The memo that should accompany a cheque dishonoured or returned for any reason is a critical document, more so in case recourse to legal action is necessitated, it said.

Instruments returned unpaid should have a signed objection slip on which a definite and valid reason for refusing payment must be stated, it said.

Certain instances of banks not mentioning the date of return on the cheque return memo have been brought to RBI's notice, it said.
Read more »

Asia's oldest co-operative bank closes

The Reserve Bank of India has finally cancelled the licence of Asia's oldest co-operative bank, Vadodara-based Anyonya Co-operative Bank Limited (ACBL), after examining all options for its revival.

RBI sources here said the bank had been ordered to stop all its transactions under Section 35A of the Banking Regulation Act, on September 14, 2007, and the bank downed its shutters in March, 2008. Its annual general meeting in September, 2008 formed a committee to find ways to re-open the bank.

The fate of the bank had been uncertain ever since the RBI clamped restrictions on it for failing to reduce its non-performing assets (NPAs). Revival, merger and liquidation were all discussed for the bank, but nothing worked.

Due to liquidity problems and high NPAs, the bank was placed under directions under Section 35A of the Banking Regulation Act 1949, placing a ceiling on repayment of deposits per depositor.

In a desperate bid to make the bank survive, Vadodara mayor and MP Balkrishna Shukla, along with ACBL chairman Dilip Kelkar and director Vrushal Revadandekar had met Prime Minister Manmohan Singh in March, 2010. Singh had said that he would take up the matter with the RBI. Shukla had also raised the issue in Parliament on March 4 and said that the institute should be granted a heritage status.
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Tuesday, September 7, 2010

Centre has cleared the appointment of five PSU bank's chiefs


The Centre has cleared the decks for appointing five public sector bank chiefs.

Mr S. Raman, Executive Director, Union Bank of India, will shortly assume charge of Bangalore-headquartered Canara Bank as Chariman and Managing Director.

Mr Ramnath Pradeep, ED, Central Bank of India, will be at the helm of Mangalore-headquartered Corporation Bank as CMD. Mr Arun Kaul, ED, Central Bank of India, will be the new CMD of Kolkata-headquartered UCO Bank.

Mr R. Ramachandran, ED, Syndicate Bank, will be the new CMD of Hyderabad-headquartered Andhra Bank. Mr M. Narendra, ED, Bank of India, will assume charge of Indian Overseas Bank in November.


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Education loan defaults rising

Education loans, a segment with lowest defaults among all other retail loans so far, have seen a sudden spurt in NPAs (non-performing assets) due to the shrinking job markets following the global economic meltdown.

The defaults have been higher in loans below Rs 4 lakh, which are given without any collateral, according to senior bank officials.

Indian Bank, for instance, has bad loans worth Rs 80 crore on its books as on June 30, 2010, according to its Chairman and Managing Director, Mr T.M. Bhasin. “We have witnessed some loans in the below Rs 4 lakh category going bad recently. We are tracking the students and trying to work out the recovery methods. The rise in delinquency is due to the lack of proper placements on completion of the course,” Mr Bhasin told Business Line.

The bank's education loan outstanding was at Rs 2,700 crore as on June 30. The bank plans to extend the tenure of loan to help the students repay the amount.

“We are planning one-year relaxation in order to give some breathing space to the students,” he said. Banks are also encouraging students to look at alternative job options such as BPOs in order to help them repay the loan on time.

“Though no cases of NPAs have been reported as yet, there is a cause for concern as in some cases it is difficult to track the students. But banks are taking a cautious approach,” said Mr K.R. Kamath, Chairman and Managing Director, Punjab National Bank.

The defaults have been higher for loans given for courses in B-grade engineering or management colleges as these do not guarantee assured placements, said a senior official at a public sector bank.

State Bank of India, Bengal Circle, has also witnessed a rise in NPAs from such loans. “There has been a clear rise in NPAs from such loans; so, we are stepping up the recovery methods. Students already get a one year moratorium on such loans. This can further be extended to 18-24 months depending on the case,” said Mr Sureinder Kumar, Chief General Manager, SBI, Bengal Circle.

The Circle registered 40 per cent growth in educational loans at about Rs 405 crore (Rs 289 crore) as on March 2010. The total loan outstanding for the bank was at Rs 450 crore as on date. The level of NPAs increased to about 4.27 per cent (three per cent) as on June 2010.

Talking about the growing defaults in the educational loans segment, a senior official at UCO Bank said, “Though our data do not reveal a rise in NPAs from educational loans, the industry has witnessed a rise in delinquencies. So we are being cautious and have already alerted our branches to take necessary measures to step up the recovery process.”
Read more »

Education loan defaults rising

Education loans, a segment with lowest defaults among all other retail loans so far, have seen a sudden spurt in NPAs (non-performing assets) due to the shrinking job markets following the global economic meltdown.

The defaults have been higher in loans below Rs 4 lakh, which are given without any collateral, according to senior bank officials.

Indian Bank, for instance, has bad loans worth Rs 80 crore on its books as on June 30, 2010, according to its Chairman and Managing Director, Mr T.M. Bhasin. “We have witnessed some loans in the below Rs 4 lakh category going bad recently. We are tracking the students and trying to work out the recovery methods. The rise in delinquency is due to the lack of proper placements on completion of the course,” Mr Bhasin told Business Line.

The bank's education loan outstanding was at Rs 2,700 crore as on June 30. The bank plans to extend the tenure of loan to help the students repay the amount.

“We are planning one-year relaxation in order to give some breathing space to the students,” he said. Banks are also encouraging students to look at alternative job options such as BPOs in order to help them repay the loan on time.

“Though no cases of NPAs have been reported as yet, there is a cause for concern as in some cases it is difficult to track the students. But banks are taking a cautious approach,” said Mr K.R. Kamath, Chairman and Managing Director, Punjab National Bank.

The defaults have been higher for loans given for courses in B-grade engineering or management colleges as these do not guarantee assured placements, said a senior official at a public sector bank.

State Bank of India, Bengal Circle, has also witnessed a rise in NPAs from such loans. “There has been a clear rise in NPAs from such loans; so, we are stepping up the recovery methods. Students already get a one year moratorium on such loans. This can further be extended to 18-24 months depending on the case,” said Mr Sureinder Kumar, Chief General Manager, SBI, Bengal Circle.

The Circle registered 40 per cent growth in educational loans at about Rs 405 crore (Rs 289 crore) as on March 2010. The total loan outstanding for the bank was at Rs 450 crore as on date. The level of NPAs increased to about 4.27 per cent (three per cent) as on June 2010.

Talking about the growing defaults in the educational loans segment, a senior official at UCO Bank said, “Though our data do not reveal a rise in NPAs from educational loans, the industry has witnessed a rise in delinquencies. So we are being cautious and have already alerted our branches to take necessary measures to step up the recovery process.”
Read more »

Wednesday, June 23, 2010

PMO rejects FinMin proposal on bank chief appointments

The Prime Minister’s Office (PMO) has turned down a finance ministry proposal to allow bankers with less than two years of residual service to be appointed as public sector bank chiefs.

The move will affect several candidates in race for top posts of banks
Sources close to the development said PMO was against dilution of appointment norms, which have been in place for several years and have coincided with the re-emergence of public sector banks as strong players in the banking space.

The sources said a term of less than two years did not give individuals time to implement their decisions properly.

Following the feedback from South Block, the finance ministry has prepared a fresh set of names and sent them to the Appointments Committee of Cabinet (ACC).

PMO’s objections come at a time when some lawmakers have written to Finance Minister Pranab Mukherjee expressing concerns over the proposal to allow executive directors with 18 months of residual service to be considered for appointment as bank chiefs. The members of Parliament said the decision was taken unilaterally by the finance ministry and ACC’s approval was not taken.

They said since 2007, the government had followed ad-hocism in appointment of bank chiefs and not followed a uniform set of rules. For the interviews conducted in February, the government kept changing norms, so much so that some candidates from State Bank of India, who were called for the meeting, were dropped at the last moment.

Interestingly, because of this intervention by PMO, a long tradition of appointment of chairmen of government banks has been broken. Traditionally, appointments at large banks are done through lateral movement, that is, the chairman of a smaller bank takes charge of a big bank. However, for Canara Bank’s top job, the government has decided to promote an existing executive director because present chairmen of smaller banks do not meet the two criterions, that is, two years of residual service and one-year experience as chairman of a smaller bank.

Union Bank’s S Raman is scheduled to take charge of Canara Bank when the present chief, A C Mahajan, retires in July. For six large banks, Punjab National, Bank of Baroda, Canara Bank, Bank of India, Union Bank of India and Central Bank of India, the system of lateral movement has been followed.

The sources said the finance ministry sought consent from eight candidates for appointment in as many number of banks where top positions would be vacant till February next year.

Apart from Canara Bank, the government has sought consent from candidates for appointment as chiefs of Corporation Bank, Andhra Bank, Indian Overseas Bank, Uco Bank, Oriental Bank of Commerce, Bank of Maharashtra and Vijaya Bank. Except for Vijaya Bank, where the post will be vacant in February, the top posts in seven other banks will be vacated in 2010.

The government has also sought consent from 11 general managers for the position of executive directors in nine banks
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PSBs to get new chiefs soon, plan set into motion

The government is set to appoint a slew of public sector bank chiefs and in the fray are executive directors (ED) of various state-owned banks. A communication to this effect was sent by the Centre late on Tuesday evening.

A number of EDs have given their consents to the government for their promotions to the top posts of few PSBs RM Malla, who is currently serving as chairman and managing director (CMD) of SIDBI, will succeed IDBI Bank CMD Yogesh Agarwal, who has been appointed as the chairman of PFRDA from next month.

Similarly, Uco Bank CMD SK Goel is likely to head India Infrastructure Finance Company and Corporation Bank CMD JM Garg is likely to get berth in chief vigilance commission(CVC). Meanwhile, Union Bank executive director S Raman has given his consent to take charge as the CMD of Canara Bank. Normally, the CMD of top six PSBs are chosen from among the CMDs of comparatively smaller PSBs on the basis of lateral transfer.

Some of the other executive directors that have given their consent for chairman and managing director’s post include Ramnath Pradeep of Central Bank of India for Corporation Bank, M Narendra of Bank of India for Indian Overseas Bank, Arun Kaul of Central Bank of India for Uco Bank, AS Bhattacharya of Indian Bank for Andhra Bank, R Ramachandra of Syndicate Bank for Bank of Maharashtra, Nagesh Pydah of Punjab National Bank for Oriental Bank of Commerce and HSU Kamath of Canara Bank for Vijaya Bank.

However, the ministry of finance is to yet to find out a person who would be replacing GS Vedi, CMD of Punjab Sind Bank who will be retiring in June.

On a similar footing, quite a few general managers serving at various PSBs have also given their consent for becoming the executive directors of the public sector banks. The list of general manager include Archana Bhargav of PNB for Canara Bank, VR Iyyer of Union Bank for Central Bank of India and N Badrinarayan of Bank of Baroda for Uco Bank. Anil Bansal of Union Bank is the only candidate whose clearance from RBI for is still being awaited to promote him as executive director.
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Licensing regulations relaxed: banks gear for expansion

RBI has allowed banks to set up branches in Tier III to VI cities without prior approval from the apex bank. With this relaxation hitting the banking platform, banks have doubled their plans of expansion.

RBI had permitted scheduled commercial banks in December 2009 that they can open up branches in Tier III to VI cities without prior permission. This has resulted in doubling of number of branches opened by banks this year in comparison to last year.

PNB plans to come up with 550 branches in the country. According to CMD, K.R. Kamath, the bank does not require license for 440 branches as they are located in areas having population less than 50,000.

SBI is also on expansion spree. The bank has spent about Rs. 100 crore to open 286 branches and 2,521 ATMs in the country in the last quarter of the fiscal that ended on March 2010.

According to an executive, IDBI Bank has been planning to open around 300 branches in the country this year which is a great rise against what the bank had done last year.

UCO Bank has plans to open 140 branches this year. The bank would however need licenses for only 89 branches. According to CMD, SK Goel, the bank has plans to increase its market share to atleast 3% as compared to the current figure of 2.6%.
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PSU banks target personal loans to boost margins

Banks such as Allahabad Bank, Uco Bank, Union Bank of India and United Bank of India have prepared plans on how to sell personal loan products to the retail client.

The retail loan portion of these banks is far below the industry average and so they have to catch up. The retail loan share of these banks is mere 12-14% as against the industry average of 20-22%. These banks along with others had halted their personal loan segment due to fright of default after the financial slowdown.

JP Dua, chairman and MD of Allahabad Bank said, “Personal loan gives a better spread as well as it helps in building relationship”. The present retail loan share of the bank is 13.92% which it plans to raise to 22% over the next 3 years.

United Bank of India chief Bhaskar Sen said the home and car loan share would increase due to the rising purchasing power of the middle class customer.

He said, “The housing segment will continue to give banks businesses many more years. In the car loan segment, demand is seen especially in the small car category”.

Uco Bank chairman and MD SK Goel said: “We have identified 200 branches across the country to push retail loan products as our share of retail loan business is comparatively low.”

Bank of Baroda executive director RK Bakshi said “A higher share of retail loan is important for credit diversification. It’s a stable business and it improves relationship with customers”.
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UCO follow-on offer likely by mid-June'

Public sector lender UCO Bank is hoping to come out with its follow-on
offer (FPO) by the middle of next month. The bank hopes to raise around
Rs 500 crore by issuing six crore equity shares.

“We hope to come out with the FPO by mid-June,” said Chairman and
Managing Director SK Goel.

The FPO is expected to bring down the government shareholding from
63.59 per cent to 58.60 per cent. Earlier, the bank was also mulling to
raise funds through qualified institutional placement (QIP), but
ultimately shelved the proposal.
“In general, the government prefers FPO, as the shareholding is
broadbased. In QIP, the shares are concentrated in few hands. However,
the cost is much less in QIP,” Goel had earlier said.

As part of capital restructuring in March 2009, the bank had received
Rs 450 crore, out of the proposed Rs 1,200 crore.

In December 2008, the bank restructured its equity capital by
converting Rs 250 crore out of the total equity capital of Rs 799.36
crore into perpetual non-cumulative preference shares.

The capital restructuring led to the government stake coming down from
74.98 per cent to 63.59 per cent.

Also, it has sought Rs 1,500 crore from the government in the current
financial year. The capital adequacy ratio of the bank stood at 13.21
per cent in the last quarter, against 11.93 per cent in the same period
last year.

The bank has set a credit growth target of 20 per cent this financial
year.
Read more »

Issue of Rs.20/- denomination banknotes with `R' Inset letter

Issue of Rs.20/- denomination banknotes with `R' Inset letter in both
numbering panels in Mahatma Gandhi Series – 2005 bearing the signature of
Dr. D. Subbarao, Governor
The Reserve Bank of India will shortly issue Rs.20/- denomination
banknotes with `R' inset letter in both numbering panels in Mahatma
Gandhi Series – 2005 bearing the signature of Dr. D. Subbarao, Governor.
Except for the change in the inset letter, the design of these notes to
be issued now is similar in all respects to the banknotes in Mahatma
Gandhi Series – 2005, with additional / new security features issued on
August 16, 2006. All banknotes in the denomination of Rs.20/- issued by
the Bank in the past will continue to be legal tender.
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SOME VERY POPULAR SCHEMES FOR INVESTMENTS (INCLUDING FOR TAX SAVINGS)

SOME VERY POPULAR SCHEMES FOR INVESTMENTS (INCLUDING FOR TAX SAVINGS)

NAME OF THE SCHEME WHO CAN INVEST MINIMUM AND MAXIMUM INVESTMENTS ALLOWED OTHER DETAILS
Public Provident Fund (PPF) A PPF account can be opened at anytime during the year in a Post Office, or in SBI & its associates or in other selected nationalized banks. It is safe to invest in the instrument, as it is government-backed. It can be held by single, joint, minor with parent/guardian and HUF Min Amount : Rs. 500/- per annum, and thereafter in multiples of Rs 5/-

Max Amount :Rs. 70,000/-



The PPF account matures after 15 years. Tax benefit: Rebate under section 80C for the amount invested. Interest accrued is Tax-free. Interest 8.0% p.a. (compounded annually) is credited to the PPF account at the end of each financial year.
Nomination is allowed at the time of opening the account or even later on during the tenor of the account.

Loan facility is also available, but the first loan canbe taken in the third financial year from the date of opening of the account, and only up to 25% of the amount at credit at the end of the first financial year.

Withdrawals are permitted every year from the seventh financial year of the date of opening of the account, of an amount not exceeding 50% of the balance at the end of the 4th proceeding year or the year immediately proceeding the year of the withdrawal, whichever is lower, less the amount of loan if any.

This is one of the most popular schemes of tax savings as the interest received is tax free.

National Savings Certificate (NSC) NSCs can be purchased through out the year by individuals either in single, joint, minor with parent/guardian, HUFs. from Post offices.
Tax benefit: Rebate under section 80C. Interest accrued for any year is taxable but can be treated as fresh investment in NSC for that year and tax benefits can be claimed

The NSCs have a maturity period of 6 years. Interest rate - 8%
Min Amount Rs. 100/- and additional investment in multiples of Rs. 100/-


Max Amount : No Limit

One can avail of a loan against the certificates by pledging it to the bank. The certificate can be encashed from the issuing post office on the due date by simply discharging the certificates at the back. It is safe to invest in this instrument, as it is government-backed. It is useful for people who invest to save tax.
If encashed prematurely, within a year of issue, then only the face value is given. If encashed after a year but before 3 years, then simple interest on the face value, at the rate applicable from time to time, will be paid. The discount rate (The difference between the accrued interest and the simple interest is the discount rate) will be specified by the government from time to time.

Kisan Vikas Patra (KVP) Kisan Vikas Patra (KVP) doubles money in eight years and seven months. This Scheme is available all through the year. This scheme it open to single, joint, minor with parent/guardian. Nomination facility is available at the time of opening the account or anytime during the tenure of the investment. No Tax benefits available Interest rate - 8% Min Amount : Rs. 100/- and additional investment in multiples of Rs. 100/-.
Max Amount : No Limit

This is a good investment instrument for retired persons and for those who do not have taxable income. The certifiates can be encahsed by discharging on certificates and providing proper identity If the certificate is lost due to theft, fire or the certificate is mutilated, a duplicate certificate is issued after proper verification. No Tax benefits are available for investments in this scheme under theIncome Tax Act

Infrastructure bonds Infrastructure bonds can be purchased only when the same have been floated by the specified financial institutions. These Bonds provide tax-saving benefits under Section 80C of the Income Tax Act, 1961, up to an investment of Rs.1,00,000.
Safety: Purely depends on the credit rating of the bank or financial institution issuing the bond

Interest rate usually ranges between : 5.50% to 6%
The Maximum investment limit is Rs 100000



Liquidity: Lock-in for three years
Tax benefit: Rebate under section 80C.

However, with low rate of interest and flexibility of investing in any type of instruments since 2005-06, these Bonds are no longer popular.

Equity-Linked Saving Schemes (ELSS) Equity linked savings scheme (ELSS) are equity funds floated by mutual funds. This scheme is suited for young people as they have the ability to take on higher risk. The ELSS funds should invest more than 80 per cent of their money in equity and related instruments. It is ideal to invest in them when the markets are down. These funds are now open all the year round. The other way of investing in these funds could be a systematic investment, which essentially means investing a small sum regularly (monthly or quarterly). It is a market-linked security and therefore there will be risks accordingly. The Maximum investment limit is Rs 10000.
Liquidity: Lock-in for three years



Tax benefit: Rebate under section 80C
Long-term capital gains tax are exempt from tax.



Insurance policies There are a range of life insurance products to choose from, such as term life insurance, whole life insurance, variable life insurance, universal life insurance, and variable universal life insurance. Annuities are tax-deferred investments that guarantee you regular payments at some future time, usually retirement. It is a market-linked security. Interest rate: Depends on returns of the funds
The Maximum investment limit is Rs 70000

Liquidity - Minimum lock-in of 2 years for participatory policies and 5 years for unit-linked

Tax benefit: Rebate under section 80C
Interest or returns are not taxable



Pension policies Pension plans apart from playing a significant role in retirement planning, also offer tax benefits under a dedicated section i.e. Section 80C. Premiums paid for the same are eligible for deduction. It is a market-linked security. Interest rate - Depends on returns of the funds.
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Some Help About Section 80C of IT ACT

What to Check before investing for Section 80C
or
How to Make Best Use of Section 80C


Most of the Income Tax payee try to save tax by saving under Section
80C of the Income Tax Act. However, it is important to know the
Section in toto so that one can make best use of the options available
for exemption under income tax Act. One important point to note here
is that one can not only save tax by undertaking the specified
investments, but some expenditure which you normally incur can also
give you the tax exemptions. Here are some tips for you : -

(1) Always Check YOUR FORCED SAVINGS / EXPENDITURE ELIGIBLE FOR
DEDUCTION :


(A) Home Loan :

There is a provision that the payment made for repayment of the
principal amount (not interest payment) of the Home Loan is eligible
for a deduction under Section 80C if you have taken a home loan and you
fulfill certain conditions.

(B) Payment towards Education Fee of the children :

Most of the young couples and middle aged income tax payee incur quite
high payments towards the education fees of their children. The
expenditure incurred on education fees is also eligible for a
deduction under Income Tax Act, Thus, if you are incurring
expnediture towards educatin fee of your children, please check whether
these are eligible for deduction under the IT Act.

(C) Payment towards Provident Fund :

Salaried income tax payee are usually have a forced saving which are
eligible for deduction under section 80C. A fixed percentage of
basic salary (ranges from 8.33% 12%) is deducted by your employer
towards the Employees Provident Fund (EPF). Some employers allow
higher deduction towards EPF. Thus, you should first of all check the
total amount that is expected to be deducted towards EPF during the
financial year. The total amount deducted from your salary will be
eligible for investments under Section 80C.

(D) Interest on National Saving Certificates :

In case you have purchased NSCs during some earlier years, then the
accrued interest as per the tables released by authorities is eligible
for deductions under Section 80C.



(2) Always Check the Lock-In Period of the Investments

Tax saving investments have a minimum lock-in period i.e. the period
during which withdrawals are usually not allowed. If the same are
withdrawn, these will be taxable in the year of withdrawal. For
example, National Savings Certificates (NSC) have a lock-in period of
six years, Public Provident Fund (PPF) has a lock-in of 15 years,
Equity Linked Saving Schemes (ELSS) have a lock-in period of three
years. Insurance policies have even greater period of lock in.



(3) Always Check Whether the investment you intend to make will meet
your goals :

You are saving every year and while saving you normally have some goal
in mind, e.g. to meet the expenditure on education of children,
purchase of a vehicle or house or marriage of your children.
Therefore, you should always look at the investments from the angle
whether it will meet your specific requirements on maturity. You should
also try to diversify your savings in different instruments.

For instance, if you have already invested a fair portion of your money
in equity (shares and mutual funds that invest in shares), avoid an
ELSS. Opting for an ELSS means a huge portion of your investments will
be in equity and that may not be what you want.
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PSBs score over pvt peers in interest income growth

Public sector banks' (PSBs) growth in net interest income (NII) vis-à-vis private banks has been higher during the fourth quarter ending March 2010 as compared with the corresponding period of the previous year, according to a study of 24 PSBs and 12 private banks.Despite higher NII, net profit of the PSBs declined 4.8% during the quarter. However, the fee-based income growth of PSBs, at 14.2%, was marginally higher than that of their private peers, at 14%.The fee-based income of the PSBs increased to Rs 46,460 crore from Rs 40,690 crore.When compared to January-March 2009, NII of the PSBs rose 37.8%, where as private banks registered a 20% increase in their NII. An analyst from the market said, "Healthy credit offtake in non-food credit helped the PSBs to increase the net interest income significantly during the fourth quarter."Among the PSBs, Oriental Bank of Commerce has seen significant increase in NII to Rs 989 crore against Rs 460 crore. "The bank's profit has come out of core operation," said the bank's chairman TY Prabhu. While interest income of the bank rose 14.4% during January-March 2010, total interest expended dropped 10.2% during the same period.However, the highest NII margin was recorded by SBI, at Rs 6,721 crore, among the PSBs, followed by PNB (Rs 2,498 crore) and Bank of Baroda (Rs 1,745 crore), Uco Bank's (Rs 744 crore), Andhra Bank (Rs 656 crore).The rise in NII of private sector banks was comparatively lower during the same period. Among the 12 private sector banks, four banks-IndusInd Bank, Dhanlaxmi Bank, ING Vysya Bank and YES Bank-showed more than 50% increase in NII during the fourth quarter.HDFC Bank had the highest NII of Rs 2,351 crore during the period, followed by ICICI Bank and Axis Bank (Rs 1,460 crore). However, NII of ICICI Bank fell marginally by 4.9% from Rs 2,139 crore to Rs 2,035 crore.
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4 banks to get Rs 1,500-cr fund infusion soon

Four state-run banks -Vijaya Bank, Central Bank of India, UCO Bank and United Bank of India- are likely to get Rs 1,500 crore as part of their recapitalisation package soon, according to sources. The fund infusion will enable these banks to maintain comfortable level of capital to risk-weighted asset ratio for supporting credit requirement of the productive sectors. Of the total, Vijaya Bank will get Rs 700 crore, UCO Bank Rs 300 crore, Central Bank and United Bank of India Rs 250 crore each, sources said, adding the government has already made a provision for subscription to tier-I instrument for capitalisation of these bank in the budget. During the past fiscal, the government had provided Rs 1,200-crore capital support to Central Bank of India, UCO Bank and United Bank of India to meet their capital requirement. UCO Bank and Central Bank of India got Rs 450 crore each while United Bank of India, which recently got listed, received a financial assistance of Rs 300 crore. The government plans to provide financial support of Rs 15,000 crore to the public sector banks during the current fiscal. The Cabinet has already approved capital infusion plan that will increase the lending capacity of the banks by Rs 1.85 lakh crore. The exact amount, the mode of capitalisation and other terms would be decided in consultation with the banks at the time of infusion. The Rs 15,000-crore fund infusion for tier I capital instruments of PSBs would enable them to expand their credit growth by about Rs 1,85,000 crore. This additional availability of credit is likely to benefit employment oriented sectors, especially agriculture, micro and small enterprises and entrepreneurs.
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RBI to decide 'Indian-ness' of banks now

The Reserve Bank of India will decide on the ‘Indian-ness’ of the country’s leading private sector banks as the government deliberates a solution for them without relaxing the provisions of the new foreign direct invesment policy. After over a year of discussions, the government has finally asked the central bank to suggest a framework for deciding on the ownership and control of such banks. The new norms will be based on parameters such as voting rights and the power to appoint directors, a senior government official said. “We need to recognize that the structure of each bank is different and accordingly redefine the concept of ownership and control for the banking sector,” he said. The move will give reprieve to seven private sector lenders including ICICI Bank, HDFC Bank, ING Vysya, Development Credit Bank, Federal Bank, IndusInd Bank and YES Bank that have been branded as foreign banks under the current norms. The long-standing issue, with its roots in Press Note 2 of 2009, was discussed at a recent meeting of the finance ministry, department of industrial policy and promotion and the RBI. Press Note 2 provides for a framework for calculation of total foreign investment in Indian companies, which is based on ownership and control of such firms. It has stated that all types of overseas ownership will be counted as foreign investment. Further, any company with over 50% overseas investment would be considered foreign owned. It defines control as the power to appoint majority of directors on the board of a company. More importantly, all downstream investments by a foreign-owned company would be considered as foreign investment and be subject to sectoral caps and restrictions. After these norms had come out, the banks had taken up the issue with the RBI and had sought clarifications on their exact status and investments. The central bank too had written to the finance ministry and pointed out that ownership and control may not be limited to just equity holding and power to appoint directors. Analysts welcomed the move but have cautioned that it would have to be carefully thought out. There is no straight jacketed approach. The formula would have to be based after a careful review of the interplay of voting rights and economic ownership of banks,” said Nimai Vijay, associate director, PricewaterhouseCoopers.
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Thursday, May 6, 2010

Govt homes in on heads for 3 institutions

Govt homes in on heads for 3 institutions

UCO Bank Chairman and Managing Director SK Goel is set to take over as the new chairman of India Infrastructure Finance Company (IIFCL).

Sources close to the development said the appointment of Goel, whose term at the Kolkata-headquartered bank was due to end in a couple of months, had been approved by the government and a notification was expected shortly.

He will replace SS Kohli, whose extended term at the infrastructure finance company came to an end last month. The financial institution’s Executive Director Pradeep Kumar is currently officiating as the chairman and managing director.

The sources also said at least two other appointments were being finalised by the government. RV Verma, executive director at National Housing Bank, is the frontrunner for the post of chairman at the refinance and housing finance regulatory agency.

The government has started the process of appointment afresh due to problems in the first round. For a year, Central Bank of India Chairman and Managing Director S Sridhar has been officiating as NHB chairman.

In addition, sources said a notification regarding the appointment of IDBI Bank Chairman and Managing Director Yogesh Agarwal as the pension regulator was expected soon. Agarwal’s appointment has been approved by the government.

The sources said that SC Gupta, the former chairman and managing director of United Bank of India was set to move to the Board for Industrial and Financial Reconstruction as a member. Canara Bank Chairman and Managing Director AC Mahajan, who also retires this year, is likely to be appointed as a vigilance commissioner. Of the two vigilance commissioners, one post is reserved for a former banker.
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UCO Bank Q4 earnings soar 3.70 times

UCO Bank Q4 earnings soar 3.70 times

Public Sector lender, UCO Bank (Q,N,C,F)* has announced a rise of 3.70 times in the net profit for the quarter ended March 31, 2010. The net profit of the company was at Rs 3,798 million for the quarter as compared to Rs 1,025.60 million as compared to prior year period. Total income of the company was at Rs 26,900, a rise of 6.72% over the prior year period.

Shares of the company declined Rs 0.8, or 1.14%, to settle at Rs 69.20. The total volume of shares traded was 2,399,012 at the BSE (Friday).
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Govt go-ahead for mobile banking

Govt go-ahead for mobile banking

New Delhi: Mobile banking is set to be a reality now. A committee of secretaries, under the chairmanship of cabinet secretary K M Chandrasekhar, has given a go-ahead to the proposal by accepting the report of the inter-ministerial group (IMG).

With wireless subscriber numbers in India crossing the 575 million mark and growing by 18-19 million every month, the government wants to empower the masses as far as financial service delivery is concerned.

The IMG was constituted in November 2009, with top representatives from the Department of Information Technology (DIT), Ministry of Finance, Department of Posts, Department of Telecom, Ministry of Rural Development, Planning Commission, Home Ministry and Reserve Bank of India. The group had finalised its report last month.

“With mobile subscribers in rural areas far outstripping bank account holders, a large section of rural population now has access to mobile telephony but not to financial services,” according to a statement by the IMG.

A system that enables provision of basic financial services through an individual’s mobile could be a major step in the direction of reaching out to the unbanked sections of the country, it added.
According to the IMG report, the members reached an agreement on the basic goals for delivery of financial services using mobile phones.

The IMG framework “envisages creation of mobile linked no-frills accounts” by banks, which will have various transaction limits. The basic financial transactions on these accounts, including cash deposit, cash withdrawal, peer to peer transfer and balance inquiry, can be executed through a mobile based PIN system.

RBI guidelines on outsourcing of financial services by banks permit banks to outsource data processing and back office related activities. “The sharing of IT infrastructure for account maintenance for scaling up operations as envisaged above would be in line with such permissible outsourcing arrangements and should also facilitate inter-bank settlement. However, this would be subject to the banks adhering to extant outsourcing guidelines and the RBI guidelines on customer data confidentiality,” according to the IMG report.

Around 51.4% of the nearly 89.3 million farmer households do not have access to any credit either from institutional or non institutional sources, as per the National Sample Survey.

The survey has shown that only 27% of farm households are indebted to formal sources. Also, only 13% are availing loans from the banks in the income bracket of less than Rs 50,000. Not only that, a large percentage of rural population does not have a deposit account.
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Govt to review bank CMD selection process

Govt to review bank CMD selection process

The finance ministry will review the selection process for the posts of chairman and managing director (CMD) of eight public sector banks (PSBs) following complaints from some Members of Parliament (MPs). The appointments may be delayed now.

The finance ministry conducted interviews earlier this year and prepared a list of candidates. Eleven top posts in public sector banks will fall vacant in 2010. Two posts have already been filled with candidates selected last year.

MPs have now raised questions over the transparency of the process and alleged that certain norms were flouted during the selection this year.

Law makers argued that relaxations in eligibility criteria were made regarding the number of years in service as executive director (ED) and years of residual service, without obtaining an approval of the cabinet appointments committee.

“There has been a lot of ad hoc selection. Initially, even managing directors of associate banks of State Bank of India were called for the interview, but were dropped later. Candidates with less than one year and nine months of service were included for the interview at the last minute. All these point to the pressure exerted on the department of financial services (a department in the ministry of finance) to favour certain candidates,” the MPs said in a letter to the government.

In response, the finance ministry said it would now look into the allegations.

For the post of chairman and managing director in government-owned banks, candidates completing a minimum of two years as ED and two years of residual service are eligible. In case of the lack of eligible candidates, the criteria for minimum residual service could be reduced to one year nine months. However, any further relaxation would require approval of the appointment committee.

“Candidates who have completed less than one year of service (as ED) have been placed above the candidates who fulfill the eligibility criteria without any relaxation. Similarly, candidates who have residual service of less than one year and nine months have been placed above the candidates who meet all the criteria,” the letter said.

Top slots in Punjab Sind Bank, Corporation Bank, Canara Bank, Andhra Bank, Bank of Maharashtra, UCO Bank, Indian Overseas Bank and Oriental Bank of Commerce will fall vacant in 2010. In addition, the post of chairman and managing director in IDBI Bank will also fall vacant, but the position is likely to be filled by a candidate selected during the last years’ interview
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Banks post big gains, but run may not last long

Banks post big gains, but run may not last long
Mumbai: Large private banks have posted healthy profits for the three months to 31 March, but their public sector peers reported mixed results, indicating, say analysts, that times could turn tough as interest rates rise amid limited upside to credit growth.

The country’s largest private sector lender, ICICI Bank Ltd, posted a 35% year-on-year increase in net profit to Rs1,006 crore for the quarter. HDFC Bank Ltd and Axis Bank Ltd saw net profit rise by 32.6% and 31.5% for the quarter, respectively.

Profit jumped on the back of growth in loans and income from the sale of retail and treasury products as well as measures to cut costs.

Among public sector banks, Bank of Baroda, Mangalore-based Corporation Bank and Hyderabad-based Andhra Bank clocked profit growth of about 20% each. Delhi-based Oriental Bank of Commerce’s net profit growth was a much higher 60%.

But Canara Bank, India’s sixth largest lender, saw profit dropping by 30%. Allahabad Bank’s profit fell by 15% and that of Indian Overseas Bank by 60%.

In all cases, banks booked higher provisions partly due to increasing stress in restructured assets and also because of a Reserve Bank of India (RBI) norm requiring provision coverage of 70% of banks’ bad debts. Treasury income in all cases was muted owing to the hardening of bond yields.

The future may not be all that promising in terms of profitability as treasury gains are expected to decline with a rise in interest rates, analysts said.

When rates go up, the bond holdings of banks depreciate and they need to make good the shortfall by making provisions. Under banking norms, they are required to invest 25% of their deposits in government bonds.

“Despite buoyant loan demand, overall outperformance looks unlikely” as rates are rising due to macro pressures and not loan growth, said a recent research report by Citigroup Global Markets Inc.

Citigroup expects a 2.75 percentage point hike in policy rates over two years.

“Typically, banks’ underperformance has come during periods of rising interest rates due to macro factors and not so much due to an increase in credit growth,” it said.

Keefe, Bruyette and Woods Inc., a financial services specialist, said in another report that the risk to the Indian banking sector includes higher-than-expected inflation and bond yields.

“We estimate earnings would decline by an average of 8% were the bond yield to increase to 9%. We believe State Bank of India (SBI) is most exposed to this risk, due to the relatively long-term duration of its bond portfolio. HDFC Bank, with a small fixed-income portfolio, is the least exposed to bond losses,” said the report.

According to the report, SBI, the country’s largest bank, has the longest duration bond portfolio. This puts SBI more at risk from a spike in bond yields than its peers. “We estimate that a spike in the benchmark 10-year bond yield to 9% could take about 17% off the bank’s earnings,” it said.

The yield on the benchmark 10-year bond is now around 8.07%. SBI will announce fourth-quarter earnings on 14 May.

Credit growth expanded steadily during the second half of the last fiscal from its intra-year low of 10.3% in October to 16.9% by March, signalling economic revival and growing corporate confidence in fresh investment for capacity expansion. RBI has pegged credit and deposit growth at 20% and 18%, respectively.

In its annual monetary policy, RBI pegged the growth forecast for 2010-11 at 8% with an upward bias and increased key policy rates by 0.25 percentage point to tame inflationary expectations, sustain economic growth momentum and accommodate the government’s borrowing plan.

Citigroup said in its report that short-term liquidity in the banking system has been declining steadily over the last couple of years and is currently the lowest in six years.

“With Reserve Bank of India continuing to drain liquidity in the form of higher reserve requirements, risks to a tighter liquidity environment cannot be ruled out, especially if credit growth rises to a stronger pace,” added the report.

Aditi Thapliyal, banking analyst at UK-based investment banking firm Execution Noble and Co. Ltd, said the incremental credit pick-up was still modest, so banks would be reluctant to hike rates in a hurry. This could have an impact on the net interest margin, she said.
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Know Your Customer (KYC) Norms/ Anti- Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)

Know Your Customer (KYC) Norms/ Anti- Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)

RBI/2009-10/439
DNBS(PD).CC. No. 172/03.10.42 /2009-10

April 30, 2010

All Non Banking Financial Companies /
Residuary Non Banking Companies

Dear Sir,

Know Your Customer (KYC) Norms/ Anti- Money Laundering (AML) Standards/
Combating of Financing of Terrorism (CFT)


Please refer to Company Circular No 166 dated December 2, 2009 on the captioned subject. Financial Action Task Force (FATF) has issued a Statement dated February 18, 2010 on the subject (Copy enclosed) which divides the strategic AML/CFT deficient jurisdictions into three groups as under:

(i) Jurisdictions subject to FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/FT) risks emanating from the jurisdiction: Iran

(ii) Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of February 2010. The FAFT calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction: Angola, Democratic People's Republic of Korea (DPRK), Ecuador and Ethiopia.

(iii) Jurisdictions previously publicly identified by the FAFT as having strategic AML/CFT deficiencies, which remain to be addressed as of February 2010: Pakistan, Turkmenistan, Sao Tome and Principe

2. All NBFCs/RNBCs are accordingly advised to take into account risks arising from the deficiencies in AML/CFT regime of these countries.

3. An acknowledged receipt of this circular may be submitted by the Compliance officer/ Principal Officer of the NBFCs to the concerned Regional Office of DNBS in whose jurisdiction the NBFC/RNBC is functioning.


Yours faithfully,

(Uma Subramaniam)
Chief General Manager-in-Charge
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Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances - Projects under Implementation

Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances - Projects under Implementation

RBI/2009-10/424
UBD.BPD.PCB.Cir.No. 59 /09.14.000 / 2009-10

April 23, 2010

The Chief Executive Officer
All Primary (Urban) Cooperative Banks

Dear Sir,

Prudential Norms on Income Recognition, Asset Classification and
Provisioning Pertaining to Advances - Projects under Implementation

'Project Loan' would mean any term loan which has been extended for the purpose of setting up of an economic venture. Banks must fix a Date of Commencement of Commercial Operations (DCCO) for all project loans at the time of sanction of the loan / financial closure* (in the case of multiple banking or consortium arrangements). For the purpose of IRAC norms, all project loans may be divided into the following two categories; (i) Project Loans for infrastructure sector (ii) Project Loans for non-infrastructure sector

2. Guidelines on Asset Classification of Projects under Implementation

2.1 Project Loans for Infrastructure Sector

2.1.1 A loan for an infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.1.3 to 2.1.5 below.

2.1.2 A loan for an infrastructure project will be classified as NPA if it fails to commence commercial operations within two years from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.1.3 to 2.1.5 below.

2.1.3 There may be occasions when completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring / rescheduling of loans by banks. If a project loan classified as 'standard asset' is restructured any time during the period up to two years from the original date of commencement of commercial operations (DCCO), in accordance with the instructions contained in our circular UBD.PCB.BPD.No. 53 / 13.05.000 / 2008-09 dated March 6, 2009 on prudential guidelines on restructuring of advances, it can be retained as a standard asset if the fresh DCCO is fixed within the following limits, and further provided the account continues to be serviced as per the restructured terms:

(a) Infrastructure Projects involving court cases

Up to another 2 years (beyond the existing extended period of 2 years i.e total extension of 4 years), in case the reason for extension of date of commencement of production is arbitration proceedings or a court case.

(b) Infrastructure Projects delayed for other reasons beyond the control of promoters

Up to another 1 year (beyond the existing extended period of 2 years i.e. total extension of 3 years), in other than court cases.

2.1.4 The dispensation in para 2.1.3 is subject to the condition that the application for restructuring should be received before the expiry of period of two years from the original DCCO and when the account is still standard as per record of recovery. The other conditions applicable would be :

In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond two years from the original DCCO, considering the high risk involved in such restructured accounts.

Banks should maintain provisions on such accounts as long as these are classified as standard assets as under :

Until two years from the original DCCO 0.40%

During the third and the fourth years after the original DCCO.
1.00%


2.1.5 For the purpose of these guidelines, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same.

2.2 Project Loans for Non-Infrastructure Sector

2.2.1 A loan for a non-infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.2.3 to 2.2.5 below.

2.2.2. A loan for a non-infrastructure project will be classified as NPA if it fails to commence commercial operations within six months from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.2.3 to 2.2.4 below.

2.2.3 In case of non-infrastructure projects, if the delay in commencement of commercial operations extends beyond the period of six months from the date of completion as determined at the time of financial closure, banks can prescribe a fresh DCCO, and retain the "standard" classification by undertaking restructuring of accounts in accordance with the provisions contained in our circular dated March 6, 2009, provided the fresh DCCO does not extend beyond a period of twelve months from the original DCCO. This would among others also imply that the restructuring application is received before the expiry of six months from the original DCCO, and when the account is still "standard" as per the record of recovery.

The other conditions applicable would be :

In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond six months from the original DCCO, considering the high risk involved in such restructured accounts.

Banks should maintain provisions on such accounts as long as these are classified as standard assets as under :

Until the first six months from the original DCCO 0.40%

During the next six months
1.00%


2.2.4 For this purpose, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same.

2.3. These guidelines will however not be applicable to restructuring of advances referred to in para 7.1.3 of circular dated March 6, 2009 viz., commercial real estate and housing loans.

2.4 Other Issues

2.4.1 All other aspects of restructuring of project loans before commencement of commercial operations would be governed by the provisions of our circular dated March 6, 2009. Restructuring of project loans after commencement of commercial operations will also be governed by these instructions.

2.4.2 Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if :

(i) The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.

(ii) The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay.

(iii) The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCP.

(iv) On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch.

3. The definition of infrastructure lending and exposure to commercial real estate are given Annex 1 II respectively.

4. Please acknowledge receipt to the Regional Office concerned.

Yours faithfully

(A.K. Khound)
Chief General Manager

* For greenfield projects, financial closure is defined as a legally binding commitment of equity holders and debt financiers to provide or mobilise funding for the project. Such funding must account for a significant part of the project cost which should not be less than 90 per cent of the total project cost securing the construction of the facility.


--------------------------------------------------------------------------------
Annex 1

Definition of 'Infrastructure Lending'



Any credit facility in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an infrastructure facility as specified below falls within the definition of "infrastructure lending". In other words, a credit facility provided to a borrower company engaged in


*
developing or


*
operating and maintaining, or


*
developing, operating and maintaining any infrastructure facility that is a project in any of the following sectors, or any infrastructure facility of a similar nature :



i.
a road, including toll road, a bridge or a rail system;



ii.
a highway project including other activities being an integral part of the highway project;



iii.
a port, airport, inland waterway or inland port;



iv.
a water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system;



v.
telecommunication services whether basic or cellular, including radio paging, domestic satellite service (i.e., a satellite owned and operated by an Indian company for providing telecommunication service), network of trunking, broadband network and internet services;



vi.
An industrial park or Special Economic Zone;



vii.
generation or generation and distribution of power;



viii.
transmission or distribution of power by laying a network of new transmission or distribution lines;



ix.
construction relating to projects involving agro-processing and supply of inputs to agriculture;



x.
construction for preservation and storage of processed agro-products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality;



xi.
construction of educational institutions and hospitals;



xii.
laying down and / or maintenance of gas, crude oil and petroleum pipelines.



xiii.
any other infrastructure facility of similar nature.


--------------------------------------------------------------------------------

Annex 2

Definition of Commercial Real Estate Exposure (CRE)

Real Estate is generally defined as an immovable asset - land (earth space) and the permanently attached improvements to it. Income-producing real estate (IPRE) is defined in para 226 of the Basel II Framework as under :

"Income-producing real estate (IPRE) refers to a method of providing funding to real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels) where the prospects for repayment and recovery on the exposure depend primarily on the cash flows generated by the asset. The primary source of these cash flows would generally be lease or rental payments or the sale of the asset. The borrower may be, but is not required to be, an SPE (Special Purpose Entity), an operating company focused on real estate construction or holdings, or an operating company with sources of revenue other than real estate. The distinguishing characteristic of IPRE versus other corporate exposures that are collateralised by real estate is the strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property".

2. The Income Producing Real Estate (IPRE) is synonymous with Commercial Real Estate (CRE). From the definition of IPRE given above, it may be seen that for an exposure to be classified as IPRE / CRE, the essential feature would be that the funding will result in the creation / acquisition of real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels) where the prospects for repayment would depend primarily on the cash flows generated by the asset. Additionally, the prospect of recovery in the event of default would also depend primarily on the cash flows generated from such funded asset which is taken as security, as would generally be the case. The primary source of cash flow (i.e. more than 50% of cash flows) for repayment would generally be lease or rental payments or the sale of the assets as also for recovery in the event of default where such asset is taken as security.

3. In certain cases where the exposure may not be directly linked to the creation or acquisition of CRE but the repayment would come from the cash flows generated by CRE. For example, exposures taken against existing commercial real estate whose prospects of repayments primarily depend on rental / sale proceeds of the real estate should be classified as CRE. Other such cases may include ; extension of guarantees on behalf of companies engaged in commercial real estate activities, corporate loans extended to real estate companies etc.

4. It follows from the definition at para 2 and 3 above that if the repayment primarily depends on other factors such as operating profit from business operations, quality of goods and services, tourist arrivals etc., the exposure would not be counted as Commercial Real Estate.

5. UCBs should not extend finance for acquisition of land even if it is part of a project. However, finance can be granted to individuals for purchase of a plot, provided a declaration is obtained from the borrower that he intends to construct a house on the said plot, within such period as may be laid down by the banks themselves.

Simultaneous Classification of CRE into other Regulatory Categories

6. It is possible for an exposure to get classified simultaneously into more than one category, real estate, CRE, infrastructure etc as different classifications are driven by different considerations. In such cases, the exposure would be reckoned for regulatory / prudential exposure limit, if any, fixed by RBI or by the bank itself, for all the categories to which the exposure is assigned. For the purpose of capital adequacy, the largest of the risk weights applicable among all the categories would be applicable for the exposure. The rationale for such an approach is that, while at times certain classifications / categorizations could be driven by socio-economic considerations and may be aimed at encouraging flow of credit towards certain activities, these exposures should be subjected to appropriate risk management / prudential / capital adequacy norms so as to address the risk inherent in them. Similarly, if an exposure has sensitivity to more than one risk factor it should be subjected to the risk management framework applicable to all the relevant risk factors.

7. In order to assist banks in determining as to whether a particular exposure should be classified as CRE or not, some examples based on the principles described above are given below. Based on the above principles and illustrations given, banks should be able to determine, whether an exposure not included in the illustrative examples is a CRE or not and should record a reasoned note justifying the classification.

Illustrative Examples

A. Exposures which should be classified as CRE

1. Loans extended to builders for construction of any property which is intended to be sold or given on lease (e.g. loans extended to builders for housing buildings, hotels, restaurants, gymnasiums, hospitals, condominiums, shopping malls, office blocks, theatres, amusement parks, cold storages, warehouses, educational institutions , industrial parks) In such cases, the source of repayment in normal course would be the cash flows generated by the sale / lease rentals of the property. In case of default of the loan, the recovery will also be made from sale of the property if the exposure is secured by these assets as would generally be the case.

2. Loans for Multiple Houses intended to be rented out

The housing loans extended in cases where houses are rented out need to be treated differently. If the total number of such units is more than two, the exposure for the third unit onwards may be treated as CRE Exposure as the borrower may be renting these housing units and the rental income would be the primary source of repayment.

3. Loans for integrated Township Projects

Where the CRE is part of a big project which has small non-CRE component, it will be classified as CRE exposure since the primary source of repayment for such exposures would be the sale proceeds of buildings meant for sale.

4. Exposures to Real Estate Companies

In some cases exposure to real estate companies is not directly linked to the creation or acquisition of CRE, but the repayment would come from the cash flows generated by Commercial Real Estate. Such exposures illustratively could be :

Corporate Loans extended to these companies
Investments made in the debt instruments of these companies
Extension of guarantees on behalf of these companies
5. General Purpose loans where repayment is dependent on real estate prices
Exposures intended to be repaid out of rentals / sale proceeds generated by the existing CRE owned by the borrower, where the finance may have been extended for a general purpose.

B. Exposures which may not be classified as CRE

1. Exposures to entrepreneurs for acquiring real estate for the purpose of their carrying on business activities, which would be serviced out of the cash flows generated by those business activities. The exposure could be secured by the real estate where the activity is carried out, as would generally be the case, or could even be unsecured.

(a) Loans extended for construction of a cinema theatre, establishment of an amusement park, hotels and hospitals, cold storages, warehouses, educational institutions, running haircutting saloons and beauty parlours, restaurant, gymnasium etc. to those entrepreneurs who themselves run these ventures would fall in this category. Such loans would generally be secured by these properties.

For instance, in the case of hotels and hospitals, the source of repayment in normal course would be the cash flows generated by the services rendered by the hotel and hospital. In the case of a hotel, the cash flows would be mainly sensitive to the factors influencing the flow of tourism, not directly to the fluctuations in the real estate prices. In the case of a hospital, the cash flows in normal course would be sensitive to the quality of doctors and other diagnostic services provided by the hospital. In these cases, the source of repayment might also depend to some extent upon the real estate prices to the extent the fluctuation in prices influence the room rents, but it will be a minor factor in determining the overall cash flows. In these cases, however, the recovery in case of default, if the exposure is secured by the Commercial Real Estate, would depend upon the sale price of the hotel / hospital as well as upon the maintenance and quality of equipment and furnishings.

The above principle will also be applicable in the cases where the developers / owners of the real estate assets (hotels, hospitals, warehouses, etc.) lease out the assets on revenue sharing or profit sharing arrangement and the repayment of exposure depends upon the cash flows generated by the services rendered, instead of fixed lease rentals.

(b) Loans extended to entrepreneurs, for setting up industrial units will also fall in this category. In such cases, the repayment would be made from the cash flows generated by the industrial unit from sale of the material produced which would mainly depend upon demand and supply factors. The recovery in case of default may partly depend upon the sale of land and building if secured by these assets. Thus, it may be seen that in these cases the real estate prices do not affect repayment though recovery of the loan could partly be from sale of real estate.

2. Loans extended to a company for a specific purpose, not linked to a real estate activity, which is engaged in mixed activities including real estate activity. For instance, a company has two divisions. One division is engaged in real estate activity, and other division is engaged in power production. An infrastructure loan, for setting up of a power plant extended to such a company, to be repaid by the sale of electricity would not be classified as CRE. The exposure may or may not be secured by plant and machinery

3. Loans extended against the Security of future rent receivables

A few banks have formulated schemes where the owners of existing real estate such as shopping malls, office premises, etc. have been offered finance to be repaid out of the rentals generated by these properties. Even though such exposures do not result in funding / acquisition of commercial real estate, the repayment might be sensitive to fall in real estate rentals and such exposures should be classified as CRE. However, if there are certain in built safety conditions which have the effect of delinking the repayments from real estate price volatility like, the lease rental agreement between the lessor and lessee has a lock in period which is not shorter than the tenor of loan and there is no clause which allows a downward revision in the rentals during the period covered by the loan banks can classify such exposures as non CRE. Banks may, however, record a reasoned note in all such cases.

4. Credit facilities provided to construction companies which work as Contractors

The working capital facilities extended to construction companies working as contractors, rather than builders, will not be treated as CRE exposures because the repayment would depend upon the contractual payments received in accordance with the progress in completion of work.

5. Financing of acquisition / renovation of self-owned office / company premises

Such exposures will not be treated as CRE exposures because the repayment will come from company revenues. The exposures to industrial units towards setting up of units or projects and working capital requirement, etc. would not be treated as CRE Exposures.
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Wednesday, April 28, 2010

Historic Settlement

The so called Historic Settlement has shown how much poor vision our top most union leadership has. After the meeting with IBA when it was decided that all employees / officers who are in the service have to contribute 1.6 times of November, 2007 salary towards their contribution towards giving another chance to PF optees. In all the circulars it was clearly indicated that this has been done with a view so that no legal hurdles are raised. Mr. Nadaf, who himself patted for the Fair settlement, has written that this is necessary as on earlier occasions (read earlier 7th and 8th settlements), PF optees have sacrificed their share.

As late as on 24/04/10 evening Mr.NADAF's Silver Jubilee speech on AIBOC's HISTORIC achievement of 9th BP, he had again reiterated before the members that pension-optees have to contribute as PF optees earlier had foregone their proportionate share in earlier revisions. However, now the same leaders have changed their tones and have gone for agreement with IBA wherein existing pension optees have been exempted from payments and the contribution from PF optees has been increased from 1.6 times to 2.8 times of November, 2007 Pay.

We give below the extracts from the so called "DETAILS OF TNBEF CC MEETING HELD ON 22/8/2009 -CHENNAI, as circulated earlier:

1 The CC congratulated the Units for successful implementation the 6/7 th August Strike.

2 Com CHV elaborately explained the happenings before the strike call and about the CLC proceeding on 7th Aug 2009.

3 The raising of the issue inside the parliament by various opposition leaders forced the Govt to reverse their decisions.

4 It was agreed to offer 17.5 % and also to accept the earlier formula of Pension Option.

5 Sharing the cost of Pension in each settlement is nothing new and it has been there right from the implementation of Pension Settlements

in the Year 1993 - Pension settlement - Pension in lieu of PF 10 %

1995 - 6th Bi-partite - Pension in lieu of PF 10 %

2000 - 7th Bi-partite - 26.5 % minus 10 % = 16.50 %

Additional Cost shared in the ratio 50:50 @ 8.25 % each by Empl & Banks

2005 - 8th Bi-partite - 30.50 % minus 10 % = 20.50 %

Additional cost shared in the ratio 45:55 @ 9.25 % & 11.25 %

2009 - 9th Bi-partite - Cost sharing @ 30 : 70

IBA's present position : In 10th Bi-partite the cost of pension should be worked out and the gap between the cost and 10 % of Basic Pay to be shared @ 30:70. So it is not a new condition imposed by IBA."

Now questions arises as to whether these retired leaders are so foolish that for last 30 months they have not even thought of consulting some lawyer or taken some legal opinion on so much important issues. They collect hundreds of crores of Rupees every year and they are not ready to pay a lakh or so for such an important issue to get the legal position before the start of the negotiations. What should members think about these so called GREAT LEADERS? It is truly said it is not negotiation, but SALE OF THE PRESTIGE OF THE BANKERS BY THESE RETIRED AND TIRED LEADERS.
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Saturday, April 24, 2010

HOW OUR SO CALLED SUPER HERO LEADERS WERE BEFOOLED BY IBA

Almost every banker in last few months have seen number of circulars by our union leaders wherein they have showered whole lot of praise on themselves for achieving a historical settlement. But one more example of "How they have been befooled by IBA" has come to our knowledge through one of readers. A reading of this will make you feel whether our union leaders are really capable of calculations or they go around hotels and enjoy their meals and sleep in the meetings.

Let us go through this example :
(A) WHAT IS THE RECOVERY AMOUNT FOR PENSION FUND AS PER IBA VERSION :
Total amount to be recovered for pension fund = Rs.1,800.00 Crore

(B) WHAT IS THE TOTAL BURDEN DUE TO INCREASE IN SALARIES AS PER IBA VERSION :
Total Amount of increase per year as on 1-11-07 : Rs.4816.00 Crore
( in other words total amount of increase per month : Rs.401.33 Crore)
Thus, all the bankers are required to pay the arrears for 4.485 (say 4½) months only to fully pay the gap of Rs.1800 crs agreed to be recovered from the existing employees.

(C ) WHAT IS ACTUALLY BEING PAID BY THE EXISTING EMPLOYEES :
With lot of negotiations and as a biggest gesture, IBA has agreed that all existing employees will pay 1.6 times of the New Salary as on November, 2007.
Now, question arises whether 1.6 times of the new salary as on November, 2007 is less than or equal to the 4½ months arrear?

Let anybody calculate his gross arrears as on November, 2007, and multiply the same by
4½ and they see what he is asked to contribute towards pension fund.
The CAT IS OUT of the BAG. This contribution ranges from 7.42 to 13.07 months salary for Scale I, II and III officers (it varies depending on what %age of HRA you are entitlede). It ranges from 5.75% to 8.92 months gross increase in salary for Scale IV and V officers. Thus, on an average, it appears officers are contributing almost double of the amount that was required as per above calculations to collect Rs.1,800 crores.
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Meeting With Finance Minister

What is the likely impact of meeting with Finance Minister for recently retired bankers.

Meeting With Finance Minister :
It has been reported that UFBU leaders represented to the Finance Minister that since the Actuarial Report was based on the details of 31-3-2008, the pension option settlement should be effective from 1-4-2008, i.e. those who were on service on 1-4-2008 should be treated as existing employees for the sake of the settlement and pension payments on account of the option should be made from 1-4-2008.
FM did not agree with this viewpoints. However, he stated that the effective date can be taken as 27-11-2009, i.e. the date on which we had signed the MOU.
What is the impact of this decision, which is likely to be the agreed upon by all (IBA & UFBU):
Now, let us try to analyse as to what will be its impact on recently retired bankers.
We are of the opinion that all those bankers who retired between 01-11-2007 and 26/11/2009 (i.e. almost a period of two years) and were PF optees and now wish to switch over to Pension option, will be at a great loss. These people were being given the impression that as the new settlement will be effective from 1-11-2007, at least all these bankers will be at par with the bankers who are in service at present.
Now all those retirees (i.e. ex bankers who retired between 01.11.2007 and 26.11.2009), have to return 156% of the bank's contribution of PF amount, instead of merely 1.6 times of the salary of November, 2007. Had they been considered at par with the existing bankers in service, they would have been asked to merely pay 1.6 times of the salary of November, 2007 + bank's contribution was to be returned.


Let us take an Example : Let us suppose a person who retired on 31st October, 2009, and he received PF amount, which included bank's contribution to the tune of Rs.10,00,000/-, and the Basic Pay we got fixed under the new scales is Rs.38200/-. Now, in case he wishes to opt for the pension, he will have to shell out Rs.15,60,000/- from his savings. Had he retired on 30th November, 2009, he would have to merely pay Rs. 61,120/-+Rs10,00,000/-. Thus, he will be paying almost Rs 4,98,000/- extra merely because he retired only one month earlier (of course he retired after the date of the New Settlement i.e 01-11-2007). It was merely due to the delaying tactics of IBA that this person will be suffering. Mostly likely they also have to pay the 1.6 times of the November, 2007 salary as this is to be paid by everybody who is entitled for arrears wef 01-11-2007.


We feels this group of people will be the most affected in terms of immediate maximum outflow of funds. Most of them have hardly used the funds received at the time of retirement.
Their cases are even more genuine then the existing pension optees who are asked to contribute towards the gap for offering 2nd option to PF optees. In case of pension optees, unions may still be able to prove that PF optees actually shared some load in earlier settlements to pay off the pension optees. However, in case of retirees after 01-11-2007, it is strong case as the new settlement is effective from 01-11-2007 for all almost all purposes expect for 2nd option for pension.

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Tuesday, April 20, 2010

Background for Pension Facilities in Banking Industry in India

Background for Pension Facilities in Banking Industry in India :
The present guidelines indicate that employees who have joined in the service of the bank on or after 29-09-1995 are automatically covered under the Pension Scheme. However, employees who were in the serving in the banks up to 28.09.1995 have to opt for Pension. This option was allowed as one time exercise in 1995, and employees who opted for Pension were not eligible for the bank contribution to PF.

A) Various Types of Pension

The following types of Pension are normally available to employees in banks, under Employees Pension Regulations, 1995:-

1. Superannuation Pension.:

Granted on attaining the age of superannuation. Minimum 10 years qualifying service required. Maximum service reckoned is 33 years (for this purpose fraction of service in excess of 6 months will be reckoned as one year).

2. Pension on Voluntary Retirement.

Minimum 20 years qualifying service is required. The qualifying service of an employee retiring voluntarily shall be increased by a period not exceeding five years subject to the condition that the retiree has got remaining service of 5 years and the total qualifying service shall not in any case exceed 33 years.

The employee may give notice of not less than three months in writing to the appointing authority; seeking voluntary retirement. The notice of voluntary retirement shall require acceptance by the appointing authority.

3. Invalid Pension.

This is applicable to employees who retire from service on account of bodily or mental infirmity, which permanently incapacitates him from the service. Minimum 10 years qualifying service is required to apply for invalid Pension. He has to submit a medical certificate of incapacitation from a Medical Officer approved by the bank.

4. Compassionate Allowance.

An employee who is dismissed or removed or terminated from service shall forfeit pension. In such cases the authority higher than the authority competent to dismiss or remove or terminate him may, if the case is deserving of special consideration, sanction of a compassionate allowance not exceeding two third of the Pension which would have been admissible to him on the basis of the qualifying service rendered up to the date of dismissal.

5 Premature Retirement Pension.

Premature retirement pension may be granted to employees who have rendered minimum 10 years of service and retires from service on account of orders of the bank to retire prematurely in the public interest or for any other reason specified in service regulations or settlement; if otherwise he was entitled to such pension on superannuation on that date.

6 Compulsory Retirement Pension.

An employee compulsorily retired from service as a penalty in terms of service regulations or settlement by the authority higher than the authority competent to impose such penalty may be granted Pension at a rate not less than 2/3 and not more than full Pension admissible to him on the date of his compulsory retirement, if otherwise he was entitled to such pension on superannuation on that date.

B) Rate of Pension :

Minimum Pension Rs 1435/- per month, who retire on or after 01.05.2005.

C) Maximum Pension

Those who have got 33 years of qualifying service will get 50% of their average emoluments as Basic Pension and where the qualifying service is less than 33 years; the basic pension would be proportionate to their service.

D) Calculation of Basic Pension.

Average of 10 months pay prior to the date of retirement has to be calculated (pay includes BP + increment component of FPP+PQP).

Basic pension = (10 months’ Average Pay x No of years of service) / (2x33)

E) Dearness Relief on Basic Pension.

In respect of employees who retire on or after 1.5.2005, Dearness Relief shall be payable for every rise or be recoverable for every fall, as the case may be of every 4 points over 2288 points in the quarterly average of the All India Average Consumer Price Index for Industrial Workers in the series 1960 = 100, at the rate 0.18% of Basic Pension.

F) Family Pension :

In the event of death while in service or after retirement, family pension shall be payable to spouse/dependents at the following rates w.e.f. 01.5.2005.

Scale of pay per month Amount of Family Pension

Upto Rs 5720 30% of the pay as family pension

with minimum of Rs 1435/-

Rs 5720 to 11440 20% of the pay as family pension

with minimum of Rs 1715

Above Rs 11440 15% of the pay as family pension

with minimum of Rs 2292 and

Maximum of Rs 4784

Dearness Relief is applicable to Family Pension at the same rate applicable to Pension.

There is no stipulation for minimum service for Family Pension. In the case of an employee who dies after 7 years of service, higher family pension equal to 50% of pay last drawn by the deceased employee or twice the ordinary rate of family pension whichever is less, is payable till the date of deceased employee would have attained the age of 65 years subject to a maximum period of 7 years.

Also in the event of death after retirement, before attaining the age of 65 years, higher family Pension as above shall be given. Pay for this purpose has to be computed as given in clause D above.

G Commutation of Pension

One third of Basic Pension may be commuted.

Commuted Value = 1/3rd Basic Pension x 12 x factor corresponding to age next birthday as on date of application for commutation as given in the table below.

After commutation, monthly Pension will be 2/3rd of Pension but D.A. is payable on full Pension. At the end of 15 years after commutation, full pension shall be restored. Commutation amount is exempted from Income Tax.

H. Gratuity
Gratuity is payable on death, retirement, permanent disablement or resignation of an employee and it is calculated by two methods as given below and the amount whichever is higher will be paid. Gratuity amount up to 3.50 lacs is exempted from Income Tax.


I. Gratuity Act 1972:

An employee is eligible for gratuity after completion of 5 years of service. The Gratuity payable under the act is 15 days wages for every completed years of service. The maximum gratuity payable under the Act is Rs.3.50 lacs.(AIBOC has represented to the Labour Ministry to raise the maximum limit to Rs 10 lacs, as allowed to Central Govt Employees).

Wages for this purpose will mean Basic Pay + PQP + FPP (less HRA component) + Dearness Allowance).

The Calculation is as follows:

Gratuity Amount = (Wages) x No of year of service x 15/26

j. Gratuity as per Service Regulations

An employee is eligible for gratuity after completion of 10 years service. The gratuity payable is 15 months pay up to 30 years of service plus additional 15 days pay for every completed years of service beyond 30 years (Pay for this purpose means BP + PQP + Increment component of FPP).
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Friday, April 9, 2010

Union Bank Of India Enters Mutual Fund

In a latest development,Union Bank of India has teamed up with KBC Asset Management based in Belgium to form a new asset management entity. The new venture is called Union KBC Asset Management which was inaugurated on Friday in Mumbai by Prince Philippe of Belgium. It will start mutual fund operations in the country soon, as the bank has revealed. The joint venture was signed two years back and as per the agreement, KBC has 49 percent stake in it while Union Bank of India has 51 percent stake. The entity is now awaiting the final approval from SEBI for making the investments. The news has been affirmed by the Managing Director and chairman of the bank Mr M.V. Nair.

Union Bank of India is expecting that SEBI will give it the required nod in a few months. The first fund of the newly formed entity will be offered in the last part of this year, the Chief Executive Officer of the JV, Mr G. Pradeepkumar has said. Recruitment for the fund management team will start in the next few weeks, as it is being planned. The JV will churn out open-ended equity funds, capital-protected investment funds and other products targeted at the retail consumers.

The Mutual fund market in India has witnessed huge growth in the recent years and Union Bank of India wants to utilize the opportunity. In the initial stage, the mutual fund operations will rely on the existing branches of the bank, as it has been learnt. It may also tie up with other banks later.
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Friday, March 12, 2010

Third Quarter Review of Monetary Policy 2009-10 By Dr. D. Subbarao Governor

This Policy Review statement should be read and understood together with the detailed review in Macroeconomic and Monetary Developments released yesterday by the Reserve Bank. The statement is organised in four sections. Section I provides an overview of global and domestic macroeconomic developments; Section II sets out the outlook and projections for growth, inflation, money and credit aggregates. Section III explains the stance of monetary policy and Section IV specifies the monetary measures.

I. The State of the Economy

Global Economy

2. The global economy is showing increasing signs of stabilisation. The growth outlook in virtually all economies is being revised upwards steadily, with the Asian region experiencing a relatively stronger rebound. Global trade is gradually picking up, but other indicators of economic activity, particularly capital flows and asset and commodity prices are more buoyant. However, even as most of the forecasts on recovery are generally optimistic, significant risks remain. The recovery in many economies is driven largely by government spending, with the private sector yet to begin playing a significant part. There are signs that high levels of global liquidity are contributing to rising asset prices as well as rising commodity prices. Emerging market economies (EMEs) are generally recovering faster than advanced economies. But they are also likely to face increased inflationary pressures due to easy liquidity conditions resulting from large capital inflows.

3. While conditions in the beginning of 2010 are significantly better than they were at the beginning of 2009, a different set of policy challenges has emerged for both advanced economies and EMEs. In 2009, while advanced economies were focused on dealing with the financial crisis, especially reviving the credit market and restoring the health of the financial sector, EMEs were engaged in mitigating the adverse impact of the global financial crisis on their real economies. In 2010, the effort in advanced economies will be to further improve the financing conditions and strengthen the growth impulses, while the endeavour in the EMEs will be to strengthen the recovery process without compromising on price stability and to contain asset price inflation stemming from large capital inflows.

Domestic Economy

4. As stated in the Second Quarter Review of October 2009, India's macroeconomic context is different from that of advanced and other EMEs in at least four respects. One, India is facing rising inflationary pressures, albeit largely due to supply side factors. Two, households, firms and financial institutions in India continue to have strong balance sheets, although there is a need to encourage domestic consumption and investment demand. Three, since the Indian economy is supply-constrained, pick-up in demand could exacerbate inflationary pressures. Four, India is one of the few large EMEs with twin deficits - fiscal deficit and current account deficit.

5. Growth during Q2 of 2009-10, at 7.9 per cent, reveals a degree of resilience that surprised many. Subsequent data releases, whether on industrial production, infrastructure or exports, confirm the assessment that the economy is steadily gaining momentum. Based on this better-than-expected performance, growth forecasts for 2009-10 have generally been revised upwards. As reassuring as this recovery is, it is still unbalanced. Public expenditure continues to play a dominant role and performance across sectors is uneven, suggesting that recovery is yet to become sufficiently broad-based.

6. For several months, rapidly rising food inflation has been a cause for concern. More recently, there are indications that the sustained increase in food prices is beginning to spill over into other commodities and services as well. The increases in the prices of manufactured goods have accelerated over the past two months. While food products, understandably, contribute significantly to this, pressures in other sectors are also visible. Further, prices of non-administered fuel items have increased significantly in line with rising international prices. With growth accelerating in the second half of 2009-10 and expected to gain momentum over the next year, capacity constraints could potentially reinforce supply-side inflationary pressures.

7. The inflation risk looms larger when viewed in the context of global price movements. As already indicated, global commodity prices are showing signs of firming up, driven both by the recovery in demand and the asset motive. Significantly, prices of important food items are also firming up. Going by the Food and Agriculture Organisation (FAO) data, the global rates of increase in the prices of sugar, cereals and edible oils are now appreciably higher than domestic rates. The opportunity to use imports as a way to contain domestic food prices is, therefore, quite limited.

8. Monetary aggregates during 2009-10 have so far moved broadly in line with their projections. However, non-food bank credit growth decelerated significantly from its peak of over 29 per cent in October 2008 to a little over 10 per cent in October 2009. Thereafter, it recovered to over 14 per cent by mid-January 2010. This credit performance should be seen in the context of improved access of corporates to non-bank sources of funds this year. Rough calculations show that the total flow of financial resources from banks, domestic non-bank and external sources to the commercial sector during 2009-10 (up to January 15, 2010) at Rs.5,89,000 crore was only marginally lower than Rs.5,95,000 crore in the corresponding period of the previous year. These numbers suggest that non-bank sources of finance have, to a large extent, mitigated the impact of the slow down in bank credit growth.

9. Our previous Reviews have commented on the monetary transmission during the crisis period. While the changes in the Reserve Bank's policy rates were quickly transmitted to the money and government securities markets, transmission to the credit market was slower. Evidently, the transmission is still in progress. The effective average lending rate of scheduled commercial banks declined from 12.3 per cent in March 2008 to 11.1 per cent in March 2009. Although relevant information for the subsequent period is not available, the effective average lending rates may have declined further as banks' benchmark prime lending rates (BPLRs) softened by 25-100 basis points during this period.

10. Financial markets have remained orderly. Overnight money market rates remained below or close to the lower bound of the liquidity adjustment facility (LAF) corridor. Liquidity conditions remained comfortable with the Reserve Bank absorbing about Rs.1,09,000 crore on a daily average basis during the current financial year. Yields on government securities could potentially have increased sharply because of the abrupt increase in government borrowings. However, the upward pressure on yields was contained by lower commercial credit demand, open market operation (OMO) purchases and active liquidity management by the Reserve Bank. Equity markets are behaving in a manner consistent with global patterns. Real estate prices have firmed up as has been the trend in several other EMEs. Increasing optimism about the recovery and high levels of liquidity are driving up real estate prices although they are still some distance away from the pre-crisis peaks.

11. On the fiscal front, the stimulus by the government in the second half of 2008-09 has clearly contributed significantly to the recovery. It may be recalled that the crisis-driven stimulus by way of reduction in excise levies, interest rate subventions and additional capital expenditure came on top of structural measures already built into the budget such as the Sixth Pay Commission Award and farm debt waiver.

12. We will have to await the forthcoming budget in end-February 2010 for the Government's decision on phasing out the transitory components of the stimulus. As regards the structural components, even though they were one-off, some of their impact is expected to continue over the next couple of years, as state governments and public sector enterprises align their compensation structures with the recommendations of the Sixth Pay Commission.

13. Managing the government borrowing programme to finance the large fiscal deficit posed a major challenge for the Reserve Bank. In order to address this, the Reserve Bank front-loaded the government borrowing programme, unwound MSS securities and undertook OMO purchases.

14. On the external front, exports have begun responding to the revival in global demand. Right through the difficulties of 2008-09 and the early months of the current financial year, there was never any pressure on the current account. However, capital outflows in the third quarter of 2008-09 led to some stress on the balance of payments, but we rode this out on the strength of our forex reserves. The Reserve Bank, however, had to initiate some conventional and non-conventional measures to ease the pressure on forex and rupee liquidity. In the space of a year, the situation has clearly stabilised.

15. The current account deficit during April-September 2009 was US$ 18.6 billion, up from US$ 15.8 billion during April-September 2008. Over the first half of 2009-10, capital inflows resumed, but were not significantly in excess of the current account deficit. India's improving growth prospects, combined with persistently high levels of global liquidity, may result in a significant increase in net inflows over the coming months. Depending on how these are handled, there will be implications in terms of a combination of exchange rate appreciation, larger systemic liquidity and the fiscal costs of sterilisation.

II. Outlook and Projections

Global Outlook

Global Growth

16. Global economic performance improved during the third and fourth quarters of 2009, prompting the IMF to reduce the projected rate of economic contraction in 2009 from 1.1 per cent made in October 2009 to 0.8 per cent in its latest World Economic Outlook (WEO) Update released on January 26, 2010. The IMF has also revised the projection of global growth for 2010 to 3.9 per cent, up from 3.1 per cent (Table 1). The IMF expects the growth performance, which will be led by major Asian economies, to vary considerably across countries and regions, reflecting different initial conditions, external shocks, and policy responses.

Table 1: Projected Global GDP Growth (%)*

Country/Region
2009
2010

US
(-) 2.5
2.7

UK
(-) 4.8
1.3

Euro Area
(-) 3.9
1.0

Japan
(-) 5.3
1.7

China
8.7
10.0

India
5.6
7.7

Emerging and Developing Economies
2.1
6.0

World
(-)0.8
3.9

Source: World Economic Outlook Update, IMF, January 26. 2010


17. The IMF has also revised upwards its projection of the real GDP growth of emerging and developing economies for 2009 to 2.1 per cent from its earlier number of 1.7 per cent. The estimates are even more optimistic for 2010. The growth of emerging and developing economies is now projected at 6.0 per cent, up from 5.1 per cent earlier. The growth in EMEs such as China and India and other emerging Asian economies is expected to be robust. Commodity-producing countries are likely to recover quickly in 2010 on the back of a rebound in commodity prices.

Global Inflation

18. The IMF expects that the high levels of slack in resource utilisation and stable inflation expectations will contain global inflationary pressures in 2010. In the advanced economies, headline inflation is expected to increase from zero in 2009 to 1.3 per cent in 2010, as rising energy prices may more than offset deceleration in wage levels. In emerging and developing economies, inflation is expected to rise to 6.2 per cent in 2010 from 5.2 per cent in 2009 due to low slack in resource utilisation and increased capital inflows.

Domestic Outlook

Growth

19. During 2009-10, real GDP growth accelerated from 6.1 per cent in Q1 to 7.9 per cent in Q2 driven by revival in industrial growth, and pick-up in services sector growth, aided by payment of arrears arising out of the Sixth Pay Commission Award. It is expected that Q3 growth, which will reflect the full impact of the deficient south-west monsoon rainfall on kharif crops, would be lower than that of Q2. As rabi prospects appear to be better, on the whole, agricultural GDP growth in 2009-10 is expected to be near zero.

20. As a result of the improvement in the global economic situation since the Second Quarter Review in October 2009, exports expanded in November 2009, after contracting for 13 straight months. This positive trend is expected to persist. The industrial sector recovery, some signs of which were noted in the Second Quarter Review, is now consolidating. The performance of the corporate sector has picked up. Increased business optimism also reflects brighter prospects for the industrial sector. Services sector activities have improved. Domestic and international financing conditions have eased considerably, and this too should support domestic demand.

21. In the Second Quarter Review of October 2009, we had placed the baseline projection for GDP growth for 2009-10 at 6.0 per cent with an upside bias. The movements in the latest indicators of real sector activity indicate that the upside bias has materialised. Assuming a near zero growth in agricultural production and continued recovery in industrial production and services sector activity, the baseline projection for GDP growth for 2009-10 is now raised to 7.5 per cent (Chart 1).

22. Looking ahead to 2010-11, our preliminary assessment of the baseline scenario is that the current growth will be sustained. This is a tentative assessment. We shall formally indicate our growth projection for 2010-11 in our Monetary Policy in April 2010.

Inflation

23. Headline wholesale price index (WPI) inflation was 1.2 per cent in March 2009. It continued to decline and became negative during June-August 2009 due to the large statistical base effect. It turned positive in September 2009, accelerated to 4.8 per cent in November 2009 and further to 7.3 per cent in December 2009. On a financial year basis, between April-December 2009, WPI moved up by 8 per cent.

24. The deficient monsoon rainfall and drought conditions in several parts of the country have accentuated the pressure on food prices, pushing up the overall inflation rate – both of the WPI and consumer price indices (CPIs). Going forward, the rabi crop prospects are assessed to be better. The large stock of foodgrains with public agencies should help supply management. On the other hand, there is a risk that inflationary pressures may emanate from the rebound in global commodity prices.

25. Assessment of inflationary pressures has become increasingly complex in the recent period as the WPI and CPI inflation rates have shown significant divergence. All the four CPIs have remained elevated since March 2008 due to the sharp increase in essential commodity prices. The Reserve Bank monitors an array of measures of inflation, both overall and disaggregated components, in conjunction with other economic and financial indicators to assess the underlying inflationary pressures for formulating its monetary policy stance.

26. The Second Quarter Review of October 2009 projected WPI inflation of 6.5 per cent with an upside bias for end-March 2010. The upside risks in terms of higher food prices reflecting poor monsoon have clearly materialised. However, some additional factors have also exerted upward pressure on WPI inflation. One, the expected seasonal moderation has not taken place, other than in vegetables. Two, prices of the non-administered component of the fuel group, tracking the movement in global crude prices, have also risen significantly. Three, there have also been some signs of demand side pressures. The Reserve Bank's quarterly inflation expectations survey for households indicates that inflation expectations are on the rise. Keeping in view the global trend in commodity prices and the domestic demand-supply balance, the baseline projection for WPI inflation for end-March 2010 is now raised to 8.5 per cent (Chart 2).

27. As with growth, we shall formally announce our inflation projection for 2010-11 in our Monetary Policy in April 2010. However, on the assumption of a normal monsoon and global oil prices remaining around the current level, it is expected that inflation will moderate from July 2010. This moderation in inflation will depend upon several factors, including the measures taken and to be taken by the Reserve Bank as a part of the normalisation process.

28. As always, the Reserve Bank will endeavour to ensure price stability and anchor inflation expectations. The conduct of monetary policy will continue to condition and contain perception of inflation in the range of 4.0-4.5 per cent. This will be in line with the medium-term objective of 3.0 per cent inflation consistent with India's broader integration with the global economy.

Money and Credit Aggregates

29. During the current financial year, the year-on-year growth in money supply (M3) moderated from over 20.0 per cent at the beginning of the financial year to 16.5 per cent on January 15, 2010, reflecting deceleration in bank credit growth during 2009-10. Year-on-year increase in non-food bank credit to the commercial sector, at 14.4 per cent as on January 15, 2010, was significantly lower than the 22.0 per cent growth a year ago. Consequently, the more important source of M3 expansion this year has been bank credit to the government, reflecting the enlarged support to the market borrowing of the government and unwinding of MSS securities.

30. Aided by the measures initiated by the Reserve Bank (see para 13), over 98 per cent of the net market borrowing programme of the Central Government for 2009-10 has already been completed by January 28, 2010. The anticipated increase in credit demand by the commercial sector in the remaining period of 2009-10 can, therefore, be easily met from the market as adequate liquidity is available in the system. In view of the increased availability of funds from domestic non-bank and external sources (see para 8), the 18 per cent growth in adjusted non-food credit growth projected earlier is unlikely to be realised. Accordingly, the indicative adjusted non-food credit growth projection for 2009-10 is now reduced to 16 per cent. Based on this projected credit growth and the remaining very marginal market borrowing of the government, the projected M3 growth in 2009-10 has been reduced to 16.5 per cent for policy purposes. Consistent with this, aggregate deposits of scheduled commercial banks are projected to grow by 17 per cent. These numbers, as before, are provided as indicative projections and not as targets.

Risk Factors

31. While the baseline scenario is comforting, a number of downside risks to growth and upside risks to inflation need to be recognised.

(i) There is still uncertainty about the pace and shape of global recovery. There are concerns that it is too dependent on public spending and will unravel if governments around the world withdraw their fiscal stimuli prematurely. As the world discovered during the recent crisis, the global economy is heavily inter-linked through the business cycle. A downturn in global sentiment will affect not only our external sector but also our domestic investment.

(ii) Oil prices have been range-bound in the recent period. However, if the global recovery turns out to be stronger than expected, oil prices may increase sharply, driven both by prospects of demand recovery and the return of the investment motive, which will affect all commodities. This could stoke inflationary pressures even as growth remains below potential.

(iii) Expectations of softening domestic inflation are contingent on food prices moderating. This, in turn, depends significantly on the performance of the south-west monsoon in 2010. If rainfall is inadequate, high food prices will continue to intensify inflationary pressures.

(iv) So far, capital inflows have been absorbed by the current account deficit. However, sharp increase in capital inflows, above the absorptive capacity of the economy, may complicate exchange rate and monetary management.

(v) As growth accelerates and the output gap closes, excess liquidity, if allowed to persist, may exacerbate inflation expectations.

32. Beyond the above risk factors, by far a bigger risk to both short-term economic management and to medium-term economic prospects emanates from the large fiscal deficit. The counter-cyclical public finance measures taken by the government as part of the crisis management were necessary; indeed they were critical to maintaining demand when other drivers of demand had weakened. But as the recovery gains momentum, it is important that there is co-ordination in the fiscal and monetary exits. The reversal of monetary accommodation cannot be effective unless there is also a roll back of government borrowing. As indicated earlier (para 13), even as the government borrowing had increased abruptly during 2008-09 and 2009-10, it could be managed through a host of measures that bolstered liquidity. Those liquidity infusion options will not be available to the same extent next year. On top of that, there will be additional constraints. Inflation pressures will remain and private credit demand will be stronger with the threat of crowding out becoming quite real.

33. There are standard, well-known and well-founded reasons for fiscal consolidation. For both short-term economic management and medium-term fiscal sustainability reasons, it is imperative, therefore, that the government returns to a path of fiscal consolidation. The consolidation can begin with a phased roll back of the transitory components. Beyond that, in the interest of transparency and predictability, the government should ideally do two things: first, indicate a roadmap for fiscal consolidation; and second, spell out the broad contours of tax policies and expenditure compression that will define this roadmap.

III. The Policy Stance

34. The Reserve Bank has pursued an accommodative monetary policy beginning mid-September 2008 in order to mitigate the adverse impact of the global financial crisis on the Indian economy. The measures taken instilled confidence in market participants and helped cushion the spillover of the global financial crisis on to our economy. However, in view of rising food inflation and the risk of it impinging on inflationary expectations, the Reserve Bank announced the first phase of exit from the expansionary monetary policy by terminating some sector-specific facilities and restoring the statutory liquidity ratio (SLR) of scheduled commercial banks to its pre-crisis level in the Second Quarter Review of October 2009.

35. Against the above backdrop of global and domestic macroeconomic conditions, outlook and risks, our policy stance in this Quarter is shaped by three important considerations:

(i) A consolidating recovery should encourage us to clearly and explicitly shift our stance from 'managing the crisis' to 'managing the recovery'. We articulated this change in our stance in the October quarterly review, but the growing confidence in the recovery justifies our moving further in reversing the crisis-driven expansionary stance. Our main policy instruments are all currently at levels that are more consistent with a crisis situation than with a fast-recovering economy. It is, therefore, necessary to carry forward the process of exit further.

(ii) Though the inflationary pressures in the domestic economy stem predominantly from the supply side, the consolidating recovery increases the risks of these pressures spilling over into a wider inflationary process. Looking ahead into 2010-11, if the growth momentum turns out to be as expected, pressures on capacities in an increasing number of sectors are likely to strengthen the transmission of higher input and wage costs into product prices.

(iii) Even amidst concerns about rising inflation, we must remember that the recovery is yet to fully take hold. Strong anti-inflationary measures, while addressing one problem, may precipitate another by undermining the recovery, particularly by deterring private investment and consumer spending.

36. Against this backdrop, the stance of monetary policy of the Reserve Bank for the remaining period of 2009-10 will be as follows:

Anchor inflation expectations and keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively through policy adjustments as warranted.

Actively manage liquidity to ensure that credit demands of productive sectors are adequately met consistent with price stability.

Maintain an interest rate environment consistent with price stability and financial stability, and in support of the growth process.
IV. Monetary Measures

37. On the basis of the current assessment and in line with the policy stance as outlined in Section III, the Reserve Bank announces the following policy measures:

Bank Rate

38. The Bank Rate has been retained at 6.0 per cent.

Repo Rate

39. The repo rate under the Liquidity Adjustment Facility (LAF) has been retained at 4.75 per cent.

Reverse Repo Rate

40. The reverse repo rate under the LAF has been retained at 3.25 per cent.

Cash Reserve Ratio

41. It has been decided to:

increase the cash reserve ratio (CRR) of scheduled banks by 75 basis points from 5.0 per cent to 5.75 per cent of their net demand and time liabilities (NDTL) in two stages; the first stage of increase of 50 basis points will be effective the fortnight beginning February 13, 2010, followed by the next stage of increase of 25 basis points effective the fortnight beginning February 27, 2010.
42. As a result of the increase in the CRR, about Rs. 36,000 crore of excess liquidity will be absorbed from the system.

43. The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation closely and take further action as warranted.

Expected Outcomes

44. The expected outcomes of the actions are:

(i) Reduction in excess liquidity will help anchor inflationary expectations.

(ii) The recovery process will be supported without compromising price stability.

(iii) The calibrated exit will align policy instruments with the current and evolving state of the economy.

Monetary Policy 2010-11

45. The Monetary Policy for 2010-11 will be announced on April 20, 2010.

Mumbai
January 29, 2010
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