TRANSI TION TI MES SEASON -2 (please do not make corrections after u receive it from me) 15 TH SEPTEMBER TO 20 TH SEPTEMBER ATM transactions not free for banks, says Raghram Rajan Second authentication for small value payments through credit cards can be reduced subject to conditions Reserve Bank of India (RBI) governor Raghuram Rajan said that while there has been criticism about reducing free ATMtransactions from five to three, it was necessary since it was free for the customers bu
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  TRANSITION TIMES SEASON -2 (please do not make corrections after u receive it from me) 15  TH   SEPTEMBER TO 20  TH   SEPTEMBER   ATM transactions not free for banks, says   Raghram Rajan   Second authentication for small value payments through credit cards can be reduced subject to conditions  Reserve Bank of India (RBI) governor Raghuram Rajan said that while there has been criticism about reducing free ATMtransactions f rom five to three, it was necessary since it was free for the customers but not to the  bank. After requests from banks to consider capping the number of free transactions, the banking r egulator decided to cap them. Banks had said that they incurred high costs by the benefit of repeated free transactions that were  being availed of, by their customers. The governor said that if one five transactions it costs the bank about Rs 75-100. There is no such thing as a free lunch, which we tend to forget sometimes. If your bank has to pay some other bank for those transactions, it has to collect it from somewhere. It collects it by increasing some other fee on customers. It passes the cost  back to customers, he said. Rajan said that to the extent that everybody does five transactions free and everybody incurs the same cost, that cost is passed back to customers. They are neither better off nor worse off, they are paying in a disguised way. But he said that this creates distortions, since cone doing five transactions get best benefits while others doing one or no transactions do not get any benefits. Should we mandate such cross subsidy and subsidying people in use of cash?, he asked. Hence, he said that there has been a partial withdrawal of the mandates whereby number of free ATM transactions will be three from November in six metros with maximum number of ATMs. RBI has reduced the number of free transactions per month for customers at any non-home bank ATM to three from five earlier. This will be effective from November in the six metro cities of Mumbai, Delhi, Kolkata, Chennai, Bangalore and Hyderabad. He also clarified that they are not telling banks that they have to charge, but are telling them you can charge. Banks can choose to still subsidize. Overall, this will reduce the hidden cross subsidy and make it more transparent, he said.  RBI has a two-step authentication process for credit card transactions, which Rajan said that would continue to  be mandated. He added that some firms are bypassing this and indeed clearing transactions abroad, thereby contravening a number of rules that are on the book. The immediate pushback was that RBI was against innovation. Whatever is the innovation, you have to follow rules. If there is a rule on the book, we don't allow it to be violating simply because the innovation is cool, he said. With this authentication, Rajan said that the security of the transactions has been improved. He also added that RBI is looking at how to adapt to innovation by allowing easy use for small value payments. Under this, they are looking at reducing second authentication for low value payments provided the card  provider has systems to protect against misuse and they would bear costs beyond a certain point if the card is misused. The governor also raised some questions regarding the priority sector. Rajan said that one needs to keep asking as to why should some sectors get easier credit than others. He said that for example, we subsidise in priority sector student loans for study abroad. Are students studying abroad the most needy in the country or is most important? I am not saying that this is  bad but we should ask questions, he opined Loan scams: Rajan warns banks on outsourcing   key internal jobs   Says better project evaluation through improved internal skills is needed  As concerns mount over rising bad loans and scams at banks, the Reserve Bank  today asked lenders to improve project evaluation skill internally instead of depending on external agencies, and to set up automated monitoring systems. We need better project evaluation through improved internal skills, not through intermediaries. A problem that has emerged in recent years and the recent scandals is the fact that the loan evaluation process has been outsourced, Reserve Bank Governor  Raghuram Rajan said addressing an industry summit here. Underlining the need for a rigorous assessment system, he said the loan evaluation process is so central to  banking that it is impossible to outsource. It has to be brought back in-house and competencies generated. We have to move towards engaged, informed banking and not getting done by engaging outside intermediaries. Banks are the main source of funding for infrastructure projects and that will increase as the economy regains its lost momentum, Rajan said. He also warned them that further forbearance to deal with non-performing assets (NPAs) or bad loans is not an  option and the answer lies in dealing with the problem upfront by raising more capital. We have to make sure that we don't give so much forbearance that we really don't know whether the asset is functioning or not...It creates enormous ever-greening and the end result is that bank balance-sheets have no meaning. The regulatory requirement is to make sure that banks' balance sheets continue to be informative, Rajan said. The true answer over time is raise more capital, to tide over the capital crunch of banks which have been getting depleted over the years, he added. Asked during an interaction whether restructuring can be provided on project loans, Rajan warned that such a move could have serious implication on banks' balance sheets and investor perception. Rajan said: Ultimately, if the account is stressed it can be restructured. There is nothing that stand in the way of restructuring. But there will be implications on provisions and capital. If we start showing forbearance on that, then it runs the risk of diluting the entire balance sheet. According to estimates, recast loans at about Rs 3.5 trillion (Rs 3.5 lakh crore) constitute nearly 6 per cent of the total banking system. Ahead of policy, Rajan rules out repo rate cut   Says there was no point in cutting interest rates to see inflation pick up again  The wholesale price index (WPI) for August may have shrunk to a five-year low, but Reserve Bank of India Governor  Raghuram Rajan is still unmoved. Just two weeks ahead of the monetary  policy r eview, Rajan said on Monday that inflation was still high and there was no point in cutting interest rates to see it (inflation) pick up again. Speaking at a banking conference in Mumbai, Rajan said he had no desire to keep interest rate higher than what they should be even for a second longer than needed. The interest rates will be brought down when we have won the fight against inflation. The conference was organised by the Federation of Indian Chambers of Commerce and Industry and the Indian Banks' Association. RBI-watched consumer price index (CPI) inflation eased slightly to 7.8% in August from 7.96% recorded in July, and Rajan said the downward trend in inflation was consistent with RBI f orecasts.    Rajan's statements suggest that the repo rate will be kept unchanged at 8% on September 30 when RBI reviews the policy. On economic growth, Rajan said the recovery was still uneven though the country was doing better than a few months ago. Industrial production rose just 0.5% in July, lower than expectations of a 2% growth and down from a 3.9% expansion in June. Rajan said strong export data and accelerating car sales growth suggest the economy could be gaining momentum, but it's still way before we are out of the woods . Rajan showed concerns on the sluggish investment growth. Investment growth is yet to pick up. When we look at investment growth, we also look at credit numbers which have not picked up as strongly as yet. Probably the reason may be that large corporate are tapping the financial markets as bond issuances have been significant in the last few months, he said. On the recent dip in oil prices, the Governor said the government must take advantage of the lowest oil prices in a year to free up fuel prices and reduce subsidies. Brent crude has fallen 14% since June to $96.38 per  barrel. We need to seize this moment to eliminate diesel subsidies completely. We can of course wait but the moment will leave us and we may be back to subsidizing, Rajan said. The RBI governor noted how the differentiation in the interest rate cycle in the world's largest economies was a large question mark looming over India's future. It may bring some respite to India in the coming months, but it may also make the global environment more perilous for emerging economies. We are probably reaching closer to the initiation of interest rates increases in the US, probably a long time still for Japan and the euro area, Rajan said. There will be differentiated situations across the world, which may be a blessing, may be their own source of turmoil as exchange rates move significantly differently based on who starts first and who starts later. Rajan said that banks will have to continue to finance infrastructure projects because, fortunately or unfortunately , there were no other entities to do long-term financing. But he also asked bankers to become  better in evaluation of projects. We need better evaluation, which cannot be outsourced. We need early recognition of projects and quick and effective project restructuring for distressed projects, Rajan said. He also touched upon the recent incidents of corruption in public sector banks and said the banking system needed to use its strengths by weeding out bad apples from the system.
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