Cut bank CEOs' pay for poor show: RBI

Aiming to discipline the financial sector, the Reserve Bank of India on Friday proposed slashing salaries of chief executive officers and directors of private banks on poor showing and limiting increases to 15 per cent. 

The draft regulations on compensation of private banks, based on sound risk management and productivity linked principles, comes within days of the US Congress passing a major financial reform bill to discipline firms on Wall Street. 

Interestingly, a finance ministry panel has only this week recommended better pay for chiefs of public sector banks. Executives of state-run banks are perceived to get salary packages way below that of their private sector counterparts. 

The country's largest private sector bank ICICI Bank's chief Chanda Kochhar got a remuneration of Rs 1.73 crore (Rs 17.3 million) in 2009-10, as against market leader and state-run lender SBI chief O P Bhatt's Rs 26.51 lakh (Rs 2.65 million). 

As per available data for fiscal year 2009-10, the number of top executives at private sector banks getting remuneration in excess of Rs 1 crore (Rs 10 million) a year is more than that of their counterparts in any other sector.
As per the latest data, about 25 private sector bank top executives, including chiefs of ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank and DCB, figured among the 200-odd such persons during the year ended March 2010.
While the government fixes the salaries for public sector bank chiefs, the private banks need a clearance from RBI for remuneration of their top executives, but currently there is no cap. 

On its part, RBI proposed limiting annual salary hikes of CEOs or wholetime directors of private banks to 10-15 per cent, besides a provision for slashing remuneration in case of poor financial showing. 

The proposals were part of the draft regulations on compensation of private sector, local area and foreign banks and are significant given the fact that high salaries and bonuses of bankers (despite their institutions faring badly) were blamed for the 2008 global financial meltdown. 

"In case of wholetime directors (WTDs)/CEOs, the annual increase in fixed pay should not be generally more than the range of 10-15 per cent," the draft said.
In the draft, the RBI said guaranteed bonuses are not consistent with sound risk management or productivity-linked principles and proposed that they should not be a part of the compensation plan. 

As such, bonus should only be given for hiring new staff and be limited only to the first year, the draft said.However, this payment should be in the form of employee stock option only, since advance payments would create 'perverse' incentives and promote undue risk taking. 

The RBI, however, suggested autonomy for private sector banks for paying perquisites to the senior staff in line with the existing practices.The central bank also proposed that private sector banks must ensure that there is a proper balance between fixed pay and variable pay. 

"At higher levels of responsibility, the proportion of variable pay may be higher. The variable pay could be in cash, stock-linked instruments or mix of both," the draft proposal said. However, deterioration in financial performance of the banks should generally lead to contraction of variable pay.

Where the variable pay constitutes a substantial portion of total pay, 40-60 per cent of this remuneration must be deferred for a minimum of three years.
A substantial portion of deferred variable pay should be awarded in shares or share-linked instruments like ESOPs and should conform to Securities and Exchange Board of India guidelines.
The remaining portion of deferred compensation should be paid as cash compensation gradually. 

In case, there is negative contribution of the bank in any year during these three years, any unpaid portion of deferral compensation should be clawed back.In case of foreign banks, RBI said, if the compensation was not properly aligned to risks or there are other lacunae, the issue would be taken up with the home-country regulator.

Private sector banks are suggested to submit a copy of their compensation policy to RBI. The draft also proposes to make it binding on private sector banks to constitute a Remuneration Committee in the Board. 

Currently, the compensation committee of each of the foreign and private sector banks clears salaries of CEOs and then refers it to the RBI for its final nod, but it is not binding. As for public sector banks, remunerations of chairmen are fixed by the government. 

Source - http://business.rediff.com/report/2010/jul/02/bcrisis-cut-bank-ceos-pay-for-poor-show-rbi.htm

Sebi norms on physical delivery settlement soon

Market regulator Securities and Exchange Board of India on Thursday said it expects to frame guidelines on enabling physical delivery- based settlement in the derivative segment by the end of July.

"The issue of enabling physical delivery-based settlement is (being) discussed between Sebi and stock exchanges and we expect to reach a conclusion by end of this month," Sebi chairman C B Bhave told reporters on the sidelines of a function in Mumbai on Thursday.

"We should see something before the end of July," Bhave said.

In March, Sebi had decided to allow physical delivery in the equity derivatives segment to bring down speculation in the stock markets and had said it will hold talks with the stock exchanges and work on the system.

Bhave also said Sebi is considering whether distributors of financial products need to be regulated.

"We are looking at the issue and once we decide on it, we will bring out a consultative paper."

Replying to a query on the slow progress of mutual fund trading platform launched on stock exchanges, Bhave said, the process was new and took time to build up.

"We want to talk to stock exchanges. . .we want to give sufficient time, before arriving at any conclusion as to why there are not sufficient volumes," he said.

Sebi is also looking at launching options in the currency derivative segment fairly soon.

"RBI in its policy has said that currency options would be permitted. The technical group between RBI and Sebi is working on this and we expect a decision soon," Bhave said. Sebi is also considering issue of listing of exchanges.

"We have referred to a committee under the chairmanship of former RBI Governor, Bimal Jalan. There were issues relating to the 'infrastructure institutions in the market' that is stock exchanges, depositories and clearing corporations. The question was that can these institutions being infrastructural in nature be driven purely for profit and what kind of conflicts can arise out of that," Bhave said.

It needs to be ensured that the infrastructure nature of these institutions is protected and no problems are created in that particular role of these institutions, he said.

Source - http://business.rediff.com/report/2010/jul/08/sebi-norms-on-physical-delivery-settlement-soon.htm

RBI raises short-term rates to contain inflation

The Reserve Bank of India on Friday raised the short-term lending and borrowing rates by 25 basis points with immediate effect to contain inflation.

The move comes weeks ahead of the scheduled policy review by RBI on July 27 and a day after the government announced that food inflation dipped by about a quarter to about 12 per cent.

Overall wholesale prices-based inflation too is in double digits.

The central bank raised both, repo and reverse repo rates (the rates at which the RBI lends and borrows short-term funds from commercial banks), by 25 basis points to 5.50 per cent and 4 per cent, respectively.

The move would raise cost of funds for banks and temper demand for loans, and in turn, consumer spending.

"The RBI's action is consistent with its gradual normalisation of policy rates towards a level consistent with the economic growth, in a non-disruptive manner," said Chanda Kochhar, managing director and CEO of ICICI.

Source - http://business.rediff.com/report/2010/jul/02/rbi-raises-key-rates-by-25bps.htm

No overwriting on cheques after December 1: RBI

The Reserve Bank of India (RBI) directive to banks, asking them not to honour cheques with overwriting, will come into effect from December 1 instead of the earlier scheduled date of July 1, the apex bank said in its latest circular.

The new rule is intended to prevent fraudulent withdrawal of money and expedite clearance of cheques.

Meanwhile, telecom company Bharti Airtel subscribers received an SMS on June 28 that said "as per RBI, cheques with changes in amount or payee name (despite signature next to them) will not be cleared with effect from July 1."

However, Airtel today said that it is in the process of sending a revised advisory to its customers informing them about the change in the deadline to December 1.

The RBI has also advised banks to create awareness among customers about the new norms, which were aimed at preventing fraud, besides expediting clearance of cheques where CTS (Cheque Truncation System) is used. Under CTS, image of cheque is sent to clearing house for transfer of funds.

When contacted, an RBI spokesperson said, "The notification regarding cheque truncation system which prohibits alteration will come into effect from December 1, 2010. There is no mention of July 1."

The central bank in February had come out with circular on 'Standardisation and enhancement of security features in cheque forms' detailing the norms for image-based processing of cheques.

RBI had said that fresh cheques should be issued by customers in case of change in payee's name or amount (whether in figures or words). Changes, however, could be made with regard to date.

The new norms will not apply to those cheques, which are cleared by clearing houses that use Magnetic Ink Character Recognition (MICR) or non-MICR system.

Also, it added, the norms will not be mandatory for over the counter collection of funds or for direct collection of cheques outside the Clearance House Arrangement.


Source - http://www.business-standard.com/india/news/no-overwritingcheques-after-december-1-rbi/99810/on

RBI to issue new banking licences post Sept

Rabo Bank and Goldman Sachs will have to wait a bit longer to start their banking operations in India as the Reserve Bank of India is expected to issue new banking licences only after it comes out with a discussion paper on the issue in September, reports CNBC-TV18 quoting sources. The RBI will review presence of foreign banks to operate in India as a branch or a subsidiary in the said month. The Reserve Bank is in favour of the subsidiarisation model as it feels it will give more regulatory control over foreign banks. As far as new licences are concerned, sources at the RBI said that they welcome banks like Rabo Bank to start operations in India. The Netherlands based bank is largely focussed on agriculture based activities, which is one of the pet projects of the RBI.

Source - http://www.moneycontrol.com/news/cnbc-tv18-comments/rbi-to-issue-new-banking-licences-post-sept_467225.html