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Read ETCETRA page of FRee Press Journal Heath articles.
Window-dressing of deposits by banks: Some truths
September 23, 2012:
Window-dressing is one of the uncomfortable phenomena in the Indian banking system. The financial status of banks is evaluated every quarter (March-end, June-end, September-end and December-end).
At these points of evaluation, banks try to boost their deposit figures through artificial means. However, the make-up does not last long. The deposit figures start dropping in the ensuing weeks till the attainment of a natural height. The paradox to be noted is that window-dressing is artificial, whereas window-undressing is quite natural.
In spite of being transitory, window-dressing has become a common and normal practice among bankers and an integrated feature of the system so much so that the quarterly figures of deposits are always accepted with a pinch of salt.
All banks window-dress; only the degree differs.
RBI's Concern
The phenomenon of window-dressing continues despite the RBI's warningsand suasion. The RBI's concern is evident from its Business Season Credit Policy, 1995.
To quote, "Banks have been repeatedly warned to eschew window-dressing and it is unfortunate that despite strong suasion this warning has been ignored. Banks are cautioned once again against the recurrence of such a phenomenon and I am constrained to say that we may have to evolve certain arrangements, including punitive action, to prevent the recurrence of such a phenomenon." (Paragraph 5 of the RBI Governor's letter to SCBs on September 29, 1995 detailing the Busy Season Credit Policy)
The RBI Annual Report 1998-99 cited window-dressing of deposits as one of the factors contributing to the "hardening of call rates".
The RBI Bulletin of May 2000 refers to window-dressing causing "year-end bulge". In his speech titled, "The Evolution of Banking Regulations in India – A Retrospect", one of the then RBI Deputy Governors, V. Leeladhar, characterised window-dressing as "prudentially undesirable." (RBI Bulletin, May, 2007)
Why Undesirable?
Window-dressing is undesirable because it introduces distortions in monetary and banking aggregates and, thereby, affects the process of monetary and banking policy and planning adversely.
Moreover, it makes the bank officials concerned complacent about making real efforts to mobilise 'stable' deposits. Of late, it is being realised that deposit mobilisation is often more effort-elastic than anything else. Window-dressed deposits are rather fickle.
Reasons
Over time, the Indian banking system has become more competitive. Not only there is stiff competition among banks to grab public deposits but also they have to compete against non-banks offering attractive returns. In contrast, the savings potential of the country has been varying in a limited range. The following graph illustrates that the country's financial savings as a percentage of GDP at CMP has been hovering around 10-13 for the past seven years. (Source: Economic Survey 2011-12, pp.5, Table 1.4). A roller-coaster ride, indeed!
Thus, there is a classical economic problem: Limited resources and unlimited competitors. The demand for of the latter is not only high but urgent and swift as well. In such a situation, those who can plan and execute the plans effectively to get a major chunk of savings can actually increase deposits; but those 'career-conscious' aspirants who fall short resort to window-dressing.
In the above framework, one pertinent question arises. Why do bankers aspire for deposits and deposits alone, when there exist so many other performance indicators? Even if banking has come a long way, still the emphasis is on 'growth' and within 'growth', deposit figures are being focussed first because banks are basically 'special' financial intermediaries, and deposits are their raw materials for credit creation. This stark reality cannot be just wished away.
Banks sign a memorandum of understanding with the Finance Ministry, Government of India that benchmarks the performance of bank Chairman and Managing Directors (CMDs) against certain parameters, within which 'growth in business (deposits and loans)' figures prominently. If banks attain their targets agreed upon, CMDs get a bonus. This is the starting line for hounding 'growth'.
The process is replicated at the micro-levels of the hierarchy where first and foremost, growth in deposits shown by incumbents at various levels is taken as a significant performance indicator.
In view of this, a blanket target-oriented approach is followed in mobilising deposits. The targets are fixed from the top on an increasing trend basis irrespective of various endogenous and exogenous changes the operating area might have undergone or might be experiencing during the time interval of the last and forthcoming evaluation points.
Generally speaking, there is a lack of gradual, continuous and systematic efforts to mobilise deposits because of stationary nature of the evaluation points.
Towards the evaluation points of time bankers receive a spur and run around to get deposits. And haste makes waste.
The Ultimate Truth
Like risk, window-dressing can only be minimised, but not eliminated. Let us accept the reality that so long as 'growth' is focussed in evaluation of financial status of banks, window-dressing will continue. All the stakeholders in the process of evaluation should be 'deprogrammed' from their obsession with 'growth'.
Evaluation should include other parameters pertaining to a bank's efficiency, safety and soundness, staff productivity, financial inclusion, technology and the like as determinants of achievements and a simple, weighted index needs to be developed to calibrate a bank chief's performance. This is a challenge for the Finance Ministry which should constitute a committee with representations from stakeholders to devise the index.
(The author is a former commercial bank economist)
CBDT specifies cost inflation index for FY'12-13
New Delhi, Sept 22:
The Central Board of Direct Taxes (CBDT) has specified a new value for the cost inflation index for 2012-13.
Last year the index was '785', and this year it is '852'. This would mean that there has been an 8.5 per cent rise in the cost inflation index for 2012-13.
The index is useful for income-tax assessees in the computation of tax on long-term capital gains (for indexation purposes). In the previous two years, the cost inflation index rose 10 per cent and 12.5 per cent, respectively.
A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation.
The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the cost inflation index) before the long-term capital gain is ascertained.
The income-tax law requires the CBDT to specify the cost inflation index for a financial year after factoring in 75 per cent of average rise in consumer price index for urban non-manual employees for the immediately preceding financial year.
Last year, the CBDT had specified the cost inflation index in June. This year it has been done in September.
"The exercise of notifying cost inflation index should be done much earlier during the year before the tax obligation cycle begins," said Aseem Chawla, Partner, MPCLegal, a legal firm.
The concept of indexation has been preserved even under the proposed direct taxes code, which is likely to come into force from April 1 next year.
Currently, the holding period is different for different assets for deciding the applicability of long-term capital gains. Under the proposed code, the test for non-business assets will be a uniform holding period of one year.
Once the new direct taxes code comes into effect, one can apply the cost inflation index, if one owns a house for more than one year. Now, it is three years for residential properties.
Chidambaram favours more action to boost investor sentiment
More policy initiatives will be taken to push reforms and boost investors' sentiment, says P. Chidambaram.
New Delhi, Sep 22:
The government will take more steps to push reforms, boost investor sentiment and provide stable tax laws, Finance Minister P Chidambaram said on Saturday, while expressing satisfaction over the positive response of stock markets to the recent policy initiatives.
"We are committed to undertaking a range of actions, small and large, that ensures that we are able to support our economic growth with a stable environment," he said at a conference, 'Economic Growth and Changes of Corporate Environment in Asia'
The assertion came a day after the Finance Ministry cut withholding tax on overseas borrowings to 5 per cent from 20 per cent and approved the Rajiv Gandhi Equity Savings Scheme to attract first time investors to stock markets.
Stock markets cheered the announcement, with the BSE benchmark Sensex closing 404 points higher at 18,752.83 yesterday.
"I am happy to note that the recent decisions taken by government have been widely welcomed, especially by markets and by important stake—holders in the market," he said.
Underlining the need for clarity in tax laws, Chidambaram said lack of clarity in laws can create a great degree of instability in the environment which is not good for economic growth.
"And one of the most important contributor to stable environment is clarity in law, especially tax laws, fairness in tax administration, and non—adversarial approach to tax administration and collection of taxes and above all a fair and quick dispute resolution mechanism...," he said.
Govt can impeach CAG if it thinks coal scam report is wrong'
Bhopal, Sept 23:
Stating that it was wrong for the UPA government to challenge CAG report on coal allocation issue, BJP leader Murli Manohar Joshi today said the government could impeach the auditor if it believed the report was not correct and he had overstepped his brief.
"Just criticising the CAG and saying he had overstepped his brief has no meaning...it can impeach CAG as the Constitution provides for impeachment of a CAG," Joshi told PTI here.
Joshi, who is chairman of the Public Accounts Committee, also said Prime Minister Manmohan Singh had set a wrong precedent by stating that the CAG report would be challenged.
Joshi said the job of the CAG was not to frame a policy but to see the manner in which it was implemented.
The senior BJP leader said the present UPA government at the Centre had failed on a number of counts and it would be erroneous on its part to believe that the people would not punish it for its lapses.
He said natural resources of a country were not the property of any government. They belong to the people and the government has no right to deal with it as per its whims.
CAG, in its report submitted recently, had estimated that private companies which were allotted coal blocks would make a "windfall gain" of over Rs 1.85 lakh crore. The government, however, has rejected the finding of the report.
High court to hear Rs 8,500-cr Vodafone transfer pricing case today
New Delhi, Sept. 23:
The Bombay High Court is expected to issue directions on Monday in the Rs 8,500-crore Vodafone transfer pricing case.
Vodafone had through a writ petition in February challenged the jurisdiction of the Tax Department in issuing a draft transfer pricing order that sought to add Rs 8,500 crore to the taxable income of Vodafone.
The Income Tax Department's draft transfer pricing order, issued in December 2011, related to transaction on Vodafone's call centre business.
Separately, Vodafone had also in end January filed objections to the draft transfer pricing order before the dispute resolution panel (DRP).
If the transfer pricing adjustment of Rs 8,500 crore were to be confirmed, then Vodafone may face tax bill of Rs 2,805 crore on this account, say tax experts.
"All the pleadings (in Vodafone Transfer pricing case) have been made. The matter is listed for directions on Monday," sources close to the development said. When the writ petition was filed in February, Vodafone had said that Supreme Court's judgment in the $11.2-billion Vodafone-Hutch deal had several observations which appeared to favour the company's position in the transfer pricing matter.
On January 20, the Supreme Court had ruled that Income Tax Department had no jurisdiction to tax the $11.2-billion Hutch-Vodafone deal struck in 2007.
But in March, the Government had come up with retrospective amendments to the income tax law to bring to tax all offshore indirect transfer of shares with underlying Indian assets.
Vodafone had few days ago offered to pay Rs 8,000 crore to settle the tax dispute with the Indian Government (on the $11.2-billion Vodafone-Hutchison deal).
This option is there if the Government were to consider waiving penalty and interest amount, Analjit Singh, Vodafone's non-Executive Chairman in India, said after a meeting with the Revenue Department officials here.
The Income Tax Department had raised tax demand of Rs 11,218-crore (including Rs 7,900 crore of tax and the remaining interest) on Vodafone for the $11.2-billion Vodafone-Hutchison deal in 2007.
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