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Bankers and representatives of mutual fund and insurance industries on Tuesday raised with two key policy advisors of the government issues such as high interest rates, loan restructuring and growing bad assets that afflict the financial sector.
The proposed General Anti-Avoidance Rules (GAAR) that, once implemented, might impact capital markets as well as larger economic growth also came up for discussion in their meeting with C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, and Montek Singh Ahluwalia, deputy chairman of the Planning Commission.
The financial sector representatives said they got a hint that the government was working on some kind of a package to perk up the economy. At the meetings, they also raised the issue of permitting mutual funds to come up with pension products.
Rangarajan asked bankers to give details of loan and deposit growth.
Emerging from the meeting with Rangarajan, Indian Banks’ Association (IBA) Chairman Alok K Misra told reporters the prime minister’s aide listened to the feedback from the mutual fund, life insurance and banking industries.
“We said projects at this point of time are not coming (through), what should be done, investors sentiment should be good and the cost should come down. Sanctions (to projects) should be made faster,” said Misra, who is also the chairman and managing director of Bank of India.
He said there were indications that the government was working on some “package”
While Rangarajan refused to give details of on Tuesday’s meeting, he said the issue of interest rate did come up in discussions.
ICICI Bank Managing Director Chanda Kochhar said the discussion points were mainly related to the economy and the measures required to boost growth.
“A whole lot of focus was on investment climate: What needs to be done around projects to get the investment moving and to bring the flow of foreign funds into India,” she said.
India’s gross domestic product growth fell to a nine-year low of 5.3 per cent in the March quarter.
Canara Bank Chairman and Managing Director S Raman said while improving the investment climate was one of the major discussion points, Rangarajan took view of the banking sector on issues related to loan and deposit growth. “What should be the direction of the interest rate? Of course, the paramount conclusion was growth is important,” Raman said.
Milind Barve, chairman of Association of Mutual Funds of India (Amfi) and managing director of HDFC Mutual Fund, said issues relating to the sector were discussed, including allowing mutual fund companies to float pension products.
After taking charge of the finance ministry last month, the prime minister had stressed the need to revive the mutual fund sector.
There are indications that the Securities and Exchange Board of India (Sebi) is in no mood to reintroduce entry load, or commission for mutual fund distributors, which it banned in 2009. After the ban, the mutual fund industry has seen a massive outflow of investment.
Sebi is, however, open to raising the expense ratio, which at the peak is fixed at 2.5 per cent of the assets of the scheme currently.
This was the second meeting of Rangarajan in two days with key players or their representatives in the economy arena. On Monday, he had met officials from industry chambers, who among other things, pressed for easing of monetary policy by the Reserve Bank of India (RBI).
However, Rangarajan had said RBI’s stance would depend on the behaviour of non-food manufacturing product inflation.
On Monday, RBI expressed displeasure at banks not cutting interest rates despite the central bank lowering the repo rate, at which it lends money to other banks, by 50 basis points in April. The apex bank had also expressed concern at the slow pace of bank deposit growth.
RBI, which opted not to change rates at the policy review last month, is scheduled to review the monetary policy on July 31.
While the short-term lending rate (repo) has been kept unchanged at eight per cent, the cash reserve ratio — the portion of deposits banks are required to park with RBI — stood at 4.75 per cent.
Deposit growth stood at 14.3 per cent year-on-year in the fortnight ended June 15 against 18.3 per cent for the same period last year. In their meeting with Ahluwalia, the officials discussed the issues related to growing debt of power distribution companies (discoms), restructuring of loans, non-performing assets (NPAs) and GAAR.
Mutual fund companies are believed to have said GAAR might impact capital markets. Recently, the finance ministry has come out with draft guidelines on GAAR. While the norms proposed that foreign institutional investors from the countries with which India has double taxation avoidance agreement will come under GAAR, those routing money through participatory notes will be spared.
After meeting Ahluwalia, Kochhar said: “Experience shows that for the industry as a whole, just about 15 per cent of the restructured assets have turned into NPAs. The most of restructured assets actually worked out”.
In general, she added, “we should remember that in a growth economy like India, most of restructured assets will work. They will turn out into performing assist”.
Later in the day, chief executives of discoms met Financial Services Secretary D K Mittal, seeking restructuring of the bank loans.
The Planning Commission has also called a meeting of the state power officials next week as power has been identified as the most ailing infrastructure area.