1. RBI proposes formula to calculate Base Rate

With an attempt to bring about uniformity among banks for calculation of the base rate and for effective transmission of policy rates to the customers, RBI proposed a new formula for calculating the Bank Rate.The Base Rate is the minimum interest rate of a Bank below which it cannot lend, except in cases allowed by RBI.The Base Rates differ across banks and there is no uniformity in the calculation.Methods of calculating the Base Rate

At present, banks are using various methodologies: marginal cost of funds method, average cost of funds method, blended cost of funds (liabilities) method etc.

RBI has suggested the banks to consider marginal cost of funds as a parameter to calculate the individual lending rates as the Base Rates based on marginal cost of funds are more sensitive to changes in the policy rates

The components of Base Rate will include cost of funds, negative carry on CRR/SLR, un-allocable overhead costs and average return on net-worth

RBI will implement this proposal from April 1st 2016 and has asked the banks to submit road maps two months prior to the implementation of the proposals, indicating the time frame within which they will be adopting the framework.Why are uniform base rates desirable?It is important in order to improve the efficiency of monetary policy transmission.What is monetary policy transmission?RBI takes monetary policy decisions to stabilise the economy and keep the price levels within rational limits. But these decisions will be effective only if the entities such as banks, markets, financial institutions etc modify their working accordingly. This is a very simplistic explanation of monetary policy transmission, though the actual process is very complex, so much so that it is called a ‘black box’ among economists.

2. RBI to issue Rs 5 coin on golden jubilee of 1965 Indo-Pak war

The Reserve Bank of India (RBI) will shortly put into circulation Rs 5 coins to commemorate golden jubilee of Indo-Pak War 1965. The coins will be legal tender as provided in The Coinage Act 2011 and existing coins in this denomination will also continue to be legal tender.About the Coin:

The new coin in the obverse will bear Lion Capital of Ashoka Pillar in the centre with ‘Satyamev Jayate’ inscribed below it.

On the reverse it will bear image of ‘Amar Jawan’ monument along with the design of olive leaves branch on its left and right sides at the center, with the

inscription ‘veerata aur balidan’ in Devnagri script on the left upperperiphery and ‘VALOUR AND SACRIFICE’ in English on the right upper

Also, ‘GOLDEN JUBILEE 1965 OPERATIONS’ in English on the lower periphery will be written on the reverse side of the coin.

Furthermore, the year ‘2015’ will be written below the image of the monument.

3.Central Bank of Sri Lanka received USD 1.1 billion from RBI

The Central Bank of Sri Lanka (CBSL) received USD 1.1 billion from the Reserve Bank of India (RBI), under the currency swap agreement between the two reserve banks. The signing of the special currency swap agreement for USD 1.1 billion by the CBSL with the RBI took place earlier on 17 July 2015.

Sri Lanka already obtained USD 400 million under this arrangement, which is available from the RBI to SAARC member countries, to increase foreign reserves. CBSL Governor Arjuna Mahendran said, the country will receive the balance 1.1 billion dollars from the Reserve Bank of India to boost foreign reserves under a USD 1.5 billion dollar swap arrangement. The funds will reach Sri Lanka overnight.In a press release the CBSL further added, the realisation of the remaining proceeds of the currency swap arrangement with the RBI amounting of USD 1.1 billion and long term financial flows to the government, including the planned term loan of USD 500 million, will support its official reserves.

Significance:With the enhanced level of official reserves, the CBSL expects that the exchange rate would stabilize in line with sound macroeconomic fundamentals and movements of other currencies of major trading partners.Important Points to Remember:

Capital of Sri lanka – Colombo Sri Lankan Currency – Sri Lankan rupee President of Sri Lanka – Maithripala Sirisena Prime minister of Sri Lanka – Ranil Wickremesinghe SAARC stands for – South Asian Association for Regional Cooperation SAARC Headquarters located in – Kathmandu, Nepal SAARC Secretary General – Arjun Bahadur Thapa SAARC Membership – 8 Members (Afghanistan, Bangladesh, Bhutan, India,

Maldives, Nepal, Pakistan and Sri Lanka)

4. R Gandhi panel recommended conversion of UCBs into Regular Banks

To strengthen the Urban Cooperative Bank (UCB) structure the Reserve Bank of India’s (RBI) nine-member High Powered internal Committee on Urban UCBs headed by RBI Deputy Governor R Gandhi in its report has recommended conversion of UCBs with business size of 20000 crore rupees or more into regular banks. Key Recommendations:

A business size of Rs20,000 crore or more may be the threshold limit beyond which a UCB may be expected to convert to a commercial bank. However, the conversion isn’t mandatory.

Smaller UCBs with business size of less than Rs20000 crore rupees willing to convert to Small Finance Banks (SFBs) can apply for conversion provided they fulfill all the eligibility criteria and selection processes prescribed by the RBI.

Licenses may be issued to financially sound and well-managed co-operative credit societies having a minimum track record of 5 years which satisfy the regulatory prescriptions set by the RBI.

Setting up a Board of Management (BoM) as suggested by the Malegam Committee has to be one of the mandatory licensing conditions for licensing of new UCBs and expansion of existing ones.

Stiff entry-point norms for new UCBs – to operate as a multi-state UCB, the minimum capital requirement would be Rs 100 crore, to operate beyond two districts and as a state-level UCB, the capital threshold is Rs 50 crore and a capital of Rs 25 crore if the UCB is at the district level.

As recommended, the depositors must have a say on the Boards. For this, a majority of the board seats may be reserved for depositors by making suitable provisions in the bye-laws.

As per the official report, this transition is required due to the changing financial landscape in the country and also for giving an opportunity to well-run UCBs to play a major role going forward. But this requires requisite amendments in the provisions of the Cooperative Societies Acts of all states which is a long process. That’s why the Committee recommended that only UCBs which are registered under the Multi-state Co-operative Societies Act, 2002 may be considered for conversion to commercial banks.

5. RBI granted ‘in-principle’ approval to 11 applicants to start a payments bank

The Reserve Bank of India granted ‘in-principle’ approval to 11 entities to set up payments banks under the Guidelines for Licensing of Payments Banks issued on November 27, 2014 proposed such licences ‘on tap’ in future.

“In-principle” Approval:

The “in-principle” approval granted will be valid for a period of 18 months, during which time the applicants have to comply with the requirements under the Guidelines and fulfil the other conditions as may be stipulated by the Reserve Bank.

On being satisfied that the applicants have complied with the requisite conditions laid down by it as part of “in-principle” approval, the Reserve Bank would consider granting to them a licence for commencement of banking business.

A total of 41 applicants had applied for payments banks from them only 11 applicants has been selected by External Advisory Committee (EAC) under the Chairmanship of Dr. Nachiket Mor, Director, Central Board of the Reserve Bank of India, Internal Screening Committee (ISC) and finalized by Committee of the Central Board (CCB).

11 applicants includes:1. Aditya Birla Nuvo Limited.2. Airtel M Commerce Services Limited.3. Cholamandalam Distribution Services Limited.4. Department of Posts.5. Fino PayTech Limited.6. National Securities Depository Limited.7. Reliance Industries Limited.8. Shri Dilip Shantilal Shanghvi.9. Shri Vijay Shekhar Sharma10. Tech Mahindra Limited.11. Vodafone m-pesa Limited.

Operations to be made by 11 Applicants (Payment Banks):

Payment banks allow mobile firms, supermarket chains, and others to cater to individuals and small businesses.

The Payments Bank will be set up as a differentiated bank and shall confine its activities to acceptance of demand deposits, remittance services, Internet banking and other specified services.

Payments Banks will initially be restricted to holding a maximum balance of Rs. 1 lakh per individual customer.

They will be allowed to issue ATM/debit cards as also other prepaid payment instruments, but not the credit cards.

These banks can also distribute non-risk sharing simple financial products like mutual funds and insurance products.

They will not be allowed to undertake lending services and non resident Indians will not be allowed to open accounts.

What are payment banks: Payments banks will provide small savings accounts, payments/remittance services to migrant labour workforce, low-income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments/remittance services in a secured technology-driven environment. A payment bank is covered under sections 5 (b) and 6 (1) (a) to (o) of the Banking Regulation Act, 1949.

How payment banks are different from regular banks: These banks can only receive deposits and remittances but cannot carry out lending activities. Aiming at financial inclusion, these banks will provide banking services to migrant labourers, low income households, etc.

6.RBI issues Rs 100 notes with new numbering patternRBI) on Thursday said it has issued Rs 100 denomination banknotes in the Mahatma Gandhi Series-2005 with a new numbering pattern."Now, the numerals in both the number panels of these banknotes will be in ascending size from left to right while the first three alphanumeric numerical characters will remain constant in size. Printing the numerals in ascending size is a visible security feature in the banknotes so that the general public can easily distinguish a counterfeit note from a genuine one," the central bank said in a release.It, meanwhile, said that all banknotes in the denomination of Rs 100 issued by the bank in the past will continue to be legal tender.RBI said that, in consultation with the government, it has been improving security features of banknotes in order to check counterfeiting and make it easy for the public to identify genuine banknotes.The new numbering pattern will be introduced in a phased manner for all other denominations, it added.

7. RBI likely to go for 25 basis points cut in September, says HSBCThe Reserve Bank of India (RBI) is likely to go for a 25 basis points rate cut in September as price pressures have fallen "notably and far more than expected", says an HSBC report.According to the global financial services firm, food prices have been falling across all major sub-groups, across the CPI and WPI measures, both on annual and sequential basis.Moreover, while rains remain 10 per cent below normal, their impact so far remains "non-disruptive" and fuel inflation has predictably eased off."All of these suggest that space for a 25 bps rate cut in the upcoming 29th September policy meeting has opened," HSBC Chief Economist India Pranjul Bhandari said in a research note.

As per official figures, retail inflation (CPI) slipped to a record low of 3.78 per cent in July while the wholesale price index-based (WPI) inflation touched a historic low of (-)4.05 per cent.HSBC, however, noted that there are two risks to its forecast of 25 bps next month.First, the rupee, which has already depreciated 2.3 per cent against dollar following developments in China, could come under further pressure from a possible Fed lift-off in September. Secondly, a large payback in August inflation reading following the July moderation could keep the RBI from cutting rates in September, it said."If the period around the September FOMC meeting remains volatile, the RBI's rate cut could be pushed to fourth quarter," HSBC said and on rupee depreciation it added that "a sharper pace of depreciation, however, could put the 25 bps rate cut in jeopardy."RBI Governor Raghuram Rajan, in his third bi-monthly policy of the fiscal, left benchmark lending (repo) rate unchanged at 7.25 per cent as also the cash reserve ratio (CRR) at 4 per cent.RBI has already reduced the policy rate by a total of 75 basis points or 0.75 per cent since January.

8. Use uniform method to calculate lending rate: RBI to banksThe Reserve Bank of India (RBI) issued draft guidelines on Tuesday for its proposed plan to change the method by which banks calculate their lending rates in order to make them more responsive to the Central bank's monetary policy actions. Banks currently have a lot of freedom in determining their lending rates but RBI officials are of the view that bankers are concentrating too much on protecting their profit margins and not passing on its rate cuts quickly enough.In spite of RBI Governor Raghuram Rajan coming down heavily on banks for not passing on the entire benefit of its 75 basis points rate cut since January 15, lenders have reduced base rates only by about 30 basis points citing higher cost of funds. During the last monetary policy review, on August 4, Rajan had even said that the RBI would not reduce rates unless banks pass on the earlier rate cuts to consumers. In the first Bi-monthly Monetary Policy Statement 2015-16 in April, the RBI had said that in order to improve the efficiency of monetary policy transmission, it will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their base rate.Banks follow different methods for computing base rate. While some use the average cost of funds method, others have adopted the marginal cost of funds and some the blended cost of funds (liabilities) method. The RBI has unveiled the detailed draft guidelines on how banks should calculate their lending rates and asked for feedback by September 15."For monetary transmission to occur, lending rates have to be sensitive to the policy rate," the RBI said. Banks have also maintained they will lower lending rates as soon as they can but are constrained because they must weigh how much they are receiving in deposits with interest they owe to customers and companies.

9. Small finance bank licences next month: RBI Governor

RBI Governor Raghuram Rajan said that new payments banks would not pose any competitive

threat to the existing banks and these new entities would rather serve as 'feeder' for the universal

banks.

     

The RBI had received 72 applications for small finance bank licences and 41 applications for

payment bank licences. Out of these, RBI yesterday granted 'in principle' approval for payments

bank to 11 entities, including big names like Reliance Industries, Aditya Birla Nuvo and Tech

Mahindra, as also Airtel and Vodafone.

     

The small finance banks can provide basic banking services like accepting deposits and lending

to the unbanked sections such as small farmers, micro business enterprises, micro and small

industries and unorganised sector entities.

     

The payments banks would be allowed to provide payments and remittance services, but can not

issue credit cards or accept deposits beyond Rs 1 lakh. They can issue ATM and debit cards and

also distribute mutual fund and insurance products.

     

Rajan said introduction of Payments Banks will revolutionise banking, make it very exciting for

customers and existing lenders will have to improve service to retain depositors.

"I've no doubt banking will become very competitive and universal banks have to provide full

service to retain customers," Rajan said during a chat with SBI Chairman Arundhati

Bhattacharya at the conference organised by the country's largest lender.