Banking Awerness Auguest-October 2013

Raghuram Rajan appointed as the next RBI Governor 
August 8th, 2013
Raghuram Govind Rajan (50), who is currently the Chief Economic Adviser to the Govt. of India, has been appointed as Governor of the Reserve Bank of India (RBI) for 3 years. He will take over from D. Subbarao who demits office on September 4, 2013. The appointment was approved by Prime Minister Manmohan Singh.
Dr. Rajan, who is credited to have correctly predicted the 2008 financial crisis, is set to take over the helm of the central bank at a time when the economy is grappling with a multi-pronged crisis of high consumer price inflation, industrial slowdown, sharp depreciation of the rupee and a widening current account deficit.
Arundhati Bhattacharya is the new managing director of SBI
August 6th, 2013
The Govt. has appointment Arundhati Bhattacharya has been appointed as the new managing director of the State Bank of India (SBI). Previously, Bhattacharya was the managing director of SBI Capital, the merchant banking arm of the bank.
Who is SBI’s first woman MD (Managing Director)?
Ms Arundhati Bhattacharya will be State Bank of India’s first woman managing director.
Who was the first Woman MD (Managing Director) of a Public Sector bank in India?
The first woman MD of a Public sector bank in India was Ms Ranjana Kumar. The Government of India appointed Ms Ranjana Kumar as the Chairperson and managing Director of the Indian Bank, she became the first woman to become head of a public sector bank in India.
Some other ladies who are at present heading banks in India:
Public Sector Banks:
  • United Bank of India: Ms. Archana Bhargav (Chairman & MD)
  • Allahabad Bank: Ms Shubhalakshmi Panse (Chairman & MD)
Private Sector Banks:
  • ICICI Bank: Ms.Chanda Kochhar (MD & CEO)
  • Axis Bank: Ms Shikha Sharma (MD & CEO)

Rajeev Rishi appointed as Chairman and MD of Central Bank of India
August 6th, 2013
The Central Government has appointed Rajeev Rishi, Executive Director, Indian Bank has been appointed as the Chairman and Managing Director, Central Bank of India. He will have a tenure of five years from the date of taking over charge.
Prior to his appointment as Chairman & Managing Director of Central Bank of India Shri Rishi was the Executive Director of  Indian Bank since October 2010.
RBI’s cash-tightening measures to stay until Forex market stabilizes: Subbarao
August 4th, 2013
RBI Governor D Subbarao has defended the central bank’s stance on choosing inflation over growth, saying that when the “inflation threshold limit is crossed, it becomes difficult to make a trade-off.”
He explained that there is a threshold level of inflation. If the inflation is below that level, then RBI can make that trade-off. But if it isn’t, then it can’t afford to do the same as inflation hurts the poor section of the country the most and for this reason some sacrifice of growth is inevitable to curb inflation. He said that this sacrifice in growth is only for the short-term. In the long-term, curbing inflation will be supportive of growth.
He refused to give any time-frame of the current cash-tightening measures taken by the central bank and indicated that these measures will stay until volatility in the foreign exchange market is curbed.
RBI lowers GDP growth to 5.7%
August 3rd, 2013
The GDP growth for the current fiscal has been fixed lower by the Reserve Bank of India’s professional forecaster’s survey. From the earlier estimation of 6% it has now been fixed as 5.7%.
Forecast by RBI:
  • The growth is expected to rise further to 6.5% in 2014-15.
  • The bank credit growth forecast for 2013-14 has also been revised downward to 15 % from 16 %.
  • For money supply has been revised downwards in 2013-14 to 13%  from 14.6 %.
  • Agricultural prospects for 2013-14 are encouraging given the good monsoon so far.
  • Revival in mining and manufacturing will take some more time but some improvement can be seen.
Inflation and Risk:
  • RBI revised the inflation target to 5.3 % from the earlier target of 6.5 %.
  • Average WPI inflation is expected to moderate to 5.3 % during 2013-14.
  • The rupee depreciation of about 9 % in Q1 of 2013-14 is likely to put pressure on domestic inflation.
  • Fuel under-recoveries have raised sharply due to the exchange rate depreciation and domestic price rigidities.
  • Businesses have weakened but signs are there that the downturn can be contained.
Weakening rupee is biggest risk to inflation: Subbarao
August 3rd, 2013
Duvvuri Subbarao, Governor of the Reserve Bank of India, stated that the declining of the rupee is the biggest risk to inflation.
RBI left interest rates unchanged as it supports a battered rupee but it would roll back recent liquidity tightening measures when stability returns to the currency market enabling it to resume supporting growth.
RBI also has reservations on issuing sovereign bonds and as it feels that sovereign bond issue would compromise financial stability. As per RBI, the cost of a sovereign bond issue outweighs the benefits at current juncture.
RBI leaves key rates unchanged to curb the depreciation of Rupee
August 3rd, 2013
The Reserve Bank of India (RBI) kept the indicative policy (repo) rate unchanged at 7. 25 % and the Cash Reserve Ratio (CRR) at 4% in order to suppress the instability in the foreign exchange market.
The RBI had brought down the repo rate from a peak of 8.50% by 125 basis points in 2012-13 and CRR from a high of 6 % in the last one-and-a-half years by 200 basis points.
RBI’s revised Growth Projection:
The RBI revised its growth projection for the current financial year from 5.7 % to 5.5 %. The depressed global conditions were undermining export performance, even as the heightened instability in capital flows had raised external funding risks. In advanced economies, activity has weakened. Emerging and developing economies are slowing, and are also experiencing sell-offs in their financial markets.
Kumar Mangalam Birla steps down from RBI Board
July 30th, 2013
Kumar Mangalam Birla who was nominated as a member of the directors of the Central Board of the RBI in 2006 stepped down from RBI Board.
Why did K.M.Birla stepped down from the RBI Board?
To avoid any conflict of interest as few weeks back his group firm applied for a bank license.
  • Among the 26 entities his group firm “Aditya Birla Nuvo” is one of the entities which have applied for a bank license.
  • The RBI is expected to grant new licenses by March 2014 as the last date for applying for a bank license expired on July 1, 2013.
RBI decreases realization period for exporters from 12 to 9 months
July 30th, 2013
Responding further to the increasing pressure on Current Account Deficit (CAD) due reduced exports and depreciation of rupee against dollar, the Reserve Bank of India has brought down the period of realization and repatriation for exporters of goods and software from 12 to 9 months with a view to increase foreign exchange inflows.
The period of realization and repatriation to India of the full export value of goods or software exported by a unit situated in a Special Economic Zone (SEZ) as well as exports made to warehouses established outside India remains unaltered.
India’s exports reduced by 4.6% for the 2nd consecutive month to USD 23.79 billion in June 2013 compared to year ago interval.
The rupee has depreciated by over 12% against the dollar since the beginning of the fiscal. Central bank and capital markets regulator SEBI had to take unconventional measures to control the market.
India emerges as the 2nd largest investor in London
July 25th, 2013
India has come up as the 2nd largest investor in the city of London with Indian companies led by software major Infosys with the investment eagerness generated by the 2012 Olympic Games in the British capital.
Infosys leads the inward Foreign Direct Investment (FDI) made by a total of 28 Indian companies, which generated 429 additional jobs for the British economy in 2012.
Major sectors of growth:
  • India has registered exceptional growth in the common areas of interest, such as transport and city planning.
  • India brought in a large amount of additional 2.5 billion-pound foreign investment into the UK since the Games and Indian FDI projects in 2012-13 are estimated to generate 24 million pounds in gross value added for London’s economy over the next 3 years.
  • Information and communications technology (ICT) was the key sector in terms of Indian FDI into London, followed by financial services and retail.
  • In the financial services sector Axis Bank stood out for setting up its global operations in London as it has the right mix of potential wholesale and retail business to make it the ideal location for their first international subsidiary.
The latest figures were released as part of an overall estimate of the economic impact of the Olympic Games on London’s economy. British government research indicated that the UK economy has seen a 9.9 billion-pound boost in trade and investment from hosting the Games.
China lifts control on Bank lending rates
July 24th, 2013
In a move toward creating a market oriented financial system to support economic growth, the People’s Bank of China and its Central Bank promulgated to lift the controls on bank lending rates.
Background for why  China lifted the control on Bank lending rates:
  • Beijing has long used its banks to subsidize state industry with low-interest loans. Depositors who put their money were paid low rates on deposits in recent years.
  • Families failed to keep up with inflation and lost money by leaving it in the bank.
  • The household spending was suppressed which is among the lowest in the world as a percentage of the economy and efforts were made for domestic sustenance rather than China’s growth from exports and investment to more self-sustained domestic consumption.
  • Chinese families looking for a better return on their savings invested into stocks and real estate. They have also shifted money into wealth management products which are indeed too risky for household investors.
How China’s lifting of control on bank lending rates will affect its economy?
  • A change in the China’s interest rate policy will be one of the major changes required to keep its growth strong.
  • Allowing banks to negotiate their own rates with borrowers could bring in more credit to private enterprise. Until now, banks were lending generally to state industry instead of entrepreneurs who create China’s new jobs and wealth so this can bring a change.
  • This will be a noteworthy development for China’s financial sector in the direction of having interest rates determined by market forces rather than government.
  • This reform is to further develop the basic role of market allocation of resources to promote financial support for the development of the real economy.
  • It will allow banks to charge lower rates to more valuable borrowers, cutting down costs for healthy businesses and strong growth. Till now the lower limit on lending rates was set at 0.7 times the state-set interest rate.
  • Private sector borrowers may get more access to credit by paying more and this could help to reduce their dependence on a vast, unregulated credit market.
Rs 25,000 crore window opened by RBI to help Mutual Fund industry
July 21st, 2013
A special borrowing window of Rs 25,000 crore was opened by the RBI to help mutual funds industry over liquidity problems. The crisis occurred due to different merger schemes in the industry and profit booking. This facility will be made available for a brief period only.
A special 3-day REPO auction was decided to be conducted by RBI under which banks can raise funds upto to Rs 25,000 crore at 10.25 per cent for on lending to the mutual funds. In 2012-13 the mutual fund industry lost more than 36 lakh investors. During the last 3 financial years, the mutual fund industry had lost over 15 lakh new investor accounts. In April-June 2013-14 as per the latest SEBI data, Mutual Funds lost 10 lakh investors in terms of individual accounts or folios.
RBI calibrates MSF to ease rupee volatility
July 21st, 2013
In the wake of continuing depreciation of rupee disturbing the monetary and fiscal calculations, the Reserve Bank of India (RBI), fine-tuned the Marginal Standing Facility (MSF) rate to 10.5% from previous 8.25%. This will be 300 basis points above the policy repo rate under the Liquidity Adjustment Facility (LAF). The increase comes into effect with immediate effect. As a consequence of the increase in the MSF rate, the Bank Rate also stands adjusted to 10.25%.
As per RBI, the overall allocation of funds under the LAF would be limited to 1% of the net demand and time liabilities of the banking system. This is estimated to be around Rs.75,000 crore.
What is MSF?
Marginal Standing Facility (MSF) allows banks to borrow funds from the RBI at a rate which is 100 basis points above the LAF (or the repo rate), against pledging the approved government securities.
How will RBI’s caliberation of MST to ease Rupee volatility impact the market?
The increase in MSF is expected to make the loans costlier.
RBI penalizes 22 banks for violating KYC norms
July 21st, 2013
The Reserve Bank of India (RBI) has fined 22 banks by imposing penalty for violating Know-Your-Customer (KYC) norms and anti-money laundering guidelines. The banks who have been fined include SBI, Bank of Baroda, Canara Bank and some other banks all of whom have been fined Rs.3 crore each. The central bank also issued “cautionary letters” to seven other banks including Citibank, Standard Chartered and Barclays as no violation of serious nature by them was established.
The violations by the public sector banks were revealed in a sting operation by online portal, Cobrapost.
As per the RBI, the investigation against the fined banks did not reveal any prima facie evidence of money laundering.
The banks who have been penalized for violating Know Your Customer (KYC)/Anti-Money Laundering norms includes the country’s largest bank, State Bank of India, and other public sector banks such as Punjab National Bank, Bank of India and Canara Bank. Earlier, three ‘new generation’ private banks were slapped with stiff fines by the central bank whose investigations followed an expose by online portal Cobrapost. The latest list includes the relatively new Yes Bank as well as some old private banks such as Lakshmi Vilas Bank.
RBI directs oil firms to buy dollar from single PSU bank
July 17th, 2013
In the current scenario of continuous down slide of the rupee against the dollar, the Reserve Bank of India, in a bid to cub this volatility, has ordered state-owned oil companies to purchase their dollar requirement from a single public sector bank for every daily transaction. State oil refiners, who are the biggest buyers of dollars, agreed to implement the RBI order with immediate effect.
The RBI issued orders to Indian Oil Corporation, Hindustan Petroleum Corporation, Bharat Petroleum Corporation and Mangalore Refinery to stop seeking quotes from several banks for their $8-8.5 billion of monthly transactional requirement of U.S. dollar.
Why RBI doesn’t want oil firms to seek multiple quotes for their dollar requirements?
As felt by the RBI, Oil firms seeking multiple quotes for their dollar requirement adds to speculation on demand for the dollar and volatility in the local unit. The RBI has, therefore, asked oil firms to buy dollars from a single bank at their published reference rate.
RBI allows asset financing NBFCs to access ECB market
July 10th, 2013
As per a notification by the Reserve Bank of India which reviewed the External Commercial Borrowing (ECB) policy, Non-Banking Finance Companies (NBFCs) categorized as Asset Financing Companies (AFCs) by the RBI have been allowed to access the ECB market.
The access is subject to certain conditions, including availing of ECB under the automatic route with minimum average maturity of 5 years to finance import of infrastructure equipment for leasing to infrastructure projects. Besides, NBFC-AFCs availing of ECB through Foreign Currency Bonds (FCB) will be allowed to raise capital only from markets, subject to regulations by the host country complaint with Financial Action Task Force (FATF) guidelines. Such ECBs can be availed up to 75% of owned funds of NBFC-AFCs, subject to a maximum of $200 million or its equivalent per financial year.
ECBs by AFCs above 75% of their owned funds will be considered under the approval route and currency risk of such ECBs is required to be fully hedged. NBFC-Infrastructure Finance Companies (IFCs) are allowed to access ECB for on-lending to infrastructure sector both under automatic and approval routes.
Supreme Court: If a cheque from joint a/c bounces, liability is on person signing cheque
July 3rd, 2013
The Supreme Court has held that in case of issuance of cheque from joint accounts, only the person who signs the cheque can be prosecuted in a cheque bouncing case under Section 138 of the Negotiable Instruments Act. The other joint account members cannot be held culpable unless the cheque has been signed by them also. As per the apex court, the proceedings filed under Section 138 cannot be used as an arm twisting tactics to recover the amount allegedly due from the appellant.
The court clarified that the culpability attached to dishonour of a cheque can, in no case except in case of Section 141 of the N.I. Act (offences by companies), be extended to those on whose behalf the cheque is issued. This Court reiterates that it is only the drawer of the cheque who can be made an accused in any proceeding under Section 138 of the Act.
Distinguishing Individual and Company:
The court distinguished b/w individuals and companies and held that Section 141 of the N.I. Act is an instance of specific provision that in case an offence under Section 138 is committed by a company, the criminal liability for dishonor of a cheque will extend to the officers of the company. In case of the company, the officers of the company, who are accountable for the acts done in the name of the company, can be made accused for the acts which result in criminal action being taken against the company.
Fact Box: White Label ATMs
June 29th, 2013
RBI gives nod to Muthoot Finance to set up White Label ATMs
Indian gold loan company Muthoot Finance Ltd has obtained the RBI’s in-principle approval to set up the white label ATMs,as the government seeks to take financial services to the remote regions of the country.
What are White Label ATMs?
ATMs set up and run by non-banking entities are called White Label ATMs (WLAs). Earlier, only banks were allowed to establish and operate ATMs. RBI had allowed the company under the guidelines it released in June 2012 which set certain minimum net worth and obligation for permitting independent non-banking firms to operate such ATMs, as per three different schemes.
The Muthoot Finance has been given approval as per Scheme A under which Muthoot Finance will set up WLAs, a minimum of 1,000 WLAs have to be installed in the first year; a minimum of twice the number of WLAs installed in the first year have to be installed in the second year; and a minimum of three times the number of WLAs installed in the second year have to be installed in the third year.
What is the purpose of this move?
The fundamental objective of permitting non-banks to operate WLAs is to enhance the penetration of the machines in semi-urban and rural areas, where bank-run ATMs are a few or none. The move is in line to the governments objective of achieving financial inclusion.

India: World’s 3rd most attractive FDI destination
June 29th, 2013
As per the World Investment Report 2013 by the United Nations Conference on Trade and Development (UNCTAD), India is world’s third most attractive destination for investment by Transnational Corporations (TNCs) during 2013-15. In the survey based on responses of 159 companies, India has been positioned after China and United States. Thus India has retained its previous ranking. As per UNCTAD the top five countries in attracting FDI are:
  1. China
  2. United States
  3. India
  4. Indonesia
  5. Brazil

As per the report, developing countries make up four of the top five host economies. Six of the top 10 prospective host countries also come from the developing world, with Mexico and Thailand appearing for the first time.
SEBI tightens buyback rules
June 27th, 2013
SEBI has released new buyback norms and a number of other market friendly measures.
Under the new rules:
  • It is mandatory for companies selling shares to purchase at least 50% of the offer size. If they fail to do so, the amount in the escrow account will be forfeited, subject to a maximum of 2.5% of the total amount earmarked.
  • Companies will have to create an escrow account towards security for performance equivalent to at least 25% of the amount earmarked for buyback.
  • Companies are prohibited to come out with another buyback offer within one year from the date of closure of the preceding offer, and the promoters of the company are not allowed to execute any transaction, either on-market or off-market, during the buyback period.
  • Maximum buyback period has been reduced to 6 months from current 12 months.
  • Start-ups and SMEs (Small and Medium Enterprises) can be listed in Institutional Trading Platform (ITP) without making an Initial Public Offering (IPO). However, these companies in ITP will be able to raise capital only from investors such as Angel Investors, VCFs (Venture Capital Funds) and PEs (Private Equities). They will not be permitted to raise capital. However, they can continue to make private placements.
  • Incorporating the recommendations of the K. M. Chandrasekhar Committee on ‘Rationalisation of investment routes and monitoring of foreign portfolio investments’ to simplify the norms for foreign institutional investors, SEBI has relaxed entry rules for offshore portfolio investors to attract more foreign capital into the country at a time of currency weakness and worries over a record high current account deficit.
  • Foreign investors will now be permitted to trade in Indian stocks without any prior registration with SEBI.
Foreign Portfolio Investors: Different categories of investors like Foreign Institutional Investors (FIIs), sub-accounts (or an investment vehicle) and Qualified Foreign Investors (QFIs) have been clubbed under a new category called Foreign Portfolio Investor (or FPI).

SEBI relaxes foreign investment norms; a new category Foreign Portfolio Investors (FPIs) approved
June 27th, 2013
In a bid to attract a larger number of foreign investors to Indian capital markets, SEBI approved a slew of changes. Among the major changes are simplification of registration and compliance requirements for foreign investors.
As per new measures:
  • A new category Foreign Portfolio Investors (FPIs) has been approved; it blends various classes of investors such as FIIs, their Sub Accounts and Qualified Foreign Investors (QFIs) to set up a simplified and uniform set of entry norms for them.
  • Recommendations of K M Chandrasekhar Committee on Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments’.
  • Any portfolio investments would be defined as investment by any single investor or investor group, which shall not exceed 10% of the equity of an Indian company. Investments beyond this threshold of 10% will be considered as FDI.
  • With the aim to make the entry norms easier, SEBI has also approved eliminating the current practice of FIIs and their sub-accounts requiring a prior direct registration of the regulator to operate in Indian markets.
In addition, SEBI would adopt a risk-based KYC (Know Your Client) approach in dealing with the overseas investors. It includes FPIs to be divided into three categories which are:
  1. Low-risk (for multi-lateral agencies, government and other sovereign entities): This category will have simplest KYC requirements, not required to submit personal identification documents.
  2. Moderate risk (for banks, asset management companies, investment trusts, insurers, pension funds and university funds), not required to submit personal identification documents.
  3. High-risk (all the FPIs not included in the first two categories): This category FPIs would not be allowed to issue Participatory Notes and will have most stringent KYC requirements
Note: These measures have been introduced at a time when the rupee has depreciated considerably against the dollar reaching an all time low recently. Also, FIIs have been pulling out money from the Indian debt market, which has resulted in the hardening of yields on government bonds.
RBI auctions Inflation Indexed Bonds
June 26th, 2013
The government has announced the sale of 1.44% ‘Inflation-Indexed government stock 2023’ for a notified amount of Rs.1,000 crore through price-based auction on June 25, 2013. The results of the auction, to be conducted using the uniform price method by the Reserve Bank of India in Mumbai, will be announced on the same day.
Up to 20% of the notified amount of bonds on sale will be allotted to eligible individuals and institutions as per the scheme for non-competitive bidding facility in auction of government securities.
Both competitive and non-competitive bids for the auction are to be submitted in electronic format on RBI’s Core Banking Solution (e-Kuber) system.
What are IIBs?
Inflation-Indexed Bonds or IIBs are are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment. These bonds will be linked to the inflation index of the country (Wholesale Price Index or WPI) and serve as a better investment option as compared to physical assets like real estate and gold. Higher the inflation, higher the returns.
Why this step?
The step is being taken to de-motivate investments in gold as bulging imports of the yellow metal has been adversely affecting the country’s Current Account Deficit (CAD), which had surged to a historic high of 6.7% in the third quarter of 2012-13. Last month, imports of gold and silver soared by 138% on an annual basis to $ 7.5 billion.
How would IIBs help?
As per RBI, IIBs would help in:
  • Boosting domestic savings and reversing the declining savings-to-GDP ratio.
  • Providing households and other investors a competitive option against gold and real estate. In the wake of rising inflation last year, there was considerable flow of investments from financial savings to safe-haven assets like gold that resulted into higher imports of the metal. This led to current account deficit or CAD widening to 4.9% of GDP at the end of September 2012.
  • Giving investors choice to use IIBs as good hedging instruments against inflation.
How will the Index ratio be determined?
The IR (index ratio) will be computed by dividing reference index for the settlement date by reference index for the issue date, and the final inflation data based on the Wholesale Price Index (WPI) will be used for providing inflation protection. Besides, in case of revision in the base year for WPI series, base splicing method would be used to construct a consistent series for indexation.
RBI extends deadline for banks to implement card security features
June 26th, 2013
The RBI has provided the banks more time for introduction of additional security features for payment through debit and credit cards as banks and related entities had yet to put in place the requisite infrastructure.  The new deadline for banks to comply with all security features such as EVM chip on cards, real time fraud monitoring system, use of PIN, limit on transactions and the like is November 30, 2013.
After this deadline, in the event of a customer complaining of misuse of the card, the issuer or the acquirer who has not adhered to the time lines should bear the loss.
Why this additional features?
The RBI had in 2011, issued the guidelines for additional security features with a view to protecting cardholders against cyber frauds and other misuse. It has been observed that increased usage of credit and debit cards has led to surge in frauds, especially in the case of lost or stolen cards. Also, there have been reports of data on cards being compromised and cards skimmed /counterfeited.
RBI relaxed ECB norms for low cost housing projects
June 26th, 2013
The RBI has eased the External Commercial Borrowing (ECB) norms for affordable housing projects by withdrawing the minimum capital requirement, and lowering total experience to three years, while extending the scheme till next financial year.
As per RBI notification:
  • Developers or builders should have a minimum of 3 years’ experience in undertaking residential projects as against five years prescribed earlier.
  • The condition of minimum paid-up capital requirement of not less than Rs.50 crore for Housing Finance Companies (HFCs) to avail themselves of ECBs has been withdrawn.
  • Condition of the minimum net owned funds of Rs.300 crore (for the HFCs) for the past 3 financial years was unchanged.
  • Aggregate limit for ECB under the low cost affordable housing scheme is extended for 2013-14 and 2014-15 with a ceiling of $1 billion in each of the two years, subject to review thereafter.
  • ECB availed of by developers and builders shall be swapped into rupee for the entire maturity on a fully-hedged basis.
  • Interest rate spread charged by the National Housing Bank (NHB) may be decided by the NHB, taking into account cost and other relevant factors.
  • HFCs while making applications for ECB should submit a certificate from NHB stating that use of ECB for financing prospective owners of individual unit is for low cost affordable housing.
  • HFCs should ensure that the cost of such individual units should not exceed Rs.30 lakh, and the loan should not exceed Rs.25 lakh; and units financed should have a maximum carpet area of 60 square metres.
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Fact Box: ‘Diaspora Bonds’
June 25th, 2013
India thinks over ‘Diaspora Bonds’
India is examining to introduce “Diaspora Bonds” to attract investment from NRIs (Non-Resident Indians), to facilitate greater inflow of funds in the infrastructure sector. The government is examining longer-term investment instruments for overseas Indians so that the NRI community could participate and benefit from India’s growth.
Current Status: At present most of the diaspora investments are in portfolio investments of a short-term nature.
Plan of Govt: The government is considering the option of ‘diaspora bonds’ for longer-term investment instruments to provide opportunities for overseas Indians and thus facilitate greater inflow of funds in the infrastructure sector.
What are Diaspora Bonds (DBs)?
  • A sovereign bond that targets investors that have emigrated to other countries and the relatives of those emigrants. For example, the Government of India tries to sell a government bond to Americans of Indian origin. Diaspora bonds are marketed to members of the diaspora.
Attraction for issuing countries:
  • “Patriotic discount” - Diaspora investors sometimes offer what is called a “patriotic” discount to governments in their country of origin/ancestry. As per George Washington University’s Liesl Riddle, when diaspora members invest in their homelands, they are motivated by more than just profit: “Social and emotional motivations also play a role.”
  • Stable source of finance, especially in bad times
  • Support to sovereign credit rating
  • Diaspora investors might be willing to accept a lower rate of return and have a greater tolerance for uncertainty when buying diaspora bonds than a mainstream investment.
  • Diaspora investors might partially view the purchase of a diaspora bond as an act of charity and might also have a greater understanding of a country’s level of risk than other foreign investors.
Attraction for investors:
  • Patriotism & desire to do “good” in the country of origin
  • Risk management – Diaspora investors are likely to view the risk of receiving debt service in local currency with much less apprehensions.
What is difference b/w Foreign Currency Deposits (FCDs) and  DBs ?
Foreign Currency Deposits (FCDs) are also used by countries to attract foreign currency inflows.
  • But, Diaspora bonds are typically long-dated securities to be redeemed only upon maturity. FCDs, in contrast, can be withdrawn at any time.
  • FCDs are likely to be much more volatile, requiring banks to hold much larger reserves against their FCD liabilities, thus decreasing their ability to fund investments. Diaspora bonds, on the other hand are a source of foreign financing that is long-term in nature.
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