Banking and Financial News – 13 May 2014

Retail Inflation Inches up (The Hindu) – Inflation measured by Consumer Price Index, inched up to 8.59% in April 2014 from 8.31% in March 2014.

RBI allows bank branches abroad to sell structured products (The Hindu) – RBI has allowed overseas branches of Indian banks to offer structured financial and derivative products like Exchange Traded Funds and Bond Derivatives. This will help in improving income. These products are not permitted in domestic market.

Regulation should prevail over ownership at government banks: RBI (Economic Times) - The Reserve Bank of India has told the government that the banking regulator should have the final say when it comes to resolving financial crisis at banks, even if they are state-owned. The central bank has pointed out this in a discussion paper, Management and Governance Issue in Public-Sector Banks, prepared in March. Public sector banks account for 70% of the nation's deposits and loan market. The government, being the majority shareholder, appoints the senior cadre — chairman and managing director as well as executive director — at these banks and often directs them on operational issues. "Regulation should prevail ownership," the RBI has written in the document prepared for debate and discussion.

This means the decision taken by the banking regulator should prevail even if the government has a different plan. The proposal comes at a time when the government has been infusing equity capital at a regular basis in state owned banks to improve their financial health.

According to the RBI, the regulator, and not the government, should decide the fate of a financial institution. Since "regulation has to be ownership neutral", whatever rules apply to private banks should apply also to public sector banks, it said.

Since the government has a say in the appointment of the board members of a bank, corporate governance practices vary between public sector and private banks, despite both being regulated by the RBI.

For instance, unlike state-run banks, private lenders need to follow the Ganguly committee recommendations on corporate governance and their chief executives are appointed based on the principles of 'fit and proper'.

Important Financial Terms in the News explained.

Consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.

Exchange-Traded Fund - ETF: A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. Introduced in 2001. Most prominent is Gold ETF.

Bond derivatives are investment vehicles designed around the buying and selling of the rights to certain types of debt, rather than the debt itself. These are often known as bond options and function much in the same as stock options, but with a few key differences. Since the underlying asset in a bond derivative is the debt, the manner of evaluating value of a bond is different that a stock.

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Courtesy : The Hindu , Economic Times