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PAN JEWELLERY – MAKE IT COMPULSORY IRRESPECIVE OF METHOD OF PAYMENT.

Recent Press Reports:
As per recent press reports the GOI is considering to make quoting of Permanent Account Number
(PAN) compulsory in case of certain cash transactions including for purchase of gold, bullion, jewellery, … etc.
Effective use of PAN:
Merely quoting of PAN should not be considered as compliance. Merely quoting of PAN can be a source of harassment in case PAN given by customer is wrong, duplicate or bogus or has been surrendered etc. To make proper use of PAN the following steps need to be taken:
The PAN card should contain permanent address of the PAN card holder and his main branches.
The details of PAN should be made verifiable on the website of IT department. These should be made available on the website of the government departments and should be easily accessible free of cost. By mentioning PAN one should be able to see all details of the PAN holder including his name, addresses of permanent establishment/ residence and branches, photo, signature etc.
The seller must be given a freedom to arrange for delivery of goods sold at such permanent address or any recorded branch address of PAN holder.
The PAN card holder should provide a Xerox copy of PAN card duly certified as true copy with duly certified fact that the said PAN is still in force on the date of transaction.
PAN card holder must also produce his original PAN card if required by the seller.
Press report analyzed:
http://www.business-standard.com/india/news/now-quote-pan-to-buy-gold-in-cash/433407/
Now, quote PAN to buy gold in cash
Vrishti Beniwal / New Delhi April 25, 2011, 0:35 IST
From news report
Analysis / Remarks.
Under attack for not being able to curb black money transactions, the finance ministry is planning to make quoting of the permanent account number (PAN) mandatory for more transactions.
Under attack must be the big chunk of black money in foreign banks and money and property in India with politicians and Bureaucrats. And not petty sums of money spent by individuals and others while purchasing jewellery and insurance policies. These will not be big money but a big source of harassment of people – another source of creation of black money by people who can harass public. The reason of black money is not only power to be exercised in favor of someone but major reason is the power to harass people.
The income tax (I-T) department may make quoting of PAN in documents for sale and purchase of bullion or jewellery involving cash transfer of Rs. 5 lakh or more mandatory.
It should be made mandatory for all transactions (cash/ cheque/ DD/PO or credit/ exchange etc,) where transaction value is more than Rs. one lakh. The limit of Rs. five lakh is very high and will not serve purpose. This is because a buyer of jewellery of say Rs. twenty five lakh can split his purchases in five different names/ different shops and different manner.In all other cases of transaction above Rs. fifty thousand, the ID proof of buyer / seller must be made compulsory.
PAN may also be required for cash payment of Rs. 1 lakh or more as life insurance premium, amid concerns that insurgents may be parking funds in high-value insurance policies.
This has already been made compulsory by way of a circular. However as expressed by the author in his article** there must be amendment by way of amendment in rules.**
http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=440
/ Circular of CBDT dated 23.07.2009 about PAN for Insurance Premium - whether valid or exercise of power without authority?
The department is also considering changes in the limits for cash payment for foreign travel. At present, the cap is Rs. 25,000, including fare, the fee of a travel agent/tour operator and purchase of foreign currency.
The requirement of PAN should be for all transactions paid by any method and not necessarily paid in cash. The limit of Rs. 25000/- is very low it should be at least Rs. 50000/- for each individual, particularly in view of high inflation during last few years.
"Rules are being changed with regard to PAN requirement in cash transactions to track the investment pattern of high net worth individuals. This will help curb black money," said a finance ministry official who did not want to be named.
The people who are holding undisclosed cash or other properties are not high net worth individuals (HNI) in eye of the system of the revenue. Why attempt is only when money is spent, why the money or other undisclosed property is not being chased or attempt is not made to bring the same in productive channels and also to collect tax?
The Central Board of Direct Taxes (CBDT) may shortly notify the changes.
As discussed in the article referred above the changes need to be implemented by way of amendment of IT Rules.
thttp://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=440
"Furnishing PAN is just one leg of the transaction. Whenever PAN is captured, the trader should put it in the invoice and summarise it in the form of the annual information return. Then, the government can match the transaction with the return. The idea is to check black money, as cash transactions don't figure in official channels," said Amitabh Singh, tax partner, Ernst & Young.
The requirement about reporting in Annual Information Return is also to be amended. For jewellery the requirement can be made on quarterly basis.
The 10-digit PAN enables the I-T department to link all transactions of a person. It was introduced to facilitate linking of various documents, including payment of taxes, assessment, tax demand and tax arrears. It facilitates easy retrieval and matching of information related to investment, borrowing and other business activities of tax-payers collected through various sources.
From April 2010, all specified transactions without PAN attract tax. Tax higher than the prescribed rate or 20 per cent is deducted on all transactions liable to tax deducted at source (TDS) in cases where PAN is not available. The law is also applicable to non-residents in respect of payments or remittances liable to TDS.
Incidentally it may be noted that there is generally no TDS on sale of goods. A seller selling goods like jewellery is not required to deduct or collect tax. In few specified cases in case of sale of some items the seller is required to collect tax (known as tax collected at source). At present there is no TDS or TCS in case of purchase and sale of gold or any jewellery. Therefore, the provision of section 206AA is not applicable in such cases of sale or purchase of jewellery.
The I-T department has already made it mandatory for employers to quote PANs of employees and parties from whom tax is deducted while filing TDS returns. The penalty for not quoting PAN, announced in Budget 2009, was aimed at strengthening the data base of the revenue department and increasing tax compliance.
The black money which is under massive attack (that is the money or property lying abroad or money and property lying undisclosed in India cannot be brought by making PAN compulsory.
Jewellery and black money:
It is commonly known that lot of jewellery and bullion is purchased by people who earn income in cash that too without requirement to disclose the same rather when it is impossible to disclose the same for ethical reasons.
Many are unable to disclose the same because the money is ill gotten – these are spending large amounts in jewellery. Some people are earning extra money by working extra and overtime their income is hard earned income and not ill-gotten money. The defect is only that they have not paid income tax on some of their income.
The people who falls in this class are – high spenders who are politicians and bureaucrats senior and junior government employees in position to have extra income by way of bribes. These are buyers in millions and crores. As per market grapevine, in cases of jewellery shops many times the AO make additions to income of the jewelers because the buyer of jewellery was not available or traceable on the address given by the buyer to the jeweler. The jeweler has already disclosed income by way of sale, therefore there is no justification in such additions and such additions are generally deleted as they are supported by stock with the seller. The Income-tax department must trace the person who purchased the jewellery, made payment in cash and gave wrong address to the jewellery shop keeper.
In low and medium spender class spending in cash are people who work extra on part time basis without disclosure of a part of income. The money so earned is not ill gotten money; it is simply irregular because legal obligation to pay income-tax has not been complied with.
Harassment should not be target:
The requirement to quote PAN is reasonable when transaction value is high. However, it should not be a source of harassment. The seller of goods can rely on PAN furnished by the buyer. If the buyer gives a wrong PAN, then what the seller can do? To avoid harassment of sellers or other persons who collect information from buyers it is desirable that the following requirements should also be made compulsory:
Under attack for not being able to curb black money transactions, the finance ministry is planning to make quoting of the permanent account number (PAN) mandatory for more transactions.
The income tax (I-T) department may make quoting of PAN in documents for sale and purchase of bullion or jewellery involving cash transfer of Rs. 5 lakh or more mandatory.
PAN may also be required for cash payment of Rs. 1 lakh or more as life insurance premium, amid concerns that insurgents may be parking funds in high-value insurance policies.
The department is also considering changes in the limits for cash payment for foreign travel. At present, the cap is Rs. 25,000, including fare, the fee of a travel agent/tour operator and purchase of foreign currency.
"Rules are being changed with regard to PAN requirement in cash transactions to track the investment pattern of high net worth individuals. This will help curb black money," said a finance ministry official who did not want to be named.
The Central Board of Direct Taxes (CBDT) may shortly notify the changes.
"Furnishing PAN is just one leg of the transaction. Whenever PAN is captured, the trader should put it in the invoice and summarise it in the form of the annual information return. Then, the government can match the transaction with the return. The idea is to check black money, as cash transactions don't figure in official channels," said Amitabh Singh, tax partner, Ernst & Young.
The 10-digit PAN enables the I-T department to link all transactions of a person. It was introduced to facilitate linking of various documents, including payment of taxes, assessment, tax demand and tax arrears. It facilitates easy retrieval and matching of information related to investment, borrowing and other business activities of tax-payers collected through various sources.
From April 2010, all specified transactions without PAN attract tax. Tax higher than the prescribed rate or 20 per cent is deducted on all transactions liable to tax deducted at source (TDS) in cases where PAN is not available. The law is also applicable to non-residents in respect of payments or remittances liable to TDS.
The I-T department has already made it mandatory for employers to quote PANs of employees and parties from whom tax is deducted while filing TDS returns. The penalty for not quoting PAN, announced in Budget 2009, was aimed at strengthening the data base of the revenue department and increasing tax compliance.
DIRECT TAXES
25/04/2011
Now, quote PAN to buy gold in cash
Under attack for not being able to curb black money transactions, the finance ministry is planning to make quoting of the permanent account number (PAN) mandatory for more transactions. The income tax (I-T) department may make quoting of PAN in documents for sale and purchase of bullion or jewellery involving cash transfer of Rs. 5 lakh or more mandatory. PAN may also be required for cash payment of Rs. 1 lakh or more as life insurance premium, amid concerns that insurgents may be parking funds in high-value insurance policies. The department is also considering changes in the limits for cash payment for foreign travel. At present, the cap is Rs. 25,000, including fare, the fee of a travel agent/tour operator and purchase of foreign currency. "Rules are being changed with regard to PAN requirement in cash transactions to track the investment pattern of high net worth individuals. This will help curb black money," said a finance ministry official who did not want to be named. The Central Board of Direct Taxes (CBDT) may shortly notify the changes.
Source : http://www.business-standard.com/india/news/now-quote-pan-to-buy-gold-in-cash/433407/
http://www.business-standard.com/india/news/now-quote-pan-to-buy-gold-in-cash/433407/
Now, quote PAN to buy gold in cash
Vrishti Beniwal / New Delhi April 25, 2011, 0:35 IST
Under attack for not being able to curb black money transactions, the finance ministry is planning to make quoting of the permanent account number (PAN) mandatory for more transactions.
The income tax (I-T) department may make quoting of PAN in documents for sale and purchase of bullion or jewellery involving cash transfer of Rs. 5 lakh or more mandatory.
PAN may also be required for cash payment of Rs. 1 lakh or more as life insurance premium, amid concerns that insurgents may be parking funds in high-value insurance policies.
The department is also considering changes in the limits for cash payment for foreign travel. At present, the cap is Rs. 25,000, including fare, the fee of a travel agent/tour operator and purchase of foreign currency.
"Rules are being changed with regard to PAN requirement in cash transactions to track the investment pattern of high net worth individuals. This will help curb black money," said a finance ministry official who did not want to be named.
The Central Board of Direct Taxes (CBDT) may shortly notify the changes.
"Furnishing PAN is just one leg of the transaction. Whenever PAN is captured, the trader should put it in the invoice and summarise it in the form of the annual information return. Then, the government can match the transaction with the return. The idea is to check black money, as cash transactions don't figure in official channels," said Amitabh Singh, tax partner, Ernst & Young.
The 10-digit PAN enables the I-T department to link all transactions of a person. It was introduced to facilitate linking of various documents, including payment of taxes, assessment, tax demand and tax arrears. It facilitates easy retrieval and matching of information related to investment, borrowing and other business activities of tax-payers collected through various sources.
From April 2010, all specified transactions without PAN attract tax. Tax higher than the prescribed rate or 20 per cent is deducted on all transactions liable to tax deducted at source (TDS) in cases where PAN is not available. The law is also applicable to non-residents in respect of payments or remittances liable to TDS.
The I-T department has already made it mandatory for employers to quote PANs of employees and parties from whom tax is deducted while filing TDS returns. The penalty for not quoting PAN, announced in Budget 2009, was aimed at strengthening the data base of the revenue department and increasing tax compliance.
Dated: - April 28, 2011

Deregulation of Savings Bank Deposit Interest Rate : A Discussion Paper

Deregulation of Savings Bank Deposit Interest Rate : A Discussion Paper

Introduction

As a part of financial sector reforms, the Reserve Bank has deregulated interest rates on deposits, other than savings bank deposits. The interest rate on savings bank deposits has remained unchanged at 3.5 per cent per annum since March 1, 2003. Keeping in view progressive deregulation of interest rates, it was proposed in the Second Quarter Review of Monetary Policy 2010-11 announced on November 2, 2010 to prepare a Discussion Paper to delineate the pros and cons of deregulating the savings bank deposits interest rate. It was proposed to place a Discussion Paper on the Reserve Bank’s website for feedback from general public. Accordingly, this Discussion Paper is an attempt to deal with pros and consof deregulating savings deposit interest rate and take on board the suggestions of various stakeholders for either maintaining the status quo or deregulating the savings deposit interest rate.

2. The Discussion Paper is organised as follows. Section II provides a historical account of deregulation of deposit interest rates in India. Section III analyses the trend in savings bank deposits in India. Section IV sketches out the international experiences with regard to the impact of deregulation of savings products in select countries. This is followed by a detailed analysis of pros and cons of deregulation of savings deposit interest rate in India in Section V. Section VI presents an analytical perspective on some of the concerns raised by banks relating to deregulation of savings deposit interest rates. Section VII sums up the discussion and sets out some specific issues for feedback from general public.

Section II : A Historical Account of Deregulation of Deposit Interest Rates in India

3. India pursued financial sector reforms as a part of structural reforms initiated in the early 1990s. A major component of the financial sector reform process was deregulation of a complex structure of deposit and lending interest rates. The administered interest rate structure proved to be inefficient. It, therefore, became necessary to reform the interest rate structure. Deregulation of interest rates was intended to strengthen the competitive forces, improve allocative efficiency of resources and strengthen the transmission of monetary policy. The process of deregulation of interest rates, which began in the early 1990s, was largely completed by October 1997. A few categories of interest rates that continued to be regulated on the lending side were small loans up to ` 2 lakh and rupee export credit, and on the deposit side, the savings bank deposit interest rate. The rates on small loans up to ` 2 lakh and rupee export credit were deregulated in July 2010, when the Reserve Bank replaced the Benchmark Prime Lending Rate (BPLR) system with the Base Rate system. With this, all rupee lending rates were deregulated. On the deposit side, the only interest rate that continues to be regulated now is the savings deposit interest rate (Box 1).

Box 1 : Deregulation of Deposit Interest Rates in India – A Historical Account

The process of deregulation of deposit interest rates had begun in the 1980s. In April 1985, banks were allowed to set interest rates for maturities between 15 days and up to 1 year, subject to a ceiling of 8 per cent. It was expected that with reasonable rates of interest on maturities, banks would be able to achieve a better distribution of term deposits rather than highly skewed distribution around longer maturities at relatively higher costs. However, when a few banks started offering the ceiling rate of 8 per cent even for maturities of 15 days, other banks followed suit without regard to consideration of profitability and set a single rate of 8 per cent for maturities starting from 15 days and up to one year. The consequence was a shift of deposits from current accounts and, to a lesser extent, from savings accounts to 15-day deposits. As a result of price war among banks, the freedom to set interest rates subject to a ceiling was withdrawn in May 1985. The process of deregulation resumed in April 1992 when the existing maturity-wise prescriptions were replaced by a single ceiling rate of 13 per cent for all deposits above 46 days. The ceiling rate was brought down to 10 per cent in November 1994, but was raised to 12 per cent in April 1995. Banks were allowed to fix the interest rates on deposits with maturity of over 2 years in October 1995, which was further relaxed to maturity of over 1 year in July 1996. The ceiling rate for deposits of ‘30 days up to 1 year’ was linked to the Bank Rate less 200 basis points in April 1997. In October 1997, deposit rates were fully deregulated by removing the linkage to the Bank Rate. Consequently, the Reserve Bank gave the freedom to commercial banks to fix their own interest rates on domestic term deposits of various maturities with the prior approval of their respective Board of Directors/Asset Liability Management Committee (ALCO). Banks were permitted to determine their own penal interest rates for premature withdrawal of domestic term deposits and the restriction on banks that they must offer the same rate on deposits of the same maturity irrespective of the size of deposits was removed in respect of deposits of ` 15 lakh and above in April 1998. Now banks have complete freedom in fixing their domestic deposit rates, except interest rate on savings deposits, which continues to be regulated and is currently stipulated at 3.5 per cent.

4. The issue of deregulation of savings deposit interest rate has arisen from time to time. The Annual Policy Statement of 2002-03 had weighed the option of deregulation of interest rate on savings bank deposit accounts but the time was not considered opportune considering that a large portion of such deposits was held by households in semi-urban and rural areas. It was, however, argued that deregulation would facilitate better asset-liability management for banks and competitive pricing to benefit the holders of savings accounts.

5. The issue was again revisited in the Annual Policy Statement for the year 2006-07. In this context, the Indian Banks’ Association (IBA) while making out a case for deregulation of savings bank deposit rates in the long run, suggested for status quo in 2006. The Reserve Bank on a review of the then prevailing monetary and interest rate conditions, including a careful assessment of the suggestions received from the IBA, considered it appropriate to maintain the status quo, although the Policy stated that “in principle, deregulation of interest rates is essential for product innovation and price discovery in the long run” (Para 109, Annual Policy Statement, 2006-07).

6. In pursuance of the announcement made in the Annual Policy Statement for the year 2009-10, the Reserve Bank advised scheduled commercial banks to pay interest on savings bank accounts on a daily product basis with effect from April 1, 2010. Prior to the introduction of a daily product method, the interest on savings deposit account was calculated based on the minimum balance maintained in the account between the 10th day and the last day of each calendar month and credited to the depositor’s account only when the interest due was at least ` 1/- or more. After the change, the effective interest rate on savings bank deposits increased, thereby benefitting the depositors.

Section III : Savings Deposits – A Concept and Trend

Savings Deposits – A Hybrid Product

7. A savings deposit is a hybrid product which combines the features of both a current account and a term deposit account. While a current account is primarily meant for transaction purposes and is maintained by companies, public enterprises and business firms for meeting their day-to-day requirement of funds, savings accounts are maintained for both transaction and savings purposes mostly by individuals and households. A savings account being a hybrid product provides the convenience of easy withdrawals, writing/collection of cheques and other payment facilities as well as an avenue for parking short-term funds which earn interest (Box 2).

Box 2 : Restrictions on Operation of Savings Bank Accounts

The Credit Policy of May 27, 1977 for the first time drew a distinction within savings deposit accounts in that a part was considered as functionally transactions-oriented vis-à-vis the remaining part that had features akin to savings. Accordingly, the Reserve Bank, with effect from July 1, 1977, fixed the interest rate on savings deposits with cheque facilities, considered as transactions-oriented accounts, at 3.0 per cent and the interest rate on savings deposits without cheque facilities, considered as pure savings accounts, at 5.0 per cent. However, the Credit Policy of March 2, 1978 merged these two accounts into a single savings account, on account of many depositors opening multiple accounts. Accordingly, the Credit Policy fixed the interest rate on savings deposit at 4.5 per cent. In April 24, 1992, the interest rate on savings deposit was fixed highest at 6.0 per cent per annum. The restrictions imposed by the Reserve Bank on the operation of savings bank account were withdrawn and banks were given the flexibility to stipulate such restrictions. The interest rate on savings bank deposit has been progressively reduced by the Reserve Bank. It now stands at 3.5 per cent that has remained fixed since March 2003.

Broad Features :

The operation of a savings bank account differs from bank to bank. However, still some broad features could be identified :

<!--[if !supportLists]-->· <!--[endif]-->One, number of free withdrawals are generally stipulated on a half-yearly/quarterly basis. Total numbers of withdrawals vary between 30 and 120 per half year.

<!--[if !supportLists]-->· <!--[endif]-->Two, no ceiling has been stipulated on the maximum amount that can be drawn per transaction.

<!--[if !supportLists]-->· <!--[endif]-->Three, there is generally no limit on the number of cheques that can be drawn per month. However, some PSBs have restricted the number of cheques that can be drawn on about 20 to 25.

<!--[if !supportLists]-->· <!--[endif]-->Four, minimum balance is stipulated, irrespective of whether the account holder is with or without cheque facility. The public sector banks have stipulated the minimum balance amount at ` 1000 for metro, urban and semi-urban areas, and ` 500 for rural areas with cheque book facility. The minimum balance amount stipulated without cheque book facility is ` 500 for metro/urban/semi-urban areas and ` 250 for rural areas. The minimum balance required to be maintained by private sector and foreign banks is generally much higher than those by public sector banks.

Source : Websites of select six public sector banks.

8. The maintenance of savings bank deposit accounts, however, entailstransaction costs for banks. Although the exact cost structure of maintaining savings bank account is not readily available, some idea of this could be had from the fee structure imposed by banks for non-adherence to the stipulated conditions by the savings bank depositors. The charges for non-maintenance of minimum balance by select public sector banks vary between ` 20 and ` 225 for urban areas and ` 20 and ` 100 for rural areas per quarter. The charges for select private sector banks vary around ` 750 for urban areas and ` 500 to ` 750 for rural areas per quarter. While some banks charge ` 1 to ` 3 per leaf for additional cheques beyond the stipulated number of cheques per quarter; some public sector banks have no limit on the number of cheques that can be withdrawn per month. With regard to the number of free transactions for using other banks' ATM for cash withdrawal and balance enquiry up to a maximum of five per month, select banks charge ` 18 to ` 20, subject to the maximum of ` 20 per transaction as stipulated by the Reserve Bank.

Trend in Savings Bank Deposits in India

9. Savings deposits are an important component of bank deposits. The average annual growth of savings deposits, which decelerated in the 1990s as compared with that of the 1980s, accelerated sharply in the decade of the 2000s. In this decade, the average growth rate of savings deposits exceeded that of both demand deposits and term deposits, notwithstanding the growth in term deposits outpacing that of savings deposits during the period 2005-10 (Table 1).

Table 1 : Average Annual Growth Rates: Aggregate Deposits and Components

(Per cent)

Period

Demand
Deposits

Savings Bank
Deposits

Term Deposits

Aggregate Deposits

1

2

3

4

5

1981-1990

19.5

17.1

19.8

18.9

1991-2000

12.5

15.7

17.4

16.1

2001-2010

16.2

19.4

18.2

18.2

(a) 2000-05

12.8

18.8

14.8

15.4

(b) 2005-10

19.7

20.1

21.7

21.0

Source : Calculations based on data in Statistical Tables Relating to Banks in India, RBI, Various Issues.

10. Savings account penetration (number of savings accounts for 100 persons), which remained broadly unchanged between March 1996 and March 2005, increased significantly by March 2009. Per capita savings bank deposits also increased from `1,067 in March 1996 to ` 7,767 for March 2009. However, in recent years, the growth in per capita savings deposits was lower than that of aggregate deposits as reflected in the decline in the ratio of per capita savings deposits and per capita aggregate deposits (Table 2).

Table 2 : Savings Bank Deposits : Number of Accounts and Per Capita Savings Bank Deposits

Year

Savings Bank Deposits
(` crore)

No. of Accounts per 100 persons

Per Capita Savings Bank Deposits (`)

Per Capita Aggregate Deposits (`)

Ratio of Col.4 to Col.5 (Per cent)

1

2

3

4

5

6

End-March 96

99020

26.0

1067

4932

21.6

End-March 00

231956

23.9

2317

8994

25.8

End-March 05

440339

25.3

4044

16874

24.0

End-March 09

896301

36.2

7767

35210

22.1

Source : Basic Statistical Returns of Scheduled Commercial Banks in India and Handbook of Statistics on the Indian Economy, RBI, Various Issues.

11. As expected, data on the ownership pattern of savings deposits during 1998-2009 reveal that savings deposits are predominantly held by the household sector (Table 3).

Table 3 : Ownership Pattern of Savings Deposits

(per cent)

Sector

1998

2009

1

2

3

I. Household Sector

84.8

83.6

II. Government Sector

8.4

9.1

of which:

State Government

3.3

5.3

Local Authorities

1.9

1.7

Public Sector Corporations and Companies

1.7

1.2

III. Foreign Sector

5.3

6.0

IV. Private Corporate Sector (Non-financial)

0.2

0.4

V. Financial sector

1.4

0.8

VI. Total

100

100

Source: Statistical Tables Relating to Banks in India, RBI, Various Issues.

12. An analysis of distribution of savings deposits by population groups reveals that between 2000 and 2009, savings deposits held in rural and semi-urban areas declined sharply, while those held in metropolitan areas increased. In 2009, the share of savings deposits held in metropolitan areas was more than that held in rural and semi-urban areas (Table 4).

Table 4 : Savings Bank Deposits –According to Population Groups

(Per cent)

Year

Rural and
Semi-urban

Urban

Metropolitan

Total

1

2

3

4

5

1991

42.7

25.7

31.6

100

1995

39.3

24.4

36.3

100

2000

40.1

25.4

34.5

100

2005

39.2

26.1

34.6

100

2009

36.2

26.1

37.8

100

Source : Basic Statistical Returns of Scheduled Commercial Banks in India, RBI, Various Issues.

13. Savings deposits also constitute a significant share of financial assets of the household sector. Their share ranged between 10 and 16 per cent of financial assets of the household sector between 2000-01 and 2008-09 (Table 5).

Table 5 : Household Savings: Financial and Physical

(As per cent of GDP at current market prices)

Item

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

1

2

3

4

5

6

7

8

9

10

Gross Domestic Savings

23.7

23.5

26.3

29.8

32.2

33.1

34.4

36.4

32.5

Household Sector

21.6

22.1

22.9

24.1

23.3

23.2

22.9

22.6

22.6

Of which:

1. Financial Assets

10.2

10.9

10.3

11.4

9.8

11.4

10.9

11.2

10.4

2. Physical Assets

11.4

11.3

12.6

12.7

13.5

11.8

11.9

11.5

12.2

Memo:

Share of Bank Deposits in Household Financial Assets (per cent)

38.1

38.1

38.3

37.6

36.4

46.0

47.9

50.4

54.9

Share of Savings Bank Deposits in Household Financial Assets (per cent)

10.3

11.2

12.1

13.3

13.7

16.0

11.8

12.7

12.8

Share of Currency in Household Financial Assets (per cent)

6.3

9.5

8.9

11.3

8.5

8.9

10.2

11.4

12.5

Source: Reserve Bank of India.

14. To sum up, savings deposits are held largely by households. Savings deposits are a popular product and they constitute about 22 per cent of total deposits of scheduled commercial banks and about 13 per cent of financial savings of the household sector.

Section IV : International Experience

15. This section provides a summary of the experience on deregulation of savings bank deposit accounts in select developed and emerging market countries.

16. Interest rates on savings account in developed countries such as Canada, Japan, Australia, New Zealand, UK, and USA are all deregulated and determined by the commercial banks themselves on the basis of market interest rates. Most savings bank accounts may carry customer charges if the number of transactions exceeds the permissible level.

17. Many countries in Asia experimented with interest rate deregulation to support overall development and growth policies. Interest rates were fully deregulated in Singapore in the mid-1970s, and in the Philippines, Indonesia and Sri Lanka in the early 1980s. Malaysia, Thailand and the Republic of Korea engaged in a gradual deregulation process, characterised by more frequent adjustments and the removal of some ceilings¹.

18. Although several countries deregulated interest rates on savings bank deposits long ago, Hong Kong did so recently and may particularly be relevant for India. Interest rates on bank deposits in Hong Kong, which were regulated by a set of interest rate rules (IRRs) issued by the Hong Kong Association of Banks (HKAB), were deregulated in phases by July 2001. This involved the removal of the interest rate cap on savings accounts and the prohibition of the payment of interest on current accounts. In response to the deregulation, a number of banks launched new products such as combined savings and checking accounts and Hong Kong inter-bank offered rate (HIBOR) linked savings products. Some also revised fees and charges and minimum balance requirements, and introduced tiered structures of interest rates.

19. Based on an examination of the effects of interest rate regulation and subsequent deregulation on the efficacy of monetary policy and rigidity of retail bank deposit rates in Hong Kong, Chong (2010) found that interest rate deregulation had increased the efficacy of monetary policy by improving the correlation between retail bank deposit rates and market interest rates and increasing the degree of long-term pass-through for retail bank deposit rates². He also showed that the adjustments in retail bank deposit rates were asymmetric and rigid upwards during the regulated period, but tended to be rigid downwards during the deregulated period. The spreads between retail bank deposit rates and market rates also narrowed sharply after the removal of interest rate controls.

20. Rates on savings accounts in China are regulated by the Peoples’ Bank of China, which specifies ceiling interest rates on these accounts. Currently, the cap is at 0.5 per cent per annum. The account provides easy access to deposited funds. Interest rates are calculated on a daily product basis. The savings account comes with a choice of either a passbook savings or a statement savings account. There is no charge for the transactions carried out in the savings account and the minimum balance in these accounts is very low at RMB 1.

21. Following deregulation in Taiwan, a fee is charged for each transaction. DBS Bank, Singapore provides a facility that combines the current account and savings account, but has a higher minimum balance to be maintained and the customer is charged if the minimum balance is less than stipulated. The account also carries monthly charges for operating the account.

22. In countries in which financial sector reforms also included interest rate deregulation, the action was primarily taken because real rates were negative, and were being propelled by inflationary pressures. The most immediate result of financial deregulation in these select Asian economies was the enhancement and maintenance of positive real interest rates, which, in turn, contributed to an increase in financial savings. It also forced a diminution in the financial market segmentation exemplified by smaller dispersion of interest rates. The deregulatory process on the interest rate structure combined with the central banks’ credible monetary policy measures for anchoring inflation expectations led to positive real rates of interest at least temporarily for Asian countries, viz., Indonesia, Malaysia and the Philippines, although only the first two countries sustained a positive real interest rate structure.

23. On the whole, cross-country experience shows that in most countries, interest rates on savings bank accounts have been deregulated and are now fixed by commercial banks based on the market interest rates. Banks generally offer variable interest rates on savings deposits. Savings bank deposits have similar characteristics such as simple procedures with no limit on the length of the maturity. Further, there is a low or no minimum amount for opening of the savings accounts and banks generally charge fees for various services offered to the depositors.

Section V: Pros and Cons of Deregulation of Savings Bank Deposits Interest Rate in India

24. Deregulation of savings bank deposits has both pros and cons as described below.

Pros

May Enhance Attractiveness of Savings Deposits

25. Regulation of interest rates imparts rigidity to the instrument/product as rates are either not changed in response to changing market conditions or changed slowly. This adversely affects the attractiveness of a product/instrument. In the case of savings bank deposits, its interest rate has remained unchanged at 3.5 per cent since March 1, 2003 even as the Reserve Bank’s policy rates and call rates (representing a proxy for operative policy rate as at a time, only one rate – either the repo rate or the reverse repo rate – is operative depending on liquidity conditions) moved significantly in either direction (Chart 1).

Chart 1 : Movement of Policy Rates, Call Money Rate and SB Rate

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26. As the administered savings deposit interest rate has not moved in sync with the changing market conditions, it has generally been unfavourable to savers. In order to assess the relative attractiveness of savings deposits vis-a-vis other deposits, there is a need to know two aspects - the savings component of savings deposits (as a part of savings deposits is also for transaction balance) and the average maturity of savings component of savings deposits (as there is no fixed maturity for savings deposits). It is significant to note that about 90 per cent of savings deposits are held for savings purposes (see also Table 12 and Para 46). However, the average period for which balances in savings deposits (time component) is held for savings purposes is not available. In the absence of such information, the task of comparing interest rate on savings with that on term deposits is rendered difficult.

27. A comparison of interest rate on savings deposit and term deposit with maturity up to one year during December 2004 to December 2010 reveals some interesting patterns (Chart 2). First, during most of the period since December 2004, the interest rate on savings deposits has been equivalent to interest rate on term deposit of 7 - 14 days maturity, barring two brief periods (December 2004 - June 2006 and March 2009 – December 2010) when it was marginally higher. Second, interest rate on savings deposit were lower than those on term deposit of all other maturities up to one year, barring a brief period (June 2009 - September 2010) when the interest rate on savings deposits was higher than that of term deposit with maturity of 30-45 days.

Chart 2 : Interest Rates for Savings Bank Deposit vis-à-vis Select Term Deposits

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Note : Data pertain to 5 major public sector banks.

28. An analysis of real deposit interest rates³ shows that the real savings deposit rate was persistently negative during the period December 2004 – December 2010, barring a brief period of March - September 2009 when WPI inflation itself turned negative. However, more or less, the same pattern was observed in respect of term deposits up to one year maturity as well (Chart 3).

Chart 3 : Real Interest Rates for Select Deposits

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29. Empirical evidence suggests that widening of interest rate differential between term deposits and savings deposits leads to reduction in the share of savings bank deposits in total deposits. This trend is also clearly discernible in respect of population groups (rural, semi urban, urban) other than metropolitan areas, where savings deposits are not responsive to the interest rate differential⁴. This perhaps suggests that savings deposits in metropolitan areas are held less for savings purposes and more for transaction purposes and hence, are less responsive to interest rate changes.

30. Deregulation of the interest rate on savings deposit will make the rate flexible along with other interest rates depending on the market conditions. Since savings bank deposits in rural, semi-urban areas and urban areas are held largely for savings purposes, deregulation of interest rate is likely to enhance its attractiveness in these areas.

Will Improve Transmission of Monetary Policy

31. Regulation of savings deposits interest rate has not only reduced its relative attractiveness but has also adversely affected the transmission of monetary policy. For transmission of monetary policy to be effective, it is necessary that all rates move in tandem with the policy rates. This process, however, is impeded if the interest rate in any segment is regulated. Savings deposit constitutes a sizeable portion (about 22 per cent) of total deposits. The fact that the savings deposit interest rate has not been changed since March 1, 2003, prima facie implied that changes in policy rates did not transmit to savings bank deposits. However, before arriving at a firm conclusion in this regard, it is necessary to consider two possibilities here. One, even though the savings deposit interest rate is fixed, what matters for banks is the overall cost of deposits and not cost of any particular component. And if the overall cost of deposits moves in tandem with the policy rates, then monetary transmission is not adversely affected. The other possibility, however, is that banks independently decide interest rates on freely determined components, disregarding the cost of savings deposits, in which case the overall cost of deposits does not move in sync with changes in the policy rates, thereby affecting the monetary transmission. This is a behavioural issue and it is difficult to find a precise answer to this question. However, the evidence in Table 6 is revealing. The correlation coefficients of savings deposit interest rate with both the call money rate (the operating target) and the lending rate of scheduled commercial banks were much lower than those of term deposits. This suggests that regulation of the interest rate on savings deposits has impeded the monetary transmission and that deregulation of interest rate will help improve the transmission of monetary policy. This is also corroborated by the Hong Kong experience as indicated in Section IV wherein following the deregulation of savings deposit rate, the correlation between retail bank deposit rates and market interest rates improved and their spread also narrowed significantly.

Table 6 : Correlations Among Various Rates

Pair of Interest Rates

Correlation Coefficient

1

2

I. Weighted Term Deposit Rate and Call Rate

0.82

II. Weighted Savings Deposit Rate and Call Rate

0.18

III. Weighted Term Deposit Rate and Weighted Lending Rate

0.45

IV. Weighted Savings Deposit Rate and Weighted Lending Rate

0.23

May Lead to Product Innovations

32. Savings deposits constitute about 22 per cent of total deposits. However, owing to regulation of interest rate, there is hardly any competition in this segment with both banks and depositors acting passively. This has inhibited product innovations. The requirements of different banks and different depositors are not necessarily the same. Just as each bank may like to tailor the savings product to suit its requirement, each depositor may like to choose a product which suits his requirements.

33. To create competition and encourage banks to introduce innovative products, it is, therefore, necessary to deregulate savings deposit interest rate. Product innovations may include a variety of modes of operations such as branches, web-based channels, ATMs etc. Rates offered may also differ based on the flexibility of operation of savings bank account and the degree of liquidity offered such as notice period for withdrawal, number of deposits and/or withdrawals allowed per month and percentage of amount that can be withdrawn in any given month, among others. It may be noted here that in response to the deregulation of savings deposit interest rate in Hong Kong in 2001, a number of banks launched new products such as combined savings and checking accounts and HIBOR linked savings products. Some also revised fees and charges and minimum balance requirements, and introduced tiered structures of interest rates.

Cons

Possibility of an Unhealthy Competition

34. A major attraction of savings deposits for banks is that it offers a low cost source of funds. This is evident from the fact that bank groups with higher share of CASA (current account and savings account) deposits (of which savings deposit is a major component) enjoy relatively low cost of deposits. However, the distribution of CASA deposits among banks is not uniform (Table 7).

Table 7 : Frequency Distribution of CASA Deposits among Bank Groups - March 2010

(Per cent)

Share of CASA

No. of Banks

Average Cost of Deposits

1

2

3

A . Scheduled Commercial Banks

1-30%

32

5.61

30-40%

23

5.40

40-50%

10

4.39

50% and above

10

2.20

B. Public Sector Banks

1-30%

12

6.19

30-40%

13

5.83

40 - 50%

2

5.41

50% and above

0

NA

C. Private Sector Banks

1-30%

12

6.66

30-40%

5

5.59

40-50%

4

5.18

50% and above

1

4.51

D. Foreign Banks*

1-30%

8

4.45

30-40%

5

4.07

40-50%

4

3.10

50% and above

9

2.16

*: Excluding one bank which is an outlier. NA : Not applicable.
Note: Cost of Deposits = Interest paid on deposits/average of current and previous year’s deposits.
Source: Reserve Bank of India.

35. It has also been observed that 49 banks, which have below average CASA deposits, constitute about 50 per cent of total asset of the banking sector. Therefore, given the attractiveness of savings deposits, it could be argued that deregulation may lead to unhealthy competition amongst banks. Should it really happen, it will have implications in that it will push up the cost of funds of the banking sector. This, if passed on to the borrower, will raise the cost of borrowings and if not, it will affect the interest margins and profitability of the banking sector.

Risk of Asset Liability Mismatches

36. One of the issues often raised by banks in the context of deregulation of savings bank interest rate is that in the event of such deregulation, it would result in an asset-liability mismatch. This is because, although savings bank deposits represent short-term savings and withdrawable on demand, a large part of savings deposits is treated as ‘core’ deposits, which together with term deposits have been used by banks to increase their exposure to long-term loans, including infrastructure loans. This is reflected in the increase in the share of term loans in total loans, barring foreign banks, during the period between 2001 and 2009 (Table 8).

Table 8 : Share of Term Loans in Total Advances

(Per cent)

Bank Group

2001

2002

2003

2004

2005

2006

2007

2008

2009

1

2

3

4

5

6

7

8

9

10

I. State Bank of India & its Associates

32.9

35.3

39.2

45.2

52.0

53.9

54.9

55.2

52.2

II. Nationalised Banks

37.2

37.3

39.3

45.0

51.2

52.7

54.9

55.6

56.0

III. Private Sector Banks

32.5

60.5

64.0

65.0

65.8

68.4

70.3

69.7

69.4

IV. Foreign Banks

46.1

48.7

47.9

45.0

49.2

48.0

49.3

48.9

46.9

V. All Scheduled Commercial Banks

36.7

42.2

44.5

49.0

54.1

55.9

57.7

58.0

57.1

Source: Statistical Tables Relating to Banks in India, RBI, Various Issues.

37. Significantly, during the same period (2001-2009), the share of long-term deposits (more than 3 years) in total term deposits declined almost steadily (Table 9).

Table 9 : Movements in Key Ratios of SCBs

(Per cent)

End-March

Savings Bank Deposits/ Aggregate Deposits

Term Deposits of More than 3 years Maturity /Total Term Deposits

Term Loans/ Total Advances

1

2

3

4

2001

20.0

31.7

36.7

2002

20.5

28.7

42.2

2003

22.3

23.9

44.5

2004

23.7

27.8

49.0

2005

24.2

26.5

54.1

2006

25.1

24.5

55.9

2007

23.4

22.6

57.7

2008

22.4

23.1

58.0

2009

21.5

20.2

57.1

Note: Data in column 3 are inclusive of RRBs.
Source: Statistical Tables Relating to Banks in India, RBI, Various Issues.

38. In particular, public sector banks (which constitute 75 per cent of total assets) with a higher share of CASA deposits have higher exposure to term loans (Table 10).

Table 10 : Frequency Distribution of Public Sector Banks’ CASA Deposits and Term Loans

Share of CASA

No. of Banks*

Term Loan/Total Advances (%)

Average

Range

1

2

3

4

20-30 per cent

11

52

44-67

30-40 per cent

13

60

44-76

40-50 per cent

2

64

56-72

*: Excludes one bank which is an outlier.
Source: Reserve Bank of India.

39. In a scenario when savings deposits are used to finance long-term assets, deregulation of savings bank interest rate, it is argued, would have implications for asset liability management of banks. Any unhealthy competition, arising out of deregulation may have the potential to create asset liability mismatches as some banks with large dependence on savings deposits for financing long-term assets may lose savings deposits to some other banks.

May Lead to Financial Exclusion

40. Should unhealthy competition result in increase in interest rate and the overall cost of funds, banks might be discouraged from maintaining savings deposits with small amounts due to the associated high transaction costs. This could particularly be the case with public sector banks, which have a large number of savings accounts and which allows depositors to maintain very low balances. Thus, it is likely that banks either increase the minimum balance to be maintained or reduce the number of transactions permitted free of cost and increase the customer service charges too. This will discourage small savers, especially in rural and semi- urban areas from opening savings deposits accounts. The campaign for “No Frills Accounts” could also suffer a setback. In sum, deregulation of savings bank deposit rate might have adverse implications for the process of financial inclusion.

Could Adversely Affect Small Savers/Pensioners

41. Many senior citizens, pensioners, small savers, particularly in rural and semi-urban areas, depend on interest as a source of regular income. In the recent period, interest rate on savings deposits has been lower than that on term deposits and deregulation may push up savings deposits higher, in which case small savers/pensioners would benefit. However, there could be occasions, especially when the liquidity is in surplus, when savings deposit interest rates may decline even below the present level. This will affect the income flow to small savers/pensioners. However, considering the fact that such occasions have been few and far between and on most recent occasions, savings interest rate was lower than short-term deposits, concerns about the impact of deregulation of savings deposits on pensioners/small deposits need not be over-emphasised.

Possibility of Introduction of Complex and not so Easily Understood Savings Products

42. Although deregulation of savings deposit interest rate may lead to product innovation, which, in general, will benefit savers, it is also possible that banks introduce some complex products, which may not be so easily understood by savers. These strategies may result in increase in the mis-selling of savings bank products, which will also result in increase in the number of customer complaints.

Section VI : Analytical Perspective

43. Two important issues, which, from banks’ point of view, need to be considered before deregulating savings deposits interest rate are the possibility of unhealthy competition and asset-liability mismatches. This section analyses historical data to ascertain as to how far these apprehensions are justified.

44. The risk of possible unhealthy competition arising out of deregulation of savings deposits interest rate should be no different from the one when interest rate on term deposits were deregulated in 1997. An attempt, therefore, is made to analyse the trends in term deposit interest rates before and after they were deregulated. The evidence of unhealthy competition in interest rates, if any, can be gauged from the spread of interest rates on term deposits over the policy rate. Unhealthy competition among banks should result in widening of spreads. Table 11 sets out data on the contemporaneous and one-year lagged spread between the term deposit interest rate and the relevant policy rate (as transmission of policy action to deposit rates takes place with some lag).

45. As may be seen from Table 11, there is no evidence of any unusual spread in term deposits immediately after interest rates on such deposits were deregulated in 1997. Although the spread tended to widen in a deregulated environment as compared with when interest rates were regulated, this was not unusual as similar or somewhat higher spreads were observed in more recent years. If deregulation of term deposits interest rate did not lead to any unhealthy competition, it is unlikely that deregulation of savings deposit rate will result in any unhealthy competition.

Table 11 : Deposit Rate of Major Banks for Term deposits of more than 1 year maturity

(per cent)

Year

Range of Interest Rate on term deposits

Average Interest Rate

Bank Rate/ Repo Rate/ Reverse Repo

Average Spread
(3-4)

Average Spread
(Lag 1 year)

1

2

3

4

5

6

Mar-91

9.0-11.0

10.0

10.0

0.0

-

Mar-92

12.0-13.0

12.5

12.0

0.5

2.5

Mar-93

11.0-11.0

11.0

12.0

-1.0

-1.0

Mar-94

10.0-10.0

10.0

12.0

-2.0

-2.0

Mar-95

11.0-11.0

11.0

12.0

-1.0

-1.0

Mar-96

12.0-13.0

12.5

12.0

0.5

0.5

Mar-97

11.0-13.0

12.0

12.0

0.0

0.0

Mar-98

10.5-12.0

11.3

10.5

0.8

-0.7

Mar-99

9.0-11.5

10.3

8.0

2.3

-0.3

Mar-00

8.5-10.5

9.5

8.0

1.5

1.5

Mar-01

8.5-10.0

9.3

7.0

2.3

1.3

Mar-02

7.5-8.5

8.0

6.5

1.5

1.0

Mar-03

4.3-6.3

5.3

5.0

0.3

-1.3

Mar-04

4.0-5.5

4.8

4.5

0.3

-0.3

Mar-05

5.3-6.3

5.8

4.75

1.0

1.3

Mar-06

6.0-7.0

6.5

5.5

1.0

1.8

Mar-07

7.5-9.0

8.3

6.0

2.3

2.8

Mar-08

7.5-9.0

8.3

6.0

2.3

2.3

Mar-09

7.8-8.8

8.3

5.0

3.3

2.3

Mar-10

6.0-7.5

6.8

5.0

1.8

1.8

Mar-11

7.8-9.5

8.6

6.75

1.9

3.6

Note: (i) Data on deposit term deposits of more than one year maturity in column 2 relate to five major banks.
(ii) Average interest rate in column 3 refers to the mid-point of interest rates range in column 2.
(iii) In column 4, the policy rate used is the relevant policy rate at the given time. Bank Rate was used for the period prior to 2003 when it was in active use. For the subsequent period, repo/reverse repo rate was used depending on the prevailing liquidity conditions in the system.
Sources : Weekly Statistical Supplement and Handbook of Statistics on the Indian Economy, RBI, various issues.

46. A deeper analysis of the data also suggests that the fear of asset liability mismatch arising out of deregulation of savings bank deposits interest rate is misplaced. Quite a sizeable part of savings deposits indeed constitutes ‘core’ deposits. This is recognised in the asset-liability management (ALM) guidelines where 90 per cent of savings bank deposits are considered as ‘core’ savings deposits and is also borne out by the behaviour of actual bank-wise data culled out from supervisory returns submitted by banks (Table 12).

Table 12 : Core Component of Savings Deposits*

Year

Ratio

1

2

2006

0.98

2007

0.92

2008

0.93

2009

0.92

2010

0.89

2011

0.92

*: The core component of savings deposit relates to scheduled commercial banks and it has been arrived at by taking average monthly minimum balance in a financial year. Data for 2006 and 2011 are based on monthly data for January-March, 2006 and April 2010-January 2011, respectively.
Source: Supervisory returns of banks.

47. Now, the issue is whether the ‘core’ component of savings deposits could undergo a substantial shift if savings bank deposits interest rate are deregulated. A large shift in the ‘core’ component of savings deposits is possible if there is an unhealthy competition. However, as has been discussed earlier, if deregulation of term deposits interest rate is any guide, the possibility of unhealthy competition arising out of deregulation of savings deposits interest rate is low. Further, the experience of deregulation of interest rates on term deposits also suggests that there was some shift of term deposits from public sector and foreign banks to private sector banks. The average share of term deposits held by public sector banks and foreign banks declined, while that of private sector banks increased. It is, however, significant to note that some shift was also noticed in savings deposits even as interest rate on savings deposits was regulated (Table 13). In this context, it needs to be noted that some shift in favour of private sector banks was also on account of new private sector banks, which in any case could have captured some market share of business of existing banks. Thus, it is difficult to indicate as to how far deregulation of term deposit interest rate resulted in shift of term deposits from public and foreign banks to private sector banks. In any case, the shift in deposits was not significant so as to destabilise the system. Thus, if deregulation of interest rate for term deposits, which constituted more than 60 per cent of deposits, did not have any destabilising impact, deregulation of interest rate for savings deposits, which constitute about 22 per cent of total deposits, may not have a significant adverse impact on the system. Thus, the concern relating to asset liability mismatch may not turn to be as serious as it has been made out to be.

Table 13: Bank Group-wise and Category-wise Share in Aggregate
Deposits of Scheduled Commercial Banks

(per cent)

Bank Group

1990-1997
(Average)

1998-2009
(Average)

1

2

3

I. Public Sector Banks

Share of Current Deposits

87.6

72.5

Share of Savings Deposits

92.8

86.6

Share of Term Deposits

85.7

77.0

II. Private Sector Banks

Share of Current Deposits

5.5

16.6

Share of Savings Deposits

4.9

10.4

Share of Term Deposits

6.6

17.7

III. Foreign Banks

Share of Current Deposits

6.9

10.8

Share of Savings Deposits

2.3

3.0

Share of Term Deposits

7.7

5.3

IV. Scheduled Commercial Banks*

Share of Current Deposits

16.5

12.3

Share of Savings Deposits

21.1

22.2

Share of Term Deposits

60.9

64.5

Memo:

Growth of Term Deposits

Average

16.6

19.1

Standard Deviation

2.6

5.8

Growth of Aggregate Deposits

Average

15.9

18.4

Standard Deviation

3.0

3.6

*: Excluding RRBs.
Source: Statistical Tables Relating to Banks in India, RBI, Various Issues.

Section VII : Summing Up

48. The process of deregulation, which began in the early 1990s, was largely completed by 1997. A few categories of interest rates that continued to be regulated were small loans up to ` 2 lakh and rupee export credit on the lending side, and savings deposit interest rate on the deposit side. The small loans up to ` 2 lakh and rupee export credit were deregulated in July 2010 when the Reserve Bank replaced the benchmark prime lending rate (BPLR) system with the Base Rate system. The only interest rate that continues to be regulated now is the savings deposit interest rate. Deregulation of interest rates in India since the early 1990s has improved the competitive environment in the financial system, imparted greater efficiency in resource allocation and strengthened the transmission mechanism of monetary policy.

49. Savings deposit interest rate has not been deregulated for the reason that a large portion of such deposits is held by low income households in rural and semi-urban areas. It is more than 13 years when the deposit interest rates, other than savings deposits, were deregulated. The issue, therefore, is how relevant are these concerns in today’s context and what will be the implications if savings deposit interest rate is deregulated.

50. Regulation of savings deposit interest rate has imparted rigidity as savings deposit interest rate has not been changed since March 1, 2003 although other interest rates have moved in either direction. Interest rate paid on savings deposits was lower than those on term deposits of all maturities, other than for term deposits at very short end for a brief period. Thus, it is the saver who has been affected adversely because rate of return on savings deposit has generally been negative and unattractive vis-à-vis short term deposits.

51. The empirical evidence suggests that unlike metropolitan areas, savings deposits in rural, semi-urban and urban areas are responsive to interest rate changes in savings deposits. Therefore, market-based interest rate may be beneficial to savers. Since savings deposit is a hybrid product which combines the features of both current account and term deposit, a market based rate of interest on this product has the potential to attract large savings from low income households. Deregulation will also allow banks to introduce product innovations which could also benefit the depositors. Deregulation will have another major advantage in that it will help improve the monetary transmission. Since savings deposits constitute a significant portion of aggregate deposits, regulation of interest rate on such deposits has impeded the transmission of monetary policy impulses.

52. However, some concerns have also been raised with regard to deregulation of savings deposits interest rate. Savings deposits have been a source of cheap funds for banks. This is reflected in the low cost of deposits in respect of those banks which hold relatively high proportion of CASA deposits (a major portion of which is savings deposits). In addition, banks treat a large portion of savings deposits as ‘core’ deposits, which has been used to finance long-term assets. However, distribution of savings deposits is skewed among banks with some banks enjoying relatively high share of savings deposits than others. It has also been observed that a large number of banks (accounting for about half of the size of the banking sector) hold CASA deposits lower than the average CASA deposits. In view of this pattern, banks have often raised the concern that deregulation may lead to an unhealthy competition. This, in turn, may result in large shift of deposits from some banks exposing them to a serious risk of asset-liability mismatch.

53. However, analysis of interest rates on term deposits after they were deregulated did not result in any unhealthy competition amongst banks. Although spreads (the difference between the term deposits interest rate over the relevant policy rate) tended to widen somewhat in a deregulated environment in comparison with when interest rates were regulated, this was not unusual as similar or somewhat higher spreads were observed in recent years. Thus, if deregulation of term deposits did not lead to any unhealthy competition, deregulation of savings deposit rate may also not result in any unhealthy competition.

54. The experience with deregulation of term deposits interest rate also suggests that deregulation resulted only in a marginal shift of deposits from public sector banks and foreign banks to private sector banks. Thus, if deregulation of term deposits interest rate is any guide, deregulation of savings deposit interest rate may not result in an unhealthy competition and a large shift of deposits from one bank to another, thereby destabilising the system. Further, the Reserve Bank has deregulated the entire asset side and bulk of liability side of banks’ balance sheets. In such a scenario, continuing regulation of savings deposit interest rate leads to distortions in the system, which need to be avoided.

55. Concerns have also been expressed with regard to the interests of low income households in a deregulated environment. There is a risk that in a deregulated environment when the cost of maintaining such deposits becomes high, banks may introduce such features as may prevent small depositors from accessing such accounts. While attractive returns may encourage low income households to open such accounts, it may also reduce accessibility of such accounts for small savers if banks impose some restrictions on the operation of such accounts. However, such issues are better addressed by regulatory prescriptions rather than by regulation of interest rates.

56. In sum, deregulation of savings deposit interest rates has both pros and cons. Savings deposit interest rate cannot be regulated for all times to come when all other interest rates have already been deregulated as it creates distortions in the system. International experience suggests that in most of the countries, interest rates on savings bank accounts are set by the commercial banks based on market interest rates. Most countries in Asia experimented with interest rate deregulation to support overall development and growth policies. These resulted in positive real interest rates, which in turn contributed to an increase in financial savings. Deregulation of savings bank deposit interest rate also led to product innovations.

Issues for Feedback from Public

In light of pros and cons of deregulation of savings deposit interest rate set out in this Discussion Paper, the Reserve Bank seeks feedback from the general public on the following issues:

1. Should savings deposit interest rate be deregulated at this point of time?
2. Should savings deposit interest rate be deregulated completely or in a phased manner, subject to a minimum floor for some time?
3. How can the concerns with regard to savers (senior citizens, pensioners, small savers, particularly in rural and semi-urban areas) be addressed in case savings deposit interest rate is deregulated?
4. How serious are concerns relating to a possible intense competition amongst banks and asset-liability mismatches if savings deposit interest rate is deregulated?
5. Should higher interest rate be paid on savings deposits without a cheque book facility?

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¹Glower, Carlos J (1994), “Interest Rate Deregulation: A Brief Survey of the Policy Issues and the Asian Experience”, Asian Development Bank, Occasional Papers, July.

²Chong, Beng Soon (2010), “Interest Rate Deregulation: Monetary Policy Efficacy and Rate Rigidity,” Journal of Banking & Finance, Vol. 34, Issue 6, June, Pages: 1299-1307.

³Real rate is calculated as the difference between interest rates of respective maturities and year-on-year WPI inflation.

Exclusively Structured Campus Placement Programme for Small and Medium Sized Enterprises(SMEs) and the Small and Medium Sized CA Firms May 2011

Exclusively Structured Campus Placement Programme for Small & Medium Sized Enterprises(SMEs) and the Small and Medium Sized CA Firms May 2011

The Institute of Chartered Accountants of India (ICAI) is pleased to welcome all Firms of Chartered Accountants (CAs) and leading companies to the forthcoming Exclusively Structured Campus Placement Programme for Small & Medium Sized Enterprises(SMEs) and the Small and Medium Sized CA Firms. The Committee for Members in Industry (CMII) of the ICAI has been successfully organising placement programme for newly qualified Chartered Accountants (CAs) twice a year.

This has consistently proved to be an extremely beneficial service to the participating companies and candidates registering for the programme.

The next Campus Placement Programme for Newly Qualified Chartered Accountants is scheduled to be held in May, 2011 at 15 centres in India. The Placement Programme of the Institute provides an excellent opportunity to peruse the particulars of a large number of newly qualified CAs, interview and recruit the suitable ones in your organisation. The scheme provides an opportunity – both to employing organisations as well as the young professional aspirants to meet and explore the possibility of having a mutually beneficial relationship.The ICAI makes all arrangements for the conduct of the Interviews at all the centres.

The details of the programme are available on http://www.cmii.icai.org/imgs/campus_sme.htm for your kind perusal.

For participation you may get in touch with Secretary, Committee for Members in Industry, Indraprastha Marg, New Delhi - 110002, Tel. No. (011) 30110450/491 E-mail: placements@icai.org, mii@icai.in.

We look forward to your active participation in this Placement Programme and solicit your valuable cooperation by way of referring the programme to various organisations known to your goodselves as a help to our young professional brethren and sisters and our alma mater, ICAI.

ICAI - President's Message - May 2011

President's Message - May 2011

It is heartening and satisfying to observe that we have always ranked integrity as one of the most fundamental requirements of our profession. All stakeholders of the profession abide by this fundamental principle. I find it quite apt to recall the example of our first President of India, Bharat Ratna Dr. Rajendra Prasad, also fondly known as Deshratna, who had called upon our profession to realise the role of the first line of defence to the unwary public against money grabbers and opportunists and asked us to have greater share of responsibilities when he was in ICAI in 1954. That holds importance for us even today. Academically brilliant, a throughout first-class-first, and personally very simple and straightforward, he was often called a common man’s President. It is cited that he voluntarily declined to accept his complete monthly salary of ten thousand rupees with a sumptuous allowance of two thousand five hundred rupees, as he found it quite high. He finally brought this down to an acceptable salary of two thousand five hundred rupees. We really need to learn from his simplicity. In fact, Mahatma Gandhi saw his own reflections in him and said:There is at least one man who would not hesitate to take a cup of poison from my hands. Mahatma later acknowledged in his autobiography: (Dr. Rajendra Prasad’s)devotion made it impossible for me to take a single step without…(his)…help. Even Jawaharlal Nehru described him as ‘Bharat’, and exclaimed once on his strengths:We often commit mistakes. Our steps falter, our tongues falter and slip. But here is a man who never makes a mistake, whose steps do not falter, whose tongue does not falter or slip and who has no occasion to withdraw what he once said or was undone what he once did.

Dr. Rajendra Prasad always believed in the purity of means: In attaining our ideals, our means should be as pure as the end. I am sure, our members and students will find his instance quite encouraging and inspiring. Let us have faith in his way of attaining ideals. Let us believe in his simplicity.

Let us observe some of the recent significant developments that have a merit to transcend our expectations, and a strength to bring us closer to the high ideals of our profession.

International Initiatives

SAFA Events in Pakistan: I wish to inform that I alongwith the ICAI Vice-President CA. Jaydeep N. Shah, immediate past-President CA. Amarjit Chopra, ICAI Secretary Shri T. Karthikeyan, and Central Council colleagues CA. Sumantra Guha, CA. Pankaj Tyagee, CA. Devaraja Reddy and CA. Abhijit Bandyopadhyay visited Karachi recently to attend the SAFA meetings and ICMAP (Institute of Cost & Management Accountants of Pakistan) International Conference on ‘Corporate Finance & Economic Challenges’. CA. Bandyopadhyay presented a paper titled Corporate Governance – The Foundation for Corporate Citizenship & Sustainable Business at Conference.We attended various Committee meetings of SAFA. I being the Chairman of the SAFA SMP Committee highlighted some of the important capacity-building measures taken by our Institute for SMPs and offered our complete support to SAFA members in this regard. CA. Jaydeep N. Shah chaired the SAFA Committee on Education, Training and CPD wherein we apprised of various certificate and postqualification courses offered by the ICAI to its members. We also offered our support to SAFA members in launching such certificate courses in their respective countries. A proposal of an MoU with other accounting bodies of the SAFA region was also discussed.

At the SAFA Board meeting, various committee reports were presented and an emphasis was laid on the byelaws and rules of the SAFA Board, which would be finalised by July 2011. Recognising an increase in number of women in accounting profession, a proposal to establish a women’s forum of SAFA was also discussed.

Proposal for MRA with AIA (UK): As you know, we had signed a joint declaration with Association of International Accountants (AIA), established in the UK in 1928 and recognised by its Government for statutory auditors under the Companies Act, 2006. As per one of the clauses contained in the declaration, our Council has recently approved the proposal for entering into a mutual recognition agreement (MRA) with the AIA paving the way for a mutual recognition of qualifications. Since, AIA is a Recognised Qualified Body (RQB) in UK, it has been proposed that our members can benefit if we have a reciprocity arrangements with AIA. As per the MRA, training at both ends shall be recognised fully. While we have stipulated that AIA members will have to pass our five papers, our members are not required to pass any paper of AIA.

Meetings with Government Officials

Meeting with RBI Deputy Governor: I, along with my Central Council colleague CA. Manoj Fadnis, met Shri Anand Sinha, Deputy Governor, RBI, recently to discuss the amortisation of impact of additional pension liability due to wage revision under the 9th Bipartite settlement. We informed him that we would endeavour to take a positive view, when the regulator acted in the light of financial stability and saw how it fitted in overall framework of the Accounting Standards. We also informed that we were working on an announcement regarding the circular already issued by the RBI permitting amortisation of pension liability to new optees in banks to cater to the needs of statutory auditors in this regard and that the proposed treatment would be to consider the regulatory dispensation as a matter of emphasis than as a full-fledged qualification.

Interactive Session with Ministry of Home Affairs: An interactive session with the Joint Secretary, Ministry of Home Affairs, Government of India, was held recently on their invitation. The objectives of interaction were to sensitise chartered accountants about common irregularities/ discrepancies with reference to implementation of Foreign Contribution (Regulation) Act, and about financial, accounting and auditing issues of the not-for-profit organisations (NPO) sector. We made a presentation on the basics of accounting for the NPO sector to follow, which was appreciated by all.

Developments in IFRS Convergence

Our Central Council colleague and Chairman Accounting Standards Board CA. Manoj Fadnis attended the National Standard Setters (NSS) meeting along with Secretary, Accounting Standards Board, Dr. Avinash Chander, in New York recently, where issues regarding the IAS 41 on Agriculture were discussed. India explained the current status of the Working Group of AOSSG on Agriculture. An approach (revision) paper on IAS 41, Agriculture is ready for comments. A meeting has already been scheduled at Mahatma Phule Krishi Vidyapeeth, Rahuri. Issue regarding rate-regulated activities was also raised, as the Ministry of Corporate Affairs, Government of India, had requested us to prepare a guidance note on Accounting for Rate Regulated Entities. In a separate discussion, the Indian concerns were discussed with representatives from Canada and the concerned IASB officials whereat it was agreed to share our attempt to issue the Guidance.
In the recently-held Foreign Exchange Working Group meeting, revision of the IAS 21, The Effects of Changes in Foreign Exchange Rates, was considered, and current Indian accounting requirement of deferring exchange differences on translating long term monetary items at current exchange rate was also discussed.
Groups Formed to Identify Issues and Formulate FAQs: A Group has been constituted to identify indirect taxes issues arising out of implementation of Indian Accounting Standards converged with IFRS (Ind ASs). Study Groups were also constituted to formulate Frequently Asked Questions (FAQs) on 12 Indian Accounting Standards to help our members and other stakeholder in the convergence process. Till date, draft FAQs have been received on two Indian Accounting Standards, namely, Ind AS 101,First-time Adoption of Indian Accounting Standards, and Ind AS 1, Presentation of Financial Statements, which will be finalised shortly.

Initiatives for Government

Uniform Accounting/Auditing Framework for Political Parties: Towards our initiative to help our Government, we had prepared a report on Uniform Accounting & Auditing Framework for Political Parties covering, inter alia, applicability of Accounting Standards, and uniform formats of financial statements and applicability of Standards on Auditing, issued by the ICAI to the political parties, etc. After a discussion with the Election Commission of India, the revised draft, based on its suggestions, has been recently approved by our Council.
Special Group on MPLAD Scheme: I wish to inform all of you that a special group had been reconstituted recently under the convenorship of our Central Council colleague CA. Jayant Gokhale to study the Guidelines of Members of Parliament Local Area Development (MPLAD) Scheme of the Central Government. The purpose of this constitution is to recommend areas for improvement with regard to accounts and audit part in the scheme. The Group has finalised its recommendations which would be likely to be discussed in the Rajya Sabha Secretariat in a meeting scheduled to take place in the last week of April.
Technical Guide for Telecom Operators: A project to provide guidance on some complex accounting issues arising out of recognition of revenue of Telecom Operators by means of bringing out a Technical Guide on Revenue Recognition of Telecom Operators has been undertaken as part of our research initiative. An exposure draft of the above mentioned Technical Guide was hosted on the Institute website as well as sent to major telecom companies for comments. Ministry of Telecommunication while sending its comments on the draft, has expressed its wish to associate itself in the formulation of the Guide citing concerns from the regulatory point of view.
Accordingly, on invitation of the Department of Telecommunication (DoT), an ICAI group had discussions with Ms. Sadhna Dikshit, Advisor (Finance), and Shri Saurabh Kumar Tiwari, Deputy Director General (Licensing & Finance-II), and other officials of the DoT, on the concerns of the DoT and how to address the issues requiring guidance in the proposed Guide. It was decided that the DoT would send us their additional comments after further internal discussions by April 2011. Thereafter, the revised draft of the Guide will again be discussed with the DoT.
Suggestions to Ministry of Home Affairs: Our comments/ suggestions on the Draft Foreign Contribution (Regulation) Rules, 2011 have been submitted to the Ministry of Home Affairs, Government of India, as the Ministry had invited our comments/suggestions on the Draft from the general public and stakeholders.
Submission of Post-Budget Memoranda, 2011: This is to inform all that Post-Budget Memoranda, 2011 on Direct Taxes and Indirect Taxes have been finalised and submitted to the Ministry of Finance, Government of India. It is a matter of pleasure that that two of our suggestions contained in Post-Budget memorandum relating to direct taxes have been accepted. The suggestions so considered and accepted have been hosted on the Institute website. Similarly, on Indirect Taxes, important suggestions have been accepted by the Government. The most significant of which was with respect to Point of Taxation Rules, 2011 where chartered accountants have been allowed to pay service tax on receipt basis as per our suggestions. To apprise the profession with this development, a note carrying all significant changes made in service tax, particularly Point of Taxation Rules, 2011, was prepared and hosted on the Institute website. It has also been sent to the registrants of IDT Net, a networking portal for members practising in indirect taxes.

Professional Opportunities

Filing Statements in XBRL and Implications: As you may be aware that the Ministry of Corporate Affairs has released a circular mandating certain class of companies in phase one for filing financial statements for the year ending 31st March, 2011, in XBRL formats, creating a new professional opportunity for all members, as we can help our clients in tagging the financial statements with the taxonomy and filing the instance documents so created with the MCA. Though the circular covers only a small class of companies, it is expected that some more will be covered in the next phase and eventually all companies will come under it, thereby giving an opportunity to professionals for XBRL filings for all its clients. Training programmes for the purpose shall be organised by the Institute, where XBRL India will provide the technical inputs, and the training schedule will be hosted on the Institute website. I am sure that our members will take the circular in right spirit and prepare themselves for such opportunities.
DISA Holder to Conduct System Audit: I am pleased to inform all members of the profession that the RBI vide its recent circular relating to submission of system audit reports has allowed a holder of a Diploma in Information System Audit (DISA) of the ICAI to conduct system audit of Authorised Payment System Operators and Entities, apart from a Certified Information Systems Auditor (CISA) and registered with Information Systems Audit and Control Association (ISACA).
“Partnership” in the CA Act, 1949, CWA Act, 1959 and CS Act, 1980: I wish to inform members of the profession that the Ministry of Corporate Affairs has issued a general circular dated 4th April, 2011, clarifying that the word “partnership” wherever occurring in the Chartered Accountants Act, 1949, the Cost and Works Accountants Act, 1959 and the Company Secretaries Act, 1980 shall mutatis mutandis be construed as including those limited liability partnerships (LLPs) where all the other partners are natural persons (individuals) and that the word “partner” shall also be construed accordingly. The matter was considered by the Council recently and, you will be pleased to note that it has been decided to allow all existing CA firms to convert themselves into LLPs, which would enable CA firms to grow bigger and increase their capacity. A much-awaited proposal, it has also been decided that, upon conversion, firms will be permitted to retain their seniority and all benefits of merger, networking, etc., will be available to the LLPs. We will soon bring out a format for making an application for conversion to an LLP. Thus, small and medium firms may enhance their capacities by including personnel with multidisciplinary competency, and grow big.
ICAI-CBEC MoU: As you are aware that, in the year 2010, we have entered into an MoU with the CBEC to facilitate setting up of the certified facilitation centres (CFC) by the chartered accountants in practice under the ACES Project of CBEC, which can upload returns and other documents for central excise and service tax assessees. I am pleased to inform you that the scheme has been renewed through an extension agreement for a further period of two years. Till recently, more than 600 CFCs have been registered under the ACES project. A list of our CFCs registered with ACES has been hosted on our website.

Capacity Building Measures

Portals for SMPs would be a Reality: I am happy to acknowledge before the members of our profession that necessary steps have been taken to create a website where small and medium practitioners may create their portals as per the norms laid down by the Council of the Institute. Thus, all CA firms will be able to upload details of their firms on the proposed website from their end and it shall also provide them an opportunity to reach out to the international practitioners. It has also been initiated to arrange for e-library, knowledge portal (including blogs, discussion forums, etc.), CA net-book facility, downloadable resources for reference including software for office management for members and firms. I sincerely hope that this would be helpful in enhancing the knowledge base of the members in practice.
Recommended Fee Structure on Professional Assignments: I am pleased to inform you that the Council has considered the Minimum Recommended Scale of Fees for professional assignments done by our members, which is about the fee as per the work performed for various professional assignments and the amount quoted under respective heads of professional work. The fee has been recommended separately for metros and nonmetros. I am sure that the prescribed fee will enhance the productivity and capacity-building of practitioners and CA firms and benefit largely the SMP segment.
Benevolent Measures for the Profession: To strengthen the competence of members and firms, we have initiated IT measures to empower them by providing tax-solution software with initial license free of cost for two years. Such a technological empowerment will eventually help our members in efficient documentation and knowledge and contact management and enable them in strengthening their practices in the field of taxation and audit.

Other Important Initiatives

Members in Industry Outreach Programme: I am pleased to inform the profession that the first Members in Industry Outreach Programme was organised at the GMR Group Corporate Office in Bangalore, where I, along with my Central Council colleague CA. K. Raghu, had the opportunity to interact with our members on issues concerning the profession. We also met the Chairman of GMR Group, Shri G. Mallikarjuna Rao, and discussed with him about the Institute and its initiatives. This programme was held to bring our members in industry closer to the Institute by enhancing interactions between the Institute and those members on matters of professional interest and by encouraging senior members to renew their membership and newly-qualified professionals to apply for membership. Such outreach programmes will also help us in understanding the expectations of the members in industry. At least, 25 such programmes would be conducted across the country. Corporates having more than 50 chartered accountants will be picked out and requested to conduct these programmes.
Launch of ICAI Web TV: It is a matter of pride and happiness for me to launch the ICAI Web TV, which will host educational videos to enable our members in industry as well as others to watch lectures of eminent speakers on their computers and mobile phones at their convenience. The idea behind this exercise is to help those members, who usually find it difficult to participate in professional programmes of the Institute due to their professional pressure and commitments. It will also cast important events of the Institute live including webinars, i.e. webseminars, and enable those members in participation.
Successful Campus Placement (February-March 2011): I am really happy to inform all our students and newly-qualified chartered accountants that the response to campus placement programme during February-March 2011 has been excellent. Sort of history was created, as against the registration of more than 5,000 candidates, 1,863 candidates, i.e. more than one third of the registered, got the offer. A record number of 223 interview teams participated. Banking industry was the largest recruiter this year and ICICI Bank topped the list of recruiters by appointing 337 candidates.
Directives to POUs regarding CPE Programme: Continuing Professional Education (CPE) programmes, conducted by the Institute, are an integral part of chartered accountants’ lifelong learning required to maintain standards of excellence in their professional services. Our Institute has been providing continual inputs to its members through seminars, lectures, workshops, background material, etc., with the help of all its Branches and Regional Councils. Recently, a communication has been sent to all programme organising units (POUs) as well as to all Non-Standing Committees with a request to follow the set of existing CPE guidelines in letter and spirit, that includes adherence of CPE programmes to the announced schedule, starting the programmes with technical sessions instead of introductions, presenting mementos in the form of technical/professional books, hosting of details on CPE programmes at least three days in advance and so on. CPE calendar for 2011-2012 has been hosted on the Institute website for the information of members and POUs.
Vision 2030 Document: A group has been constituted for the project of preparation and development of Vision 2030 and action plan for the next two years, as desired by the Ministry of Corporate Affairs. Another group was constituted to study various reports and key regulatory developments for formulating our strategy to promote the interest of profession, which could be a part of Vision document.
Interactive Meeting with Chairmen and Heads of ICAI Regional Councils: Recently a meeting of the Chairmen of all Regional Councils and Heads of all Regional Offices of the ICAI was held with the ICAI leaders, i.e. President and Vice-President, at the ICAI headquarters in New Delhi. Issues such as CPE programmes, XBRL, infrastructure, services to our members and students, branch accounts reconciliation, other pending matters etc., were discussed in the meeting. There was also a presentation on vision for the year ahead for collecting inputs from other participants. All the participants gave assurance to cooperate in all endeavour of the Institute.
Appellate Authority is Functional: As all members of the profession are aware, the Appellate Authority under Section 22A(1) of the Chartered Accountants Act, 1949 was constituted by the Central Government in March, 2009, but the same was not functional, as the Chairperson of the Authority had not taken charge. Recently, Justice Shri S. N. Dhingra (Retd.) has been appointed by the Government as the Chairperson. I had the opportunity to call on him recently. At this meeting, we discussed the action plan to operationalise the Appellate Authority, and infrastructure requirements for the same. Shri Dhingra along with the representatives of all the three Instiutes would meet the MCA Secretary where it would be, inter-alia, proposed to request for an office space for the Appellate Authority that is currently housed in the ICAI headquarters in New Delhi.
C&AG Consideration of Criteria in Empanelment: As our profession is aware, the Office of C&AG has notified new norms of empanelment this year. Despite our efforts, the C&AG Office informed that it was not possible to defer the present empanelment norms this year. However, it has agreed to have a re-look at the criteria in respect of compensation payable to a partner either on percentage or on an absolute basis. I am pleased to inform you that the C&AG Office has extended the date for filing of documents to 30th April 30 from 25th April, 2011.
ICAI Nominates on RBI’s Working Group on Concurrent Audit System: Recently, the Reserve Bank of India has constituted the Working Group on Concurrent Audit System in Commercial Banks. On a request received from the RBI, we have sent our nomination to the RBI on the Group on Concurrent Audit.
Certificate Course on Internal Audit: Despite being given to work in multi disciplinary internal audit teams, chartered accountants have created a niche of their own in that area. To maintain the niche in the area of internal audit, a core competence area of chartered accountants, they would require to periodically assess their skills and upgradation requirements. Considering this, a certificate course on Internal Audit has been launched, which will aim at disseminating technical developments among our members and providing practical implementation guidance to them. Further, to provide more focus on the area, three articles have been published on internal audit in this issue.
On Disciplinary Cases: There are around 125 cases pending for enquiry by the Disciplinary Committee under the unamended Act. As of now two hearings by the Disciplinary Committee under Section 21-D have been conducted in New Delhi wherein in 13 cases, Disciplinary Committee has concluded its hearing out of 46 cases fixed for hearing. This month, during the meetings of the Board of Discipline and Disciplinary Committee (under Section 21B), hearing of nine cases were concluded. Besides the above, 23 cases have been disposed off by the Board of Discipline till prima facie stage. Most recently, notices have been issued in 32 reports for consideration before the Council. On the Satyam matter, recently, an order has been passed by the PCAOB and SEC against the audit firm of the company on 5th April, 2011. We have forwarded this order to our Disciplinary Directorate for taking necessary action arising due to this order.

Initiatives for Students

Entry Requirement for CA Course: A Group, under the convenorship of the our Central Council colleague CA. Abhijit Bandyopadhyay has been formed recently with other Central Council colleagues CA. Vinod Jain, CA. Manoj Fadnis, CA. Charanjot Singh Nanda, CA. J. Venkateswarlu, CA. Naveen N.D. Gupta, CA. Nilesh S. Vikamsey, CA. M. Devaraja Reddy, CA. Atul C. Bheda and CA. Mahesh P. Sarda as members to review the entry requirement for Chartered Accountancy course and submit its recommendations within a stipulated time to be considered by the Council. I am really pleased to inform you that, after two meetings, draft recommendations on the matter are ready for comments of other competent members of the profession, after which, the recommendations will be brought to the Council for approval.
15-Minute Reading Time allowance CA Students in Examination: In order to bring down stress and anxiety in our students, the Council has taken a decision to allow 15 minutes of reading time to all students during examinations commencing from May 2011 examinations, i.e. students will be given question papers 15 minutes before the scheduled time of commencement of examination to facilitate them with time to go through question papers thoroughly and strategise their answers. All the students will surely benefit from this decision.
Setting up CA Students’ Associations: The Council has decided to allow setting up of Chartered Accountants Students’ Association at all its branches. Though students association exists at many places, it is the endeavour of the Council to ensure that students’ association comes up at all its 126 branches so that the students’ activities can go up.
Workshops for Resource Persons Organised regarding Examinations: Two workshops for the resource persons associated with the Institute have been organised with a view to sensitise them for enhancing the quality of valuation of answer books, maintaining timeliness, seeking newer ideas and methodologies for improving the quality of testing process and taking our exams with international benchmark levels. While there were about 350 participants in the workshop for the Northern Region, there were about 550 participants for the Central Region.

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Let me take this opportunity to extend my sincere wishes and congratulations to all our stakeholders a great May Day, also known as International Worker’s Day, as it is a celebration of the spirit, rights and solidarity of workers and employees. Recently while attending a gathering of employees of the Institute, I found their spirit quite inspiring and overwhelming. Instinctively, I felt a presence of tremendous power, which was the result of this unity. It can bring progress to the Institute, as together we can create wonders. I would like to see all stakeholders of the Institute smile, cherish and prosper in unison, as I understand, ultimately this happiness will reflect and bear upon the quality of services to be offered to our members and students, and other associates of the profession.
Poet-reformer, nationalist and iconoclast, Mahakavi Subramania Bharathi, is of the opinion: We shall not look at caste or religion; all human beings in this land - whether they be those who preach the Vedas or who belong to other castes – are one. Let us believe in the oneness of mankind and its divinity. Such a unity will bring us peace, happiness and prosperity.