India saved Rs 14,000 cr as US refuses higher IMF quota

The US Congress has not approved International Monetary Fund (IMF) reforms because it has refused to ratify a capital increase for the fund which was agreed to four years ago.

(In 2010, the United States of America agreed to double the IMF’s quotas to a total of US$720 billion). The reform seeks to increase the quota of developing countries in the IMF by six percentage points and also move two of the 24 directorships from European to developing countries.

  • With the US refusal to sign off on a higher quota for developing countries viz. India, etc in the International Monetary Fund (IMF) has given the Indian government an opportunity to save Rs 14,000 crore that it had budgeted for this reform and could use it to support its fiscal deficit.
  • With the delay of the reform, the Indian government has got some space at a time when the finance ministry has ruthlessly cut expenditure to stay within its fiscal deficit target of 4.8% of GDP for 2013-14.
  • The government had budgeted Rs 56,574 crore for investment in international financial institutions this fiscal.
About International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Headquarters:Washington, D.C.

About IMF quota system
  • The IMF’s quota system was created to raise funds for loans. Each IMF member country is assigned a quota, or contribution, that reflects the country’s relative size in the global economy. Each member’s quota also determines its relative voting power. Thus, financial contributions from member governments are linked to voting power in the organization.
  • Quota formula is a weighted average of GDP (weight of 50 %), openness (30 %), economic variability (15 %), and international reserves (5 %). For this purpose, GDP is measured through a blend of GDP—based on market exchange rates (weight of 60 %)—and on PPP exchange rates (40 %). The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members.
  • Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account. The largest member of the IMF is the United States, with a current quota of SDR 42.1 billion (about $64 billion), and the smallest member is Tuvalu, with a current quota of SDR 1.8 million (about $2.7 million).

Bimal Jalan panel on new bank licences to meet on Feb 10, 2014

The Bimal Jalan panel which is scrutinizing applications for new bank licences will hold a meeting on February 10, 2014.

Which are the entities in the race for bank licences?

Initially, 26 entities expressed interest in entering the banking field. But, Tata Sons, the holding company of the Tata group, withdrew its application in November 2013 leaving 25 players.

  • Public sector units:  India Post and IFCI, Private sector: Anil Ambani group, Aditya Birla, Bajaj Finance, Muthoot Finance, Religare Enterprises, etc have applied for the licences.
  • The last two entities to get banking licences from RBI in 2003-04 : Kotak Mahindra Bank and Yes Bank. 

At present, India has 27 public sector banks, 22 private sector banks and 56 regional rural banks.

RBI’s Guidelines for New Bank Licenses:

The RBI issued guidelines for licensing of new banks on February 22, 2013 and issued clarifications in June 2013.

  • The business model of the applicant would be an important criterion for processing the application and the model should provide for financial inclusion.
  • Bank should have 49% caps on foreign holding in new banks.
  • New banks are required to establish at least 25% of their branches in places with less than 10,000 populations.
  • Existing NBFCs, if considered eligible, may be permitted to promote new banks or convert themselves into banks.
  • Private corporate and public sector entities must have 10 years experience to be eligible to apply for new license. The initial paid-up capital for new banks has been set at Rs 500 crore. 

Note: Mr. Bimal Jalan, former Reserve Bank of India (RBI) governor, heads the panel on new bank licenses.