RBI: Loosening its purse strings

The government's policy on current account convertibility is based on a most politically incorrect premise. Officially, the rupee is not fully convertible. But in actual practice, the restrictions apply mostly to Indian companies and citizens. Foreign investors are pretty much free to bring in and repatriate as much money as they wish without too many hassles.

But now, the Reserve Bank of India (RBI) is making it easier for Indian nationals to access foreign exchange (forex) legally. Its new 'licensing policy for authorised persons' envisages expanding the network of forex dealers around the country.

These new dealers, called Restricted Authorised Dealers, can however, sell foreign currencies only for non-trade related current account transactions. They will convert one currency into another on the basis of a simple declaration from an applicant or on the production of an appropriate document like a passport, medical certificates, admission proof, etc.

"Increased competition among dealers will lead to better services for customers," notes the RBI appointed committee headed by H. Bhattacharya, Chief General Manager (Department of External Investments and Operations). The forex ceiling for individuals, however, remains unchanged at $25,000 per calendar year for business travel and $30,000 per academic year for studies abroad. Customers can buy forex for travel and tourism, medical reasons, education, employment, and film shooting. In order to check any unauthorised activities like money laundering, the RBI has also put in place strict Know Your Client (KYC) norms. "This will clean up the market and check money laundering and havala transactions," says J. Moses Harding, Executive Vice President (Treasury), IndusInd Bank.

Experts feel the RBI may ease, and even scrap, the ceiling on the amount of forex that an individual can legally carry abroad after studying the impact of this scheme. With a forex kitty of more than $140 billion (Rs 6,30,000 crore), it is certainly in a position to loosen its purse strings. The economic logic apart, it will also be the most politically correct thing to do.

-Anand Adhikari

More Harassment For Tax Payers
The I-T department is tracking the purchases of expensive watches and modular kitchens.

FM Chidambaram: Heavy handed

On November 29, over 1,500 income tax officials swooped down on hundreds of importers and distributors of luxury products like watches, pens and modular kitchens across the country. Their objective: to gather a list of customers who could be using unaccounted money to purchase these items. In the last Budget, the government had removed mobile phones from its one-by-six scheme and replaced it with "the payment of electricity bills" of over Rs 50,000 a year. The groping hand of the state, it seemed, was being put on a leash. But now, it appears as if the finance ministry is reversing that philosophy.

Says Sharad Chandra, Director (Tax Policy & Legislation), Central Board of Direct Taxes, Revenue Department, Finance Ministry, Government of India: "The tax authorities have powers to call for information from different sources, including the assessee. The Annual Information Report introduced a year ago requires some institutions and banks to maintain data on specific transactions. The idea is to track individuals who may not be reporting their income correctly." According to a finance ministry notification, taxmen are allowed to look closely at people buying property over Rs 30 lakh or making credit card purchases of over Rs 2 lakh a year. Mechanisms, therefore, exist for tracking high value transactions and errant tax payers.

Ajay Kumar, Executive Director, PricewaterhouseCoopers, is unimpressed. "How can you go to a dealer to find out about buyers of plasma TVs? They don't have the pan number of the individual buyers or, in many cases, even the addresses." How indeed! Meanwhile, if you are an assessee with a taste for the fine things of life, be prepared for some heavy-duty harassment.

-Kumarkaushalam

"Micro-finance Isn't Charity"

Praful Patel, vice president (south Asia) of the world bank, spoke to Business Today's Arnab Mitra on how micro-finance can help lift millions of Indians out of poverty. Excerpts:

What is micro-finance?

Micro-finance is an institutionalised mechanism of delivering very small loans to needy people or groups of people. Most banks, for example, don't give loans of less than Rs 10,000. But institutions dealing in micro-finance make advances ranging from Rs 100 to Rs 50,000. Bangladesh's Grameen Bank has been able to lift millions of people in that country out of poverty. In India, organisations like the Self Employed Women's Association (SEWA) in Gujarat and schemes like Indira Gandhi Pratham have also shown the difference micro-finance can make to the lives of poor people.

How does it work?

About 87 per cent of India's poor don't have any access to credit. Our target is to bring this down to 50 per cent within the next decade. But no bank or institution wants to get into this segment. So, we work through ngos like SEWA and a few others to reach out to the needy. At the grassroots level, these NGOs form 10-member self-help groups that monitor the administration of loans to its members. The default rate: zero per cent. The World Bank is trying to rope in regular banking institutions into this field. I understand that ICICI Bank is working on a $10-million (Rs 45-crore) deal to securitise micro-loans.

How can the reach of micro-finance be expanded?

The World Bank has granted loans of close to $1 billion (Rs 4,500 crore) at 0.75 per cent interest to extend the reach of micro-finance to the heart of rural India. But we find that documentation of land ownership is in a very poor shape. This makes it difficult for the poor to use their assets as collateral. Also, caps or ceilings on interest rates don't work. The government shouldn't just assume that the removal of the interest rate ceiling will automatically lead to micro-credit institutions charging usurious rates. Micro-finance is different from charity. The market has to find its own rate if the sector is to become financially viable. These are issues the government has to address and find answers to.

Have you set any goals?

About 380 million Indians now live on less than $1 (Rs 45) a day. The goal is to cut this figure by half to 190 million by 2015. Micro-finance will be the single most important instrument for achieving this.