Revamped inflation bonds soon, payment bank on anvil: RBI

Concerned over the lukewarm response to inflation-indexed bonds , the Reserve Bank plans to revise their features to attract more retail investors.

"We had launched inflation-indexed bonds that were not successful. We are coming out with a revised version," RBI Deputy Governor H R Khan said on the sidelines of a BFSI conference organised by SBI Caps Securities here today.

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The bonds, introduced in June last year by the central bank, were aimed at giving returns that exceed the rate of inflation to ensure that rising prices don't eat into the value of investor savings.

Khan said one of the reasons for inflation-indexed bonds not doing well was possibly the wrong timing of the launch. The structure of the bonds was complex and investors failed to understand it.

He said the RBI and the government are in talks to improve the features of the investment product so as to make it attractive for investors.

"We have suggested a few things to the government.

One, in terms of increasing the spread and whether we can have non-cumulative option. They (government) are considering, let us see," Khan said.

The central bank may also look at offering quarterly interest payout, he said.

Asked if there was any plan to increase the foreign institutional investors' investment limit in government bonds, the Deputy Governor said, "Right now, there is no such discussion under way."

As recommended by the Nachiket Mor Committee, the RBI will soon come out with India's first payment bank, which will provide deposit and payment services but can't lend, he said.

"We are coming up shortly with what could be payment bank because there is a huge potential for financial inclusion with focus on remittances by involving payment system product."

He said the RBI and the government are discussing a framework on differentiated bank licences.

"There is a need for reorienting banking structure. We need small banks, we need big banks. We need differentiated banks."

Talking about non-performing assets of the banks, Khan said although there was moderation in bad loan levels it would be too early to say the worst is over for the industry on this front.

The gross NPA level of commercial banks stood at 3.9 per cent as of end-March compared with 4.2 per cent as of September 2013.

He said the corporate governance is an issue in both private as well as public sector banks. "Let us not be lulled by the notion that private sector bank boards are all excellent and run in a professional manner.

"We know there are banks which are dominated by promoters or CEO and so called 'independent director', and how they function," Khan said.

The Deputy Governor, however, said public sector lenders have to do a lot more to improve their corporate governance than their private peers.

Worried over the prevailing work culture in private banks, Khan said such lenders run the risk of losing their reputation.

"The kind of work culture some of the private sector banks have, that I think going forward, will be a reputation risk for them," Khan said.