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Interest rates never cease to hold interest
July, 27th 2006


Lady Macbeth, with `a heart so white' says, `A little water clears us of this deed' and exclaims, `How easy is it, then!'

The recent hike in reverse repo rate by 25 basis points may likewise seem little for bystanders. Because the change is but small a mere quarter of a percentage point though the impact is felt on several other economic variables.

"A very little little let us do. And all is done. Then let the trumpets sound the tucket sonance and the note to mount; for our approach shall so much dare the field that England shall couch down in fear and yield," writes the Bard in King Henry V. Yield, yes, of bonds, is just one of the variables that reacts sharply to even the minuscule changes in interest rates. There are similar responses to interest hikes from sectors such as home lending and corporate credit, for they are all interconnected gears that turn in tow with the tweaking of the master wheel.

Call it a curse or debit, accountants generally steer clear of monetary policy pronouncements, despite the common appellation `credit policy' that latches on to the Guv's periodical output. Which is not the way it should be, considering the extensive relationships that interest rates have with other economic variables, and also the extent of interest that interest rates generate in business news. For instance, in April, the People's Bank of China, the central bank, raised its one-year benchmark lending rate to 5.85 per cent from 5.58 per cent, but left unchanged the one-year deposit rate at 2.25 per cent, notes in a report dated July 23. A case of interest transposition, you may say.

The Bank of Japan is likely to hike interest rates only once more in the current fiscal year, postulates As you may remember, it was on July 14, that the BoJ ended its zero rate policy of March 2001; the bank raised the target for the overnight call rate to 0.25 per cent. The Slovak central bank (NBS) board decided to raise certain key interest rates on July 25, says an alert on, `38 minutes' old.

"The latest increase may be seen as another attempt to prop up the Slovak koruna as well as a measure to curb inflation," it adds.

"Nine central bank interest rate cuts have lowered Brazil's benchmark interest rate to 14.75 per cent, the lowest in at least 20 years, compared with 19.75 per cent last September," informs in a story dated July 26. Brazil's rate is "the second-highest among the world's 48 major central banks after Turkey's 17.5 per cent."

Interestingly, you can know from Brazil's central banker about how paycheque-deductible loans, known as `credito consignado', jumped 3 per cent last month from May.

These loans, secured by the borrower's paycheque, "keep down borrowing costs and account for half of Brazil's consumer lending," educates Bloomberg.

A snatch of relevance to accountants is this: "The average length of credit increased for consumers to 332 days from 328 days in May and 242 days in June 2005, the central bank said. The percentage of loans 90 days or more past due fell to the equivalent of 4.6 per cent of the total lending portfolio, from 4.9 per cent in May. The indicator fell for the first month in seven." Metrics that may need to be incorporated closer home?

Seven frauds to look for

A must-read document that the RBI released on Tuesday is an updated `Master Circular' about `Frauds Classification and Reporting'. Intro notes how frauds, dacoities, and robberies in banks are a matter of concern.

The central bank laments that frauds are, at times, detected in banks long after their perpetration. "Sometimes, fraud reports are also submitted to RBI with considerable delay and without complete information. On some occasions, RBI comes to know about frauds involving large amounts only through press reports." This, despite banks in possession of a software package called `Frauds Reporting and Monitoring System' since June 2003.

To ensure uniformity in reporting, the recent document classifies frauds into seven categories, `based mainly on the provisions of the Indian Penal Code'. These are: (a) Misappropriation and criminal breach of trust; (b) fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property; (c) unauthorised credit facilities extended for reward or for illegal gratification; (d) negligence and cash shortages; (e) cheating and forgery; (f) irregularities in foreign exchange transactions; and (g) any other type of fraud not coming under the specific heads as above.

A section titled `reporting of frauds to RBI' speaks of four groupings, viz. frauds involving Rs 1 lakh and above; frauds committed by unscrupulous borrowers; frauds involving Rs 100 lakh and above; and cases of attempted fraud. FMR stands for many things on Such as: Follow Me Roaming, Frequency Modulated Radar, Financial Management Report and Fresh Molten Rock. In the document on hand, the abbreviation means `fraud monitoring returns'. Four formats have been prescribed for the purpose of reporting.

A field of interest is `fraud number', aimed at facilitating `computerisation and cross-reference'. Fraud number is an alphanumeric field consisting of the following: "four alphabets (to indicate name of bank), two digits for the year (02, 03, and so on), two digits for the quarter (e.g. 01 for January-March quarter) and the final four digits being a distinctive running number for the fraud reported during the quarter." Does the providing of four digits per quarter suggest a bleak outlook of the central bank on the status of the malaise in banking operations?

D. Murali

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