ECONOMIC BRIEFS – 14.11.08
* * * * *
‘Now, RBI gets headroom for more rate cuts’ (BL 14.11.08)
Single digit inflation after a period of five months may provide fresh impetus to the Reserve Bank of India to cut rates further. In fact, now it is not only feasible for the central bank to cut rates, but even desirable, because economic activity is slowing down, say bankers and economists. Inflation for the week ended November 1, fell to 8.98 per cent from 10.72 per cent in the previous week. Dr Rupa Rege Nitsure, Chief Economist, Bank of Baroda, said, “There is a possibility of a rate cut by RBI before the end of this fiscal. With commodity prices falling and signs of an imminent slowdown, the RBI would not like the high interest rate to be a barrier facing the corporates.” A cut of 50 basis points in repo rate and a 100 basis points in reverse repo is likely, she said.
CIBIL working on home loan repository (BL 14.11.08)
Credit Information Bureau (India) Ltd proposes to come out with a home loan repository. This mortgage repository will have information on individual home loan payment history. Banks and housing finance companies can refer this database for evaluating the creditworthiness of potential borrowers. Personal loan score is another product, the bureau will be offering to its customers. The personal loan score, built out of the personal loan data of the past few years, can be used to predict the possibility of delinquency of a customer in this loan segment at some future time and will be launched in December, said Mr Arun Thukral, Managing Director, CIBIL. For being assigned a score, the customer needs to have at least a 6-month payment history. CIBIL is also working on another important database on loan frauds. The fraud repository, which will have information on customers indulging in fraud, will be ready by nest financial year.
Pension option: Actuaries’ report lifts staff hopes (BL 14.11.08)
About 2.6 lakh employees of public sector banks are likely to get a second chance to opt for pension instead of a lumpsum payment at the end of the service. This likelihood emerges from the expenditure estimates submitted by the two actuaries appointed jointly by the Indian Banks Association and the bank unions. The actuaries (Mr D. Basu and Mr K.P. Sarma) have said in their report that it would cost the public sector banks around Rs 6,000 crore, if all the 2.6 lakh employees (currently under the provident fund scheme) surrender the balance in their PF accounts and opt for the pension scheme. This amount is slightly higher than the estimate (Rs 4,700 crore) made by an actuary appointed by the unions, but is drastically lower than IBA’s initial estimate of Rs 28,000 crore. The unions are enthused by the actuary’s report because they feel that the banks’ managements cannot deny employees the “second option” on the grounds that it is too expensive.
‘NBFCs may shift to banking lines’ (BL 14.11.08)
With the mutual fund industry reeling under pressures of redemption, the non-banking finance companies (NBFC) would part-replace the borrowings from the fund houses with banking lines over the short to medium term, said rating agency ICRA. According to ICRA, NBFCs rely to a large extent on mutual funds to meet their funding requirements (approximately 50 per cent as on March 31, 2008). The switch to banking lines, however, would come at substantially higher cost.
Panel calls for repo in corporate bonds (BL 14.11.08)
Corporate bonds should be made repo-able. This has been recommended by the Expert Panel on Financial Stability Assessment and Stress Testing that has assisted the Committee on Financial Sector assessment set up by the Finance Ministry and the RBI to assess India’s financial stability. If corporate bonds are made repo-able, they will become more liquid, and the secondary market will become more active. At present this activity goes on mainly in government securities. Another recommendation is that there should be a gradual reduction in statutory pre-emptions and some rebalancing in favour of corporate bonds.
Bank on operational efficiency (BL 14.11.08)
Benchmarking and improving on cost-to-income ratio will help financial institutions drive efficiency while targeting growth, improve return on equity and be better prepared for portfolio contingencies.
Real effective exchange rate of rupee declines (BL 14.11.08)
The rupee’s sharp depreciation against the dollar since the beginning of this year has begun reflecting in the Real Effective Exchange Rates (REER). The REER retreated to 103.67 against a six currency basket. In April this year, the index was 112.16. The REER is the weighted average of nominal exchange rates adjusted for inflation differential against domestic and foreign countries. The six currency basket with a base of 1993-94 comprised the US dollar, Euro, Yen, Pound Sterling, Hong Kong dollar and Renminbi Yuan. The drop in the REER brought it closer to the levels of 2000-01 when it was 102.82. A fall in the index implied a depreciation of the rupee against the respective currencies. Since the beginning of this financial year, the rupee depreciated by 19 per cent against the US dollar. But the rupee’s depreciation against the Yuan was the sharpest, by over 20 per cent for the same period. The depreciation of the rupee against the Yuan was indicative of the high trade between the two countries. A falling REER normally indicates an improved export competitiveness regime.
Fall in dollar assets only part of the story (BL 14.11.08)
India’s foreign currency assets declined by a hefty $38.6 billion between September 26 and October 31, 2008; 14 percentage points in a single month! Over the same period, however, euro-denominated foreign currency assets declined by only 1 percentage point; not 14. The point is that such data should not be used to hurriedly conjure up disturbing visions of FIIs rushing towards the exit; without stopping to reflect that a large portion of the decline was in fact merely attributable to the widely noted rise of the dollar vis-a-vis a basket of six major currencies.
IT majors prefer to stay ‘liquid’ (BL 14.11.08)
Large Indian software exporters have begun hedging business risks by making their balance sheets more liquid, preferring to hold a bulk of their cash reserves in bank deposits. Such a liquid balance sheet would help these exporters meet any contingencies as business outlook deteriorates. Infosys, followed by Satyam, lead in holding bulk of the cash in bank deposits, while the country’s largest exporter, TCS, holds a larger portion of its cash in mutual funds.
NIC sweetens universal policy (BL 14.11.08)
National Insurance Company has sweetened up its Universal Health Insurance Policy for above poverty line and below poverty line (APL and BPL) families by expanding the scope of age profile for purposes of coverage as well as by revising down the premium payable. The age band as per the amended scheme would be from three to 70 years, revised from 65 currently. Premium rates too have been reduced and there would be no service tax payable. Beneficiaries can now enjoy `cashless' facility in the hospitals of their choice anywhere in the country. The policy will cover the insured, spouse and first three children, apart from their parents. A unique feature of the policy is that it extends the cover to the aged parents
Aviva Life ties up with Anagram (BL 14.11.08)
Aviva Life Insurance has entered into a tie-up with Anagram Stockbroking Ltd for selling life insurance products.
Max NY Life, Access tie up (BL 14.11.08)
Max New York Life Insurance announced a tie-up with Access Development Service to market and sell its product 'Max Vijay'. Access Development, which has alliances with 110 micro finance institutions (MFIs), would help to market and sell Max Vijay. The company has also announced its corporate agency relationship with eight MFIs.
Inflation rate drops to lowest in six months (BL, BS, ET, FE 14.11.08)
Inflation dropped to its lowest levels in nearly six months in early November as price levels in the case of both metals and fuels showed a sharp decline. The annual Wholesale Price Index-based inflation rate was at 8.98 per cent during the week ended November 1, sharply below the previous week’s annual rise of 10.72 per cent. The dip in the year-on-year inflation rate to a single digit level, after 21 consecutive weeks in the double digits, was on account of an all-round decline in price levels led by a sharp decline in annual inflation in the fuels category. It was the lowest reading since May 24, when the rate was 8.90 per cent and well below early August’s peak of 12.91 per cent. The WPI for the latest reported week declined by 1.26 per cent to 235.5 points, down from 238.5 points the previous week. Inflation in the corresponding week a year ago (week ended November 3) at 3.35 per cent, however, was significantly lower. Final inflation for the week ended September 6 was, however, revised up to 12.42 per cent from the provisional WPI-based estimate of 12.14 per cent.
Indian population to overtake China by 2050: Report (BL 14.11.08)
By 2050, India would overtake China to become the most populous country with a projected population of 1.658 billion people. According to the United Nation Population Fund (UNFPA)’s State of the World Population 2008 report.
Banks protest service levy on forex deals (BS 14.11.08)
In a move that could impact banks’ profitability from forex trade, the Revenue Department has asked them to pay 0.25 per cent service tax on every forex transaction. Crucially, the tax will be levied on the rupee equivalent amount for every forex transaction. This is perhaps the main reason that banks are upset with this move. “The presumptive rate of 0.25 per cent on the turnover is unrealistic considering the market realities. Banks do not make this much profit from forex transactions,” said an Indian Banks’ Association (IBA) official. Banks make a profit in forex transactions by charging a spread over the foreign currency. If the rupee is traded at 49.50 against the dollar, banks sell dollars above 49.50 but buy at below 49.50. Banks attempt to retain a margin while changing currency to cover the forex exposure risk due to daily price movements. Bankers say there is no service component in such transactions. Also, there are hundreds of transactions daily and it is difficult to keep track of gains or losses in each transaction. There are broadly two type of forex transactions covered under the tax net - bank-to-bank and bank-to-customers. The margins in inter-bank tradings are very thin. Service tax is not levied on forex transactions between the Reserve Bank of India and banks.
NBFC loans under banks' scanner (BS 14.11.08)
Taking a cue from the global credit crisis, Indian banks have stepped up the monitoring of end-use of funds while lending to NBFCs, especially the ones which have heavy exposure in the retail segment. The NBFCs are now required to produce a certificate from an independent auditor appointed by the bank to authenticate the purpose of the loans. The auditor is also required to keep a tab on the regular fund flow and report to the bank on a monthly basis. “Following the global crisis, the monitoring measures are being tightened and implemented with more intensity. Now even if an entity defaults on a single instalment, we follow up immediately as the possibility of defaults has increased,” Union Bank’s general manager for large companies, HS Upendra Kamath, said.
ICICI Pru shows the way, ups exit load on FMPs (BS 14.11.08)
In order to plug redemptions, ICICI Prudential Mutual Fund has increased the exit load on some of its fixed maturity plan (FMP) schemes for prospective investors from two per cent to as much as five per cent. Most debt fund managers are likely to similarly increase the exit load on their FMPs in order to stem mass withdrawals in the future. “We have done this to ensure that only genuine long term investors are attracted to our scheme and existing investors are protected,” ICICI Prudential Managing Director and CEO Nimesh Shah said. According to another top debt fund manager, a high exit load can be effective in covering losses whenever there is mass withdrawal in any scheme.
Banks doubt promoter pockets, revisit loans (ET 14.11.08)
With liquidity conditions remaining tight, banks are worried that promoters may fail to bring in their share of equity contribution within the deadline stipulated in the loan agreement. Typically, after a loan is sanctioned for a project, the bank disburses the money in stages, depending on the progress. Similarly, the promoter of the project makes his equity contribution at different stages. “If the promoter is unable to bring equity and if the project is already under implementation, banks may be forced to provide more debt to the company. As a result, the debt-to-equity ratio (of the project) gets skewed, which in turn can make a project unviable,” pointed out Jitendra Balakrishnan, deputy managing director of IDBI Bank. Bankers say that segments most likely to be affected are those related to real estate, power and steel industries. These are some of the sectors where promoters were to get equity funding from external sources. Even projects that are already completed could face problems.
Banks busy examining stress levels in assets (ET 14.11.08)
Banks such as Punjab National Bank, Union Bank of India and Canara Bank are examining the stress levels in their asset portfolio. “We are monitoring major accounts. We may give them additional finance, but it will be at a price,” said KC Chakrabarty, CMD of Punjab National Bank. Canara Bank’s top brass is meeting all its big ticket borrowers. “We are to trying to evaluate problems faced by borrowers and have assured them that resources will be made available for viable projects,” said AC Mahajan, CMD of Canara Bank.
Banks want to have a LAF as liquidity remains tight (ET 14.11.08)
A series of liquidity infusing measures by the Reserve Bank of India (RBI) has not eased cash conditions. This is reflected in the continued borrowing by banks from RBI under its liquidity adjustment facility (LAF). After running a surplus for a few days, banks are again seeing liquidity drying up. On November 6, banks had parked surplus liquidity worth Rs 31,830 crore with the central bank through reverse repo under LAF. Banks had borrowed only Rs 1,200 crore from RBI by pledging their bonds. However, the scenario has started changing from November 10, as the surplus parked with RBI has started dipping sharply and banks have started borrowing higher amounts from the central bank. On November 12, while 10 banks borrowed a total of Rs 10,990 crore under LAF, only one bank parked a surplus worth Rs 15 crore with RBI.
Centre sends out 11.5% rate signal (FE 14.11.08)
11.5% - that’s the benchmark around which the Centre would like banks to set their prime lending rate, down from the current range of 12.75-14%, to bring down the cost of scarce capital for Indian industry. A clear signal to this effect is that the finance ministry has, in an office memorandum issued last week, left interest rates on central government loans to states, public sector entities and public financial institutions unchanged from last year. While loans to financial institutions like Rural Electrification Corporation and National Bank for Agriculture & Rural Development (Nabard) will be available at 10% interest, the ministry has pegged the interest on investment loans to PSUs at 11.50%. The department of economic affairs revises the interest rates applicable on such loans annually. This would also make it difficult for the country’s largest retirement fund, the Employees’ Provident Fund Organisation (EPFO), to declare a PF rate higher than the 8.5% paid in 2007-08.
Eased inflation not to lower housing loan rates: Parekh (FE 14.11.08)
Bankers, including country’s largest housing finance company HDFC, have indicated that interest rates on home loans are unlikely to fall in the wake of a decline in inflation. Pointing out that cost of funds, a determining factor in deciding lending rates, remains high, HDFC chairman Deepak Parekh literally ruled out slashing home loan rates. “Inflation might have come down, but the cost of money has not. Hence, there is no chance of home loan rates falling down further,” Parekh said. Public sector Union Bank’s chief MV Nair also hinted that lending is likely to continue at the same rate as it (interest rate) is “affordable” now. “Home loan rates have come down substantially. Public sector banks have lowered rates. I believe it is affordable now. I would say a genuine buyer should not postpone his buying,” Nair, CMD of Union Bank, said.
NRI deposits in Sep takes a big jump (FE 14.11.08)
At a time when foreign institutional investors are continuing their pull out from India, capital inflows on account of deposits by non-resident Indians have registered a sharp jump. Attracted by higher interest rates, NRIs have deposited over half a billion dollars ($513 million) in the Indian banks in September this fiscal, compared to the withdrawal of $428 million in August. The total amount of NRI deposits in various accounts rose to $787 million in the April-September period, compared to withdrawals of $78 million in the same period last year, as per RBI’s latest data.
Source BL= Business Line, BS=Business Standard, ET=Economic Times & FE=Financial Express