ECONOMIC BRIEFS – 16 & 17.11.08
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SBI for further lowering of key rates (BL 17.11.08)
With inflation coming down to single digit of 8.98 per cent to single digit of 8.98 per cent after a gap of five months, the country's largest State Bank of India pitched for further lowering of key policy rates by the RBI to kick start the economy. "Interest rates (by RBI) should be lowered further otherwise the kick-start in economy won't take place," the SBI Chairman, Mr O P Bhatt, said pointing out that the bank has already decided to cut the deposit rates by 50 basis points from December 1.
Banks to be more ‘considerate’ in lending to real estate sector (BL, ET 17.11.08)
Banks are expected to be more ‘considerate’ in lending to commercial real estate with the Reserve Bank of India removing the additional capital requirements for advances to this sector. Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India and Chairman of the Indian Banks’ Association, said in keeping with the economic needs, the RBI has rightly relaxed the provisioning requirements to support the real estate and NBFC sectors. Mr M.V. Nair, CMD, Union Bank of India, said RBI has given clear indication that banks must lend to the real estate sector. Pricing will depend on the funding cost. Earlier, banks were hardly lending to this sector because of the risk and the exposure limits.
Lenders likely to loosen grip, offer more credit (BL, FE 17.11.08)
Lenders are expected to loosen their purse strings to make available more credit in the coming days on the back of the likely reduction in interest rates, the Confederation of Indian Industry President, Mr K.V. Kamath, has said. This remark came in response to views expressed at the India Economic Summit 2008 here on Sunday that bankers may have clamped up following the global financial crisis and that they needed to ‘unfreeze’ to put back vigour in the credit markets.
e-payments gain ground; surge 41% in first half (BL 17.11.08)
The Reserve Bank of India's thrust to migrate the economy towards electronic payments is slowly but surely gathering steam. Total payments made via retail electronic payment systems - electronic clearing service (ECS), National Electronic Funds Transfer (NEFT) system, and credit and debit cards - have surged by 41 per cent to Rs 2,31,387.18 crore in the first half of the current financial year as against Rs 1,63,826.15 crore in the corresponding period last year. Retail electronic payments, payments routed through NEFT system - a nation wide funds transfer system to facilitate transfer of funds from any bank branch to any other bank branch - accounted for around 46 per cent (Rs 1,06,982.59 crore) of the total retail electronic payments made in the first half of the current financial year as against 35 per cent (Rs 57,911 crore) in the corresponding period last year.
Yields fall on deposit inflows, RBI intervention (BL 17.11.08)
Bond yields dipped powered by deposit inflows into the banking system, sagging oil prices and retreating inflation. Traders said that the yield dip also stemmed from Reserve Bank of India’s interventions. The RBI infused Rs 10,000 crore of liquidity, through repurchase of two Market Stabilisation Scheme securities - the 6.65 per cent 2009 and the 5.87 per cent 2009. The recourse to the reverse repo window amounted to Rs 9,800 crore. In addition, FIIs invested about $155 million last week, further increasing the liquidity. However, importer and refinery purchases pulled down the rupee-dollar exchange rate sharply to Rs 49.46 per dollar. Cash to spot forward premium also firmed to 7.28 per cent (5.03 per cent) as foreign banks resorted to sell-buy swaps to take advantage of the interest rate differential. The differential continued to remain wide, with the Fed funds rate at 0.35 per cent and the domestic call rates at 7.25 per cent. This triggered speculation of a possible cut in the reverse repurchase rate. The reverse repurchase rate currently acts as a floor rate, below which call rates seldom drop. The preference for long-dated securities pulled down the ten-year YTM to 7.52 per cent last week, on a weighted average basis, from the previous week’s level of 7.72 per cent. The softening was largely on account of mounting deposit inflows into the banking system. In October alone, time deposit accretions amounted to Rs 94,000 crore. The incremental credit deposit ratios also remained high during the period at 147 per cent, as credit off-take remained high.
Dewan Housing Finance - sustained demand from low, middle income groups (BL 17.11.08)
Dewan Housing Finance Corporation (DHFL) has said it is targeting fresh loan disbursement of about Rs 1,000 crore in the next five months, taking the overall disbursements during the financial year to over about Rs 2,000 crore. "Our total loan disbursement stood at Rs 1,761 crore in 2007-08, and we expect a 20 per cent growth this fiscal,” Mr Kapil Wadhawan, Vice-Chairman and Managing Director, DHFL, said. He said the company continues to see sustained demand from low and middle income segments.
ICICI Pru's health programme (BL 17.11.08)
ICICI Prudential Life Insurance has launched a programme, Health Active, under which it would offer a range of services to its policy-holders. "In a study done on around 5,000 people, we found that 70 per cent of young Indians are suffering from some or the other medical problem like hypertension or diabetes. They were either not aware of their health problem or they didn't pay attention to it," ICICI Prudential Life Insurance Head (Health Insurance), Mr Binay Agarwala, said. "This gave us an idea to design a programme which can keep people well informed and help them take appropriate steps to prevent diseases," he said.
'JP Morgan may axe thousands of jobs' (BL 17.11.08)
JP Morgan, the US investment bank, is drawing up plans to axe thousands of jobs across its worldwide operations.
Oriental Bank to open 5 new branches in state (BS 17.11.08)
In a bid to expand its business in Orissa, the public sector Oriental Bank of Commerce (OBC) plans to open five more branches in the state. The new branches will come up at Jajpur Road, two rural locations in Jagatsinghpur and Bhadrak districts and two semi-urban locations in Keonjhar and Rayagada districts. At present, the bank has a network of 18 branches and one extension counter in the state.
Small savings loan back in favour (BS 17.11.08)
Borrowings from the National Small Savings Fund (NSSF), which appeared prohibitive for the Orissa government due to its high cost few months back, may soon turn out to be an attractive source of borrowing in the backdrop of the current financial meltdown. The interest rate on the market borrowing, an alternative source of borrowing for the state government, is nearing 9 percent, which is closer to 9.5 percent interest charged on NSSF loans.
RBI in talks with banks to cut derivative risks (ET 17.11.08)
Amid greater uncertainties, frozen credit lines and choppy markets, talks are on to change the rules of the game in the world of derivatives. The aim is to lower the risk and smoothen trades in times when markets as well as fate of institutions can change dramatically. Derivative deals between two banks or a bank and a corporate have a long life - two years or even five years when the derivatives contract finally expires. By then, the market may have undergone a sea change or one of the parties may have collapsed. So, instead of keeping alive such risks for years, it would make sense for the two parties in a derivative contract to take a look at the deal every fortnight or month, and then pay or collect cash depending on which way the market has moved. “There have been some discussions between Reserve Bank of India and some of the large banks to introduce this in the Indian derivatives market. It will lower credit risk, a factor which is pertinent in today’s market,” said a banker. The party with an m-t-m loss - the position that's described as 'out of money' in market parlance - pays the other party who is 'in the money'.
LIC in line for IRDA breather (ET 17.11.08)
The insurance regulator IRDA is set to give more leeway to the Life Insurance Corporation (LIC) to invest in debt instruments of a single company. The proposed move would help state-owned companies access funds from LIC that has surpluses to invest even in these turbulent times. But India’s largest insurer is hamstrung as the current insurance regulations allow life insurers to invest only a sum of 10% of the capital employed by the investee company. One option is to revise the ceiling to 10%, given that LIC is the only institution in India with long term funds.
'Economy may slow down to 6.3-6.5%' (FE 17.11.08)
While the Indian economy may be able to sail through the global financial crisis with a healthy 7.8% growth in this fiscal, the Asian Development Bank expects 2009-10 to be much gloomier when economic growth could slow down to 6.3% - 6.5%. “The numbers are very fragile, and they may be brought down further,” managing director general of the Asian Development Bank (ADB) Rajat M Nag told.
RBI must cut key policy rates to spur growth: CII (FE 17.11.08)
Amidst receding inflation, industry body CII has asked the Reserve Bank to further cut key policy rates, including short-term lending (repo) rate by 1.5%, to spur economic growth. Besides, it has asked the apex bank to slash key reserve ratios-Cash Reserve Ratio and Statutory Liquidity Ratio-by 2.5% and 2% respectively. The move could result in further injection of liquidity in the banking system. Some measures of liquidity injection have been announced, but liquidity shortage could be in the order of about $40 billion, the chamber said.
Economy will rebound in 6 to 9 months: FM (FE 17.11.08)
The financial meltdown will not spare any sector of the economy, but on the brighter side recovery could be just six to nine months away, finance minister P Chidambaram has said. “There will be some slowdown in every sector... but monetary measures, counter-cyclical measures and enlightened measures by the companies themselves can get over this painful period of adjustments and in about 6-9 months we should be back to the growth rate,” he said.
Banks, have no fear (FE 17.11.08)
Mahesh Vyas, head of CMIE, looks at Indian manufacturing data and concludes that corporate financials are in good shape. Debt-equity ratios in March 2008 were the lowest in a decade despite a sharp increase in investment. So lending institutions should find companies attractive Perhaps the most debilitating impact of the current financial crisis is a loss of confidence. Banks do not trust each other and other businesses as there is no transparency or even understanding of the nature and extent of the toxic assets held by enterprises. Suspicion and fear breed panic. And, even in India, banks get extra-cautious in extending credit.
Banks’ provisioning norms for realty, capital markets eased (BL, ET, FE 16.11.08)
In yet another set of measures to further boost liquidity and enhance credit flow, the Reserve Bank of India on Saturday eased prudential norms for banks’ exposure to sensitive sectors such as the capital market and commercial real estate. The provisioning requirement for banks on standard advances in the commercial real estate sector, personal loans, and capital market exposure and NBFCs (ND) has been reduced to 0.40 per cent from 2 per cent. (RBI had earlier progressively increased this from 0.25 per cent to 2 per cent.) The provisioning for home loans beyond Rs 20 lakh has also been reduced to 0.40 per cent, from 1 per cent. RBI has also allowed banks to pay more interest on NRI deposits, to avail themselves of additional liquidity support to the tune of Rs 22,000 crore under the export credit refinance facility, and park funds with SIDBI and NHB to meet the shortfall in priority sector lending. Further, Indian corporates are permitted to buy-back or pre-pay FCCBs, and exporters are allowed pre-shipment rupee credit for 90 more days. In order to help mutual funds and non-banking finance companies, which are still facing funds shortage, the RBI has decided to extend the special term repo facility till end-March 2009. Banks can avail themselves of this facility either on incremental or rollover basis within their entitlement of up to 1.5 per cent of Net Demand Time Liabilities. RBI increased the interest rate ceiling on foreign currency non-resident (banks) and non-resident (external) rupee term deposits by 75 basis points each with immediate effect. The interest rate ceiling on FCNR deposits is now Libor/Swap rate plus 100 basis points while that on NRE term deposits is Libor/Swap rates plus 175 basis points.
RBI getting focussed on specific sectors (BL 16.11.08)
The most noteworthy thing about the measures taken by the RBI on Saturday is that, at long last, it is getting focused on specific sectors, rather than using broad spectrum liquidity measures to buoy up the sagging economy. The need for this became clear when the banks, in spite of the huge infusions of liquidity they received during October, refused to step up their lending.
RBI allows longer export credit (BL, ET, FE 16.11.08)
In view of the difficulties being faced by exporters on account of the weakening of external demand, the RBI has decided to extend the period of entitlement of the first slab of pre-shipment rupee export credit, currently available at a concessional interest rate ceiling of the benchmark prime lending rate minus 2.5 percentage points from 180 days to 270 days with immediate effect.
Banks will get an additional liquidity support to the tune of about Rs 22,000 crore as the eligible limits of scheduled banks (excluding RRBs) under the export credit refinance (ECR) facility has been enhanced to 50 per cent of the outstanding export credit eligible for refinance. The rate of interest charged on the ECR facility will continue to be the prevailing repo rate of 7.5 per cent.
Y V Reddy appointed to UN panel on financial crisis (BL 16.11.08)
Former RBI Governor Dr Y V Reddy is among members of a high-level panel of economists appointed by UN General Assemble President, Mr Miguel d'Escoto, to suggest measures to deal with the current economic crisis, including possible reform of global financial institutions. Mr Joseph Stiglitz, who won the Nobel Prize for Economics in 2001 and is a former chief economist of the World Bank, will chair the panel which will suggest steps that member states can take to secure a more stable global economic order.
Work on new WPI, IIP series slows down (BL 16.11.08)
The Centre’s plans of rolling out revised indices of wholesale prices (WPI) and industrial production (IIP), with 2004-05 as base year and covering a larger basket of commodities, has hit a roadblock. This is on account of the Collection of Statistics Bill, 2007, not getting passed by the Rajya Sabha in the recent extended monsoon session. The Bill is crucial, as it substantially empowers the Government to collect price and production-related data from all firms. So far, out of the targeted 8,000, hardly 3,000 units have responded, which is not good enough to generate an index, said Dr Pronab Sen, Chief Statistician of India.
Derivatives market expands in first half: BIS report (BL 16.11.08)
The Bank for International Settlements (BIS) has said the notional amounts outstanding of over-the-counter (OTC) derivatives continued to expand in the first half of 2008 and stood at $683.7 trillion at the end of June. In its semi-annual publication of market developments of OTC derivatives, interest rate derivatives and foreign exchange (FX) derivatives released at its headquarters in Basle recently, the central bankers’ central bank said multilateral terminations of outstanding contracts resulted in the first-ever decline of one per cent in the volume of outstanding credit default swaps (CDS) since the first publication of CDS statistics in December 2004. This small decline needs to be seen against the average growth rate for outstanding CDS contracts over the last three years, which has been 45 per cent.
Chinese banks face rising bad loans (BL 16.11.08)
Chinese banks face rising bad loans and narrowing profit margins as the central bank cuts interest rates to boost expansion in the world's fourth largest economy, the banking regulator said. Chinese banks are scaling up lending after the government pledged a 4 trillion yuan ($590 billion) stimulus plan on November 9 to bolster growth as the world heads toward recession. Lower interest rates will shrink margins and loan defaults may increase, HSBC Holdings Plc said in a research note November 12.
Short term deposits see steep rise (ET 16.11.08)
Indian investors are using short-term bank fixed deposits (read: three-month & six-month) to park their funds earlier meant for real estate and equity markets. On an average there appears to be a 40 to 50 % growth in fixed deposit for shorter tenures. While Kotak Mahindra Bank saw its inflows more than doubling on fixed deposits (FDs) in the last few months, the Bangalore based ING Vysya Bank witnessed an over 50% increase in its short-term deposits. Axis Bank, on the other hand, reported a growth of 25-30% in the 20-20 version of FDs. India’s second largest private bank, HDFC Bank was also on a northbound journey. The bank’s deposits grew by almost 80% in the last nine months. In fact, in October alone, Indian banks raised term deposits worth Rs 94, 811 crore.
Source BL= Business Line, BS=Business Standard, ET=Economic Times & FE=Financial Express