ECO BRIEFS - 07.11.2008

‘Banks may see rise in bad loans’ (BL, BS, FE 07.11.08)
Mr O.P. Bhatt, Chairman, State Bank of India, has said that he expects no slowdown in credit growth in the current fiscal, but banks may see a rise in their bad loans due to moderation in the economic growth. In the last four years, banks have seen an average loan growth of around 30 per cent. Loan growth, more or less at the same level so far in the current year, is unlikely to slow down. Mr Bhatt said banks would need to raise capital as the onus of funding corporates had shifted to them in the context of other sources of funding (external commercial borrowings, foreign currency convertible bonds, and lines of credit from overseas financial institutions) drying up; they would also have to take care of the write-offs on account of stressed assets. SBI, is planning to raise between Rs 5,000 crore to Rs. 10,000 crore by way of subordinated debt (Tier-II) capital to improve its resource position, by December. SBI on Thursday decided to reduce the benchmark prime lending rate by 75 basis points to 13 per cent with effect from November 10. The bank also cut the deposit rates by 50 bps across the maturities from 91 days up to 5 years and by 25 bps for deposits with maturities of 5 years and above effective from December 1. Mr Bhat said the rate cut would boost demand for home loans and lead to a reduction in equated monthly instalments.

More banks cut lending rates (BL, BS, ET, FE 07.11.08)
On Thursday, Bank of Baroda, Central Bank of India and Dena Bank were among the banks that announced a reduction of 75 basis points in their BPLR, with effect from November 10. BoB cut its BPLR from 14 per cent to 13.25 per cent. Dena Bank cut its BPLR from 14.25 per cent to 13.5 per cent. Central Bank of India cut its PLR from 14 per cent to 13.25 per cent. Andhra Bank has reduced the benchmark prime lending rate (BPLR) by 75 basis points from the existing 14 per cent to 13.25 per cent with effect from November 10. This change would benefit all loans linked to BPLR, including loans given for housing, education and vehicles. Allahabad Bank has announced a 75 basis points cut in its prime lending rate at 13.25 per cent, down from 14 per cent, effective November 10. The bank has also announced a reduction of 50 basis points on interest rates on deposits effective December 1. State Bank of Travancore (SBT) has reduced its prime lending rate (PLR) by 75 basis points to 13.25 per cent. The new PLR will come into effect from November 8. The bank has also decided to lower its deposit rates from December 1. Oriental Bank of Commerce has decided to reduce its Prime Lending Rates by 75 basis points with immediate effect. Citibank announced a 50 basis point cut in its prime lending rate to 15 per cent with immediate effect.

Syndicate Bank looks to raise Rs 500 cr (BL 07.11.08)
Syndicate Bank might look at raising Rs 300-500 crore Tier-II capital by way of subordinate bonds during the current fiscal, according to Mr George Joseph, Chairman and Managing Director of the bank. The bank had plans to raise Rs 800 crore worth Tier-I capital through a follow-on public offer or by way of Qualified Institutional Placements. However, given the current volatile market conditions, the bank would not go for its fund raising plans at present, he said. The capital adequacy ratio of the bank is at 11.55 per cent.

Sundaram, BNP float venture for securities services (BL 07.11.08)
The Chennai-based Sundaram Business Services (SBS), the BPO arm of Sundaram Finance Ltd, and BNP Paribas Securities Services (BNP Paribas) have signed a joint-venture agreement to provide securities services in India. The new joint venture will be called Sundaram BNP Paribas Securities Services with 51 per cent owned by SBS and 49 per cent owned by BNP Paribas.

RBI to regulate issue of ‘pre-paid’ payment cards (BL, FE 07.11.08)
The Reserve Bank of India proposes to regulate ‘pre-paid’ payment cards and will shortly come out with an approach paper on the same, said Mr G. Gopalakrishna, Executive Director, Reserve Bank of India. Prepaid cards are multipurpose payment cards that can be obtained by paying cash upfront. These cards can be used to make bill payments such as telephone bills or to make purchases at shops. Some of the banks that issue prepaid cards are ICICI Bank, HDFC Bank, Kotak Mahindra Bank and Axis Bank. After the guidelines are issued, they would be applicable to the existing prepaid card issuers as well as new entrants, Mr Gopalakrishna said. Since the prepaid cards were a means of storing money they had to be regulated.

RBI buys back Rs 10,000 cr of MSS bonds (BL 07.11.08)
The Reserve Bank of India on Thursday bought back Rs 10,000 crore of MSS dated securities, as part of the measures announced to infuse liquidity into the system. The RBI conducted the buy back of two Government securities - 6.65 per cent 2009 paper and the 5.48 per cent 2009 paper. For the 6.65 per cent 2009 the cut off price was Rs 99.93 (6.78 per cent YTM). For the 5.48 per cent 2009 G-Sec, the cut-off price was Rs 99.23 (6.82 per cent YTM).

Liquidity situation may be focus of financial markets panel meet (BL 07.11.08)
The liquidity situation in the economy is likely to again dominate Saturday’s meeting of the High Level Coordination Committee on financial markets. The HLCC had last met on October 1 and chiefly deliberated on ways to ease the tight liquidity situation. The HLCC comprises officials from the Finance Ministry, the Insurance Regulatory Authority of India, SEBI and RBI.

Drowning in liquidity (BL 07.11.08)
Reserve Bank of India (RBI) has recently pumped in at least Rs 300,000 crore, approximately equivalent to 7.5 per cent of banks’ deposit liabilities. The year-on-year incremental credit-deposit ratio is a staggering 96 per cent. No wonder the banks have no resources to lend. After three years of unbridled 30 per cent per annum credit expansion, there is bound to be a slowdown. Rather than suddenly pumping in over Rs 300,000 crore of liquidity into the system within a few weeks, it would have been preferable to calibrate the release. Injecting large doses of liquidity would only result in a hair-curling inflation in 12-15 months.

CII for Govt help to improve liquidity, confidence (BL 07.11.08)
“RBI could also consider further reduction in SLR by 2 percentage points and allowing oil and fertiliser bonds acceptable for SLR,” Mr R. Seshasayee, Chairman, CII Committee for Economic Affairs, said. CII has further suggested removal of caps on interest rate payable for deposits made by non resident Indians as well as raising, perhaps between $5 billion and $10 billion through a bond issue abroad, on the lines of the ‘Resurgent India Bonds’.

ECB, BoE slash interest rates (BL, BS, ET, FE 07.11.08)
The European Central Bank and Bank of England both slashed their main interest rates on Thursday in a dramatic escalation of global efforts to save off the threat of recession. The Bank of England slashed its key lending rate by a record 1.5 percentage points to 3.0 per cent while the ECB cut its main lending rate by half a percentage point to 3.25 per cent. Both banks said they were reacting in the face of an increasingly grim economic climate, highlighted by the failure of stock markets to rally off the back of Barack Obama's US election win.

PSU insurers unfazed by shrinkage of aviation biz (BL 07.11.08)
Public sector insurance companies’ liabilities are expected to shrink by about Rs 1,700 crore this year with the termination of aviation leases. The sum insured on each of the aircrafts on lease to both Kingfisher Airlines Ltd and Jet Airways Ltd was about $29 million. Both these companies have already indicated in stock exchange notices that the leases of at least 12 aircraft would be returned to the lessors. The lease termination and the consequent cancellation of the risk contracts would push up the solvency ratios to at least 210 per cent. The flip side is that there would be some premium losses. Currently, the average premium paid by aviation companies is about Rs 1 crore per aircraft.

Costlier primary items push up inflation rate (BL, ET, FE 07.11.08)
The annual Wholesale Price Index-based inflation rose 10.72 per cent during the week ended October 25, marginally above the previous week’s annual rise of 10.68 per cent. Inflation in the same period in the previous year at 3.11 per cent, however, was significantly lower. The official WPI for ‘All Commodities’ for the latest reported week rose by 0.1 per cent to 238.5 points, from 238.3 points for the previous week. On a disaggregated basis, in the ‘Primary Articles’ group, the annual point-to-point inflation increased to 11.41 per cent, as compared with 10.92 per cent reported last week. In the commodity group ‘Fuel, Power, Light and Lubricants’, the rate of inflation remained unchanged at 14.09 per cent during the latest reported week. The final WPI for the week ended August 30 stood revised to 241.4 points, as compared with the provisional estimate of 240.8 points, while the annual rate of inflation based on final index, calculated on a point-to-point basis, stood at 12.38 per cent as compared with 12.10 per cent reported earlier.

Top bankers see higher NPAs (BS, FE 07.11.08)
Despite the slew of measures taken by the Reserve Bank of India (RBI) in recent weeks, bankers said on Thursday that liquidity still remains a major cause of concern for the industry, and the coming quarters could witness a significant rise in non-performing assets (NPAs). Emphasising the need for liquidity, ICICI Bank Joint Managing Director Chanda Kochhar said, “We need funds to fill the gap arising from absence of trade credit and global liquidity. Resources are also needed to keep up India’s growth and investments. Liquidity impacts the interest rates prevailing in the system. Source of funding from the capital market is also not available.” “We will see higher NPAs in the coming days with Indian financial institutions, due to their credit derivative, counter party and concentration risks. NPAs should rise across the sector. Statistically, it is inevitable that NPAs would go up as the asset growth of the banking industry has been over 30 per cent in the last four years,” added Bhatt, CMD, SBI. Citibank’s CEO for India and South Asia, Sanjay Nayar, said, “We have to shift our deposit and asset profiles to address the crisis. We have to tackle the assets-liability mismatch, and avoid mis-pricing of credit-related risks. We need long-term structural liquidity for which capitalisation of banks is essential.”

Excess liquidity to create bad assets, warn bankers (BS 07.11.08)
Too much of liquidity in the market might lead to an increase in bad assets in the coming months, warn experts. According to Neeta Mukherjee, president of Arcil, the asset reconstruction company (ARC), "In view of the ongoing financial crisis, the banks are faced with challenge to manage the NPAs, and there is an expectation that bad debts would rise in the coming months." According to K C Chakrabarty, chairman and managing director of Punjab National Bank (PNB), retail loan clients should gear up for high interest rate regime. Renu Challu, managing director of State Bank of Hyderabad (SBH), said banks needed to ensure that corporates did not have stressed assets while lending in future. T M Bhasin, executive director of the United Bank of India (UBI), said, "We are passing through tough times, and have to take adequate measures for risk management."

PSU banks turn cautious on foreign education loans (BS 07.11.08)
Indian students going in for higher education or job-specific courses overseas will find it tough to get loans from Indian banks. Most banks are going slow on clearing such loan applications as the employment scenario has turned adverse due to the financial crisis faced by most companies. Banks are now insisting on higher interest rates, collaterals and guarantees for job-specific courses like hotel management and pilot training. Indian Bank Chairman and MD Sundararajan said “it’s going to be tough because of the economic slowdown in developed countries and we cannot remain in a comfort zone. We will keep monitoring the developments”. Anathanarayan, chairman of Karnataka Bank, said the bank is maintaining a status-quo on educational loans. “We do not have much exposure in this category. But given the volatility in the financial sector and slowdown, caution is the watchword for us," he said.

'New-age banks match global peers' (BS 07.11.08)
The new-generation Indian banks are on a par with their global peers in terms of risk appetite, governance and use of risk-measurement tools. However, traditional banks are still lagging in key areas such as fund-transfer pricing and asset and liability mismatch (ALM) modelling, according to a McKinsey & Company study. “Both sets of banks (new-generation and traditional) have highlighted the lack of adequate people capabilities as well as the scope/mandate of the mid-office as key concern areas,” the report highlighted.

Peer-to-peer lending gains prominence (BS 07.11.08)
As the financial turmoil rages on, a relatively new practice of lending and borrowing without intermediaries such as banks is emerging through online sharing of money. According to a study by market intelligence and data analysis services provider Grail Research, ‘peer-to-peer lending’, which refers to an individual or a group lending money to a person in need without any intermediary, is fast emerging and may reduce dependence on banks. This new form of loan is more popular among people, belonging to low-income groups, who do not have easy access to bank loans.

Asset-liability mismatch may hurt banks’ profits (ET 07.11.08)
Despite prodding by the FM to lower interest rates and lend a bit more generously, many banks may struggle to grow their loan books in the near future. Analysts are saying balance sheets of most banks are showing a short-term funding challenge and this could lead to a pronounced slowdown in their lending to Indian companies. This asset-liability mismatch is also likely to dent banks’ earnings, they warn. “Over the last three years, banks funded their long-term credit via short-term liabilities, mostly deposits, a large part of which were corporate bulk deposits and certificates of deposits,” says Aditi Thapliyal, analyst at Noble Group. “As a result, in the shorter end of the duration curve (less than or equal to one year), Indian banks face an asset-liability mismatch with a large volume of deposits maturing faster than loans,” says Ms Thapliyal. This lending slowdown is almost certainly likely to coincide with rising non-performing assets. This combination of funding problems for specific banks, a lending slowdown for those banks and rising non-performing assets across the sector could mean that although the Indian banking sector is trading at 8 times the estimated earnings for the current year (down from 16x in January 08), they are still not trading at the “bottom-of-the-cycle” valuations, say analysts.

Banks waive Rs 310 cr for MAMC revival (FE 07.11.08)
The consortiums of banks and public sector enterprises reviving the Durgapur-based Mining & Allied Machinery Corporation (MAMC) have settled for a repayment of Rs 120 crore on account of principal and interest against the Rs 430core bank debt of the closed public sector unit. While Coal India Ltd (CIL), Damodar Valley Corp (DVC) and Bharat Earth Movers Ltd (BEML) have taken up the task of reviving MAMC, the sick unit’s Rs 430 crore debt lies with the State Bank of India (SBI) and United Bank of India (UBI).

South Indian Bank feat (FE 07.11.08)
South Indian Bank has been adjudged as “the best performer in asset quality category” among private sector banks, in the Analyst2008 survey conducted by the Institute for Chartered Financial Analysts of India, in reducing non-performing assets.

KVB inks MoU with CARE (FE 07.11.08)
Karur Vysya Bank (KVB) has signed a memorandum of understanding (MoU) with CARE for utilising CARE’s ratings for evaluating its existing as well as potential clients.

Nabard arm forays into MF business (FE 07.11.08)
Nabcons, the National Bank for Agriculture and Rural Development’s (Nabard) consultancy subsidiary, has entered the business of selling and distribution of Mutual Fund schemes. The Nabcon’s foray into the business of selling and distribution of MF schemes is quite new as it is so far engaged in providing consultancy in all spheres of agriculture, rural development and allied areas.

Sept withdrawals push PPF deposits into red (FE 07.11.08)
It isn’t only mutual funds and non-banking financial companies that are facing redemption pressure. The government-run Public Provident Fund (PPF)-the single largest fixed-income scheme in the country-has also suddenly registered a spurt in withdrawals. PPF deposits have shrunk by over Rs 6,700 crore in September alone. Contrast this with the deposit inflow of Rs 5,072.39 crore for the first five months of this fiscal.

Bank of Japan can’t rein in rising yen (FE 07.11.08)
The Bank of Japan may be powerless to prevent the yen from rising to a 13-year high, according to the world’s biggest foreign-exchange traders. Deutsche Bank AG, UBS AG and Barclays plc predict that the yen will recover from its steepest weekly decline since 1999 as investors reduce carry trades that fund purchases of higher yielding assets by borrowing in Japan.

Major rates & parameters as on 06.11.08 (BL, RBI)
Rupee/$
Call Rates
Auction under RBI’s LAF
Govt. Securities (Yield)


Repo
Reverse Repo
8.24% 10-Yr 2018
7.94% 13 Yr- 2021
47.74/75
6.20-6.40%
Nil
Rs 14,240 Cr
7.71%
-
Rs 1,200 Cr
Rs 17,590 Cr

****Source BL= Business Line, BS=Business Standard, ET=Economic Times & FE=Financial Express