ECONOMIC BRIEFS – 04.12.08
* * * * *
Banks need more capital to meet rising credit offtake (BL 04.12.08)
Many banks are beginning to run out of capital to support the high pace of credit growth. Currently, credit is growing at an annual clip of 28 per cent. The situation is prompting banks to park funds in government securities that are zero risk weighted. Top bankers said that they have appraised the Reserve Bank of India of the situation and have sought reinstatement of interest on cash reserve ratio (CRR) as an alternative to capital support from the government. Currently, banks are expected to have a CRAR of 9 per cent. However, under the Basel II architecture they are required to maintain a minimum capital of 12 per cent CRAR. Among the banks that have already reached the upper limit capital for sustaining the credit growth are Dena Bank, Punjab & Sind Bank, UCO Bank and Vijaya Bank. In the case of UCO Bank and Punaj & Sind Bank, the government has already agreed to convert part of their respective equity into preference shares. This was to enable the banks to raise equity from the financial markets. However, with depressed markets neither of the banks is in a position to raise equity funds. In the case of Vijaya Bank, the Tier-I equity is currently about 5.3 per cent. Moreover, the government stake in the bank is down to 53.5 per cent, giving it little room to raise capital either through the Tier-I or Tier-II routes.
Public sector banks on fast track now (BL 04.12.08)
It’s a reversal of roles. Public sector banks now have more customers knocking on their doors for auto loans than private banks, which were leading the race earlier. The reason: public sector banks have started sanctioning auto loans at the same speed that private banks used to - two to three days - and are offering lower interest rates as well. The public sector banks’ change of heart seems to have come about from the huge opportunity they see as private banks go increasingly stringent in financing vehicles due to the global meltdown. Take for instance Mr Wilfred Minz, a supervisor at Life Insurance Corporation who was out scouting to finance his Alto. He preferred to approach the State Bank of Patiala that offered him an interest rate of 12.25 per cent, while private banks rates start from 13 per cent and go as high as 18-19 per cent. “My experience has been that despite the extensive documentation they need (public sector banks), I did not have to run around and my loan got sanctioned in just two days,” recounts Mr Minz. According to a banking source, since the slowdown, ICICI Bank’s share in financing Maruti cars has dropped to about 1,100 cars a month from the 11,000 cars that it did in its hey day. In contrast, SBI’s share has grown to 14,000 units a month from around 8,000 earlier.
Banking on makeovers (BL 04.12.08)
Since the entry of the new-age private sector banks with their promises of faster customer service and products backed by the latest technology, the image of public sector banks in India had taken a beating. However, over the last few yeas, PSU banks have upgraded their technology. Now, they are on par with their private sector counterparts in all aspects. This is the message they hope to get across through their ad campaigns even as they put in place changes at the ground level. For Union Bank of India, which recently changed its logo and brand, it was important to be perceived differently, says R. B. Menon, Deputy General Manager, Corporate Communications. Menon says: “In the financial services sector how you are perceived is critical because any product is commoditised very fast. Some studies had indicated that top-of-mind unaided recall was not very high for Union Bank of India. Also, in the last two years we had made a lot of changes internally, but these were not known to the world. So we felt re-branding was necessary.” Indian Overseas Bank’s advertisement, which depicts a little child trying to snap his fingers, in various situations - at school, in bed, in the park - is about how a little bit of personal advice given by the banker can help customers at the opportune moment.
Interest subvention hiked on farm loans (BL 04.12.08)
The Union Government has approved higher interest subvention of 3 per cent per annum as against 2 per cent per annum announced earlier to public sector banks (PSBs), co-operative banks and Rural Regional Banks (RRBs) in respect of short-term production credit of up to Rs 3 lakh provided to farmers for the year 2008-09. This subvention is available to the banks on the condition that they make available short-term credit at the ground level at 7 per cent/ annum. The amount of subvention is calculated on the amount of the crop loan disbursed from the date of disbursement/drawal up to the date of repayment or up to the date beyond which the outstanding loan becomes overdue, i.e. March 31, 2009 for kharif and June 30, 2009 for rabi, respectively, whichever is earlier.
IRFC raises Rs 2,700 cr at 9% (BL 04.12.08)
The Indian Railway Finance Corporation (IRFC) has raised about Rs 2,700 crore till date this fiscal at a weighted average cost of 9 per cent and an average tenor of 10.22 years. In 2007-08, IRFC had raised Rs 4,609 crore at 9.3 per cent. The financing arm of railways is looking to raise $400 million more from the external market this fiscal when the market conditions are conducive, having recently raised $100 million. “We raised $100 million from Bank of Tokyo-Mitsubishi, at an attractive cost of 145 basis points over the USD Libor for a five-year (bullet repayment) tenor, which means a cost of about four per cent,” Mr Rakesh Kashyap, Managing Director, IRFC told.
SBT facility for Guruvayur temple (BL 04.12.08)
State Bank of Travancore (SBT) has activated an Internet banking facility for online payment of donation to Guruvayur temple. The facility can also be used for booking `vazhipadu/pooja' at the temple by logging on to `www.guruvayurdevaswom.org'.
Insurance regulator working on norms for mergers & acquisitions (BL, ET 04.12.08)
The IRDA Chairman, Mr J. Hari Narayan, said “There is a need to evolve M&A guidelines. Given what is happening across markets, it may be an opportune time for insurance industry to consider M&As. But in India we do not have within the insurance regulatory roadmap (framework) appropriate guidelines in this regard. I think we need to evolve some of them and we are working on them.” A consolidation in the industry is expected to help improve competitiveness of the players besides providing increased benefits to customers. Since the opening up of the insurance sector, the number of participants in the industry has gone up from six insurers (including Life Insurance Corporation of India, four public sector general insurers and General Insurance Corporation, as the national re-insurer) in 2000 to 42 insurers operating in the life, non-life and re-insurance segments as of today.
Rating downgrades on the rise (BS 04.12.08)
“The environment will deteriorate further. In the next 12-18 months, we expect that downgrades will be more than upgrades,” said Crisil Managing Director & CEO Roopa Kudva. Icra Managing Director Naresh Thakkar said that he did not see any improvement in the next six to nine months. Care Deputy Managing Director D R Dogra said in the third quarter alone, as companies report poorer financial performance, downgrades would rise further. For Icra, the ratio of downgrades to upgrades touched 2.75 at the end of the first half of 2008-09, compared with 1.50 during the corresponding period last year.
Irda seeks longer-term papers (BS 04.12.08)
The Insurance Regulatory and Development Authority (Irda) will request the finance ministry to take steps to increase availability of more longer-term securities for insurance companies to invest in as they are facing an asset-liability mismatch. “In the market, long-term securities are less. We want more ten, twenty and thirty year bond floats in the market for insurance companies,” Irda Chairman J Harinarayan said at an insurance seminar organised by Ficci. The regulator was concerned that instruments in which insurance companies have invested in have a term of maturity shorter than the liability that they have.
Tepid response to NBFC papers (BS 04.12.08)
Life is getting tougher day by day for non-banking finance companies (NBFCs). With the interest rate cycle showing signs of moderating, they are finding no takers for their short-term debt instruments, even for their AAA-rated papers. As a result, companies said their borrowing cost will still remain high though the interest rate across the industry is falling. The high borrowing cost will further squeeze their margins. “The market for CPs is virtually dead as mutual funds, which had been the most active player, are facing redemption pressure. Similarly, for NCDs, there are fewer takers as banks have started to lower interest rates and, as far as securitisation of assets is concerned, that too has dried up after the recent amendments in the guidelines by the regulator,” said Shriram Transport Finance Company MD, R Sridhar.
Funds, banks buy CPs (BS 04.12.08)
Volumes rose in the secondary market On Wednesday as rates fell sharply by 30-35 basis points on hopes Reserve Bank of India may soon announce interest rate cuts, dealers said. These hopes gained momentum on Tuesday after a finance ministry official hinted there may be a rate cut by this weekend. Banks were also buying CDs in the market with a trading view. On Wednesday, CDs maturing in December were dealt at 6.50-6.60 per cent compared with 6.75-7.25 per cent on Tuesday. On Wednesday. Around Rs 700 crore of CDs were placed in the market compared with Rs 850 crore on Tuesday.
'Fraud repository will help banks' (BS 04.12.08)
From 13 members and database on four million trades in 2004, when Credit Information Bureau of India (Cibil) was set up, the country’s first credit information company now has 162 members and database on 127 million companies and individuals. The company, which launched operations in November 2007, hopes to add to the list of offerings by the end of the year. Cibil Managing Director Arun Thukral told that the company will soon offer the first fraud repository, data on personal loans and a mortgage repository that lenders can access.
Securitised market safe and sound, says Crisil (BS 04.12.08)
Rating agency Crisil has placed the Indian retail securitisation market ahead of many countries, particularly the US, on the back of a superior profile of assets securitised in the country amid global meltdown. The rating agency said financial instruments created out of securitised assets in India are far less complex than those in developed markets. With few rating downgrades, the Indian market has shown greater stability and has zero losses on investor payouts, Crisil said. It, however, added that the size of the Indian market is very small compared with that of the US.
Sovereign bond may up forex reserve, but high deficit a risk (BS 04.12.08)
As the Reserve Bank of India tries to support weakening rupee, India’s foreign exchange reserves are declining steadily. From $314 billion in April, they have fallen to $245 billion as on November 21, a fall of nearly 22 per cent in under nine months. With global recession spreading, demand for India’s exports have declined, particularly in the US and Europe. For the first time in several years, they have actually declined in October by 12.1 per cent to $12.82 billion from a year ago. Besides, corporate India is finding it difficult to raise foreign exchange loans abroad at reasonable rates. It may be too early to talk of a foreign exchange crisis, but it may be prudent for authorities to think of their options in case of such an eventuality. One option to raise supply of foreign exchange in the Indian market is for the government to issue sovereign bonds. The credibility of Indian government is excellent, and currently not too many good quality papers are available in market. But those who oppose the idea of Indian government issuing sovereign bonds point out that India’s fiscal deficit is too high to generate investor confidence. Other risks include foreign currency exposure that such an issue creates, possible refinancing needs, especially in periods of tight international liquidity conditions, and adverse terms of trade shocks.
No takers for loans despite rate cuts (ET 04.12.08)
Rate cuts have failed to enthuse borrowers. Even after banks cut their benchmark lending rates (PLR), credit offtake still remains low. As a result, surplus liquidity in the system is rising. Bank credit dipped Rs 2,193 crore during the fortnight ended November 21 to Rs 2,632,700.47 crore. While food credit dipped Rs 2,183 crore, non-food credit dipped Rs 9.43 crore during the fortnight, according to the latest RBI data. Bank investments in government and other approved securities dipped Rs 2,168 crore during the fortnight to touch Rs 1,06,890 crore as on November 21. This is largely because many banks are redeeming bonds issued under market stabilisation scheme (MSS) - that were issued to mop up liquidity infused through dollar purchases. On the liabilities side, however, deposits mobilised by commercial banks rose Rs 2,616 crore. While demand deposits dipped Rs 11,563 crore, term deposits rose Rs 14,179 crore. Only term deposits have shown some perceptible growth in the latest fortnight ended November 21. Banks are now flush with liquidity. For the second consecutive day, they parked over Rs 50,000 crore of surplus liquidity under the LAF window.
Get Well Soon: Core, exports likely to get Rs 17k-cr recovery pack this Sat (ET 04.12.08)
The stimulus package is slated to be announced this Saturday. According to government officials, special lines of credit will be provided for housing, exports and nonbanking financial companies. This would ensure the funds crunch being faced by industry, particularly the housing sector, exporters and infrastructure sector, is mitigated to some extent. RBI is expected to announce cut in repo and reverse repo rates to the extent of 200 basis points and 150 basis points respectively on Saturday. While RBI might not cut the cash reserve ratio, banks would be asked to cut deposit rates. About Rs 15,000 crore will be given to the infrastructure sector, a government official said, adding that infrastructure and housing will create a ripple effect in the economy leading to greater demand for steel, cement, capital equipment and labour. This would be the first tranche to the special infrastructure fund. Exporters, especially those exporting labour - intensive products such as textiles, handloom, handicraft, leather, gems & jewellery and marine products - which have been hit most by the global slowdown - will get a bailout package of Rs 2,000 crore. This includes service tax refunds, terminal excise duty refund and pending payments of duty drawback and from the textile upgradation fund.
Blame it on cash crunch, NBFCs stall fresh loans (ET 04.12.08)
The liquidity crunch faced by non-banking finance companies (NBFCs) has hit disbursements by these financial sector intermediaries. Reliance Capital, one of the leading Indian NBFCs, has cut disbursements sharply across different segments over the past few weeks. The NBFC arms of other business groups, including Indiabulls, have also stopped all disbursements due to the severe cash crunch and rising delinquencies. Disbursements by Reliance Capital across its different business segments such as personal, business, home and auto loans have come to a standstill in the past few weeks. The funding costs for most NBFCs range between 14-17%. And if establishment and other delinquency costs are taken into account, then for most NBFCs, it has now become a losing business proposition to disburse loans.
Banks want RBI to ease realty NPA norms (ET 04.12.08)
In a bid to avoid classifying advances to troubled real estate companies as bad loans, banks have urged RBI to put in place a uniform norm for restructuring debt to realty companies. As of now, the moment a loan extended to either real estate, capital market or personal loan segment is restructured, the lender has to classify it as a bad loan. At the same time, however, one-time restructuring of loans to any other sector such as steel, textile or cement would not result in the loans being classified as non-performing assets. In a recent meeting with RBI governor D Subbarao, CEOs of many large banks urged the regulator to relax these restructuring norms. They pointed out that a number of real estate companies have been complaining about the liquidity crunch and have approached lenders to rollover the loan. However, there is a resistance among banks to give them an additional line of credit or reschedule their loans on the ground that this will add to their pool of NPAs. Meanwhile, banks have also urged RBI to relax norms on restructuring of loans to manufacturing companies. As of now, when a performing loan to a manufacturing company is restructured for the first time, it can be treated as a standard asset. However, if the loan to the same company is restructured again, it has to be treated as substandard. Banks have urged RBI that given the global turmoil and the slowdown in the economy, banks should be given a second chance to restructure the loan.
NHB tightens norms for HFCs (ET 04.12.08)
Housing finance companies (HFCs) will now need a larger capital base if they wish to finance the entire value of a property, and if the size of a single loan exceeds Rs 30 lakh. National Housing Bank (NHB), the apex body for promoting and regulating HFCs, has enhanced the capital requirement for such lending and introduced loan-to-value (LTV)-based risk weightage calculation for making HFCs more immune to credit risk. An LTV is the ratio of a loan to the value of a property being financed. Typically, when the LTV is more than 75%, the possibility of default becomes higher. Accordingly, NHB has prescribed a higher risk weightage at 100%, raised from 50% earlier, for standard assets where LTV ratio is more than 75%. Earlier, all housing loans offered by HFCs attracted 50% risk weightage, irrespective of the loan size and LTV. The new guidelines are effective December 2, 2008.
Rising $ pushes inward remittances (BL 04.12.08)
It is not just NRI deposits which are growing. Remittances from Indians working abroad are now on the rise. In October alone, State Bank of India (SBI), which accounts for over 25% of inward remittances, has seen inflows rise 56% (year-on-year). ICICI Bank, the country’s largest private bank and which is reckoned to be a major player in this segment, has reported a growth of 38.2% during the second quarter of FY09 to Rs 11,946 crore ($2.5 billion) compared with a year ago. The bank expects to end the year with a 40% growth in business. Unlike NRI deposits that are repatriable, remittances are permanent onetime transfer by NRIs, generally to their relatives back home. Reflected in private transfers in the balance of payments, this figure also includes donations and gold in the individual baggage, among others. Remittances cannot be repatriated by rule and are meant for use by families. But there is a provision for locals to gift up to $200,000 annually to relatives abroad. This facility is being increasingly utilised by NRIs and instead of using the money for family maintenance, a portion is used for investment purposes. In FY08, India received $42.6 billion by way of remittances, up by 47% over the previous year’s levels. This growth momentum is expected to be maintained in the current year as well.
Nabard sanctions Rs 186.31 cr to Punjab, Haryana (FE 04.12.08)
National Bank for Agriculture and Rural Development (Nabard) has sanctioned Rs. 186.31 crore for Punjab and Haryana for strengthening of technical institutions and reconstruction of roads under Rural Infrastructure Development Fund (RIDF).
Major rates & parameters as on 03.12.08 (BL, RBI)
Auction under RBI’s LAF
Govt. Securities (Yield)
8.24% 10-Yr 2018
7.95% 24 Yr- 2032
Rs 28,020 Cr
Rs 28,590 Cr
Source BL= Business Line, BS=Business Standard, ET=Economic Times & FE=Financial Express