ECONOMIC BRIEFS – 14 & 15.12.08
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United Bank to lower lending rates for SMEs (BL 15.12.08)
With a view to extending a helping hand to the small and medium enterprises (SME) segment and arresting the build-up of non-performing assets, Kolkata-headquartered United Bank of India has announced a restructuring plan for the segment. Mr Satish C. Gupta, Chairman and Managing Director, said the restructuring initiatives would include lowering of interest rates for the SME and MSME segments.
Indian Bank to decide on new recruitments soon (BL 15.12.08)
Indian Bank expects to take a decision on fresh recruitments and the number of vacancies in about a week to 10 days’ time. Mr M.S. Sundara Rajan, CMD, Indian Bank, said “We do a total business of Rs 1.12 lakh crore and have adequate employees and can manage with the current 20,400.” “With the bank planning to open branches in Madhya Pradesh and elsewhere, we expect to go for fresh recruitments,” he said.
South Indian Bank expanding in North (BL 15.12.08)
South Indian Bank has decided to expand its footprint across the country by opening 40 new branches over the next 12 months. Also, SIB plans to recruit about 500 people in the remaining months of this financial year. This would take the headcount to 4,900 by end March 2009. “We had, last week, received RBI licence to open 40 new branches. These would come up by end December next year. Out of the proposed 40 new branches, we will have 11 in the Delhi region,” Dr V.A. Joseph, Managing Director & Chief Executive Officer, said. Dr Joseph said that SIB, which currently has 520 branches, of which 30 are in the National Capital Region, wants to have a national presence with special focus on the North and Eastern India. Currently, its entire branch network is core-banking solutions (CBS) enabled. He also said that the bank was well on course to add 7 lakh new customers this financial year.
Downturn has not dampened use of plastic money’ (BL 15.12.08)
Transaction processing and knowledge management company Venture Infotek believes that the downturn has not dampened the use of plastic money across the country. Its Vice-Chairman and Managing Director, Mr Piyush Khaitan, pointed to a 55 per cent growth in the number of card transactions during October this year compared with the corresponding period of the earlier year and value wise it had shot up by around 69 per cent, indicating an increased spend through plastic money. The company’s analysis has been based on the data of 14 banks to whom it offers end-to-end acquiring managed services. In October, the transaction volumes increased by 25 per cent and the value by 35 per cent compared with September.
Slew of sops await home loan takers (BL 15.12.08)
The much-awaited details of the incentives for home loan borrowers up to Rs 20 lakh are likely to be made public on Monday. This follows a meeting of bankers with the Finance Ministry officials held in Delhi last week, where a consensus was reached among PSBs to disburse home loans up to Rs 20 lakh at lower rates. In the meeting, the bankers are understood to have received an assurance from the policy makers to relax norms related to risk weights and margin requirements for home loans, which would enable banks to lend more in these categories.
SC rule on cheque bounce cases (BL 15.12.08)
The Supreme Court has held that only a lower court in whose jurisdiction an offence of cheque bounce is committed will try the case. The apex court said complainants, including financial institutions and banks, while filing cheque bounce cases, should ensure that no inconvenience is cased to the accused. There are numerous instances where complaints are being filed at more than one place to harass an accused.
Output of worry (BL 15.12.08)
When the quick estimates of industrial production for August were released, Mr P. Chidambaram, then Finance Minister, doubted the extent of the slippage. From 7.4 per cent the previous month, industrial output growth had shrunk to just 1.3 per cent. Now, as if to confirm that August was not a freak month, the data for October show a decline of 0.4 per cent in industrial output. Manufacturing fell off the edge, declining by 1.2 per cent for the first time in 15 years. While other central banks and governments, realistic about the depth of their economies’ fall, are thinking big, Indian policymakers are still tinkering with low-level stimuli. Why focus on reductions in rates for home loans up to Rs 20 lakh when a good part of the market is driven by higher value housing. How will prioritising easier loans for SMEs help them when they are dependent on orders from the large companies that are at present in no mood to expand their investments or output?
Welcome moves but room for more (BL 15.12.08)
Experts are likely to feel that the fiscal stimulus package errs on the side of caution. The Government should not hesitate to introduce a further fillip to the economy through additional contra-cyclical spending, if necessary.
'Insurance preferred over FDs' (BL 15.12.08)
Government securities may be seen as safe investments the world over in these times of turmoil but the findings of a survey say that more number of people in India think insurance is a better option than fixed deposits. At the same time, the survey, conducted by the global research firm Nielson, said all-weather investment option gold continues to be the safest bet for most of the respondents. As many as 58 per cent of the surveyed people prefer gold as safe investment, followed by 54 per cent respondents for insurance and 34 per cent for fixed deposits.
RBI sells $20.6 b in Oct (BL, BS 15.12.08)
The Reserve Bank of India sold $20.6 billion in October. It was during October that the local currency faced severe pressure. The currency declined from about 47 to the dollar at the beginning of the month to a little over 50 at the end of October. The super spike in oil prices on the one hand and flight of capital on the other have been the two factors that saw the RBI furiously sell off dollars to prop up the rupee, according to Dr D.K. Joshi, Director and Principal Economist at rating agency Crisil. The RBI has so far in this fiscal sold close to $34 billion while purchasing $5.68 billion. The net sale of $28.3 billion would mean that an equivalent amount of Rs 1,20,000 crore has been removed from the banking system - causing some liquidity crunch before the announcement of recent liquidity infusing measures. During 2006-07 the RBI did not sell any dollars in the market. In 2007-08 also the RBI remained a purchaser of dollars - except in March, when it sold about $1.4 billion. During these two years alone, the RBI had purchased about $100 billion – which got added to the country’s forex reserves.
Yields continue to head south as inflation abates, oil prices fall (BL 15.12.08)
Bond yields maintained their south bound trajectory, fuelled by abating inflationary pressures and weak global oil prices. There was sustained buying of government securities on expectations of more policy interventions from the Reserve Bank of India. The anticipation came amidst mounting fears of a deceleration in the GDP growth. Last week, the RBI Governor, Dr D. Subbarao, had, in fact, expressed such fears, indicating growth projections were likely to face a downward revision from the targeted 7.5-8 per cent for the current year. Besides, foreign institutional investors-led inflows during the week were about $250 million. Along with these flows, exporters also began remittances after receiving their delayed payments. In addition, inflow of non-resident deposits into public sector banks remained high. The comfortable liquidity situation was evident from the weekend liquidity adjustment facility auctions. At the weekly LAF auctions, the recourse to the reverse repurchase window was Rs 24,035 crore. At the 91 day T-bill auctions, the cut-off yield dropped 5.65 per cent, down from the previous week’s 6.58 per cent. Rush for securities pulled down the ten-year yield to maturity (YTM) last weekend to 6.17 per cent on a weighted average basis, from the previous weekend’s level of 6.89 per cent. This is the lowest level since January 2003. All profits from sale of HTM category are to be treated as the capital reserve. Banks took advantage of this opportunity, since other forms of raising tier-I capital - equity or through perpetual bonds - were still difficult given the current market conditions. Pause in the yield softening is likely, as banks book profits at current levels. Further accretions are expected to take place after deposit rates are brought down. One year CDs are below 8.5 per cent and still falling. This rate is at least 200 basis points below the one year retail deposits, clearly implying that there is little interest in bulk funds for the moment. Retail deposit rates could follow suit in the coming weeks, along with lending rates.
25 US banks go bust so far this year (BL 15.12.08)
Reeling under a recession that's getting worse, the US has seen the collapse of 25 banks this year, with two entities going belly up on average each month. The world's largest economy, which officially entered a recession phase in December last year, has seen the demise of three banks this month.
US household borrowings shrink in July-Sept (BL 15.12.08)
Data from the Federal Reserve’s latest Flow of Funds Accounts, released on December 11, shows that net borrowings by US households during July-September contracted by $117.4 billion. The previous two quarters had seen substantial credit slowdowns - households borrowed only $77.1 billion in April-June 2008, against $949.2 billion and $1,397.5 billion during the same quarter of the preceding two years. Reduced spending by US consumers could hit Indian exports hard - especially in sectors such as textiles, leather goods, handicrafts and auto-components.
PNB targets Rs 4,000 cr from state (BS 15.12.08)
The Orissa circle of Punjab National Bank (PNB) expects to achieve a total business volume of Rs 4,000 crore by the end of March next year, up from the existing figure of Rs 3,200 crore. BP Sharma, head of PNB’s Orissa circle said, “PNB’s business volume for the Orissa circle has jumped from Rs 1,228 crore to Rs 3,200 crore over the past two years, thereby clocking a growth of about 146 per cent. We expect to achieve our targeted business volume of Rs 4,000 crore by March next year.” “The priority of public sector banks in the country is to boost advances in the agricultural sector as it is in the interest of the nation’s economy” he added.
KVG Bank to have core banking (BS 15.12.08)
Karnataka Vikas Grameena (KVG) Bank, the regional rural bank covering Dharwad, Haveri, Gadag, Belgaum, Bijapur, Bagalkot, Udupi, Dakshina Kannada and Uttara Kannada districts, will soon bring its urban and semi-urban branches under the core banking System. KVGB chairman M Dhananjaya, speaking at a customer meet arranged by eight branches of the Dharwad-headquartered bank, said the bank had total business of Rs 5,550 crore and a customer base of about 33 lakh.
Dewan Hsg to dilute 15% for Rs 200 cr (BS 15.12.08)
Dewan Housing Finance (DHFL), a housing finance company, said it is planning to dilute 15 per cent equity to raise close to Rs 200 crore by the end of this financial year. “We will be raising Rs 150-200 crore through around 15 per cent equity dilution by March 2009. We are exploring all options, including a rights issue,” said DHFL Vice-chairman and MD Kapil Wadhawan. Though banks emerged as their principal source of funds, with interest rate hovering around 13-14 per cent many HFCs are looking for alternate source of funds.
Only new buyers to get home loan sops (ET 15.12.08)
Existing home loan borrowers will not benefit from the special home loan schemes to be introduced by state-owned banks as a part of the government’s stimulus package. The scheme, with cheap rates on home loans, will apply only to fresh purchases and not for refinancing. The scheme is likely to be formally announced by the Indian Bank Association (IBA) on Monday. Under the special package, loans up to Rs 5 lakh will be priced at 8.50% while loans between Rs 5-20 lakh will attract interest rates of 9.25%. At present, the lowest rates applicable to home loans are above 10%. Other features of the special package include free loan insurance cover, waiver of pre-payment penalty and lower margins.
I-banks’ income melts in ’08 (ET 15.12.08)
As slowdown-hit companies put a break on investment and fund raising, investment banks face a sharp drop in their fee-based income. This income, earned from providing various deal-related services, dropped 36.3% in the first eleven months of the 2008 calendar year, according to data compiled by a leading business information provider. The drop has been a sharper 82% in the case of fee earned from helping companies raise equity. Fee from managing the debt market-related activities also came down 19.7%. Almost all major players such as Goldman Sachs, Citi, Nomura, Deutsche Bank, ICICI Bank and Kotak Mahindra reported a decline in their I-banking fee volumes.
Global biggies vie for 26% in UTI AMC (ET 15.12.08)
UTI Asset Management Company (AMC), the oldest fund house in the country, is in advanced talks with top global players for offering a 26% strategic stake. The AMC is understood to have shortlisted 4 international players. The names under consideration are the US firm T Rowe Price, Shinsei Bank of Japan and two European firms. According to plans approved by the finance ministry, the four sponsors of UTI AMC - the State Bank of India (SBI), Life Insurance Corporation of India (LIC), Bank of Baroda and Punjab National Bank - would offload part of their holdings to the strategic partner. These four state-owned entities currently hold 25% each in the asset management company.
Fed Reserve likely to cut interest rates (ET 15.12.08)
The Federal Reserve is expected to cut interest rates to a record low after it concludes a two-day policy-setting meeting on Tuesday. Twelve of 16 US primary dealers polled by Reuters expect the Fed to cut the key federal funds rate by 50 basis points, which would bring it down to an unprecedented 0.5%. Others predict a bigger cut. Global interest rates are converging to historic lows as major central banks slash interest rates to battle recession.
Geneva Banks lost upto $4 b to Madoff (ET 15.12.08)
Geneva-based banks and investment funds have lost more than 5 billion Swiss francs ($4.22 billion) in the alleged $50-billion fraud by former Nasdaq chairman Bernard Madoff, Swiss newspaper Le Temps reported on Saturday.
PNB ready to give auto credit sans dealers’ cut (FE 15.12.08)
Punjab National Bank on Sunday said it is open to provide credit in case auto players come clean and do not demand commission for their dealers. “These auto manufacturers have told me, you have to give dealers’ commission. I can’t do that,” PNB chairman and managing director KC Chakrabarty said when asked why the public sector banks are reluctant to do auto financing. Referring to credit squeeze into blessing in disguise for public sector banks, Chakrabarty said those who never wanted to deal with PSU banks are coming in.
Cheaper home loans may not cheer realty sector (FE 15.12.08)
The real estate sector is unlikely to see any movement even after measures like bringing Rs 20 lakh and below loans under the priority sector. However, it will trigger demand in the tier II and tier III cities.
India Inc rediscovers FDs & asset mortgage (FE 15.12.08)
The liquidity crisis has top Indian companies going back to the good old ways of raising fund-taking fixed deposits and pledging shares. Apparently, companies have realised that those who garner funds at the best rates are the ones with the best chance to survive. With the equity market virtually shut for new issues and banks reluctant to lend to the corporate sector, companies have little option but to turn to debt placement. “The cost of funds for any decent company would be around 14 to 18% now while fixed deposits can be raised for around 12.5%. So they are attractive,” says Mandar Gupte, CFO with a multinational company. For investors, too, the fixed deposit route makes sense as the returns are more than that what are available from banks, which offer at best around 10%.
Systematic investment in bank deposits (BL 14.12.08)
Union Bank of India has recently launched a recurring deposit that allows investors to enjoy the returns of a term deposit while allowing flexibility to invest varying sums into the account every month. Union Monthly Plus is a recurring deposit scheme offered for individuals, institutions, corporates, partnership, trusts and HUFs. Investors can put in an initial amount and add to it by way of instalments made every month. Investors can vary the term of the investment for any period between 6 and 60 months (in multiples of one month). This deposit scheme requires investors to choose a minimum core amount (initial investment) that can vary from Rs 100 to Rs 1,00,000 and deposit it initially. Investors may have to choose the core amount conservatively, as the subsequent instalments cannot fall short of this amount. Future instalments can, however, be hiked up to 10 times the core amount. There would be no penalty for delayed payment of instalment or failure to pay instalment in a given month. The recurring deposit would enjoy returns similar to the prevailing term deposit interest rates offered by Union Bank. The interest rate for a five-year term deposit is 9.5 per cent. Interest rates are credited on a quarterly basis and would be compounded and received at the end of the deposit term. However, for the purpose of calculation of interest, the bank would consider only the minimum balance between the 10th and last day of a given month. Thus, any instalment for a given month would earn interest only if it is deposited before the 10th of the month. Investors can also avail a loan against the deposit for up to 25 per cent of the deposit amount at 2 per cent over the deposit rate.
Bank interest rates to drop in the next 2-3 weeks: Kamath (BL, ET, FE 14.12.08)
Interest rates in the banking sector are set to drop in the next 2-3 weeks. This would help borrowers taking loans for homes, auto, and education among others. Indicating this, Mr K.V. Kamath, Managing Director and Chief Executive Officer of ICICI Bank, said, “the rate cut this time would be steeper, as I foresee inflation expectation rate to be below five per cent”. During the last two weeks, the rate on 10-year Government bonds moved down by 1.5 per cent. “We need to keep that in view, as that would set in motion the deposit and lending rates.”
Interest rate risk stares in the face of NBFCs (BL 14.12.08)
Will interest rates rise or fall? The answer to this question is crucial for the NBFCs, because most of them raise funds on floating rates of interest, while lend them at fixed rates. “Interest rate risk is staring at our faces. We are confused about interest rates,” says Mr R. Sridhar, Managing Director, Shriram Transport Finance Company. Mr T.T. Srinivasa Raghavan, Managing Director, Sundaram Finance, expresses a slightly different view. According to him, those companies that are predominantly dependent upon bank funding - which is at floating rates of interest - only will face this problem. Others, who raise funds from multiple sources such as public deposits and securitisation, are not likely to face interest rate risk.
Fixed return to beat slump (BL 14.12.08)
With equity markets declining, insurance companies may clock slower growth rates. Until the beginning of 2008, the insurance industry as a whole was growing at 30-40 per cent over the last few years; some private insurers even achieved triple digit growth. Strong rally in equity markets over this period led to unit-linked insurance plan (ULIP) emerging as the most popular insurance product, accounting for 70-80 per cent of the new premium income. Now with the stock markets well into a protracted downturn, insurance companies have changed their strategies to stay afloat. Further, with interest rates peaking out, insurance companies are betting on debt products to lock-in funds into fixed returns.
Developers want more from stimulus package (BL 14.12.08)
Over the last fortnight the Government and the RBI announced several measures to soothe the troubled real-estate sector and cool soaring interest rates. However, real-estate companies feel the steps are inadequate to pull the sector out of the sales slump and financial crunch. But the larger challenge is that the demand for housing is not reflected in the order book, as consumers anticipate that residential prices may fall further. This `inaccurate belief’ is hurting sales, says , Mr Kumar Gera, Chairman, CREDAI. Industry watchers believe that interest rates on housing loans need to come down to 7-8 per cent and loans up to Rs 35 lakh classified as priority sector. A Rs 20 lakh loan means a ticket size of Rs 25 lakh, and that kind of residential pricing is only possible in smaller cities, not in metros and Tier I cities, says Mr Pradeep Jain, Chairman, Parsvnath. The ideal interest rate for loans up to Rs 5 lakh should be below 5 per cent, whereas for loans up to Rs 35 lakh it should be pegged at below 7 per cent and above Rs 35 lakh should be below 9 per cent, feels Mr Jain.
Source BL= Business Line, BS=Business Standard, ET=Economic Times & FE=Financial Express