ECO BRIEFS - 2.12.2008

ECONOMIC BRIEFS – 02.12.08
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Banks facing overdues on realty, home loans (BL 02.12.08)
Banks have begun stress testing their realty assets as delinquencies in loan service payments have begun mounting. Bankers said that many banks have begun facing overdues on some of the realty loans and some home loans. Bankers said that in at least 10 percent of the home loan accounts, there had experienced such slippages. Two years ago, when rates were low, the slippage was only about 2 per cent.

Corporates re-pricing deposits with banks (BL 02.12.08)
With short and medium-term deposit rates remaining high, corporates are beginning to terminate past deposits and reinvesting them at current rates. Corporates, that had burnt their fingers in the mutual funds, are turning to bank certificates of deposits at rates of about 9 and 10 percent. The RBI’s weekly statistical supplement showed gross deposit accretion of Rs 3.2 lakh crore so far this financial year. However, time deposit accretions for the same period were Rs 3.9 lakh crore. Some of retail depositors also resorted to re-pricing their deposits to take advantage of the higher interest rates, implying that at least Rs 70,000 crore was reinvested. Cost of working funds for the banks are currently well over 7 percent.

Allahabad Bank lowers FCNR rates (BL 02.12.08)
Allahabad Bank has revised downward the interest rates on foreign currency non-resident (FCNR) deposits from Monday. The rates for NRE term deposits too have been reduced.

State Bank of Mauritius CEO killed in Mumbai attacks (BL 02.12.08)
State Bank of Mauritius Ltd., the Indian Ocean islands second-biggest bank, said the Chief Executive Officer, Mr Chaitlall Gunness, died. Mr Gunness was among the victims of the terrorist attack on the Taj Mahal Hotel in Mumbai last week.

HDC Bank expects rupee to fall to 52 (BL 02.12.08)
HDFC Bank, in its monthly report update on economy and markets, has forecast that the rupee, like other Asian currencies, can weaken and move to 52 levels by March '09. The currency was trading on Monday at about 50.29 levels. In the longer term, however, the bank expects rupee to strengthen and to move to 46-47 levels by December 2009.

Provisioning norms for urban co-ops relaxed (BL, BS 02.12.08)
The Reserve Bank of India relaxed the provisioning norms for standard assets of Urban Co-operative Banks (UCBs). Further, the risk weights on loans and advances given by these banks against the security of commercial real estate have been reduced. The central bank has relaxed the prudential requirements as a counter cyclical measure. Provisioning requirements in case of Tier II UCBs for all types of standard assets stands were reduced to a uniform level of 0.40 percent, except in the case of direct advances to agricultural and SME sectors. These sectors will continue to attract a provisioning of 0.25 per cent. Tier I UCBs will continue to make a general provision of 0.25 per cent on all their standard assets. Loans and advances secured by commercial real estate would attract a risk weight of 100 per cent, as against the extant risk weight of 150 per cent.

LIC stake in 3 public sector banks tops 5% (BL 02.12.08)
Life Insurance Corporation of India has bought heavily into banking stocks when markets plunged sharply in October and November. LIC’s stake has crossed five percent in three public sector banks-State Bank of India, Bank of India and Allahabad Bank. During October-November, LIC acquired 1.67 crore shares of SBI from the secondary market increasing its stake to 7.04 percent as on November 18, 2008. LIC also purchased 9.6 lakh shares of Bank of India on November 11, 2008 raising its stake to 5.14 percent. In Allahabad Bank, it has bought over 1.09 crore shares taking its stake to 8.84 percent as on November 12.

NIC sees further growth in terror cover premiums (BL 02.12.08)
The National Insurance Corporation (NIC) is expecting a growth in terrorism cover premium income from corporate clients in days to come, according to Mr V. Ramasaamy, NIC’s Chairman cum Managing Director. Premium income from terrorism cover by NIC has grown by nearly 15 percent in the first six months of 2008-09 compared with the corresponding period last year. The public sector general insurer does not have any exposure in the two hotels -Taj and Oberoi-damaged in the recent terror attack in Mumbai, he said.

Wins insurance award for innovation (BL 02.12.08)
Agriculture Insurance Company of India Ltd (AICIL) has won the innovation of the year award at the 12th Asia Insurance Industry awards ceremony held in Hong Kong recently. In 2007-08, AIC covered 671,000 farmers and an area of 1,034,629 hectares for a sum insured of Rs 1,758 crore, and earned a premium of Rs 145.5 crore.

Aegon Religare Life’s new plan (BL, FE 02.12.08)
Aegon Religare Life Insurance has announced the launch of a new product that guarantees tax-free returns along with the added benefit of life cover. “This product called the Guaranteed Return Plan is a single premium plan that gives a fixed annual compounded return of 7.2 per cent. The returns on maturity are tax-free and the plan comes with an added benefit of life cover – five times of the single premium paid,” Mr Rajiv Jamkhedkar, Chief Executive Officer of Aegon Religare Life Insurance, said.

Market opens up, ends lower on weak cues (BL 02.12.08)
After opening positive, the Sensex and the Nifty changed direction and closed more than two per cent lower on Monday following a spate of bad news from the domestic economy and the global equity markets. The Sensex ended 252 points down at 8,839 points while Nifty closed at 2682 down by 72 points. FIIs and domestic institutional investors were net buyers of equities worth Rs 28 crore and Rs 49 crore respectively.

RBI lifeline not being utilised to optimum (BL 02.12.08)
Measures such as introduction of special refinancing window for the banks (1 per cent of Net Demand and Time Liabilities), special repo window for mutual fund/NBFC (1.5 per cent of NDTL) and dollar-swaps for banks to support their overseas branches, earlier thought to be temporary have now been extended for some more time. The special refinancing facility and dollar swaps (which were available for 90 days) and mutual fund repo window (available up to March 30, 2009) will now be available up to June 30, 2009. In addition, RBI has also extended the period of post-shipment entitlement for exporter from 90 days to 180 days. Redemption pressures for mutual funds are already said to have eased in the past few weeks and the Rs 60,000 crore special refinance window for mutual funds remains under-utilised.

Bourses await FMC nod to resume futures in 4 commodities (BL 02.12.08)
The ban on futures trading in four agriculture commodities – soy oil, channa, potato and rubber – lapsed on Monday. Commodity market regulator, Forwards Markets Commission (FMC), had banned trading in the four commodities in May for a period of four months, which was later extended till November-end. National exchanges – NCDEX and MCX – expect to restart trading soon after receiving the contract approval from FMC.

FIEO, MCX-SX ink pact (BL 02.12.08)
The micro, small and medium enterprise (MSME) export sector can now look forward to obtain training on the sophisticated currency and commodity markets to equip them in tackling volatility that marks trading in such markets. The Federation of Indian Export Organisations (FIEO) has entered into a memorandum of understanding (MoU) with MCX-SX Ltd to conduct training and certification programmes on these markets for FIEO members.

Exports dip 12% at $12.82 b in October (BL, ET, FE 02.12.08)
Although India’s export juggernaut slowed down distinctly in October 2008 by 12 per cent in dollar terms amid the slowdown of the global economy, overall export growth during the first seven months of the current fiscal – April to October – continues to cruise on a high growth of 23.7 percent in dollar terms and 32 percent in rupee terms. Exports during October 2008 at $12.82 billion were 12.1 percent lower than the level of $14.58 billion in October 2007. However, the cumulative value of exports during the first seven months of the current fiscal continues to show salubrious trends with exports amounting to $107.79 billion, against $87.14 billion in April-October 2007. Imports during October 2008 at $23.36 billion were 10.6 percent higher over the level of imports valued at $21.12 billion in October 2007, while cumulatively imports during April-October 2008 at $180.78 billion were 36.2 percent higher than $132.78 billion in the corresponding period of 2007. The country’s trade deficit during the period April-October 2008 zoomed to $72.99 billion from the level of $45.63 billion during the corresponding months of 2007.

Additional World Bank loan of $1.5 b by March, says Chidambaram (BL 02.12.08)
In view of the anticipated weakness in private capital flows, India has been obliged to go back to its old benefactor, the World Bank. It expects to get $1.5 billion out of the proposed additional $3 billion loan assistance from the World Bank by March 2009. The other half will come by June next year, the outgoing Finance Minister, Mr P. Chidambaram, said.

Foreign reserves and the rupee (BL 02.12.08)
While as recently as April the RBI was purchasing large quantities of dollars and adding them to its reserves, its net sales of the dollar between June and September was as much as $14.1 billion. Overall, the decline in reserves between the end of March 2008 and November 7, 2008 has been $58.4 billion, which is a substantial proportion of the $310-plus billion India had when reserves were at their peak. One factor responsible for the excess of outflows over inflows is, of course, the exodus of foreign institutional investors. But this does not seem to be the whole explanation. Total outflows from equity investments by FIIs between April and November 2008, which is seen as underlying the stock market collapse, amounted to $10.7 billion, or less than a fifth of the decline in reserves during this period. The balance of payments data referred to above, point to a decline in aggregate (direct and portfolio) foreign investment, from $10.1 billion during April-June 2007 to $5.9 billion during April-June 2008, and a decline in foreign debt flowing into the country from $7 billion to $1.6 billion across these two periods. There is sufficient reason to believe that this tendency would have intensified in the period after June 2008.

Further deposit rate cuts only after inflation falls, says IBA (BS 02.12.08)
While asking all members to fall in line and lower interest rates on bulk deposits, Indian Banks’ Association (IBA) said further reduction in term deposits rates for retail customers will depend on a fall in inflation. IBA expects all members to lower rates over the next few days. The cut will help reduce the cost of funds. RBI has said that it expects inflation based on wholesale price index (WPI) to moderate to 7 percent by March 2009 though its comfort level is closer to 5 percent. Recently, inflation has moderated to 8.84 percent.

Home loan firms not to cut rates (BS 02.12.08)
A slew of measures by the Reserve Bank of India (RBI) during the last few weeks may have led to a reduction in home loan rates by public sector banks, but housing financial companies (HFCs) are in no mood to reduce lending rates. HFCs are complaining that the cost of funds is showing no signs of easing as banks are still charging around 12-13 percent, which is higher than the average lending rate of HFCs. “Our interest rates are a function of our cost of funds. We have always passed on the benefit of lower cost of funds to our customers and we will continue to do the same. As of now, we have not seen interest rates coming down even though RBI has taken steps to provide liquidity. The issue today is not of liquidity, but of credit and until it is made available, it would be difficult for anyone to bring down interest rates,” said HDFC Joint Managing Director Renu Sud Karnad.

'We may have to restructure loans to textiles, steel, real estate sectors' (BS 02.12.08)
State Bank of Patiala (SBoP) is the only public sector bank with its headquarters in Punjab. With the financial sector under pressure globally, the State Bank of India (SBI) associate has evolved a strategy to offset the impact of slowdown. SBoP Managing Director A C Verma said, to a certain extent, the slowdown is a correction. Markets were overheated. A correction was indeed the need of the hour. Our exposure to textile and hosiery units based in Punjab is significant. A recession in the US may hit their bottom lines and they may borrow less. After this, steel and real estate may be affected. So, we may restructure loans in these sectors.

Go by local rules to give loans for houses on farm land: RBI (BS 02.12.08)
The Reserve Bank of India (RBI) has asked banks to act on the basis of local rules when sanctioning loans for farmers to build houses on agricultural land. In a circular to the banks today, the central bank has clarified that the directions of gram panchayats and municipal councils will not apply to such houses as they neither sanction plans nor issue completion certificates for the same. The central bank cited the recommendations of the Monitoring Committee, constituted by the Delhi High Court, which clarified that the agricultural land is outside the purview of gram panchayats and municipal councils and hence they have no say in the matter.

Banks queue up for CDs (BS 02.12.08)
Issuance of certificates of deposit (CDs) rose on Monday because banks rushed to raise funds noting the sharp fall in rates of such papers since last week. CD rates have fallen by over 75 basis points since last week in the 3-month segment. Banks placed over Rs 1,400 crore of CDs across various tenures, compared with just Rs 25 crore on Friday and Rs 500 crore on Wednesday.

Nabard sanctions Rs 257 crore for state (BS, ET 02.12.08)
National Bank for Agriculture and Rural Development (Nabard) has sanctioned Rs 257 crore to the Orissa government under the 14th tranche of the Rural Infrastructure Development Fund (RIDF) for 2008-09. The amount has been sanctioned by Nabard to take up construction of 73 minor irrigation projects, three flood control projects, six drainage projects, 25 roads and bridges as well as nine fish/passenger jetties.

OSCB fails to achieve crop loan target (BS 02.12.08)
The Orissa State Cooperative Bank (OSCB) has failed to achieve its crop loan target during the kharif-2008 in the state. The OSCB through its 17 Central Cooperative Banks (CCB) provided only Rs 546.29 crore crop loan to 4,65,251 farmers during this period, which is about 46 percent of the target fixed by the government..

Chidambaram upbeat on growth, fall in inflation (ET, FE 02.12.08)
Outgoing finance minister P Chidambaram expressed confidence on Monday that the Indian economy would grow at a “satisfactory” rate of 7-8% in the current fiscal despite the global economic downturn. “I have explained that there will only be a slowdown in India and not a recession. Inflation will moderate (further) and growth will be satisfactory this year”, he said. The economy grew by 7.8% in the first half of the current fiscal, much in line with the government’s estimate of 7-8% and the central bank’s projection of 7.5-8%.

C Rangarajan may be the next FM (ET, BS 02.12.08)
Rajya Sabha member and former central bank governor Dr C Rangarajan is seen by many officials in the finance ministry as the front runner for the post of the next finance minister. While the possible appointment could not be confirmed from the Prime Minister’s Office, Dr Rangarajan’s appointment looks likely as he is already a member of the Parliament and has been closely involved in financial policy making as the chairman of the Prime Minister’s Economic Advisory Council till August this year. The other candidates for the top job in North Block are Rajya Sabha member and former RBI governor Bimal Jalan and Planning Commission deputy chairperson Montek Singh Ahluwalia.

Finmin starts hunt for RBI deputy governor (ET 02.12.08)
The finance ministry has started compiling names of eligible candidates to replace V Leeladhar, one of the four deputy governors at RBI. He is due to retire on December 5. Chiefs of six public sector banks including Bank of India, CMD T S Narayanasamy, Punjab National Bank CMD K C Chakrabarty and Union Bank of India CMD M V Nair have been found eligible for the post of new DG. However, BoI CMD Mr Narayanasamy is being considered the front-runner for the post as he is the senior most among the eligible bankers. The eligibility criteria would require the candidate to have served for at least one year as the chairman of a public sector bank. The formal process of appointing the DG, however, is yet to start.

State Bank receives ‘best bank’ award (FE 02.12.08)
State Bank of India was adjudged the best bank of 2008 by London based ‘The Banker’ magazine of the Financial Times Group. This award is decided on the basis of intensive research and analysis of financials and performance of prominent Banks, and clearly SBI emerged as the winner and best bank in the country. This year’s annual bank of 2008 awards presentation was held at the Ballroom of The Dorchester Hotel, London on November 26. OP Bhatt, chairman, SBI, received the award from Stephen Timewell, editor-in-chief of ‘The Banker’.

PSBs head for trouble with deposit-lending rates mismatch (FE 02.12.08)
Something unusual of sort is happening in the public sector banks (PSBs). For many nationalised banks, deposits rates have become higher than their lending rates, in some cases by as much as 75 basis points, something that rarely happens. It means that the cost at which banks are raising funds is much higher than the rate at which they are lending. This mis-pricing of risk is apparent in banks like Bank of India, Punjab National Bank and Indian Bank. For other PSBs, the difference between deposit rates and lending rates is either negligible or much lesser than what is used to be before the credit crunch kicked in. The moral suasion from the government that forced banks to cut lending rates also meant that they ignored this apparent difference between cost of funds and revenue they would generate. This also means that the bad assets of banks may rise over time and the net interest margins may come under pressure. “The resetting (of rates) needs to happen. But until private banks reduce their deposits rates, we would be unable to do so,” said a senior banker with a nationalised bank. A senior banker said that one should not read too much into the ‘rackrates’ or the lending rates being quoted by PSBs. “Even if lending rates are lower does not mean they (banks) are lending,” a banking analyst said. Bankers said they are beating this interest rate mismatch through other means. “What we do not get from interest income, we get from fee income. Plus, we restrict the supply by asking customer for a higher upfront of the total loan amount,” another public bank officer said.

Banks up in arms against service tax on govt business (FE 02.12.08)
Banks are in a quandary over the imposition of service tax by the Central Board of Direct Taxes (CBDT) on income out of agency commission on various services being provided by them on behalf of the government. These services include accepting advance payment of tax, pension disbursement and various government payments, which generate income for the banks. In turn, the banks want an increase in the agency commission to compensate the service tax burden in case the government was unable to waive such a tax. A sub-committee will be formed by the IBA to finalise the banks action plan on these issues.

Major rates & parameters as on 01.12.08 (BL, RBI)
Rupee/$
Call Rates
Auction under RBI’s LAF
Govt. Securities (Yield)


Repo
Reverse Repo
8.24% 10-Yr 2018
7.95% 24 Yr- 2032
50.28
6.10-6.15%
Rs 500 Cr
Rs 21,885 Cr
7.05%
7.61%
Nil
Rs 14,680 Cr

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