ECONOMIC BRIEFS – 30.11.08 & 01.12.08
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IOB disburses Rs 20-lakh loans (BL 01.12.08)
The Indian Overseas Bank (Madurai Region), disbursed under differential rate of interest (DRI) scheme for weaker sections, a sum of Rs 20.85 lakh in a function held on Friday. The bank signed a MoU with the Development Promotion Group (Chennai) for the identification of the beneficiaries and extended the loan to 180 beneficiaries covering various activities such as keeping petty shops, vegetable/fruit vendors, idly shops, and tailoring.
Yields head south as inflation, oil prices continue to slide (BL 01.12.08)
Bond yields moved further south as inflation continued to retreat and global oil prices maintained their unimpeded slide. Traders said that firm bond prices (soft yields) were also fuelled by large deposit inflows into the banking system. Banks have been seeing deposit inflows of at least about Rs 4,000 crore per day. The deposit inflows were largely from investors fleeing from the equity markets. The deposit inflows, in turn, triggered a demand for government securities from banks to maintain the mandated Statutory Liquidity Ratio (SLR) of 24 per cent. Traders said that the demand was also triggered by the Reserve Bank of India’s refusal to agree to bankers’ request to make subsidy and other public sector bonds eligible for SLR. Such a move would have released at least Rs 1.5 lakh crore of liquidity. Liquidity, however, tightened slightly during the week, largely on account of the outflows by foreign institutional investors and high credit demand. Recourse to the repo window amounted to Rs 12,250 crore. But, some liquidity surplus public sector banks also parked Rs 7,000 crore in the reverse repo window. The temporary liquidity surplus was partly on account of the certificate of deposit (CD) floats by some banks. During last week alone Rs 1,000 crore of CD resources were raised by banks, stimulating a demand for government securities. Some of the resources were also parked in Treasury bills. As a result, at the weekly T-Bill auctions, the cut-off yield on the 91-day fell to 7.14 per cent down 17 basis points over the previous week. The weighted yield dropped to 7.10 per cent or 16 basis points over the previous week. The preference for long dated securities reflected in the ten-year Yield to Maturity (YTM) that dipped to 7.16 per cent on a weighted average basis from 7.24 per cent last week. Besides, credit demand remained high. The Vijaya Bank Chairman and Managing Director, Mr Albert Tauro, said, “If this (credit) demand continues, liquidity may not be sufficient for sustaining the credit flow.” Corporates, unable to access foreign credit lines, continue to draw down on domestic lines, keeping rates high. Spreads between Triple A and sovereign papers were about 600 basis points. For the immediate requirements the preference was for short-term resources through CDs . Some of the new 90-day CD floats were done at rates as low as 9 per cent. Bankers anticipate that these funds could be refinanced with even lower rates in the coming weeks, as reverse disintermediation gathers pace. For pushing the rates down, banks looked towards the RBI for overcoming the approaching tight liquidity.
‘RBI alone should take final decision on M&As among banks’ (BL 01.12.08)
The Reserve Bank of India (RBI) alone should take the final decision on allowing mergers and acquisitions (M&As) between banks, and the opinion of the Competition Commission should be made available as an input to the central bank. This is the view of an advisory panel appointed by the committee on financial sector assessment (CFSA), to look at financial sector stability. In September 2006, the Government and the RBI had constituted the CFSA to undertake a self-assessment of financial sector stability and its development. Before entering into any M&A, the entities involved in the transaction have to give notice to the Commission and wait for a maximum period of 210 days. “Waiting for the mandatory 210 days would be impractical,” sources in the advisory panel said. “The flexibility available with the RBI in permitting M&As may get weaker under the provisions of the Competition Act. It is being felt that RBI’s powers should not get diluted or weakened and the current status must continue,” sources said.
Nabard credit plan for Tirunelveli (BL 01.12.08)
The Potential Linked Credit Plan (PLCP) for Tirunelveli district has envisaged an outlay of Rs 1,689.84 crore for 2009-10. The Nabard prepared plan has provided an allocation of Rs 437 crore for crop loan, Rs 203 crore for agriculture term loan, Rs 220 crore for non-farm sectors and about Rs 800 crore for other priority sector.
Credit plan for Virudhunagar (BL 01.12.08)
The Annual Credit Plan for Virudhunagar district envisages a credit outlay of Rs 1,785.65 crore for the year 2009-10. The plan provides Rs 450.22 crore for agriculture and farm-related industries, Rs 1,007.58 crore for non-farm sector and Rs 284.84 crore for priority sector.
Mumbai attacks bring to fore inadequacies in terrorism cover (BL 01.12.08)
Terrorist attacks on the Trident Oberoi and Taj hotels and the Nariman House in Mumbai have brought to the fore the limitations of the existing terrorism pool in that it does not insure public liability and personal accident. The terrorism pool, which has a corpus of about Rs 1,000 crore, at present insures only damage to property. The Mumbai attack is on private property and the loss arising from public liability (liability of the hotel towards the guests and visitors in it) and personal accident may be larger as the damage to properties of Trident Oberoi and Taj hotels will be paid by insurers from the terrorism pool.
Citigroup may sell NikkoCiti trust banking unit in Japan (BL, ET 01.12.08)
Struggling Citigroup Inc plans to sell NikkoCiti Trust and Banking Corp, its trust bank unit in Japan, as part of its global restructuring efforts in a deal that could raise up to 40 billion yen ($420 million). Major Japanese trust banks such as Mitsubishi UFJ Trust and Banking Corp, a subsidiary of Mitsubishi UFJ Financial Group, Sumitomo Trust & Banking Co and Mizuho Trust & Banking Co are likely to make bids for the Citigroup unit.
PM holding Finance may boost market sentiment (BS 01.12.08)
Prime Minister Manmohan Singh taking charge of the finance ministry as well as positive cues from global markets may boost the sentiment on Dalal Street, said analysts. “The market should bounce back. Prime Minister has a proven track record of being a good finance minister and with the UPA top guy Chidambaram taking over the home ministry, the investors’ confidence will improve,” Taurus Mutual Fund MD R K Gupta said.
FDI cap increase may bring in Rs 7,000 cr to insurance sector (BS 01.12.08)
The Union Government’s recent approval to the insurance Bill, which proposes, among other things, to raise the cap on foreign direct investment (FDI) to 49 per cent from 26 per cent for private sector insurance companies, is expected to bring around Rs 7,000 crore into the industry, according to industry representatives. However, the Bill is yet to be introduced in Parliament. Currently, the insurance industry has a total FDI of around Rs 2,500 crore. The expected inflow is likely to create 3 lakh jobs in the sector as more companies are planning to use the additional funds mainly to execute their expansion plans. Given that life insurance is a capital intensive industry, this move will help insurers access larger international capital over a period of time, said N S Kannan, executive director, ICICI Prudential Life Insurance.
Terror insurance premium to rise (BS 01.12.08)
With terror attack claims likely to wipe out over 70 per cent of the Rs 700-crore terror pool, insurers are expected to chip in with additional funds to replenish the corpus and raise the premium paid for terrorism insurance. According to initial industry estimates, insurance companies will take a hit of over Rs 500 crore on account of the Mumbai terror attacks. Most of the claim will be settled using the terror pool. These estimates may, however, be revised after full assessment of the damage is carried out.
RBI may take lead on rates after FM’s exit (ET 01.12.08)
The impact of the change in guard in North Bock may well be felt in the country’s financial sector. With P Chidambaram set to take over as the new home minister, there is a perception that the Indian central bank may gain more breathing space while making policies. For the state-owned banks too, the new ministerial change could come as a breather. The chiefs of state-owned banks have often faced pressure to keep the lending rates low given the repeated doses of moral suasion administered by the finance minister. Such pressures may ease now.
Market expects speedier, steeper rate cuts (ET 01.12.08)
RBI may be forced to cut interest rates earlier than planned and more aggressively than previously hoped, as it comes under pressure to navigate an already faltering economy away from the turbulent economic aftershocks of the Mumbai terror attacks. Much like the 9/11 attacks in the US in 2001, hastened the easing of the monetary policy stance, many in the market are expecting RBI to adopt a similar response to what many are calling India’s version of 9/11. “Declining inflation and increased downside risk to growth hint that another round of easing by the central bank is imminent. However, the Mumbai attacks could prompt RBI to announce a bigger cut than the 50-basis point we had expected prior to the attacks,” said Rajeev Malik, chief economist with Macquarie Securities in a research report. The market is already betting on this. Overnight interest rate swaps, a derivative product commonly used by traders to express a view on interest rates, are trading at a 5-year low, suggesting rate cuts are imminent.
Pvt life insurers seek refuge in govt bonds (ET 01.12.08)
Private life insurance majors, such as Max New York Life (MNYL), MetLife, Aviva and DLF Pramerica, are increasingly shifting their focus from equity markets and corporate bonds to central government securities (g-sec) amidst global economic uncertainty. The shift is likely to hit fund raising of companies as life insurers invest about Rs 100,000 crore every year in various investment instruments, such as bonds and share markets. They generate about Rs 100,000-crore assets every year as part of their standard premium collection. While life insurance firms are required to invest 50% of total assets in g-secs, they are planning to raise their exposure in the segment up to 75%, leaving very little for equity markets and corporate bonds. “From the standard portfolio, we plan to invest about 75% of the new premium earning in central government securities,” MYNL senior director and CFO Sunil Kakar said. Though there are no stipulation on mandatory investment from Ulip products, insurance companies are playing safe and have increased their investment in g-secs from the Ulip portfolio also. For instance, MYNL has increased the ratio of investment in g-secs from their Ulip portfolio to about 8% by October-end from about 5% in the beginning of the year. Aviva has also followed the trend.
Business as usual for bankers (FE 01.12.08)
Business is as usual for the bankers after the terrorist attack kept the entire city under its siege for nearly 60 hours. At least two state-run banks including Central Bank of India and Andhra Bank were supposed to hold their board meetings at the Trident Hotel, which was kept under siege by the terrorists for more than 46 hours. Though their boards couldn’t meet in the hotel premises as per their plans due to the sordid episode that followed, the bankers are firm that they will continue to hold significant meetings in Mumbai, whenever the need arose so. While Ashok Kapur, non-executive chairman of private lender, Yes Bank, died in the terrorist attack in the hotel, CM Puri, the workman director of the state-owned Central Bank of India, was injured in the incident at the same hotel while two other government-nominated directors of the banks, who had also checked in to the hotel immediately before the episode began, escaped unhurt. Similar was the case with the two general managers of the Hyderabad-based Andhra Bank who had also checked into the hotel hours before the incident took place. However, after being held as hostage by the terrorists for more than 24 hours, their ordeal came to an end and they headed towards Hyderabad by the earliest available flight on November 27.
‘Liquidity not a constraint for economic growth’ (FE 01.12.08)
The government and the Reserve Bank have made a slew of rate cuts to infuse adequate money into the market. Alok K Misra, CMD, Oriental Bank of Commerce, spoke on the effects of these mesures on the country’s banking system – "The Government of India and the Reserve Bank of India are taking prompt steps to ensure the availability of adequate liquidity to all the productive sectors of the economy. Surely, the demand for bank credit will continue, especially with the onset of the busy season. But I am very confident that liquidity will not be a constraint for the growth of the economy."
Banks to deploy gunmen, go for hi-tech gadgets (BL 30.11.08)
Gaining entry into the corporate headquarters of banks in Mumbai could prove to be a bit of a hassle soon. Following the terrorist assault on five-star hotels, major banks in the city have decided to tighten security. From not allowing outside vehicles inside the building precincts to installing CCTV cameras to frisking, further security measures are in the works. State Bank of India, which has its Head Office in the central business district of Nariman Point, has decided to step up security further. As part of the new security drill, all people entering the bank’s premises will have to get their identity verified at the outer gate itself, and not after they reach the reception. Outside vehicles, including cabs ferrying employees, will not be allowed entry. IDBI Bank, which has its Head Office in the World Trade Centre complex, plans to beef up its security further. Chander Mukhi building, Central Bank of India’s corporate office, already has CCTV within the building, guards on each floor in two shifts and adequate security at night. Similarly, Union Bank of India is planning to install an X-ray baggage scanner for which the purchase process has already begun. The bank is also planning to deploy armed guards, at its corporate office in Nariman Point.
Banks' support to kin of victims (BL, FE 30.11.08)
As a mark of respect to police, army and bank personnel killed in the terrorist attacks, some banks have said they will offer token cash and jobs to their families. Saraswat Co-operative Bank has offered to give jobs to one member of the immediate families of the police officers and constables and Union Bank of India has decided to donate Rs 1 lakh each to the family of every National Security Guard, marine commandos, Mumbai police and defence personnel who gave their lives in the operation.
RBI steps in to improve credit flow to exporters (BL 30.11.08)
The RBI, in a statement said, in view of the difficulties being faced by exporters on account of the weakening of external demand, the period of entitlement of the first slab of post-shipment rupee export credit, currently available at a concessional interest rate ceiling of benchmark prime lending rate (BPLR) minus 2.5 percentage points, would be extended from 90 days to 180 days with effect from December 1, 2008. Banks have been allowed to avail liquidity support under the Liquidity Adjustment Facility (LAF) through relaxation in the maintenance of Statutory Liquidity Ratio to the extent of up to 1.5 per cent of their Net Demand and Time Liabilities (NDTL) for the purpose of meeting the funding requirements of Housing Finance Companies also. Earlier, banks could meet the funding requirements of only non-banking finance companies and mutual funds under this arrangement. Further, the RBI, which is presently providing forex liquidity to Indian public and private sector banks having foreign branches or subsidiaries, through forex swaps of tenors up to three months, has decided that this facility, which is available on request, will be made available up to June 30, 2009.
Governments guarantee a must for capital flows: Doha Bank chief (BL 30.11.08)
The only solution to the current global financial meltdown and the consequent global economic growth is political consensus on economic reform, says Mr Raghavan Seetharaman, Chief Executive Officer – Doha Bank group, Doha, Qatar. Mr Seetharaman wants India to ginger up liberalisation of financial markets, making way for free inflow of global capital.
Citi rescue package terms ‘lenient’ (BL 30.11.08)
Global banking giant Citigroup, had earlier received a $25-billion capital injection via preferred stock by the US Treasury. This time around, the US Treasury will infuse $20 billion in 8 per cent preferred stock under the Troubled Asset Relief Program. The next step is a Government guarantee on a portfolio of $306 billion of securities, loans, and commitments, which are backed by residential and commercial real estate and other assets as agreed by the US Government. Citi will issue an additional $7 billion in preferred stock to the Treasury ($4 billion) and the Federal Deposit Insurance Corp (FDIC, $3 billion), bringing the total equity infusion to $27 billion. The guarantee is for 10 years on residential assets and for 5 years on non-residential assets. The capital injection measure is estimated to pull the Tier I capital adequacy ratio to 14.8 per cent, more than twice the requirement. It is also expected to allow more time for Citi to shed assets, control costs and streamline its business to rein in its huge losses stemming from toxic debt.
Lull in home loan refinancing (BL 30.11.08)
Banks taking over home-loans from housing finance companies, or vice versa, are not uncommon. But a lull appears to have set in with borrowers thinking twice about incurring foreclosure charges and processing fees all over again and lending institutions too not enthusiastic about such takeovers. The situation was different two years back, when the interest rate was going uphill and borrowers, especially those that opted for floating rate of interest, sought a change to fixed rates, fearing a rise in their monthly outgo. But those who have borrowed from tech-savvy private banks, seem to be waiting for an opportunity to shift their loans to housing finance companies or public sector banks. SBI sources say that there have not been many takeover accounts in recent months.
Source BL= Business Line, BS=Business Standard, ET=Economic Times & FE=Financial Express