ECONOMIC BRIEFS – 07.12.08
* * * * *
RBI signals cheaper loans (BL, BS, ET 07.12.08)
Sending a clear signal to banks to reduce lending rates and advance more credit to productive sectors, the Reserve Bank of India on Saturday cut its key short term rates – the repo and reverse repo – by one percentage point each. Leaving other key ratios such as the CRR (cash reserve ratio) and SLR (statutory liquidity ratio) unchanged, the RBI cut repo to 6.5 per cent from 7.5 cent and the reverse repo to 5 per cent from 6 per cent from December 8. The revision in reverse repo comes after a gap of almost two-and-a-half years, the last being a hike by 25 basis points in July 2006. Reduction in reverse repo is to encourage banks to lend more to the productive sector rather than parking their surplus funds with RBI. However, banks, which had reduced their lending and deposit rates last month after the first round of rate cuts by the RBI, appear unprepared for another cut immediately, some of them claiming they needed a “cooling off” period. The RBI Governor did note, “Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity. Admittedly, there is some risk aversion and there is a tendency among banks to maintain more than adequate liquidity.” In view of the need to enhance credit delivery to the employment-intensive micro and small enterprises (MSE) sector, the RBI has decided to provide refinance to the tune of Rs 7,000 crore to SIDBI. The facility will be available at the prevailing repo rate under the LAF for a period of 90 days. During this 90-day period, the amount can be flexibly drawn and repaid. At the end of the 90-day period, the drawal can also be rolled over. This refinance facility will be available up to March 31, 2010. The RBI is also working on a similar refinance facility for the NHB amounting to Rs 4,000 crore. In view of the difficulties faced by exporters on account of the weakening of external demand, the RBI said the prescribed interest rate as applicable to post-shipment rupee export credit (not exceeding BPLR minus 2.5 percentage points) would now be extended to overdue bills up to 180 days from the date of advance of the loan.
Foreign convertible bonds buyback with rupee resources allowed (BL, BS 07.12.08)
Indian companies can now pre-pay their existing foreign currency convertible bonds (FCCBs) from their rupee resources in addition to their foreign currency accruals. The guidelines for pre-payment/buyback of FCCBs by Indian companies, issued by the Finance Ministry on Saturday, coincided with the Reserve Bank of India Governor, Dr D. Subbarao’s announcement in Mumbai of growth stimulus measures. The Finance Ministry has in its guidelines specified that the provision of pre-payment (premature purchase) of existing FCCBs would be available up to March 31, 2009. Also, the existing condition of minimum maturity period for redemption of bonds has been put on hold till March 31, 2009. For buyback allowed under the automatic route out of foreign currency funds raised through fresh ECBs, it has been stipulated that the all-in-cost ceiling should not exceed 6 months LIBOR plus 200 basis points, if the fresh ECBs are co-terminus with the residual maturity of the original FCCBs but is less than three years. Also, there should be a minimum discount of 15 per cent on the book value. In the case of approval route, Indian companies can buyback out of rupee resources, representing internal accruals, so long as the amount does not exceed $ 50 million of the redemption value of the FCCB per company and a minimum discount of 25 per cent on the book value.
RBI sees inflation rate below 7% by year-end (BL 07.12.08)
The Reserve Bank of India expects the year-end inflation figures to be significantly lower than the seven per cent projected earlier. Headline inflation, as measured by the wholesale price index, has declined in the past four weeks owing to falling commodity prices and slowing domestic demand. “Inflation would be significantly lower than the seven per cent projected earlier as the decline in inflation from the October policy announcement has been sharper than what we had anticipated,” said Dr D. Subbarao, Governor, RBI. For the week ended November 22, India’s annual inflation rate stood at 8.4 per cent, as against 8.84 per cent in the previous week. Inflation had touched a peak of 12.91 per cent in August this year driven by high commodity and fuel prices. The reduction in prices of petrol and diesel announced on Friday should also further ease inflationary pressures.
Rate cuts soon, say banks based in Mangalore (BL 07.12.08)
Bankers in Mangalore view the growth stimulus measure, which was announced by the Reserve Bank of India (RBI) on Saturday, as a positive thing for the entire economy. Mr J.M. Garg, Chairman and Managing Director of Corporation Bank, told that the growth stimulus measure will help banks to lend more. Asked about the rate cut by the bank, he said: “We will have our meeting soon and take a decision shortly as to what needs to be done. We will have to act quickly as signalled by the RBI. We will do that. I am sure that all other banks will do that.” Reduction in repo and reverse repo rates will put pressure on the banks to reduce the interest rate. So both lending and deposit rates will come down. This will, in turn, help the industry as well as investment climate in the country. It is a positive factor for the economy, he said. On the measure announced to the real estate sector, Mr Garg said this measure has been again a relief to the real estate sector, which was reeling under slowdown and high cost of funds etc. Other measures announced today will help boost the growth of micro and small enterprises and housing sectors, he added. Terming the stimulus measures an expected move, Mr Ananthakrishna, Chairman and Chief Executive Officer of Karnataka Bank Ltd, said that this will help in credit expansion. Opining that there could be rate cuts in banking system, he said Karnataka Bank will take a decision on rate cut after its meeting next week.
SBI waits for stimulus package (BL, FE 07.12.08)
"A general reduction in interest rates on assets and liabilities cannot be ruled out following RBI’s latest measures. We will take stock of the situation arising out of these measures. We will weigh the impact of our action in this regard on millions of our depositors and also take into account the stimulus package that the government will be announcing tomorrow before taking rate action,” said a senior SBI official.
SBH likely to further soften rates (BL 07.12.08)
Ms Renu Challu, Managing Director, State Bank of Hyderabad, said the reduction in repo and reverse repo rates by RBI is a good signal that interest rates should soften further. “This will facilitate better refinancing to the banks by NHB and SIDBI, among others, and boost credit to sectors such as housing if the builders are willing to reduce the prices. While the credit for productive sector is already progressing well, it can now grow further. We, at SBH recently announced cut in interest rates and they will further soften in due course,” she said.
PNB to review interest rates in January (BL 07.12.08)
The Punjab National Bank will review its lending and deposit rates in January, its Chairman and Managing Director, Dr K.C. Chakrabarty, said. “I had already anticipated the reverse repo and repo rate reduction from the Reserve Bank of India and announced PLR cut of 100 basis points with effect from December 1. Now I can’t be changing my interest rates every day. We will review rates in January,” Dr Chakrabarty told. In the last week of November, the bank had also decided to reduce its peak deposit rate from 10.5 per cent to 9.5 per cent for deposits of one year to less than three years.
‘Banks will make credit affordable’ (BL 07.12.08)
"RBI steps on short-term interest rates, regulatory forbearance for the commercial real estate and viable units facing cash flow problems, SMEs, HFCs, exports, etc are pragmatic and in line with the needs of the economy. The cut in repo and reverse repo rates are related to short-term liquidity. As for affecting a cut in deposit and lending rates, we’ll have to see. The regulator has been forthcoming. So, banks will align rates to make credit affordable and make a difference to borrowers,” said Mr T.S. Narayanasami, Chairman & Managing Director, Bank of India.
IDBI to cut deposit rates (BL 07.12.08)
The IDBI Bank Chairman and Managing Director, Mr Yogesh Agarwal, said his bank would be cutting deposit rates by 100 basis points next week. “The RBI has sent a strong signal for reduction in interest rates. As for lending rates, we are ahead of the curve. We reduced our BPLR by 75 basis points about a month back. However, there will be sectoral adjustment in lending rates so that cost of funds comes down for borrowers,” he said.
Karur Vysya to reduce BPLR (BL 07.12.08)
The Managing Director of Karur Vysya Bank, Mr P.T. Kuppuswamy, said the cut in the policy rate was on the cards and it was no surprise. “We have decided to reduce the BPLR rate by 50 basis points to 15.25 per cent with effect from December 15,” he said. He ruled out any further cut below this level for the present. “Around 75 to 80 per cent of the advances are below BPLR. The proposed reduction of 50 basis points would exclude those to who we have lent at sub-PLR,” he said
South Indian Bank ‘to wait & watch’ (BL 07.12.08)
Dr V.A. Joseph, Managing Director of South Indian Bank (SIB), said the stimulus package would help reduce the cost of deposit as also bring down the lending rate. SIB would, however, ‘wait and watch’ the bigger banks move the coin before taking a call on this.
Yes Bank to cut rates by 50 bps (BL, FE 07.12.08)
Yes Bank has decided to cut its PLR by 50 basis points to 16.50 per cent from December 8. Mr Rajat Monga, President, Financial Markets and CFO, Yes Bank, said the time was appropriate and the environment conducive to translate the monetary policy signals into lowering its lending rates to customers. The bank has preferred to retain the one to two year fixed deposit rate at the prevailing 10.75 per cent/annum
Enabling bankers to support borrowers (BL 07.12.08)
The reduction in repo and reverse repo rate are welcome measures to meet the objectives of maintaining adequate liquidity and financial stability as well as conditions conductive to economic growth, according to Ms Chanda Kochhar, Joint Managing Director, ICICI Bank Ltd.
‘Markets have discounted RBI measures’ (BL, BS 07.12.08)
Officials at broking firms and mutual funds do not appear too enthused by the interest rate cuts and other monetary measures announced by the RBI on Saturday; the stock markets having factored this in earlier. “All the new norms have already been discounted by the markets,” said Mr Gaurav Dua, Head of Research, Sharekhan Ltd. On Thursday, the Sensex and Nifty gained around 5 per cent each on expectations of both interest rate cuts by RBI and a stimulus package for industry from the Union Government.
Relief to both developers and home buyers (BL, BS 07.12.08)
According to the present guidelines, restructuring of standard loans offered to commercial real estate would reduce such exposure to a ‘sub-standard asset’. RBI’s move now, allows such restructured loans to continue as a standard asset. This measure is available for all commercial real estate exposures for banks, which are restructured up to June 30, 2009. Given the present liquidity crunch, the relief offered would help real estate companies direct precious funds into completion of projects. Further, their credit worthiness would not be affected as their borrowing would continue to be classified as standard. The RBI has also decided to classify loans granted by banks to housing finance companies for further lending to home buyers as priority sector lending. This is applicable provided the loan taken is less than Rs 20 lakh. This package is, however, available only for loans granted by banks up to March 31, 2010.
Micro and small enterprises get a lifeline (BL 07.12.08)
As the banks are going slow on lending to micro and small enterprises (MSEs), the RBI has opened a Rs 7,000-crore refinancing facility for 90 days to SIDBI which will help SIDBI-funded MSEs, directly and indirectly. Bank exposure to MSEs may thus be less risky, as it is routed through SIDBI.
SEZs await apex bank decision on ‘infrastructure’ status (BL 07.12.08)
The Empowered Group of Ministers (eGoM) is in favour of classifying special economic zones (SEZs) under ‘infrastructure’ projects with the objective of bringing about flexibility in external commercial borrowing (ECB) norms. As most SEZs now face liquidity crunch hampering their investment plans, this move is seen to be helping them raise funds from different sources. The matter is under active consideration of Reserve Bank of India and a favourable decision will be taken soon, according to Mr Lalit B. Singhal, Director-General Export Promotion Council for EOUs & SEZs.
Alternatives to FDs (BL 07.12.08)
Income funds are debt funds that primarily invest in bonds, debentures, Government securities and short-term instruments, such as commercial papers and repos. They invest in debt instruments of various maturity periods. The current anticipated downtrend in interest rates is a good opportunity for investors to allocate a portion of the portfolio to this product. The funds are highly prone to interest rate risk, though in the long-time horizon, it may iron out the risk. Gilt Locking into debt instruments with longer maturity periods would help deliver higher yields. As interest rates cool off, the yield of these gilt funds could move northwards. FMPs are closed-ended debt funds that buy bonds/debentures and other debt instruments and hold them to maturity. FMPs are the closest to fixed deposits and are for a specified term. The key behind choosing FMPs over FDs is the tax efficiency. Appreciation in the NAV of the debt funds are treated as capital gains. Long-term capital gains are taxed at 20 per cent after indexing (for cost inflation index) or 10 per cent flat.
Draft norms for securitisation cos on dues realization (BL 07.12.08)
The Reserve Bank of India in its Draft Guidelines on change in or takeover of the management of the business of the borrower by Securitisation Companies (SC) or Reconstruction Companies (RC) issued on Friday said SCs/RCs could change or takeover the management of borrower business for the purpose of realisation of dues under SARFAESI Act when the amount due to the them from the borrower is not less than 25 per cent of the total assets owned by the borrower. Further, the SCs/RCs could also press for a change in or takeover of the management of the business of the borrower where the borrower is financed by more than one secured creditor (including SC/RC), secured creditors (including SC/RC) representing not less than 75 per cent of the total secured debt agree to such action.
Inflation no cause for worry any more, say economists (BL 07.12.08)
Leading economists are of the view that inflationary expectations have ‘moderated considerably’ to a point where headline figures ‘have ceased to become a cause of worry’ for policymakers. Chief Economist, HDFC Bank, said that consensus market view was that inflation would come down to three per cent or even below by March 2009. This is a significant improvement on stated Reserve Bank target of seven per cent or below.
IRDA seeks investment details from insurers (BL 07.12.08)
The Insurance Regulatory and Development Authority (IRDA) has asked all insurance companies to furnish the details of investments made by them during the last three months. As the “safety and prudence as enshrined in the recently amended Investment Regulations should be ensured” it asked all the insurers to declare all investments (other than Government of India securities) made during September, October and November on or before December 15. Further, the insurers are also required to file with the Authority internal norms to be adhered by the investment department in approving debt/debenture/equity/loan/other investments, as approved by the board or investment committee before December 8.
Banks to cut rates (BS, ET, FE 7.12.08)
Taking a cue from the Reserve Bank of India, banks are likely to lower lending rates by 50-75 basis points and deposit rates by up to 100 basis points in the coming weeks. Yes Bank made the first move by announcing a 50-basis-point reduction in its benchmark prime lending rate, or BPLR, bringing it down to 16.5 per cent with effect from Monday. An Axis Bank executive said the bank would first look at a 25-50-basis-point reduction in deposit rates before taking a call on the BPLR. Oriental Bank of Commerce said it might cut lending and deposit rates by 50 basis points. Punjab & Sind Bank is likely to cut deposit rates by 50-75 basis points. “The signal from RBI is that banks should start lending aggressively to support economic activity. We will take a call on the interest rate after watching the moves of other banks,” said Corporation Bank Chairman & Managing Director J M Garg.
Home loan firms hint at rate cut (BS 7.12.08)
Housing finance companies (HFCs) are contemplating a cut in their prime lending rates (PLRs) following the latest measures of the Reserve Bank of India. HFCs see RBI’s measures reducing their cost of funds on two counts. First, with the 100-basis point cut in the repo rate, general funds from banks will be cheaper. Second, the central bank’s move to raise the cap on loans granted by banks to HFCs for on-lending to individuals for purchase or construction of houses is set to ease the credit flow to HFCs. RBI increased the limit on loans from banks to HFCs under the priority sector from Rs 5 lakh to Rs 20 lakh.
Helping builders, SMEs & manufacturers: (ET 7.12.08)
The rate cut is backed by measures targeted at various sectors that have been hit hard by the global downturn and a bearish market. For instance, the RBI has opened up a Rs 7,000 cr refinance window to enable greater flow of credit to micro and small enterprises. The troubled realty sector will also get a breather with the RBI extending up to June 30, 2009, concessional treatment to commercial real estate loans, which have been restructured. This would allow banks to give builders more time to repay the loans. More significantly, banks will now be able to carry out a second restructuring of loans given to manufacturing companies. The move will benefit sectors such as textiles, steel and cement, among others. Activities to promote comparatively less expensive houses may also get a boost. If a bank refinances a home loan of up to Rs 20 lakh given by a home finance company like HDFC or LICHF, then the bank can consider showing such lending as part of its priority sector target. Till now this limit was Rs 5 lakh.
Indian growth story still intact: Citi (ET 7.12.08)
Financial major Citi feels that the pressure could ease slightly from the next fiscal when trade deficit is expected to come down. It mentions that while India growth story is not over, the growth would be lower and the currency would remain weak. The foreign financial major feels that India would gain from fresh hydrocarbon discoveries despite a likely 5% contraction in exports. It is also of the view that India has sufficient reserves to manage possible outflows. On a positive note, India has sufficient reserves to finance even a worst-case situation of all possible outflows, it adds. According to Citi, India’s combined fiscal deficit for FY09, including all below-the-line items, is likely to come in at 8.6% of GDP, compared to around 6% during the previous year.
RBI steps good but not enough: India Inc (FE 7.12.08)
Unsatiated by the policy steps announced by the Reserve Bank of Indiay, India Inc said the package on rate cuts and steps for boosting housing and small and medium industries was not enough and pegged its hopes on the government for more stimulants.
RBI measures: D-street may get a boost (FE 7.12.08)
"The RBI's step of reducing both repo and reverse repo rates by 100 basis points is in line with the market expectations. It was expected consequent upon sharp reduction in inflation over the last few weeks and the desperate need for kick-starting the process of providing stimulus for growth," Reliance Money CEO Sudip Bandhyopadhyay said.
ICICI's home loans of Rs 20-lakh cheaper by 1.5%(FE 7.12.08)
Private sector lender, ICICI Bank, has reduced its interest rate for home loans of Rs 20-lakh and below to 11.5 per cent. This cut will, however, be applicable for only new home loans, the spokesperson said.
French mutual bank buys German Citibank (FE 7.12.08)
French mutual bank CM-CIC on Friday said it was buying Citibank Germany, which has a market share of over 7 per cent in Europe's largest economy, allowing it to expand it a neighbouring country. Citigroup said the French bank was paying 5.2 billion euros ($6.65 billion) in cash and it would make an after-tax gain of some $4.0 billion. The deal was first announced in July. CM-CIC said Citibank Deutschland has 3.25 million clients.
Source BL= Business Line, BS=Business Standard, ET=Economic Times & FE=Financial Express