ECONOMIC BRIEFS – 08.12.08
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Govt cuts excise duty, offers sops for key export sectors (BL, BS, ET, FE 08.12.08)
In a bid to minimise the impact of the global economic slowdown on the Indian economy, the Government on Sunday unveiled a “multi-dimensional” fiscal stimulus package that is expected to help boost output across sectors and stoke growth. The measures include an additional Plan expenditure of up to Rs 20,000 crore this fiscal, an estimated excise duty give-away of Rs 8,700 crore, a 2 per cent interest subvention for the labour-intensive export sectors and steps for improving the financing environment for infrastructure projects. On the excise duty front, the Government has effected an across-the-board cut of 4 percentage points in the ad-valorem cenvat for the remaining part of the current fiscal on all products other than petroleum and those where the current rate was below 4 per cent. Prior to the latest change, the three main ad-valorem excise rates applicable on non-petroleum products were 14 per cent, 12 per cent and 8 per cent. India Inc had urged the Government to reduce excise duties when the latter had exhorted corporates to cut prices of finished products to tackle demand slowdown. On infrastructure front, India Infrastructure Finance Company Ltd (IIFCL) has been authorised to raise Rs 10,000 crore through tax-free bonds by March 2009 and the proceeds to be used to refinance bank lending of longer maturity to eligible infrastructure projects, particularly in the highways and ports sectors. For exporters, the Government has given 2 per cent interest subvention on both pre and post shipment credit for labour intensive export sectors namely textiles (handlooms, carpets and handicrafts), leather, gems and jewellery, marine products and the SME sector. This subvention will be available till March 2009, subject to a minimum rate of interest of 7 per cent a year. On housing, Mr Ahluwalia said that public sector banks would shortly announce a package for borrowers of home loans in the two categories of up to Rs 5 lakh and Rs 5-20 lakh.
G-secs to stay in favour despite RBI rate cuts (BL 08.12.08)
Bond yields headed further south as banks rushed to buy up securities anticipating a reduction in the Reserve Bank of India’s policy rates. Traders said bonds were also buoyed by the surge in deposits and falling international oil prices. Bank deposit accretions are currently taking place at about Rs 4,000 crore per day. Time deposits this year have surged by 16 per cent this year as a result. During the corresponding period of last year, the growth was just 13 per cent. The slight dip in credit off take also helped bonds. Several large corporates held back from drawals from their credit lines in anticipation of week-end rate cuts. This translated into recourse to the Reverse Repurchase window at the week-end Liquidity Adjustment Facility (LAF) auction, which touched Rs 45,095 crore. The liquidity build-up was despite the continued Foreign Institutional Investor exit from emerging markets including India. FIIs exited from equities and several of them moved into government securities to pick up gains once bond prices rose. FII debt purchases last week amounted $221.3 million. Since the outflows were also limited, exchange rates held firm at Rs 49.69 to the dollar as against last weekend’s level of Rs 49.84. Forward premia also retreated, as refineries that had already covered their exposures. Liquidity appeared comfortable, evident from the drop in call money rates to below the reverse repo rate of 6 per cent. Besides the cut off yields at the weekly Treasury Bill auctions dropped sharply. The cut-off yield on the 91-day T-Bill was 6.58 per cent, a drop of 56 basis points over the previous week. The weighted yield was down to 6.52 per cent. But the 364 day T-bill yield movement was a pointer to sliding interest rates. The yield on the 364-day T-bill was 6.3 per cent or just 30 basis points over the prevailing reverse repo rate of 6 per cent. The 10- year yield to maturity also followed this pattern dropping to 6.89 per cent, down from the previous week’s level of 7.16 per cent. Traders’ expectations were confirmed when towards the week-end, the RBI snipped 100 basis points of the reverse repo to 5 per cent and the repo rate to 6.5 per cent. At least Rs 2,000 crore was raised through one year CD, as corporates moved to banks even at rates as low as 9 per cent. But yields could drop further in view of retreating global oil prices.
SMEs face difficulties in getting bank loans (BL 08.12.08)
Small and medium enterprises are feeling the heat of the slowdown and are facing difficulties in accessing credit from banks, according to industry experts. While the real impact of this ‘caution’ on the part of the banks is yet to be felt in a significant way, there is an early signal to what could be in store for SMEs in days to come as far as availability of credit is concerned, according to Mr Gurumurthy, Project Director, German Technical Corporation (GTZ), which liaisons between the SMEs and banks for credit. Mr D.E. Ramakrishnan, President of Industrial and Financial Reconstruction Association for Small and Tiny Enterprises (IFRASTE), and Member of the National Board for Micro, Small and Medium Enterprises, Ministry of MSME, said: “The issue in extending credit to SMEs seems to be one of the fear of the unknown as currently liquidity per se is not a problem.” The banks, however, say that it pays to be prudent in current economic scenario. “Some export-oriented units and the SMEs which are vendors to some majors are facing some problems. Their cash flow gets affected; their ability to repay too would be impacted ,” said an official of HDFC Bank.
Mass dharna by co-op bank staff today (BL 08.12.08)
The Tamil Nadu Cooperative Bank Employees Association (TNCBEA) has given a call for a mass dharna on December 8 at Park Town in Chennai to reiterate its demand, which among others include provision of pension to the retired cooperative bank employees numbering about 6,000, restoration of tax exemption for cooperative banks and speedy implementation of Prof A. Vaidyanathan’s Task Force recommendations.
Allow rejig of retail loans too: CII (BS 08.12.08)
Confederation of Indian Industry (CII) President and ICICI Bank Managing Director K V Kamath today pitched for restructuring of loan facility for retail borrowers to spur demand for consumer durables. “While the extension of restructuring guidelines to the real estate sector is welcome, there is also an urgent need to enable restructuring of facilities for the retail borrowers, who constitute the consumers of products of various sectors,” Kamath said. This is necessary to restore consumer confidence and encourage household demand and asset creation, he said. “RBI’s policy actions will certainly help in the process of reviving confidence and enabling India to weather the global economic crisis,” Kamath said.
Food prices hurt consumers: RBI (BS 08.12.08)
Even though inflation has declined for four successive weeks to touch a seven-month low of 8.40 per cent, food items are still costing a lot to a common man, with their prices touching the sky, according to the Reserve Bank of India. While the inflation for wholesale prices came down to 8.40 per cent for the third week of November, the latest data for the Consumer Price Inflation showed that it has reached a new high in 10 years in October due to higher weight of food articles. “The Consumer Price Inflation for the months of September and October did increase. This is possibly owing to the firm trend in food articles inflation and higher weight of food articles in measures of the Consumer Price Index,” RBI Governor D Subbarao said in a speech. “Historically, there has been a correlation between the Wholesale and Consumer Price Inflation and given this correlation, the Consumer Price Inflation too can be expected to soften in the months ahead,” the RBI governor said.
RBI, govt packages to buoy markets (BS 08.12.08)
The Reserve Bank of India’s (RBI) move to slash the key short-term rates by 100 basis points is likely to provide a positive push to the volatile stock market, say analysts. However, they cautioned that the impact of fresh monetary measures would be short-lived as these are in line with expectations. “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.
RBI relief rollout (ET 08.12.08)
Many core sector companies, especially in the automobile, cement and steel sectors, will get to avoid the non-performing asset (NPA) tag with the Reserve Bank of India (RBI) allowing banks to carry out a second restructuring of loans till end-June. Usually a loan is restructured when the bank senses that the borrower is under stress and may default. The bank is not required to classify such loans as NPAs, which is not only a stigma on the bank’s performance but also entails higher provisioning. Now, corporates will get a second chance to get their loan restructured. “RBI is right in making the distinction between a wilful defaulter and a default due to the market conditions. No corporate would like to default wilfully. In many cases, the corporates have made profits on sales but the money is not flowing as there is no liquidity,” Aditya Birla group head (corporate finance) Bharat Banka said. With RBI giving the banks the liberty to undertake a second loan restructuring, the corporate borrowers will get breathing space. This could be double bonanza for many companies who will not only have to pay a lower interest rate but also get a longer time to repay the loans.
Asset reconstructors may get to revive sinking firms (ET 08.12.08)
Armed with the RBI mandate to acquire management control of defaulting firms, Asset Reconstruction Companies (ARCs) are set to become reviving agents for sinking companies. So far, they could acquire and sell only the collateral borrowers had pledged and not the company. RBI’s draft guidelines issued last Friday would make corporate rescue and turnaround a robust business for ARCs, which would fetch better returns than from peddling in the secured assets snatched from defaulters, bankruptcy experts say. “ARCs can now appoint professionals on the boards of companies to turn them around and tie up with non-banking finance companies to infuse fresh working capital when needed. We will see such pilot projects soon,” explained Sumant Batra, a leading bankruptcy lawyer and vicepresident of Insol International, a global body of insolvency experts. The role of NBFCs is crucial in the turnaround of a company as they do not insist on collateral as banks do. As per RBI's latest guidelines, ARCs can acquire management control if the amount due is more than a quarter of the defaulter's total assets.
Cos line up to avail FCCB buyback offer (BL 08.12.08)
A host of companies have approached the Reserve Bank of India (RBI) to buy back their foreign currency convertible bonds (FCCBs), which are trading at a massive discount. These include automobile and pharmaceutical companies. The FCCBs of most companies are quoting at a discount of 30-70%. Corporates that are eligible and have funds would, therefore, be able to buy back their bonds at a steep discount. RBI officials have said they had received a lot of proposals from companies to buy back the bonds. Bankers said that a couple of pharma companies, an auto company and a few other corporates had approached RBI recently seeking approval after the central bank eased the norms for buyback of these bonds. In its announcement on Saturday, RBI had said that corporates could use their foreign exchange resources held in India - including Exchange Earners Foreign Currency Accounts (EEFC) - or overseas or raise fresh foreign borrowings, provided there was a minimum discount of 15% on the book value of the FCCB. According to the new norms, corporates can buyback FCCBs out of rupee resources if there is a minimum discount of 25% on the book value and provided that the resources for buyback are drawn out of internal accruals of the company which have to be certified by the statutory auditor. The central bank has, however, limited the rupee buyback to $50 million of the redemption value for each company.
PNB chief lauds Reddy for safeguarding banking system (BL 08.12.08)
The country must thank God and the previous RBI governor YV Reddy for safeguarding the banking system here from the global financial meltdown, Punjab National Bank's CMD K C Chakrabarty said. But he said the worst of the financial crisis was yet to be seen. "We must thank our policy makers, our regulators, as they have insulated us and we are a little bit better. For that, we must give credit to earlier governor of RBI. He has created so much flexibility in the monetary policy that today we are able to roll down many measures.
Banks not in a hurry to cut rates (ET 08.12.08)
A likely cut in lending rates by banks may fall short of borrowers’ expectations. While some banks may do a token rate cut this week, and lower the rates for small-ticket home loans, many banks will take a call on bringing down rates across the board after the advance tax outflow, which takes out the liquidity from the system. Most banks are expected to bring down interest rates by end-December. Till now, only ICICI Bank has announced a cut for a category of home loans. While the interest rate has been lowered by as much as 1.5 percentage point, the lower rate is only for new borrowers taking loans up to Rs 20 lakh. Most banks are not in a hurry to lower lending rates for retail customers considering that delinquencies on retail, SME and corporate loans are rising. What’s clear is that deposit rates will now come down, with several banks set to revise their rates. Lower lending rates would follow the cut in deposit rates. As and when banks choose to reduce their lending rates, the interest rates on secured products such as home, auto and loans against securities are likely to come down first. The cut in lending rates could be around 0.5% and 1% for a few banks, said a cross section of industry officials. Unwillingness of some of the private and foreign banks to rush through a rate cut may be partly attributed to the fact that they had not passed on the steep rise in borrowing costs in the past several months. HDFC vice-chairman and MD Keki Mistry said, “The repo rate cut and reduction in deposit rates will reduce the cost of funds. Once they come down, we will pass on the benefit to borrowers.”
If opportunities come, we won’t let them go (ET 08.12.08)
When KR Kamath took over charge at Allahabad Bank on August 2, this year, the bank had a business mix of Rs 1.24 lakh crore. The aim now is to grow business to Rs 2 lakh crore by March 2010. Mr Kamath shares his vision - Despite the economic slowdown, India’s GDP is likely to grow by 7.5-8%, which is quite robust. Accordingly, there will be enough room for banks to grow. At Allahabad Bank, we were planning to grow our deposits by 17% and advances by 20%. But the strategy is now to realign and churn the balance sheet. On the liability side, the bank has shed Rs 5,000 crore of bulk deposits. As a policy, we have decided against raising bulk deposits and it has come down to Rs 15,000 crore by end-November. We focused on core deposits. And it is satisfying that we managed a 20% year-on-year growth. The share of bulk deposits to total deposits was 28% in March 2008 and the share has now come down to 21%. In terms of assets, we have repriced all the low-yielding advances to high-yielding ones. As a result, the balance sheet size would remain almost at the same. The assets are largely being churned and we should be able to maintain the net interest margin at 2.7%. It is not the right time to think of acquisitions. Having said that, let me tell you, I am not closed on the possibility of a merger or an acquisition. If opportunity comes, we would not let it go.
Source BL= Business Line, BS=Business Standard, ET=Economic Times & FE=Financial Express