RBI again warns banks on asset-liability mismatch

Two days after the Reserve Bank of India (RBI) raised a red flag over the high incremental credit-deposit (ICDR) ratio, it on Thursday commented adversely on banks’ average maturity of deposits.  "The maturity of deposits has gone down drastically. More than 70 per cent of these are of around two years. While on the lending side, if you consider infrastructure, it needs financing for a longer term,” RBI Deputy Governor Anand Sinha said in an interaction with analysts. “This imbalance needs to be controlled, otherwise it could pose a big systemic risk. If you do not have resources, then (you must) slow down credit growth.”  The asset-liability management of banks is critically dependent on the maturity profile of their deposits. As banks generally raise resources through short-term liabilities to finance both short and long-term assets, the liquidity and credit risks get multiplied, particularly during crisis periods. On Tuesday, the central bank said the ICDR of banks was 102 per cent, indicating that banks were supporting their loan growth by borrowing one-day money from the repo window of RBI. ICDR indicates how much banks are lending for every rupee received as deposits. For every Rs 100 deposit, banks have to set aside Rs 30 in the form of the cash reserve ratio and the statutory liquidity ratio, which are six per cent and 24 per cent, respectively. So, for every Rs 100 deposit, banks can only lend up to Rs 70. Apart from deposits, banks can use borrowed funds for lending. However, RBI data show that Indian banks rely heavily on deposits, which constituted 78 per cent of all liabilities of banks in 2009-10. Borrowing accounted for only 8.7 per cent. The high ICDR is mainly on account of lower deposit growth as compared to credit growth. While credit growth has been a little over 24 per cent in the past one year, deposit growth has been 16 per cent. During the beginning of the financial year, RBI had projected credit and deposit growth at 20 per cent and 18 per cent, respectively. The central bank still maintains the projection and wants banks to cut credit expansion. RBI data show that for 2009-10, public sector banks experienced a shift in their deposit liabilities towards the short-term end of the maturity spectrum, while loans and investments moved towards the long term. New generation private sector banks, which normally rely heavily on short-term deposits, exhibited a shift in favour of medium and long-term deposits, while their loans moved closer towards the short end of the spectrum.

RBI tightens provisioning norms for non-banking financial companies

Setting the stage for a rate hike by non-banking financial companies (NBFCs), the Reserve Bank of India on Monday tightened the prudential norms for NBFCs to protect them from any impact of possible economic downturn. Under the new RBI norms, both deposit and non-deposit taking NBFCs will have to set aside 0.25 per cent of performing loans to meet any financial exigencies.

Inflation needs to be restrained to promote growth: RBI

Indicating another hike in key policy rates in its quarterly review on Tuesday, RBI on Monday said that containing inflation would be the top priority as high rate of price rise could hurt the economic growth. "... containing inflation will have to be the predominant objective of monetary policy in the near term," the Reserve Bank said in its macroeconomic review released a day before the third quarterly review of the policy. The review further said that upside risks of inflation have increased and it could endanger the growth objective and also amplify risks to inclusive growth. The economy grew by 8.9% in the first half of the current fiscal, but inflation remained at a high level of 8.43% in December, led by high food prices. The food inflation for week ended January 15 was 15.52% after touching a high of 18.32 on December 25, 2010. The central bank raised key short-term lending (repo) and borrowing (reverse repo) rates for six times in 2010 to tame inflation. The quarterly monetary policy, to be released tomorrow, is expected to balance the need for containing inflation and promoting growth.

Rate hikes seen coming, but deposits first

With the Reserve Bank of India hiking repo and reverse repo rates by 25 basis points, banks are likely to increase lending and deposit rates in the near term. However, with banks looking to increase their deposit mobilisation, deposit rates are likely to go up before lending rates. Mr O. P. Bhatt, Chairman, State Bank of India, said the bank's asset-liability committee will meet soon to take a call on the increase in rates. “There has been an upward bias in rates for a very long time and you have seen this bias getting translated into increases in lending and deposit rates. But there has been a small lag between the rate hike and the transmission. It will depend on where each bank is on the liquidity curve and its asset-liability situation”, Mr Bhatt, who is also the Chairman of Indian Banks' Association. Ms Chanda Kochhar, MD and CEO, ICICI Bank, said there is an upward bias in interest rates. “Deposit and lending rates increase depends on how cost of funds is moving and what is the supply-demand situation. Cost of deposits has been moving up. So clearly there is an upward bias in interest rates. But when and how much will vary from bank to bank,” she said. Mr K.R Kamath, Chairman and Managing Director, Punjab National Bank, said there is a need for a balance between deposit and credit growth rates as the pace of the growth is not the same. “There is case for an increase in lending and deposit rates. When and how, the market will decide. In case banks are not getting deposits to fund the credit growth, then deposit rates will be increased first”, he said. Mr Anil Kothuri, Head-Retail Finance, Edelweiss Capital, pointed out that even though the RBI has increased interest rates six times in 2010 aggregating 300 bps, home loan interest rates have increased by only 150 bps. “The latest increase will put upward pressure on home loan interest rates, given that bank and housing finance companies have very little wiggle room left. Nonetheless, the demand for home loans will continue to be strong, if property prices stay stable and the environment continues to be buoyant,” he said. Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said the RBI wants the incremental growth in the repo rate to be passed on to the credit market. “The intent of the policy is absolutely clear. Deposit has to keep pace with the growth in credit,” he said.

Loan lessons

Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty retains his maverick streak. At the finance leadership summit of the Indian Institute Management, Lucknow (IIM-L), someone in the audience asked why car loans were cheaper than education loans in India. The veteran banker’s reply: "When a bank gives car loans, it knows that the borrower has a good job to repay. In education loans, the repayment capacity is not clear beforehand."

Bank of Baroda chief M D Mallya is BS Banker of the Year

Mangalore Devdas Mallya, the chairman & managing director of Bank of Baroda, is the Business Standard Banker of the Year for 2010. Mallya was chosen by a five-member jury headed by Securities & Exchange Board of India’s former chairman, M Damodaran, for BoB’s sterling performance over the last couple of years. The jury had shortlisted three bankers from 30 on performance parameters ranging from growth in deposits, advances, assets and bad debt to return on assets and business per employee.  Mallya took charge of BoB in 2008 at atime when global turbulence in the financial sector had threatened to shake India’s banking foundation. Mallya’s mandate was to take BoB to a new level and attract the young. Not only did the person with an “ice temperament” — as colleagues describe him — steer the bank out of the storm, he brought about good growth numbers and a better-than-counterparts showing. BoB’s profits grew 55 per cent in 200809 and 37 per cent in 2009-10. Return on assets improved to 1.21 per cent this financial year from 1.1 per cent last year, while return on equity increased to 22.19 per cent from 19.48 per cent. At the peak of the crisis, the bank contained its incremental delinquency ratio at 1.13 per cent (for 2009-10), with a provision coverage ratio of 74.9 per cent as on March 31, 2010. Investors took note and the stock price outperformed the sector, fetching a return of over 172 per cent. For Mallya, “cautious aggression” and “stable growth with quality” were key words that helped him steer a steady course through the mayhem. In an interview with Business Standard —the details of which are published in the Banking Annual distributed with today’s edition — when Mallya was asked if BoB’s risk appetite was less than its strength, the CMD said: “…look at our growth of 28 per cent (credit). Where is the conservative approach in that? We are aggressive, but cautious.” So, Mallya played with astraight bat, unlike those playing to the gallery with flamboyance, and it paid off.

RBI admits it’s lost its way on inflation management

RBI Governor D Subbarao said inflation management has not been proceeding the way policy makers expected it to go.  “Inflation management is not happening along the lines we were expected to,” Subbarao told analysts and investors in a conference call. “Demand-side pressures are abating because of our monetary policy.”  The RBI governor raised inflation forecast as rising prices threatens to shoot past the expectations for the second fiscal. He had raised rates seven times since March. Policy rates were raised 25 basis points on Tuesday, meeting market expectations, and he raised inflation forecast for the fiscal by 150 basis points to 7%. That led to criticism that the central bank’s inflation forecast and policy measures were not up to the mark. Inflation is at more than 8.4%. Food inflation has remained stubbornly above 15% for weeks as unseasonal rains damaged crops and rising income is leading to higher demand.  The bureaucrat-turned-monetary policy maker who had questioned the reliability of many data from the government, said factors that RBI takes are more or less what are available to analysts. “Increasingly, the central bank is working on the principle that there is no asymmetry between information that we have and that analysts have,” said Subbarao.  The index of industrial production fluctuates violently. The IIP grew 9.5% between April and November but it swung between 3% and 16%.  Mr Subbarao further said: “Liquidity deficit is independent of the government cash balances. Our comfort level is plus or minus 1%. This is linked to the statutory liquidity need. You should read this as comfort zone, irrespective of the transient factors. I don’t see it getting into a surplus. But certainly, we want to see less of it,” he added. Newly-appointed deputy governor Anand Sinha said: “So far as the increase in interest rate is concerned, it has to be a result of the monetary policy. But banks have to manage the issue of delinquency arising out of higher interest rates... Banks have to take care of their liabilities.”  Deputy Governor K.C.Chakrabarty said: “Risks are there. It depends on both the borrower as well as the bank.”

SBH to extend financial aid to 1,102 villages

Following the Reserve Bank of India (RBI) directions, the State Bank of Hyderabad (SBH) said it would extend financial inclusion across 1,102 villages with above 2000 population spread across 36 districts in Andhra Pradesh, Maharashtra, Karnataka and Gujarat. These districts together cover a rural population of about 42.69 lakh. Financial inclusion will provide banking products such as savings, loans and services like remittance and insurance in areas where there are no banking services. It caters to low income groups and offers services at an affordable cost. According to SBH, the proposed financial inclusion will be implemented in two phases. While the first phase will cover about 300 villages by March 2011, the remaining villages will be covered in the next fiscal. SBH said it has already commenced enrolment and opening of savings accounts in 261 villages covering AP and Karnataka. On Tuesday, the bank distributed biometric cards to customers in few villages in Mahaboobnagar district. As part of the project, the bank has launched overdraft products to meet the financial requirements of beneficiaries across all villages. Besides opening a savings account, customers can also opt for variable recurring deposit, term deposits, overdraft in recurring deposits and term deposits in loan category general purpose credit card will also be available to all villagers.

OMO a monetary policy tool, deposit accretion picking-up: RBI

I the second-half of 2010, transmission (of monetary policy action) has been good. "Banks have raised their rates as also their base rates," the RBI Deputy Governor said. Gokarn voiced concern over the decline in foreign direct investment (FDI) in 2010 and the possibility continuing in 2011 as well. "The recovery in the US economy may lead to global re-balancing of portfolios. This may hit the emerging markets' attractiveness and the country may not receive capital inflows that it would otherwise have," Gokarn said. This, combined with oil and fertilisers which are significantly imported into the country and whose prices are rising, may put pressure on India's current account deficit, (pegged close to 3.5 per cent of GDP) Gokarn said.

Black money: What have you done so far, SC asks govt

The Supreme Court on Thursday slammed the government again over the issue of illicit wealth parked in foreign banks, asking it to file a report on the action taken by it against people and firms that have stashed black money in tax havens abroad. Expressing concern that the black money stashed in banks abroad might have originated from arms deals, drug trafficking and smuggling, the Supreme Court asked the government as to what action it had taken against individuals and firms having foreign accounts. A bench headed by Justice B Sudarshan Reddy directed the government to file its response by Thursday next. The court also sought replies from the government, the Reserve Bank of India and the Chief Vigilance Commission of India on a petition seeking direction to the government to ratify UN convention on corruption which would facilitate in bringing back black money from foreign banks.