ICICI, five PSU banks hike rates

Mumbai, May 6: ICICI Bank and five state-owned banks today raised their lending rates by about 50 basis points each, making auto, home and other loans expensive. The Union Bank of India, Indian Overseas Bank, the United Bank of India, Andhra Bank and the State Bank of Bikaner and Jaipur are the public sector banks that raised interest rates today. The decision of the banks to raise rates comes within days of the Reserve Bank increasing short term lending (repo) and borrowing (reverse repo) rates by 50 basis points (bps), with an aim to calm down inflation, which has hovered above the government’s comfort level. Several other banks, including Punjab National Bank, Canara Bank, the Bank of Baroda, Allahabad Bank and Indian Bank, have already increased their rates. ICICI Bank today raised its base rate by 50 bps to 9.25 per cent and the benchmark prime lending rate (BPLR) to 18 per cent. The new rates will come into effect from tomorrow, it said. A hike in lending rates will increase the cost of credit for new borrowers and the existing ones who had obtained loans at a floating interest rate. According to ICICI Bank, the floating reference rate, on the basis of which interest rates are determined for existing borrowers, will now be 15 per cent. The decision, the bank said, will not impact the customers who had obtained loans at fixed interest rate. After the hike, the base rate of the Union Bank of India, Indian Overseas Bank, the United Bank of India and Andhra Bank stands at 10 per cent. The base rate of State Bank of Bikaner and Jaipur will be 9.25 per cent. Besides, BPLR of all banks, except ICICI Bank, now stands at 14.25 per cent. The base rate system replaced the BPLR system from July 1, 2010. However, BPLR is applicable to older customers who took loans earlier. The higher lending rates would make loans dearer to both new and existing auto, home and corporate borrowers. Banks have been on a rate hike spree since the Reserve Bank’s decision to raise short-term key rates, including the repo and reverse repo by 50 basis points in its annual credit policy on May 3. The repo and reverse repo rates now stand at 7.25 and 6.25 basis points, respectively. Besides, the RBI also raised the savings bank deposit interest rate to 4 per cent from 3.5 per cent.

'Monetary policy alone can't tackle inflation beyond a point' - Aditya Puri, HDFC Bank

Aditya Puri, managing director of the country’s second largest private sector lender, HDFC Bank, believes raising of rates would not suffice to control inflation; instead, it may slow the growth of the economy. He tells Somasroy Chakraborty how HDFC Bank plans to sustain its growth in this period of elevated interest rates.

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High inflation posing risks to growth: Subbarao

Reserve Bank of India (RBI) Governor D Subbarao on Friday said the current high level of inflation was posing significant risks to future growth and it was imperative to bring it down even if that meant sacrificing some growth in the short term.  In a presentation to the Inter Ministerial Group (IMG) on inflation, Subbarao said the monetary policy measures, announced in the bank’s Annual Statement for 2011-12, were based on the premise that bringing inflation down, even at the cost of some growth in the short term, should take precedence.  The RBI, in its credit policy statement on May 3, reduced growth estimates to eight per cent, as it increased the policy rates for the ninth time in over a year. It decided to go for a sharper-than-expected 50 basis points rise in the policy rates to rein in inflation. “We said everything we needed to say in the policy document. The RBI’s understanding of short-term and long-term inflation situation was explained to the IMG,” Subbarao told reporters after emerging from the third meeting of the IMG that lasted about two hours.  He explained that experience in India as well as globally suggested that in the long run, there was no trade-off between growth and inflation. He said any attempt to push growth above the potential level would only lead to higher inflation, but no durable growth or employment gain. He, however, emphasised that containing inflation was imperative to sustain growth over the medium term.  “This is a critical attribute of a favourable investment climate, on which growth sustainability depends. Fiscal consolidation will also contribute to improving the investment climate,” he said.  Chief Economic Advisor Kaushik Basu, who heads the IMG, agreed there was no conflict between the objectives of high growth and low inflation in the long run. In the short run, lowering inflation can have a dampening effect on growth, as the traditional Philips curve analysis suggests. But this is desirable, according to him, if the aim is to achieve high, sustainable growth.  Basu said all emerging economies were troubled by the resurgence of inflationary pressures and there was a concern that the very nature of global inflation might be changing.  The Wholesale Price Index-based inflation for March was 8.98 per cent. Although food inflation came down to 8.53 per cent for the week ending April 23, from 20 per cent in February last year, actual prices of food items continue to remain high.  The IMG was set up at the suggestion of Prime Minister Manmohan Singh in February ‘to review inflation situation and suggest corrective measures’. The meeting was also attended by secretaries from finance, commerce, Planning Commission, food and agriculture ministries, who are part of the IMG.

Getting policy act together

The Finance Ministry, while revising the growth estimates, must find ways to use its vast and varied armoury to fight sticky prices.  Recently, the Economic Advisor to the Finance Ministry, Mr Kaushik Basu, told presspersons that the Ministry might just revisit the forecast for GDP in the current year and lower it a notch. Global commodity and fuel prices are rising, putting pressure on growth worldwide, and India, he said, will have to take stock of that. In a break from past practice, the Finance Ministry will undertake an interim review of the economy that will analyse current developments and, accordingly, fix a new and more modest GDP forecast. As Mr Basu added, India will be following a trend prevalent all over the world, with several economies pegging their growth for the current year at lower levels. That should not become an excuse for not exploring policy options on revitalising the engine of growth. The downside risk is real. The RBI's annual statement, released a few days ago, has already sounded the cautionary note in its analysis of the year gone by and its prognosis of the one we are in now. According to the central bank, it is the inflationary pressure brought about by global commodity prices that is now adding to the “downside risk” of subdued growth. In fact, the RBI has found evidence of “moderating growth” with a sluggish capital goods industry and slackening investment spending. What spending there is, a good chunk of it is flowing to overseas suppliers, especially the Chinese, starving domestic producers, in the process, of much needed incremental demand. Take a look at external commercial borrowings and it is evident that a number of firms in power and telecommunication sectors are importing capital equipment; and no prizes for guessing what they regard as the most attractive source of such imports. China has built up a sizable capital goods industry and now is considered a major exporter of even alternative energy equipment. What the Ministry will have to remember is that the review will be gauged against the sombre mood that permeates the RBI report. What it essentially points to is slowing growth coupled with rising inflation and, as a central bank, it has done what it can do. Now, North Block, while revising its growth estimates, will have to find out just how its vaster and more varied armoury can be utilised to fight sticky prices. So far, New Delhi has simply waxed eloquent on the prospects of high growth without a thought to inflation, treating it as a problem for the RBI to handle. Restoring the past momentum of growth, combating inflation on multiple fronts and easing regulatory bottlenecks must top the Finance Ministry's policy agenda.

The wrong war? - T N Ninan

No one should cavil at the new repo rate of 7.25 per cent (up from 6.75 per cent earlier), since inflation is at 9 per cent. Still, in a week when the Reserve Bank of India (RBI) has said that combating inflation is now its primary focus, it is important to ask: is RBI fighting yesterday’s war, instead of peering into the future to glean what might be coming — as monetary policy is supposed to do? Rewind to where the inflation debate started. From the middle of 2009-10, sundry government spokesmen predicted that the year would end with 5 per cent inflation. It wasn’t to be. Then they switched to making the same forecast for 2010-11. Several reasons were given for the expected drop in inflation: a high base effect would kick in, a good harvest was coming, and so on. None of it made a difference. Last year, wholesale price inflation was 9 per cent, and the year before 10.2 per cent. Retail price inflation was comparable, if not worse (8.8 per cent and 14.9 per cent).  Forecasting is a hazardous business, especially about the future, as a rueful Dr Subbarao wisecracked the other day. So if you were to ask why RBI and the government got their inflation numbers way off track, the truth is that no one could have seen that international oil prices would treble in the last two years, from $40 per barrel to $120. Or that global commodity prices as a whole (including oil) would see an 80 per cent price surge. The domestic backwash was clear too: primary articles went up 22.4 per cent, and fuel and power 13.8 per cent in 2009-10; both went up a further 13 per cent in 2010-11. How could any governor achieve 5 per cent wholesale price inflation in such a context?  Having got it wrong twice, the RBI wants to be third time lucky —except that global commodity prices have just taken a tumble. Oil has dropped below $100, and silver is down 30 per cent. Copper, tin, coffee, cocoa … they have all dropped. From the country demand perspective, China is slowing down and US indicators look shaky. As for the domestic signals, from January 2010 till now, consumer price inflation has virtually halved (from over 16 per cent). There is more room to fall, but in the most recent months, between November and March, the consumer price index went up from 182 to just 185. So, has the inflation beast already been tamed — especially if global commodity prices are falling? And if so, is the anti-inflation thrust in danger of curbing growth?  Note that the index of industrial production for the latest four months (till February) has shown average annual growth of less than 3 per cent. Despite the surge in commodity prices last year, import growth was just 17 per cent. Discounting for the price surge (think oil and commodities), import growth would have been in the low single-digit region — pointing to a lack of domestic demand. If you look at sectors, the demand for capital goods has already slowed. With higher interest rates, the demand for consumer goods should slow too. And the government has become less of a spendthrift; with lower deficit numbers, it is no longer pumping up demand as it was doing through 2008-11 (a period in which 43 per cent of the increase in money supply was accounted for by fresh credit to the government!). Finally, agricultural growth this year is likely to be modest, since it comes on top of a good harvest last year. In short, you might be lucky to get even the lower 8 per cent GDP growth that is now forecast.

RBI makes first move in savings account rate change

The Reserve Bank of India (RBI) has said in a draft paper that the savings account interest rate should be deregulated. This rate is currently 3.5% and is the only interest rate offered by banks that is enforced across all banks. Even though knowledgeable investors do not keep a significant proportion of their money in savings accounts, this is a useful move.  On Tuesday, the RBI announced a hike of 0.5 percentage point in the savings deposit rate — the first increase in 19 years — taking it to 4% with immediate effect.  Savings bank accounts are the primary savings vehicle, almost by definition, of the least well-informed class of savers. As such, the only way these people have of maximising their returns is if the RBI creates conditions that facilitate that. A few months ago, RBI had forced banks to change the method of calculating the savings bank interest on the daily average balance instead of the minimum balance. This made the calculation fair and enhanced returns for customers. Interestingly, after the RBI's draft on rates was released, some bankers seemed to suggest that rates may actually come down because they claim that small accounts are uneconomic at even the current levels. My guess is that the banks will end up giving different interest rates to different categories of customers. Whether that achieves the RBI's goal remains to be seen. Savings bank returns apart, banks products are the default 'investment' that a majority of Indians use, and it's a fact that bank's rules and regulations are not setup to maximise your returns. This means that if you are using fixed deposits as an investment vehicle—and a lot or people are—then you need to track their expiry carefully because lapsed fixed deposits are major source of leakage of returns. The ideal would be if the RBI would fix the underlying rules, but failing that, investors need to take care of their interest themselves.

Opening up the last spoon-fed rate

The Reserve Bank of India (RBI) has published a discussion paper on deregulation of the interest rate on savings bank deposits, seeking feedback. The RBI, in its latest monetary policy review, did decide to increase the savings bank deposit interest rate from 3.5% to 4% with immediate effect, pending a final decision on doing away with the administered rate and leaving it up to banks. The paper seems cautiously optimistic that deregulated, market-determined interest rates on savings bank deposits would bring about better allocation of resources, boost savings and lead to better transmission of monetary policy. The interest rate on savings bank deposits is the last remaining administered rate in the domestic banking system. Now, in the days of pre-reform , what was essayed was a conscious policy of financial repression so as to coagulate funds at fine rates for investment. Back then, most deposit and lending rates were controlled by the finance ministry, including for entire segments of consumers. With thoroughly suboptimal results, it needs to be said. The paper mentions that financial sector reforms here were initiated in the path-breaking 1990s, as part of structural economic reforms begun during the period. There were missteps and wrong moves along the way, notes the paper. For instance, in April 1985, there was a tentative move to deregulate deposit interest rates with banks allowed to decide interest rates for maturities between 15 days and one year, subject to a ceiling of 8%. But the end-result was a race to the bottom with banks offering the highest possible rate for the shortest period and a general shift of deposits from current accounts and even from savings accounts to 15-day deposits! The freedom to decide on interest rates was withdrawn in May 1985. The paper adds that the process of deregulation restarted in the early 1990s, and was largely completed by October 1997. When it comes to bank lending, a few categories of interest rates continued to be regulated: for small loans up to . 2 lakh and rupee export credit. These two rates were deregulated in July 2010, when the RBI replaced the benchmark prime lending rate (BPLR) system with the base rate system. It meant curtains for all administered rupee lending rates. So, the only interest rate that continues to be regulated today is the savings deposit interest rate. The paper enunciates that deregulation of the deposit rate, with interest rates decided by individual banks as per liquidity conditions, would be favourable to savers. It cites empirical evidence to suggest that widening interest rate differential between term deposits - long deregulated - and savings deposits leads to reduction in the share of savings bank deposits in total deposits. Apart from reducing relative attractiveness, administered interest rate policy on savings deposits also adversely affect the transmission of monetary policy , avers the paper. And the fact that the savings deposit interest rate has not been changed since March 1, 2003, does imply that changes in RBI's policy rates - for example, the dearer cost of funds indicated by the central bank of late - have not been transmitted to savings bank deposits. The study hastens to add that if the overall cost of deposits moves in tandem with the policy rates, then monetary transmission is not so adversely affected. Be that as it may, savings deposits are about 13% of financial savings of households, and the interest rates on such funds do need to be market determined and not by administrators at RBI. International experience also corroborates such deregulation. For instance, well into the 1970s, commercial banks in the US faced a panoply of restrictions on interest rates, both on deposits and extending credit. And subsequent deregulation did allow banks to offer better services at lower prices. However, for banks, savings deposits are a low-cost source of funds, and could deregulation mean unhealthy competition and asset-liability mismatches? If deregulation of interest rate for term deposits , which constituted more than 60% of deposits, did not have a destabilising impact, deregulation of interest rate for savings deposits, which constitute about 22% of total deposits, may not have a significant adverse impact on the system, concludes the paper. It makes sense to begin deregulation of the savings deposit rate in a phased manner, subject to a minimum floor initially, and with builtin flexibility on cheque issuance and withdrawals. (Deregulation of Savings Bank Deposit Interest Rate: A Discussion Paper, RBI, April 2011).

Pushing growth beyond potential to boost inflation: RBI

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RBI asks Tamilnad Mercantile Bank to list shares through an IPO

TUTICORIN , TAMIL NADU: The Reserve Bank of India has asked the Tamilnad Mercantile Bank (TMB) to list its shares through an IPO, a top official of the bank said on Friday. "We are one of few unlisted banks in the country and the Reserve Bank of India wants us to get listed as soon as possible .... We would be considering this proposal provided a couple of pending cases are resolved," A K Jagannathan, managing director and chief executive officer of the Nadar-dominated , Tuticorin, Tamil Nadu-based bank, said. He was speaking after the release of the bank's results.
The RBI suggestion is important as a few weeks ago the banking regulator had declined to acknowledge the sale of a 33.54% stake by well-known serial entrepreneur C Sivasankaran to a group of investors. The group's members included Rajat Gupta, former McKinsey chief, and Ramesh Vangal , the former Asia Pacific president for PepsiCo Foods . The investors were acting as a group, the banking regulator said and asked them to cut their stake to about 5%. TMB was one of the many community banks that were set up in the 20century in many parts of the country to finance local entrepreneurship and take care of community needs. Over the years, it became successful and started attracting attention from corporate and takeover artists like Sivasankaran. The Essar Group tried to get a foothold but were rebuffed. Siva, who belongs to the Nadar community, also could not get full control and decided to sell to the
Vangal-led group a few years ago. The issue has got more complicated now due to a shareholder's suit in the Madras High Court challenging the RBI's order. The shareholder alleged that the central bank's order is vague since it did not include B Ramachandra Adityan and his family members as part of the Vangal-led group. Asked whether the IPO would be the way for these investors to cut their stake to 5%, Jagganthan said the bank can go for IPO on its own and it is up to the investors to decide what they want to do. "After the Reserve Bank of India order , the bank's hands have been freed to make key operational decisions . Now the annual general meeting holds the key, where the proposals for IPOs, bonus and rights issue can be made. However , there are a few lawsuits in courts which have to be settled to go ahead with the annual general meeting," he added. After the Reserve Bank of India order, the bank had planned to conduct its annual general meeting on June 15. On a thin equity of Rs 28.45 lakh, Tamilnad Mercantile Bank has reserves of Rs 1,366.02 crore and the book value of the Rs 10 share is at Rs 48,022 a share as of March 31. The bank has been roiled by ownership tussles for two decades but the latest round does not seem to have affected its performance in the past year. In fiscal 2011, the bank's net profit rose 35.97% to Rs 250.90 crore, while business grew 23.17% to Rs 24,679 crore. The net interest margin was at 4.25%, while gross NPA was 1.30%. The bank has declared a dividend of Rs 1,000 per share for fiscal 2011, up from Rs 800 a share last year, pending shareholders' approval.