Banking & RBI

Speaking on the sidelines of an interactive session organised by Confederation of Indian Industry (CII) on `Alternatives to SME financing', Jayanta K Sinha, chief general manager of State Bank of India (SBI), pointed out that SBI was planning to foray into private equity funds which might not be focussed on SME exclusively but may focus on infrastructure and other sectors also.

However, he mentioned that the whole idea is under incubation and still at an embryonic stage. The SME business of the bank was one of the fastest growing segments and it recorded all-India business of around Rs 76329 crore as on March 31, 2008.

The segment recorded a robust growth of 30 percent compared to last year's performance which was around Rs 58674 crore, he added.

If the present momentum of growth is maintained SBI also expects to touch Rs 100,000 crore in another two years time, said Sinha.

What emerged is that several banks, both public and private sector have shifted their attention to SME business because of the sector's high potential reflected in its bouyant performance despite the current economic upheaval

"As business confidence continues to remain strong...the private corporate investment in 2008-09 is likely to increase, although it may grow at a slower pace", said an RBI analysis on the corporate investment growth in 2007-08 and prospects for 2008-09.

The turnaround in corporate investment, RBI said, "Which began in 2002-03 and maintained healthy thereafter, is expected to be sustained in 2008-09".

Pointing out that downside risks arising from high international oil prices, hardening interest rates etc will be there, the analysis said, "the domestic demand is still resilient and supporting overall economic growth, driving corporates to continue the ir expansion plans at the back of rising capacity constraints."

The capital investment intentions for 2008-09 based on institutional assistance up to the end of March 2008, aggregates to Rs 1.48 lakh crore as against Rs 1.25 lakh crore in the previous year.

The proposed investment taking into account financial assistance from other sources such as ECBs and public issues, would work out to be Rs 1.73 lakh crore during the current fiscal, the analysis said.

In addition to this, the RBI added, the capital expenditure envisaged by the fresh projects in the private corporate sector has been above Rs 1 lakh crore in the past two years and "the incentive to invest are likely to remain strong in the current fisca l."

The hike will make the BPLR-related loans of the bank dearer to its customers. With this, vehicle loans having a three-year tenor will now carry an interest rate of 12 per cent as against 10.5 per cent earlier, the bank's website said.

However, the lender has spared its educational loan borrowers and housing loans up to Rs 20 lakh from the hike in benchmark rate, the bank said.

Customers who opt for home loans above Rs 20 lakh in five-year tenor, will have to pay 1 per cent more floating rate at 10.75 per cent as against 9.75 per cent earlier, the bank said.

Fixed rate for housing loans above Rs 20 lakh with a tenor of up to five years, has been upped to 11.25 per cent from the existing 10.25 per cent, the bank said.

Similarly, floating rates for 5-10 year home loans above Rs 20 lakh, has been revised to 11.25 per cent from 10.25 per cent.

The bank's asset liability committee (ALCO), which met on Saturday, decided to hike rates in view of the recent monetary policy actions from RBI in its quarterly review of its annual monetary policy.

The Reserve Bank, in its quarterly monetary policy review, hiked the cash reserve ratio and repo rate by 0.25 per cent and 0.5 per cent respectively to check inflation, now at 12.01 per cent.

According to the guidelines, banks are expected to lend directly to the projects and ensure that the funds don't go to state governments. But in a notification posted on the central bank's website on Wednesday, the RBI said, "It has been observed that some banks have extended financial assistance to state PSUs which is not in accordance with the norms." The central bank went on to advise these institutions to "follow the instructions scrupulously, even while making investment in bonds of sick state PSUs as part of the rehabilitation effort." In its guidelines released in July this year, the central bank had allowed banks to sanction term loans only to corporate entities including special purpose vehicles (SPVs) set up exclusively to fund infrastructure projects. It had instructed banks and eligible financial institutions to ensure that these loans/investments are not used to fund state governments budgets.

In the late nineties, many state PSUs had floated bonds guaranteed by their respective state governments which subsequently resulted in fiscal slippages for the states as these entities had not managed the funds properly. RBI has been trying to make infrastructure lending more attractive for banks by liberalising exposure and provisioning norms and also the conditions which would make the loans turn bad. It may be recalled that RBI had said in its guidelines on July 1 that single-borrower limits would be applicable to public sector entities. According to RBI, a bank can lend to a single borrower up to 15% of the bank's capital. This includes the bank's entire capital base -- equity, debt and other hybrid instruments.

However, banks could be more liberal in case of entities bidding in the PSU divestment programme of the government. Banks have been allowed to fund acquisition financing of successful bidders in these auctions. The regulatory ceiling in such cases would be higher, at 40% of the bank's capital, which will be on par with the norms applicable for a group.

It will also be considered as claim on the government with zero risk weight for meeting capital adequacy norms.

This wavier should be transferred to a separate account, and can be treated as performing asset only if adequate provision is made for the loss in Present Value (PV) terms.

The government is expected to release the first tranche of the total repayment, estimated at Rs 60,000 crore, around September.

The discount rate for arriving at the loss in PV terms should be taken as 9.56 per cent, which is the yield to maturity on 364-day Treasury Bills today, the central bank said in its late night communication to banks.

In recent months, the government has opted for a "safety first" approach, with the Reserve bank of India choosing to aggressively tighten monetary policy despite the risk of slowing growth in Asia's third-largest economy.

The bank has this year already raised rates twice, and upped the Cash Reserve Ratio, or the amount of cash banks must hold in reserve, three times.

India's industrial production growth slid sharply to 3.8 per cent in May - its slowest pace in six years - hit by rising inflation and monetary tightening.

Industrial growth was clocked at 10.6 per cent in May last year. But while India's economic engine has been losing steam, inflation holds centre stage. The rate is currently at 11.89 per cent and far above the central bank's declared comfort level of five percent.

"We are presently examining the comments received in response to the draft guidelines issued. Based on this, the final guidelines would be issued within a period of two weeks," Reserve Bank's Executive Director, R B Barman told reporters here on the sidelines of a seminar.        

Issuing the draft guidelines for M-banking in June this year, the apex bank had asked banks to allow customers to perform transactions even using the most basic mobile phones.        

As per the draft guidelines, banks can use SMS-based facilities to perform small-ticket payments upto Rs 1,500.        

A host of lenders, including leading public-sector lenders, State Bank of India and Union Bank, are on the final stages of launching their M-Banking services, which would benefit millions of customers to transfer money through mobile phones.        

Recently, the apex bank had asked banks to put their mobile-payment services on hold till it issues the final guidelines on the matter.        

"We have to see the various aspect of the mobile-payment service, especially the security aspects of such transactions prior to allowing banks the implementation. We would also examine the functioning of similar services by those banks who presently offer the service," Barman said.

He indicated that the central bank could raise the cash reserve ratio (CRR), or the proportion of deposits that banks kept with RBI, by 25 basis points but that might not prompt the country's largest bank to raise interest rates.

"It is very difficult to second guess the governor, especially two days before the policy. When oil prices were at their peak, it was safe to assume further tightening... A final decision will be taken by the asset-liability committee after the RBI's announcement," he told reporters on the sidelines of a function.

Since April, the RBI has increased the CRR by 125 basis points to 8.75 per cent, while the repo rate has been increased by 75 basis points to 8.50 per cent.

Bhatt, however, said that the liquidity situation for SBI was comfortable, though there was some slowdown in demand for loans from the manufacturing sector, especially small and medium enterprises, for commercial real estate and auto loans.

Banks can, however, continue to provide basic services such as mobile alerts for credit or debit entry, balance enquiry or other services that are in the nature of providing information, the RBI said in a statement.

It has asked banks to dissociate themselves from any mobile-based money transfer service that has not received the regulator's "explicit approval" or is not covered by its guidelines.

Sources indicated that at present there are no norms governing these transactions and the RBI does not want to allow payments in the absence of proper norms. "What is the hurry when the final guidelines will be issued soon?" an official said.

The fund will be the largest one (Rs 500 crore) from the bank, which floated a venture capital subsidiary way back in 1989. The VC arm has so far floated four funds, the total corpus of which is Rs 112 crore and has invested in around 80 companies.

Senior officials of the bank confirmed that they have sought approvals from the regulatory body, after which they will be hard-selling this product to other government-owned institutions for participation.

Allahabad Bank, Corporation Bank, Indian Overseas Bank, Oriental Bank of Commerce, Vijaya Bank, Andhra Bank and Small Industries Development Bank of India have earlier participated as investors in its earlier fund, the corpus of which was around Rs 60 crore.

This new initiative from Canara Bank follows a series of measures initiated in the last six months. This financial institution first divested 49 per cent in its asset management business to Rebecco, and then went in for a massive rebranding exercise in an effort to connect to young investors.

The bank during the past three quarters has also been aggressive in lending to the GMR Group. According to Venture Intelligence, a venture and private equity research firm, India-focused PE /VC funds have raised $4 billion during the first half of 2008 and this number is expected to cross the $10 billion-mark.

It is estimated that around 24 lakh people applied for 20,000 clerical posts advertised by the State Bank of India showing that there are more takers for a career in banking. This is specially so as bank wages are likely to be revised by the end of the current fiscal, for which negotiations are going on between the unions, Indian banks association and finance ministry.

The hiring is expected to go up significantly in 2008-09 due to an increase in business opportunities in retail banking, marketing and expansion in rural banking.

According to the Indian Institute of Banking and Finance (IIBF), which is conducting examinations for the banking sector, it has been receiving requests to conduct recruitments from a number of banks for next year and there will be a mega recruitment drive in the early 2009.

Interestingly, the hiring is getting broad-based, bringing in specialists along with generalists for various cadre posts.

There is also speculation that if these rates continue to run at their present level, bank interest margins would definitely come under danger. In addition to this, all those corporates which have borrowed at rates linked to money market rates will also see their funding cost rise.

Another problem for banks with cash shortage is that this is a highly unusual for it. It generally occurs at the beginning of a quarter since this is the time when money that has gone out of the system, by way of taxes, comes back in the form of government spending. This quarter, the government is yet to spend the Rs 16,613 crore of cash balances with RBI as of end-June.

Bankers are attributing this cash shortage to three main factors. First, banks have been asked to maintain higher cash balances with RBI. Second, the central bank has been selling dollars which results in a fall in rupee funds. And third, the government is yet to spend funds worth over Rs 16,613 crore, raised by way of taxes.

For most of the year, money market rates have been ruling within the bracket decided by the RBI. The repo rate determines the higher end of the floor and it stands at 8.5 per cent. Repo rate is the rate at which the central bank lends to banks. The lower point is fixed by the 6 per cent reverse repo rate -- the rate at which RBI borrows.

RBI's sale of dollars is evident from the position of forex assets. In the latest week ended June 27, they have dipped by Rs 8,418 crore.

S Raghavan, head of treasury-fixed income at IDBI Gilts said, "Had it been exporters selling dollars, it would have caused more funds to enter the banking system. This has to be RBI selling dollars in a bid to prevent a sharp fall in the rupee and also rein in money supply into the system at a time when price levels are close to the 12 per cent mark. This also helps the central bank control import costs, especially for oil companies."

However, lack of money supply is not the only reason why banks are suffering. The demand side is also putting pressure on the banks. The central bank had hiked the CRR on 24th June to be effective from July. Since July 1, banks have had to keee a higher portion of their deposits in the form of cash reserves (CRR) with the central bank. Presently, the banks keep 8.5 percent of their deposits with RBI against 8.25 percent in June. However, by mid-July, CRR would increase to 8.75 percent leading to another hike in the deposits kept as CRR with RBI.

At a time when deposits are rising, the incremental CRR requirement also tends to go up. On the implication of this whole trend, YES Bank chief economist Shubhada Rao says, "The central bank is unlikely to resort to further monetary tightening on July 29. However, for the fiscal year as whole, some more tightening is expected."

According to the RBI guidelines, " lenders should not resort to undue harassment - persistently bothering borrowers at odd hours, use of muscle power for recovery of loans, etc."

And maintaining that India is a civilised country governed by the rule of law, the apex court had barely two months ago reminded banks that they cannot de- ploy musclemen to recover loans, often pushing defaulters to suicide. The court's remarks had come in connection with the suicide of 34-year-old Himanshu Dev Sharma after he was humiliated by ICICI Bank's recovery agents.

That's not all. Only a week ago, the National Consumer Disputes Redressal Commission had noted: "In case of motor vehicle loans... the debtor/borrower is under constant tension that if he fails to pay one or two instalments, he would receive threats from so-called 'recovery agents' of the banks."

The national consumer court also took a dig at the RBI, saying: "The RBI has permitted banks to appoint 'recovery agents' on contract without per- haps fully appreciating the implications that these 'recovery agents' are usually musclemen, employing whom increases nothing but goondaism."

The central bank's guidelines permit recovery agents being hired but make banks responsible for their actions. Reiterating the RBI Guidelines on Engagement of Recovery Agents, the court on May 15 said: "The RBI may consider banning a bank from engaging recovery agents in a particular area... for a limited period. In case of persistent breach of the above guidelines, the RBI may consider extending the ban."

It is high time the RBI takes note of frequent violations of its guidelines and disciplines erring banks.

The 28 public sector banks saw a 40 per cent jump in the education loans extended till March this year. The state-run banks had outstanding education loans of Rs 19,817 crore at the end of March 2008 compared to Rs 14,214 crore at the end of March 2007.

Data for the large private banks is unavailable, but the smaller players are also focusing on young borrowers.

"High skills and qualifications will lead to an upward mobility in earnings. Hence, there is a market for value-added services such as wealth management, besides the normal banking activity," said the head of credit at a South-based private bank.

What also helped banks last year were the tax benefits provided by the government. Prior to the last financial year, only students who borrowed directly were eligible for tax deductions, while parents, who were the borrowers in most cases, were not entitled to any benefits. The government provided tax benefits to the parents last year by amending the Income Tax Act.

RBI Deputy Governor Usha Thorat pointed out that many banks were not following the norms on collateral security while lending to the small and micro enterprises.

Though guidelines exempt banks from taking any form of collateral for group loans up to Rs 5 lakh, banks seek some form of security from these units. She, however, did not elaborate on the RBI stance on this matter.

Though the lending to SMEs has grown substantially in the recent past, it is not commensurate with their share in the economy.

Banks could use the group collateral approach along with SHG model and micro finance institutions, both of which have helped in improving financial inclusion, for micro and small units, Thorat said while addressing the Indian Banks' Association's meet on Leverage lending to MSMEs.