Banking & RBI

Sources in the industry say that the key issue on the holding company structure would be regarding the State Bank of India, the country's largest bank in terms of assets and branch network. The bank has five associate banks and several subsidiaries. SBI directly holds a majority stake in its subsidiaries and associate banks.

The discussion paper will address the issue whether the bank should directly hold stake in the associate bank and subsidiaries or float a holding company to which the bank's stake in its subsidiaries is transferred.

While RBI's discussion paper was silent on the issue of holding company, the paper made it clear that promoters of any new bank would have to bring down their stake to at least 20%. Although RBI had considered various options, the list of advantages cited by RBI weighs in favour of the proposal to have a general threshold for shareholders at 5% of the capital but raise the threshold for promoters and other significant shareholders to around 20% in the long run. RBI has, however, kept the door open for higher stake subject to stringent criteria.

Source: Economic Times RBI may release another discussion paper on holding structure for banks

Hospitals and hotels were not allowed to raise any money under the automatic route as they were considered real estate investments. In November 2009, RBI reclassified hotels and hospitals as infrastructure companies after which they were allowed to raise up to $100 million under the automatic route every financial year.

"We approached RBI to raise $250 million ECB in February or March. But then, RBI had said it doesn't have mandate from finance ministry to entertain request for ECBs over $100 million. We could only raise $100 million through ECB. This relaxation will help the healthcare sector in acquiring hospitals overseas and to make capital investment for adding new hospitals," said Yogesh Sarin, CEO of Fortis.

Under ECB guidelines, companies in all other sectors can raise ECBs of up to $500 million under the automatic route with the all-in-cost cost ceiling fixed at 300 bps above Libor for loans of three to five years and 500 basis points above Libor for loans of above five years.

Source: Financial Chronicle By Manju AB, Shruti Verma RBI relaxes ECB limit for hotels, hospitals, IT firms

Rates are being raised between 25 basis points and 75 basis points across maturities. A basis point is 0.01 percentage point.

The increases come a day after the Reserve Bank of India raised key policy rates and sent signals that it is on course to keep it going until it manages to temper the demand pull price increase, which forced it to raise inflation forecast for the year to 6% from 5.5%.

"Considering that liquidity in the system has moved into a negative terrain and that there is a strong potential for loan growth, we think it is the appropriate time to raise deposit rates," said Paresh Sukthankar, executive director at HDFC Bank. "The transmission to base rate will take a few weeks."

Base rate is the minimum at which a bank can lend. The second-largest private bank said it will pay 25 basis points more for two-year deposits at 7.5%, and 7% for one year. These are effective July 30. The sharpest increase of 75 basis points, to 5.25%, is for six months, where temporary factors may keep the market tight.

Source: Economic Times Banks Hike Deposit Rates, But Lending Rates May Stay Unchanged

In the recent past, it had said repeatedly that it would follow a "calibrated" exit from loose monetary policy, which markets had taken to mean 25 basis point rate hikes at each quarterly review. "The dominant concern that has shaped the monetary policy stance in this review is high inflation," the central bank said.

"With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations," it said. The central bank, which reviews monetary policy on a quarterly basis but has twice this year surprised investors with off-cycle rates, also said it would begin undertaking mid-quarter reviews.

The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, which was in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by a steeper than expected 50 basis points to 4.50 percent.

India's benchmark 10-year federal bond yields eased briefly immediately after the policy announcement by one basis point while shares gained a tad after the central bank raised its key policy rates. As expected, the central bank left the cash reserve ratio (CRR) unchanged at 6 percent.

Source: The Economics Times RBI hikes short-term rates; CRR unchanged

The draft regulations on compensation of private banks come within days of the US Congress passing a major financial reform bill to discipline firms on Wall Street.

Coincidentally, a finance ministry panel has only this week recommended better pay for chiefs of public sector banks.

In the draft, RBI has hit out at guaranteed bonuses saying they are "not consistent with sound risk management or productivity-linked principles" and proposed that they should not be a part of a compensation plan.

Bonus should only be given for hiring new staff and be limited only to the first year, the draft said.

 Source: Economic Times RBI wants pay cut for pvt bankers on poor show

A new interest rate regime will begin on Thursday when the country moves to the RBI-mandated system of following Base Rate, believed to be a more objective interest rate benchmark than the currently followed bank prime lending rate (BPLR) system. It is also believed that compared to the BPLR system, the base rate regime will bring in more transparency in fixing the lending rate in the banking system.

In addition, unlike in the BPLR system, under base rate regime, no bank can lend below the base rate. This new rate is arrived at by taking into consideration a bank's cost of deposits, its profitability of the previous fiscal year, its administrative costs etc, with the cost of deposits having the most weight, top banking officials said.

On Tuesday, banking major SBI led the sector by fixing its base rate at 7.5% per annum. During the day, it was followed by a host of PSU and private sector banks, each settling at 8%. Central Bank of India, Punjab National Bank, Union Bank of India and Bank of Rajasthan also announced their base rates on Tuesday while HDFC Bank, ICICI Bank, Axis Bank and others will announce their rates on Wednesday.

After announcing the base rate, OP Bhatt, chairman, SBI said, "the bank will announce its housing loan and other consumer loan rates, which will be linked to the base rate, on Wednesday." With the banking leader setting the tone, other banks are also expected to follow SBI in fixing their home loan and other rates, industry observers said. However, the banking sector could also witness some intense competition as a section in the market expects that HDFC Bank, the private sector banking major, could fix its base rate lower than SBI's.

Source: Times Of India SBI fixes its base rate at 7.5%

This is one of the many chang- es the central bank is planning to make in licensing norms for the new set of banks that may be al- lowed to open for business in the next two years or so. In the early 1990s, when RBI allowed the first set of new private banks to start business, they were required to have a net worth of Rs100 crore.
Earlier this decade, when RBI al- lowed two more banks to come into being, the amount was raised to Rs300 crore.

Among other norms, RBI may want at least 25% of the distribu- tion network or branches of an NBFC to be in rural areas and its non-performing assets (or bad loans) to be not more than 2%, a person familiar with the devel- opment said.

Yet another critical criterion is a prospective NBFC's exposure to sensitive sectors such as real estate and capital markets (the less the better). "Besides, the en- tity must have a diversified own- ership," added this person, who did not want to be identified.

To be sure, nothing has been finalized as yet and RBI's inter- nal discussion is at a preliminary stage, he added.

anita.b@livemint.com

Source: Live Mint By Anita Bhoir RBI may raise net worth for new banks

"The direction is clear. We are in favour of deregulating all interest rates, but the decision will be taken only after adequate debate," said KC Chakrabarty, deputy governor , RBI.

Currently, the savings rate of banks stands at 3.25 per cent.

On being asked whether a huge difference between the savings bank rate among banks post deregulation is possible, Charabarty said, "In highly competitive markets prices do not vary much. What rate a customer gets depends on market conditions. If the rates vary too much then customers will move from one bank to another."

Chakrabarty also added that this deregulation, which is a part of financial reforms ,is approved by Parliament.

Agreeing with the views of Chakrabarty, C Rangarajan, chairman, Prime Minister's Economic Advisory Council too, has favoured a deregulation in the interest rates. "It is just a matter of time before we see deregulation in savings deposit rates," he noted.

Existing rules do not allow foreign firms to carry out auditing functions in the country. However, these firms have often been accused of indulging in surrogate practices. At present, these companies are allowed to carry out functions such as advisory, consulting and research only.

Most recently, the name of PwC's member-firm PriceWaterhouse came under the scanner for its role in the Rs 10,000-crore Satyam scam which rockedthe corporate world in January last year. The Institute of Chartered Accountants of India-appointed high-powered committee on Satyam has also found that multinational auditing firms have been flouting rules and practising in the country through local affiliates.

Explaining the rationale behind allowing the entry of foreign auditors, Khurshid said, "if they are allowed, we can fix more responsibility on them." However, he added, the interest of domestic firms would be kept in mind while allowing the foreigners to open shops here.

"This is not any more a world in which you can create huge barriers for services or trade; but you have to protect your own territory, your own turf and give your own citizens a level-playing field. Therefore, it is our duty and mandate to ensure that we protect our professionals," Khurshid said.

In some cases, the `phishing' e-mails were found to contain fake RBI letterheads purportedly signed by its top executives, RBI Regional Director A K Bera said.

The money lost through such e-mails is not recoverable, Bera said.

"Over ten cases of e-mail fraud have been reported at the Foreign Exchange Department of RBI here, where residents have been duped of anything between Rs 50,000 to Rs 1.5 lakh through such fictitious e-mails," Bera told reporters.

"Clarity is required on some of the issues... like what will be the cost of funds and what will be the base for calculation like one-year deposit or six-month deposit rates," Bhatt said. "Though there may not be any immediate change in cost of borrowing, still pricing may rise over a period of time in some of the products, whereas the same may go down in some other products too," he told reporters.

The chiefs of leading state-owned lenders today met under the aegis of SBI to discuss various operational challenges while migrating to the new benchmark system suggested by the Reserve Bank instead of the existing benchmark prime lending rate (BPLR) to enhance the transparency in lending.

According to Bhatt, the idea is to make the rates transparent, fair and trans mission mechanism swifter.

MV Nair, chairman and managing director, Union Bank of India, said: "There are some concerns on the issue. First of all, is the consumer aware of it? We are charging interest rate of BPLR plus something, but now we will have to charge base rate plus something. So, there is a need to change the mindset of the consumer."

Giving into a request from bankers,the Reserve Bank of India (RBI) had earlier agreed to extend the deadline for implementing the base rate regime from April 1 to July 1, 2010. BPLR will continue along with the base rate until  the transition is complete. The base rate will be applicable to new borrowers, and existing customers will continue to be governed by BPLR beyond July until their loan is due for renewal.

According to the RBI guidelines, though all banks have to shift to the base rate modal on July 1, they are free till December 31 to choose the parameter using which the benchmark rate will be computed.

Securitised debt, where banks slice loans into securitities before selling them to mutual funds and other market players, was largely blamed for recent financial crisis in the US where complex products were sold to large investors. The regulator is putting in place a listing agreement between the issuer and the stock exchange for such instruments, like the one that exists for shares and bonds. The regulator feels that if securitised debt is listed and then traded on exchanges, it can be better regulated through higher disclosures, said two people familiar with the development.

Recently, the Reserve Bank of India (RBI) revised guidelines on securitisation, where it proposed that the bank originating such instruments should hold the loan on its book for a certain period. This will make banks more responsible while slicing loans, RBI felt. If the regulator operationalises this practice, originators would also have to compulsorily hold a part of the loan even after this seasoning period. Combined with the listing requirement, this could change the securitised debt market forever, bankers said.

The Sebi-RBI technical committee that works on corporate bonds is now expected to call for a meeting with market participants to discuss prospective regulations, a person who is aware of the development said. This person said that the debt listing agreement would be used as "the base" and then further "adding or subtracting" may be done to arrive at the final draft.

Source: Economic Times By Gaurav Pai & Reena Zachariah Banks may now have to list securitised debt

The special concession would be valid for both kharif as well as rabi seasons by the end of March 2011.
Similarly, interest rates on crop loans between Rs 3 lakh and Rs 25 lakh have been reduced from the range of 11.75% -12.75% to 10% per annum for one year, it said.

An additional concession of one percentage point will be offered to borrowers who repay the loan promptly as per the repayment schedule. Therefore, the effective interest rate will be only 9% per annum (fixed) up to one year, for borrowers paying promptly, SBI said in a statement.

Last year, after the weak monsoon, SBI had devised a special scheme to help farmers and give a fillip to the agriculture sector. The only change from the last year's special scheme is that while the interest rate was 8% for minor irrigation loans last year, it has been upped to 8.5% in the new one.

At the same time, the margin money requirement for new minor irrigation loans has been reduced to 10% flat, from the existing 15-25% of the project cost.

According to the RBI, it is subject to banks' comfort level and their carrying out suitable due diligence as also instituting additional safeguards as may be considered appropriate to minimise the agency risks, it said. This comes nearly a week after RBI announced its annual monetary policy for 2010-11 which proposed to permit banks to engage any individual as BC.

Business correspondents are allowed to conduct banking business like helping people to open bank accounts, get loans and other banking business as agents of the banks at places other than the bank premises -- especially in remote areas. In recent times, however, there were demands from various sectors that the eligible entities to act as BCs be enlarged, to facilitate increased outreach of the banking system.

"We have not extended the deadline as we still have some time left. If some banks have a problem in meeting the requirement, we may consider their request on a case-to-case basis," he said.

ICICI Bank on Saturday said they had received the RBI permission to achieve 70 per cent provision cover by March 31 as against the earlier deadline of September 30. Market analysts have been expecting RBI to allow banks to achieve the provision cover norm by March 31.

He said RBI was optimistic on growth following the good monsoon forecast. "We have said 8 per cent plus growth. Let us first understand the forecasts. What finally happens, we will see it then. This gives a more optimistic picture," Chakrabarty said. The India Meteorological Department said rainfall this year was likely to be 98 per cent of the long term average, signalling good rains.

Chakrabarty reiterated RBI had not asked banks to refrain from offering teaser rate schemes, but had advised them to ensure transparency and non-discrimination in pricing. "Banks should understand the risks involved and must also communicate this to their customers. They must offer the scheme to all customers, old and new," he said.