RBI should roll back steps after rupee stabilises: SBI

New Delhi, July 16: Bankers today said that the liquidity tightening measures announced by RBI are temporary and hoped that they will be rolled back once the rupee stabilises. “These measures are temporary, to calm down volatility. We are not taking that these measures will be long-term. I think once the rupee stabilises, these steps should be largely rolled back,” SBI Chairman Pratip Chaudhuri said.

The Reserve Bank of India had last night announced a slew of measures like raising the cost of borrowing by banks by 2 per cent to 10.25 per cent and announcing sale of bonds worth Rs 12,000 crore through open market operations to suck liquidity to check the rupee slide. The rupee had earlier this month touched a life-time low of 61.21 to a dollar. On the impact of RBI measures on interest rates, Chaudhuri said: “Impact on loan growth depends on how long these measures stay. Deposit rates do not have such a close correlation with the money market.’’ RBI’s measures strengthened the rupee to 59.20 against the dollar in noon trade against the previous close of 59.89.

“RBI action is towards the forex side of market and to contain volatility in rupee,” Bank of Baroda Chairman S.S. Mundra said, adding that it would be too early for RBI to change the policy stance. RBI is scheduled to announce its first quarter monetary policy review on July 30. UCO Bank Chairman Arun Kaul said RBI’s step is a temporary measure and the bank has to wait for some more time to decide on the impact of this move. “The objective of RBI action is to compress liquidity. The implications are same as repo rate hike. RBI has opted for that time which is slack in terms of credit demand,” Kaul said.

PSU banks decide not to hike rates

Jaipur/ New Delhi/ Mumbai, July 16: You need not worry about an increase in your equated monthly instalments after RBI’s late night action on Monday. The finance ministry has leaned on public sector banks that control around 70% of the business against raising rates to keep a large constituency of middle class and corporate borrowers pacified ahead of key elections. After all, for over a year now, the finance ministry has been prodding RBI to cut rates, while the central bank has refused to toe the government line. Instead, on Monday it signalled a reversal in policy to offset the impact of the weakening rupee by announcing several measures that will push up the cost of funds for banks.

While there were expectations of banks responding with hikes in the coming days, the finance ministry swung into action and impressed upon banks to maintain status quo.

By evening the impact was visible as banks started issuing statements, saying rates will not go up. “The measures taken by RBI are designed to curb speculation in the market and are not seen by SBI as indicative of any systemic problem or deeper malaise. It is, therefore, expected that the position in the market will stabilize shortly. Hence neither the management nor the board of SBI that met on Tuesday in Mumbai felt that this requires any adjustment of lending,” State Bank of India said in a statement. Taking a cue from the largest lender, others including Punjab National Bank, Bank of Baroda and IDBI Bank followed suit.

Earlier on Tuesday, finance minister P Chidambaram seemed to lay down the ground rule. While kicking off a pre-election campaign on government schemes, Chidambaram said he did not expect banks to raise interest rates. “These measures are intended to quell excessive speculation in the forex market, reduce volatility and stabilize rupee. They should not be read as a prelude to any policy rate changes,” he said. Admitting that the high current account deficit has made the rupee weaker, the finance minister said, “Given the current account deficit and the inflation, some depreciation of the rupee is expected. But sometimes there is excessive speculation in the foreign exchange market and the role of RBI is to ensure that volatility is cut.

The tight liquidity situation due to the recent measures raised concerns of growth being impacted. But the finance minister allayed such fears. “These measures will in no way affect our commitment to growth. We must increase credit delivery and stimulate growth.” He reeled off a number of reforms and initiatives taken by the government in the last four months to revive growth and reverse the policy paralysis that has stalled projects approvals.

LIC's 11% SBI stake makes RBI see red

The banking regulator is unhappy with the Life Insurance Corporation (LIC) of India holding more than 10 per cent stake in State Bank of India, the country’s largest lender. LIC stake in SBI was 11.05 per cent, as on June 30.
The Reserve Bank of India (RBI) has conveyed its discomfort to the bank’s management, according to a top SBI official. “These are two big institutions. RBI is not comfortable with two large institutions having a cosy relationship,” the official said.
A top RBI official also confirmed the development. “Any institution that wants to have more than five per cent stake in a bank needs to have our prior approval, even if the stake is acquired from the secondary market,” the RBI official said. “We don’t want the banking sector to have too much capital from volatile sources,” he added.
The move comes at a time when LIC has increased stake in public sector banks by purchasing shares both from the secondary market and through direct equity infusion via preferential allotment. The cash-strapped government had asked LIC to infuse equity into public sector banks so that these lenders could have eight per cent tier-I capital. LIC had infused close to Rs 8,000 crore in several public sector banks such as Punjab National Bank, Bank of Baroda, Union Bank of India, Dena Bank, and Central Bank of India, among others, in the last financial year. LIC’s stake in SBI, however, has been acquired from the secondary market.
Interestingly, the insurance regulator is also unhappy with LIC for its more than 10 per cent stake in several public sector banks, as such a move breaches the single company cap norm. Concerned over the concentration risk, the Insurance Regulatory and Development Authority (Irda) has sought details of LIC’s investment in banks. Nearly 26 per cent of LIC’s equity investment is in banks, while nearly 39 per cent of its equity exposure is in stocks of public sector units.
According to the Insurance Act, equity exposure in a single entity is capped at 10 per cent. Thus, LIC can invest up to 10 per cent of the capital employed by the investee company, or 10 per cent of the fund size in a corporate entity, whichever is lower. The capital employed includes share capital, free reserves and debentures or bonds.
As on March 31, 2011, LIC’s investment corpus stood at nearly Rs 11 lakh crore, of which 20 per cent, or Rs 2.2 lakh crore, was equity. Of that, investments in state-run stocks stood at Rs 85,031 crore, while exposure in banks stood at nearly Rs 59,586 crore.

Proposed guidelines of RBI on Banks' exposure State Bank of India, ICICI Bank to be affected

New Delhi, August 20: The SBI and ICICI Bank are among those that would be affected if RBI implements its proposed guidelines on banks' exposure to their group entities, global credit rating agency Moody's said today. Last week, the Reserve Bank released draft guidelines to limit banks' exposure to their own group non-financial and financial entities.
As per Moody's, the proposed rules would hurt companies that depend on parent banks for capital and brand support, particularly those with large international operations, or those that operate insurance, securities or asset management businesses that need capital and liquidity support to meet their business needs.
"If the RBI adopts them, the new guidelines would be credit positive for India's banks, but credit negative for group companies that rely on parent banks for capital and brand support," Moody's Investors Service said in a report. It said the "affected banks" include ICICI Bank, State Bank of India, Bank of India, Bank of Baroda and Kotak Mahindra Bank.  "The guidelines would lead these banks to re-examine the financial support they provide to group businesses as anything exceeding the stipulated limits would be detrimental to their standalone capital calculations and thus their business growth," Moody's said.
The rules, it said, would benefit India's banks because they would reduce their concentration and contagion risks from group activities. The guidelines, if implemented, would limit to 5 per cent of paid-up capital and reserves a bank's exposure to a single group non-financial entity, while the maximum exposure to regulated financial services companies would be 10 per cent. However, Moody's said that for the time being, these draft guidelines do not help the banks in any way cope with their immediate asset quality challenges owing to the difficult environment.

SBI wants benchmark prime lending rate scrapped

Mumbai, August 7: Led by State Bank of India — the country’s largest lender — banks have asked the Reserve Bank of India to invoke the sunset clause on benchmark prime lending rate (BPLR), and has argued such a move will reduce interest rates for customers by 50-75 basis points as they will shift to base rate.

BPLR is the erstwhile benchmark rate for all loans, and was replaced by base rate in July 2010. While all new loans were disbursed using base rate as the reference, it was not made mandatory for old customers — who were given loans in the BPLR regime — to shift to base rate. When the base rate was introduced in 2010, even then bankers had demanded the end of the BPLR regime by invoking the sunset clause.

The demand for the sunset clause is being made again by banks at a time when the central bank is reviewing the loan pricing mechanism. A committee under RBI Deputy Governor Anand Sinha is looking into the issue of transparency in loan pricing and also studying the efficacy of base rate with respect to transmission of monetary policy.

Banks had aggressively hiked BPLR in the last two years, following 13 interest rate increases by RBI between March 2010 and October 2011. The move was also aimed at encouraging borrowers to shift to the base rate regime.

Rate Card

Bank                                  Base rate        BPLR (%)
State Bank of India             10.00            14.75
ICICI Bank                         9.75             17.50
HDFC Bank                        9.80             18.30
Punjab National Bank        10.50             14.00
Bank of Baroda                 10.50             14.00
Union Bank of India           10.50             15.00
Canara Bank                     10.50             14.75

Bankers said borrowers were given loans at sub-BPLR rates while in the base rate regime. But a spread was added to the base rate. Yet, effective lending rate under base rate is still 50-75 bps lower than that of the BPLR regime. They said only about 30 per cent of the borrowers are yet to shift to the base rate despite continuing to pay higher interest.

“There is an administrative cost in running the BPLR system,” said a banker who is involved with the discussion on this matter with the regulator. “SBI has written to the central bank to invoke the sunset clause for all banks, which will not only benefit the banks but also reduce the interest rate burden of the customers.”

SBI’s base rate is 10 per cent while its BPLR is at 14.75 per cent.

In 2010, banks had requested RBI to invoke the sunset clause. The regulator refused, citing legal complications as the banks had entered into a contract, which needs to be honoured, while giving a loan, and the customer cannot be forced to shift to base rate.

Banks have also asked RBI to allow them to review the base rate formula at least once in three years. When the base rate mechanism was introduced, RBI allowed banks to tweak the formula for one year. But the formula cannot be changed after one year.

During interactions with bankers, it was also noticed by the regulator that banks were using various indicator to capture its cost of funds. The committee reviewing the loan pricing suggested that marginal cost of funds could be a better indicator for cost of funds. However, the proposal has not found favour with banks having higher current account and savings account deposit (as a portion of total deposits), as increase in marginal cost will not reflect the overall cost increase of the bank.