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.

Banks offer festive bonanza to customers

Mumbai, August 18: With an eye on getting business in the festive season, banks have started offering discounts on interest rates and waiving processing fees to attract retail customers. Mumbai-based Union Bank of India on Saturday announced it has waived processing fees on home and auto loans from August 15 to January 26.

State Bank of Bikaner and Jaipur, an associate of the State Bank of India, has found an innovative way to attract customers. While the bank is giving a discount of 25 basis points on retail loans across the board, customers who are applying for a car loan above Rs 10 lakh on line will get an additional rebate of 25 basis points, thus making the effective interest rate at 10.5 per cent which is the base rate of the bank, said Shiva Kumar, managing director, SBBJ. He added, the bank was offering 10.75 per cent for home loan customers, and those who apply on line will get a rebate of 10 basis points.

With credit growth slowing down in the current financial year amid high interest rate, banks are seeing the festive season as an opportunity to boost their credit portfolio. State Bank of India, for example, had said that it expected growth in retail credit to offset the impact of slowdown in corporate credit. The country's largest lender had earlier announced the cut in the interest rates for home and auto loans, immediately after Reserve Bank of India announced a one per cent SLR cut in July. SBI's home loan rates stand at 10.25 per cent for home loans up to Rs 30 lakh and 10.4 per cent for the loans above Rs 30 lakh. It also slashed its interest rate on car loans by 50 basis points to 10.75 per cent across the tenors.

Another public sector lender Andhra Bank is expected to take the decision about cutting interest rates on retail products. “We will be taking a decision soon” said, K K Misra, executive director of Andhra Bank.

Central Bank of India has already launched some products and is in the process of launching few more schemes both on asset and liability side. It has launched a special 555 days fixed deposit product in which the interest rate is higher by 50 basis points that the normal deposits of that tenor. It has also launched a recurring deposit account where the customer has the flexibility of putting the money according to his/her adjustment. Normally in the recurring accounts one has to put a fixed sum every month. “We will be waiving the processing fees on the retail loans, and where there is scope of reduction of interest rates we will cut the rates” said Ram Sangapure, general manager (retail), Central Bank of India.

Banks begin reviving special schemes

Special schemes are back in focus as bank deposits continue to grow only at a sluggish pace. With no relief in sight for further monetary policy easing, banks have also increased interest rates on long-term deposits, to garner much needed liquidity.
State-run Bank of Baroda on Monday revised deposit rates upwards by 25-65 basis points (bps). M D Mallya, chairman and MD, said it had realigned the rates, keeping in view the sticky inflation and entrenchment of inflationary expectations. The bank has introduced a term deposit scheme of 1,111 days, offering an interest rate of 9.15 per cent. This is 15 bps higher than the normal term deposit of similar tenors.
Other public sector lenders and small private banks are also offering such schemes, where depositors would have to lock-in funds for an exact number of days. "The only attraction in such schemes is a higher rate of interest as compared to normal deposits of the same tenor bracket," said a general manager of a large public sector bank (PSB).

Central Bank of India raised rates on special deposit schemes by 20-25 bps, effective August 6. UCO Bank extended its schemes till September and also increased the maximum deposit cap to Rs 5 crore. In the past fortnight, PSBs have also realigned the rates offered on deposits up to Rs 15 lakh, on Rs lakh to Rs 1 crore and for Rs 1 crore and above.
In October 2007, the Reserve Bank of India (RBI) had asked banks to withdraw special schemes, as the rates of interest offered on these deposits were not in tune with those on normal deposits.
"No bank should discriminate in the matter of interest paid on deposits, between one deposit and another, accepted on the same date and for the same maturity, whether such deposits are accepted at the same office or at different offices of the bank," it had told banks.
To stay within regulatory limits, some banks exclude the special scheme tenor from the normal deposit bucket. For instance, a bank might offer 50 bps more on a tenor of 1,000 days, as compared to tenors of up to 999 days.
Akeel Master, partner, KPMG, said the trend might not sustain for long, as higher interest rates will have an impact on banks' margins in the absence of a corresponding growth in advances. "Banks that are under pressure from mismatch in asset-liabilities for certain tenors must have been compelled to tweak interest rates accordingly," he said.
RBI’s latest data shows bank advances, as of July 27, had grown 17.2 per cent over a year, while deposit growth lagged at 13.8 per cent .
The central bank has projected deposit growth of 16 per cent in the annual monetary and credit policy for 2012-13.
"Concerns that deposit growth has significantly been slower than credit growth for a prolonged period of time is something we have been watching closely and that was one of the issues we discussed with bankers on Monday," RBI Deputy Governor Subir Gokarn had told Business Standard in an interview after the first quarter policy announcement last month.
He said RBI might put out a projection in the second-quarter policy review to be announced on October 30. It is slated to announce the mid-quarter policy review on September 17.