Wednesday, January 13, 2010
Industrial production surges by 11.7%, rate worries loom
Industrial production surges by 11.7%, rate worries loom
Hindustan Times, January 13, 2010, Page 21
Industrial output grew by 11.7 per cent in August, the highest in two years, raising prospects of a sustained revival in the broader economy in the coming months.
Manufacturing accounts for 80 per cent of overall industrial output, and grew 12.7 per cent. But the real story lay in the consumer durables sector that grew by a record 37.3 per cent, implying that private consumer demand is reviving growth in the broader industrial horizon.
The data shone out as a beacon of hope for government as it prepares to present the budget for 2010-11 next month.
“The data shows that domestic demand is strong and is becoming visible,” commerce and industry minister Anand Sharma told reporters as he announced a Rs 500 crore incentive package for exporters.
Exports ended a 13-month streak of contraction, growing by 18 per cent in November and followed it up with a 9 per cent growth in December.
“We have to be cautious in our approach. The withdrawal should not be abrupt, as some sectors will still need help,” Sharma said.
All eyes are now on the Reserve Bank of India (RBI) that would announce the monetary policy later this month. Analysts were not sure whether the latest data could pave the way for a higher interest rate.
“We believe there is a high probably that growth in the next couple of years will surprise on the upside rather than downside,” said Rajeev Malik of Macquarie Securities.
Give infrastructure status to hotels
Give infrastructure status to hotels
Times of India, January 13, 2010, Page 24
NEW DELHI: Reiterating its demand for infrastructure status for hotels, the tourism ministry has sought inclusion of hotels as infrastructure under Section 80-IA of the Income Tax Act in the forthcoming Union Budget. This is likely to give new hotel projects a major boost allowing companies to reinvest their profits.
According to sources, if this incentive is given, all new hotel projects will be able to avail the benefit of 100% deductions with respect to profits and gains for a period of 10 years. The measure will bridge the shortfall of hotel accommodation in next five years and could even make India a more competitive destination in terms of room tariffs.
The tourism ministry is also considering revival of 80 HHD of Income Tax Act for the sector. This tax incentive could be useful to encourage investments in hotel sector. According to sources, other sops that are likely to make it to the tourism ministry’s wishlist for the Union Budget include deemed export status for earnings of inbound tour operators and bringing cruise operators at par with tour operators by extending 70% abatement of service tax.
In order to provide relief to tour operators hit by the global economic slowdown, the ministry may propose foreign exchange earned by inbound tour operators be considered as deemed export and full service tax exemption be provided to them so that they get reimbursement in service tax at par with other exporters.
Seeing the initiatives taken by the government to give a boost to cruise tourism in India, the ministry also hopes that cruise operators be brought at par with tour operators by extending 75% abatement of service tax. This, if accepted, will give a boost to cruise tourism which is still in a nascentstate.
SPEED MACHINES: IIP RISES 11.7% IN NOV ’09
SPEED MACHINES: IIP RISES 11.7% IN NOV ’09
The Economic Times, January 13, 2010, Page 1
Industry grows fastest in 2 yrs
Robust industrial output, amid a continuous surge in consumer goods, reaffirms hopes of 8-9% GDP growth while raising fears of a rate hike to check inflation
Our Bureau NEW DELHI
INDUSTRIAL production grew at a two-yearhigh 11.7% in November 2009, putting India on track to achieve an 8% economic growth in the current financial year and strengthening the calls for a hike in interest rates to tame rising prices.
“It (industrial growth) is very good. I expect the trend to continue,” said Kaushik Basu, chief economic adviser to the finance ministry.
The better-than-expected industrial output growth, boosted by a massive 37.3% jump in consumer durables and 12.2% increase in capital goods, however, failed to lift the market that ended in the negative territory due to selling pressure on front-line stocks.
Industrial growth in November 2008 was a lowly 2.5%, exaggerating the rate of expansion in November 2009. Output grew 10.3% in October 2009. The stellar output growth figure for November, however, is dwarfed by the 19.2% growth reported by China for the same month.
Industrial output grew at its fastest pace since October 2007 as the economy began to consume and invest more, suggesting that it may no longer need the stimulus offered in the form of low interest rates and high government spending.
Favourable economic growth and high inflation may prompt RBI to absorb excess liquidity in the system through a hike in cash reserve ratio—interest-free reserves banks keep with the central bank—and even raise interest rates when it undertakes the quarterly review of the monetary policy later this month. Bond yields rallied to a near 15-month high after industrial production data were released in anticipation of a rate hike.
The pick-up in investments highlighted by higher capital goods output has also been validated by a marginal increase in Customs collections for December 2009, suggesting higher non-oil imports.
“We will have to revise our GDP estimates for the year. It is currently at 7%, but we will revise it to 7.3-7.4%,” said Abheek Barua, chief economist at HDFC Bank.
The Indian economy grew at 7.9% in the July-September 2009 quarter, taking overall growth for first half of the current fiscal year to 7.1%, prompting the government to say it could meet or even exceed the 7.75% forecast for the year.
RBI not amused about teaser rates
RBI not amused about teaser rates
The Economic Times, January 13, 2010, Page 1
Our Bureau MUMBAI
INDIA’S banking regulator, the Reserve Bank of India (RBI), has expressed concern about banks offering home loans with teaser rates— schemes where monthly installments rise after the initial years.
The central bank’s worries stem mainly from the fear that borrowers may find it tough to repay loans once interest rates go up after the first couple of years when the rates are fixed. “Teaser rates are being offered increasingly, which is a cause for concern,” said Usha Thorat, deputy governor, RBI, at a banking conference here. “I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account the repaying capacity of borrowers when the rates become normal.”
RBI’s concern can perhaps be traced to the fact that the genesis of the mortgage crisis in the US lay in home loans extended to borrowers who struggled to repay. These loans, popularly known as subprime loans because they were given to people in lower income groups, included so-called adjustable rate mortgages where the repayment was low in the initial months with installments rising in subsequent months, somewhat similar to teaser rates.
Lenders in India, however, say there is no cause for concern as far as the quality of lending is concerned since repayment capacity is assessed based on the overall liability and not the first year’s rate.
Many leading lenders, including State Bank of India (SBI), ICICI Bank, Canara Bank, Punjab National Bank and HDFC, have recently introduced such special offers to attract borrowers at a time when demand for loans from individuals and industries has been tepid.
Teaser home loan rates are cause for concern: RBI
Teaser home loan rates are cause for concern: RBI
Hindu Business Line, January 13, 2010, Page 1
Our Bureau, Mumbai
The ‘teaser' home loan rates or the fixed-cum-floating rates, which are increasingly being offered, are a cause for concern.
Banks must ensure that borrowers are aware of the implications of such rates and the appraisal takes into account the repaying capacity of borrowers when the rates become ‘normal', said Ms Usha Thorat, Deputy Governor, Reserve Bank of India.
However, Ms Thorat said that it was up to each bank to take a call on the issue.
Ms Thorat's comments are significant in view of the fact that most banks, both public and private, have come out with dual rate home loan schemes.
Under the scheme the interest rate is fixed at a low rate of 8-8.5 per cent for the first few years after which it becomes the prevailing floating rate.
State Bank of India was the first to come out with such a scheme, followed by almost all other banks. Mr O. P. Bhatt, Chairman, State Bank of India, said the bank launched the special loan scheme as it had excess liquidity and there was no pressure from the Government.
He also said that even under the normal floating rate loans, the interest rate increases after a few years.
The 8 per cent loan scheme helped SBI's present credit offtake, he added. According to Mr M.V. Nair, Chairman of the Indian Banks' Association and Chairman and Managing Director, Union Bank of India, as long as the bank does an appraisal of the borrowers' repaying capacity and is transparent about the rates, there is no issue with regard to dual rate home loan schemes.
Struggling exporters get Rs 500-cr lifeline
Struggling exporters get Rs 500-cr lifeline
The Economic Times, January 13, 2010, Page 11
Specific Incentive Schemes Comes To Rescue Of Over 2,000 Products
Our Bureau NEW DELHI
THE government has announced additional incentives for export sectors which are still struggling under the impact of the global economic crisis. This comes in the wake of growing debate over rolling back the fiscal stimulus follwoing strong industrial growth.
Beginning January 1, exports of 2,000 new products from sectors such as engineering, handicrafts, textiles, chemicals, electronics and some metals will be allowed duty free import of inputs under the existing product and market specific incentive schemes, commerce minister Anand Sharma announced on Tuesday.
The list of eligible countries under the market linked scheme has also been expanded to include China and Japan, large markets for Indian goods.
The package will not impose any additional burden on the government finances as the commerce department is funding it from its budgetary resources. These additional benefits will cost Rs 450 crore — Rs 500 crore for the remaining three months of the fiscal year.
Addressing the media, Mr Sharma said that while the export sector had showed recovery in the last two months of 2009, which would substantially help in closing the gap between last fiscal’s export figures and this fiscal’s performance, it had to be viewed in the backdrop of a low base and 13 consecutive months of fall in exports.”
The new incentives follow a sectoral review by the commerce ministry, which revealed that some sectors were still struggling from a demand crunch in the overseas market. The rising rupee had also eroded the competitiveness of India’s exports.
Mr Sharma said that the commerce department has asked the finance ministry to reduce the rate of interest for dollar credit (to Libor plus 1% instead of Libor plus 3%). "We understand that the strengthening rupee could affect the profitability of exporters, that is why we have asked the finance min to reduce interest rates on dollar credit," he said.
Exporters will get duty free scrips or certificates valued at 2%-5% of value of exports. These can be either used to import goods duty free or sold in the market for use by other importers.
Exports registered a growth of 18% and 15%, respectively, in November and December after 13 months of continuous fall, but cumulative exports for the current fiscal is still much lower than last fiscal’s exports. Exports in the first three quarters of the current fiscal approximately valued at $119 billion is about 19% lower than $146 billion of exports in the comparable period of the previous fiscal.
Federation of Indian Export Organisation (Fieo) chief A Sakthivel pointed out that inclusion of China & Japan in the Market Linked Focus Product Scheme will help in addressing adverse trade balance with these countries which is becoming a cause of concern.
He also said that the government needs to extend benefits to the garment sector also for export to EU and US as these markets are still not showing improvement. The commerce department is also in talks with the finance ministry for continuation of interest subvention or discount provided to labour incentive industries and including additional sectors like engineering and chemicals in the list.
Industry body Ficci, said the finance minister should positively consider the industry demand for providing interest subvention to additional sectors including engineering goods & chemicals, continuation of interest subvention of 2% for the existing 7 sectors and provide dollar credit at lower rate of interest. "We have also asked the finance ministry to continue interest subvention (discount) of 2% provided to labour intensive sectors and extend it to additional sectors including engineering sectors and chemicals," Mr Sharma said addressing a press conference.
The Economic Times, January 13, 2010, Page 11
Specific Incentive Schemes Comes To Rescue Of Over 2,000 Products
Our Bureau NEW DELHI
THE government has announced additional incentives for export sectors which are still struggling under the impact of the global economic crisis. This comes in the wake of growing debate over rolling back the fiscal stimulus follwoing strong industrial growth.
Beginning January 1, exports of 2,000 new products from sectors such as engineering, handicrafts, textiles, chemicals, electronics and some metals will be allowed duty free import of inputs under the existing product and market specific incentive schemes, commerce minister Anand Sharma announced on Tuesday.
The list of eligible countries under the market linked scheme has also been expanded to include China and Japan, large markets for Indian goods.
The package will not impose any additional burden on the government finances as the commerce department is funding it from its budgetary resources. These additional benefits will cost Rs 450 crore — Rs 500 crore for the remaining three months of the fiscal year.
Addressing the media, Mr Sharma said that while the export sector had showed recovery in the last two months of 2009, which would substantially help in closing the gap between last fiscal’s export figures and this fiscal’s performance, it had to be viewed in the backdrop of a low base and 13 consecutive months of fall in exports.”
The new incentives follow a sectoral review by the commerce ministry, which revealed that some sectors were still struggling from a demand crunch in the overseas market. The rising rupee had also eroded the competitiveness of India’s exports.
Mr Sharma said that the commerce department has asked the finance ministry to reduce the rate of interest for dollar credit (to Libor plus 1% instead of Libor plus 3%). "We understand that the strengthening rupee could affect the profitability of exporters, that is why we have asked the finance min to reduce interest rates on dollar credit," he said.
Exporters will get duty free scrips or certificates valued at 2%-5% of value of exports. These can be either used to import goods duty free or sold in the market for use by other importers.
Exports registered a growth of 18% and 15%, respectively, in November and December after 13 months of continuous fall, but cumulative exports for the current fiscal is still much lower than last fiscal’s exports. Exports in the first three quarters of the current fiscal approximately valued at $119 billion is about 19% lower than $146 billion of exports in the comparable period of the previous fiscal.
Federation of Indian Export Organisation (Fieo) chief A Sakthivel pointed out that inclusion of China & Japan in the Market Linked Focus Product Scheme will help in addressing adverse trade balance with these countries which is becoming a cause of concern.
He also said that the government needs to extend benefits to the garment sector also for export to EU and US as these markets are still not showing improvement. The commerce department is also in talks with the finance ministry for continuation of interest subvention or discount provided to labour incentive industries and including additional sectors like engineering and chemicals in the list.
Industry body Ficci, said the finance minister should positively consider the industry demand for providing interest subvention to additional sectors including engineering goods & chemicals, continuation of interest subvention of 2% for the existing 7 sectors and provide dollar credit at lower rate of interest. "We have also asked the finance ministry to continue interest subvention (discount) of 2% provided to labour intensive sectors and extend it to additional sectors including engineering sectors and chemicals," Mr Sharma said addressing a press conference.
NPAs may go up 1% on export, realty loans drag
NPAs may go up 1% on export, realty loans drag
The Economic Times, January 13, 2010, Page 11
Atmadip Ray KOLKATA
RESTRUCTURED bank loans worth a whopping Rs 30,675 crore may turn bad in 2010-11, which may pushup banks’ gross non-performing assets (NPAs) on an average by one percentage point . This is a prediction by Fitch Ratings, which has just completed a study on banks’ restructuring loan portfolio. Banks’ ROA could be lower by 13 basis points in 2010-11, too, owing to surging NPA levels.
During 2008-09 and the first quarter of this fiscal, banks have restructured Rs 1.23 lakh crore collectively, which is 4.4% of total bank loans, primarily to help ease temporary cash-flows and liquidity problems faced by companies following the global financial crisis. Four industries — namely, infrastructure, textiles, commercial real estate and steel -- together account for nearly half of the total restructured loans.
According to Fitch, around 15-25% of banks’ restructured loans may turn NPAs in this fiscal. "Close to 75% of the restructured loans are expected to fall due by March 2011 and if there is no further setback in the economy, NPAs from these loans are anticipated to be within a band of 15%-25% of the portfolio," Fitch senior director Ananda Bhoumik told ET.
Incidentally, State Bank of India chairman OP Bhatt has already warned on the possibility of rising NPAs. Now, Fitch has validated Mr Bhatt’s concerns.
Fitch said private banks have restructured 2% of their loans whereas government banks restructured 5% of their loans. "This contrast is largely explained by the low exposure of the larger private banks to some of the vulnerable credit segments, including the export sectors, infrastructure and commercial real estate," the report said.
"So far, nearly all public sector banks have shown an improvement in asset quality. This is a sheer contradiction, given last year’s financial crisis and rising interest rates. This is due to the loan restructuring exercise done by banks, especially the public sector ones. Now, even as the economy has shown improvement, there could be one percentage point rise in banks’ gross NPA for the current fiscal on account of the restructured loans," Mr Bhoumik said.
The banking sector has 2.4% of their loans as NPAs now. Some banks have also deployed dedicated resources to monitor restructured accounts.
The contagion effects of the global slowdown were the most acute for export related sectors - textiles, gems and jewellery, and automotive. Fitch observed these sectors not only suffered from demand contraction in the developed countries but also from volatile exchange rates. The real estate sector suffered from falling domestic demand and real estate prices, while the iron and steel sectors faced a setback from inventory pile-up and a drop in global prices. The agriculture sector was also affected by erratic monsoons. The infrastructure industry experienced project delays and cost overruns.
However, as Mr Bhoumik said, had not been the economic condition improved, the impact on banks’ NPAs would have been worse than whatever is predicted now.
The Economic Times, January 13, 2010, Page 11
Atmadip Ray KOLKATA
RESTRUCTURED bank loans worth a whopping Rs 30,675 crore may turn bad in 2010-11, which may pushup banks’ gross non-performing assets (NPAs) on an average by one percentage point . This is a prediction by Fitch Ratings, which has just completed a study on banks’ restructuring loan portfolio. Banks’ ROA could be lower by 13 basis points in 2010-11, too, owing to surging NPA levels.
During 2008-09 and the first quarter of this fiscal, banks have restructured Rs 1.23 lakh crore collectively, which is 4.4% of total bank loans, primarily to help ease temporary cash-flows and liquidity problems faced by companies following the global financial crisis. Four industries — namely, infrastructure, textiles, commercial real estate and steel -- together account for nearly half of the total restructured loans.
According to Fitch, around 15-25% of banks’ restructured loans may turn NPAs in this fiscal. "Close to 75% of the restructured loans are expected to fall due by March 2011 and if there is no further setback in the economy, NPAs from these loans are anticipated to be within a band of 15%-25% of the portfolio," Fitch senior director Ananda Bhoumik told ET.
Incidentally, State Bank of India chairman OP Bhatt has already warned on the possibility of rising NPAs. Now, Fitch has validated Mr Bhatt’s concerns.
Fitch said private banks have restructured 2% of their loans whereas government banks restructured 5% of their loans. "This contrast is largely explained by the low exposure of the larger private banks to some of the vulnerable credit segments, including the export sectors, infrastructure and commercial real estate," the report said.
"So far, nearly all public sector banks have shown an improvement in asset quality. This is a sheer contradiction, given last year’s financial crisis and rising interest rates. This is due to the loan restructuring exercise done by banks, especially the public sector ones. Now, even as the economy has shown improvement, there could be one percentage point rise in banks’ gross NPA for the current fiscal on account of the restructured loans," Mr Bhoumik said.
The banking sector has 2.4% of their loans as NPAs now. Some banks have also deployed dedicated resources to monitor restructured accounts.
The contagion effects of the global slowdown were the most acute for export related sectors - textiles, gems and jewellery, and automotive. Fitch observed these sectors not only suffered from demand contraction in the developed countries but also from volatile exchange rates. The real estate sector suffered from falling domestic demand and real estate prices, while the iron and steel sectors faced a setback from inventory pile-up and a drop in global prices. The agriculture sector was also affected by erratic monsoons. The infrastructure industry experienced project delays and cost overruns.
However, as Mr Bhoumik said, had not been the economic condition improved, the impact on banks’ NPAs would have been worse than whatever is predicted now.
Builders forum wants Govt to rein in steel, cement prices
Builders forum wants Govt to rein in steel, cement prices
Hindu Business Line, January 13, 2010, Page 2
Our Bureau, Hyderabad
The All-India Builders Forum has appealed to the Prime Minister, Dr Manmohan Singh, and the Union Finance Minister, Mr Pranab Mukherjee, to rein in steel and cement prices.
With the recession hitting them hard, the builders have asked the Prime Minister to take steps to reduce the cement prices to Rs 120 a bag from the present Rs 175 and steel prices to Rs 25,000 a tonne from Rs 44,000.
Though the production of steel and cement has gone up significantly, the prices of the branded steel and cement were ruling high, bringing all construction activity to a standstill, Mr Muppavarapu Satyanarayana, Forum President, said.
In a letter, copies of which were also sent to the Union Ministers of Urban Development and Steel and Mines, he said the rise in the prices of these commodities shot up the per-square feet rate significantly.
The industry had requested the Government to set up a regulatory body to keep a check on the rising prices of steel and cement. “But the Government has not taken any initiative in this direction,” he pointed out.
Alleging that the manufacturers formed cartels to hike prices, he asked the Government to take measures to foil such attempts.
RBI warns against underpricing of risk
RBI warns against underpricing of risk
Hindu Business Line, January 13, 2010, Page 6
Our Bureau, Mumbai,
Banks are once again resorting to sub-PLR short-term lending due to the excess liquidity in the system, said Ms Usha Thorat, Deputy Governor, Reserve Bank of India, while speaking on the sidelines of BANCON, in Mumbai, on Tuesday.
In her address on risk management for the banking sector, Ms Thorat said pricing of risk is important. There is a temptation to under-price risk whenever there is excess liquidity and pressure to generate profits. Pricing below cost can be risky and the risk cost is very often not captured adequately. Moreover, this gives rise to asset price bubbles, she said.
She also cautioned about the large investment by banks into debt-oriented mutual funds.
“MFs have invested large amounts in bank CDs. Banks that have a significant part of their liabilities in the form of CDs have to be sensitive to the rollover risk. Equally, banks that have large investments in MFs have to be sensitive to the liquidity risk in the event of the need for sudden redemption by large investors at the same time. This distortion -whereby MFs are apparently acting as intermediaries in what should otherwise have been intermediated in the interbank market - is something that needs to be addressed,'' Ms Thorat said.
On lending to non-banking finance companies engaged in micro-finance there is a risk that multiple lending and high interest rates could lead to deterioration in asset quality. Therefore, banks should assess the credit quality of these loans by better oversight at the grass root level on a sample basis, she said.
Securitisation of assets by banks during the year ended March 31, 2009, showed a decline of about 30 per cent over the previous year. This might affect the profitability of banks, which have been undertaking securitisation activity as one of the main business lines. However, the securitisation activity may pick up once the retail loan segment starts growing again. RBI would shortly issue guidelines on minimum retention requirement and minimum holding period for securitisable loans, Ms Thorat said.
Banks must also closely monitor the unhedged positions of their borrowers, as it can translate into severe stress on their asset quality.
While introduction of technology in banking has increased the speed and accuracy of service delivery, it has also increased banks' vulnerability to cyber frauds. Banks, therefore, need to put in place appropriate control mechanisms to prevent such frauds, Ms Thorat said.
RBI worried over teaser rate on consumer loans
RBI worried over teaser rate on consumer loans
Business Standard, January 13, 2010, Page 6
BS Reporter / Mumbai
For the first time since fixed-cum-floating rate home loan schemes, branded as teaser rates, were introduced in December 2008, the Reserve Bank of India (RBI) today cautioned banks about the risks in offering such loans, as consumers might experience payment shocks when interest rates rose.
Bankers said there was no reason to worry because they had factored in the payment capabilities of borrowers even after the rise in interest rates. Besides, they said, the lending norms had not been eased and the schemes were being clearly explained to borrowers.
Under the fixed-cum-floating rate schemes being offered by almost all large banks and mortgage companies, banks have fixed interest rates at 8-8.50 per cent for a period of 1-5 years. Subsequently, borrowers would shift to a floating rate scheme that is linked to the prevailing market rate.
When State Bank of India (SBI) launched the fixed-cum-floating option, HDFC, the largest home loan player, had said the teaser rates could spoil the market. SBI executives today said the scheme was launched to push credit at a time when demand for loans was absent. Besides, they said the real estate sector was under stress and the government had asked banks to formulate schemes to help the sectors most affected by the global financial crisis.
RBI Deputy Governor Usha Thorat today said at the Bancon conference that the teaser rates did cause some concern. “Banks should ensure that income of borrowers is adequate to service the loan when recovery picks up and interest rates return to normal levels,” she said.
The scheme has now been expanded from home loans to other consumer loan segments like car finance.
SBI Chairman O P Bhatt defended the scheme, saying RBI paid 3.25 per cent for funds parked at reverse repo window, while this money could earn 8 per cent if lent for buying homes.
The bank has managed to scale up its market share in home and auto loan businesses on the back of the fixed-cum-floating rate schemes. HDFC, which had originally opposed the scheme, has also opted for it, though it has called it a limited-period offer.
Last week, ratings agency Fitch flagged the teaser rates for home loans as an area of concern. It said the interest rate, which was set artificially low for initial period, could give a “payment shock” to borrowers, as the equated monthly instalment (EMI) shot up after lenders began to charge regular interest rates.
The sub-prime crisis in the US was triggered by banks offering mortgage loans at ultra-low rates to borrowers who couldn’t repay them when rates rose. RBI’s concern comes at a time when local banks have said there could be some pressure on their loan portfolio, as companies are yet to recover fully from the impact of the financial crisis. Ratings agency Crisil estimated that gross non-performing assets of the Indian banking sector could touch 5 per cent by March 2011, from 2.3 per cent in March 2008.
Referring to underpricing of loans in a market awash with liquidity, Thorat said there was risk in lending at below prime lending rates. Banks had to ensure that funds were used by clients for productive purposes.
Admitting to the risks of underpricing, Union Bank of India Chairman and Managing Director M V Nair said banks were competing for lending in a low credit growth environment. “We will take up the issue at the (Indian Banks’) association level to sensitise banks,” said Nair, who is also the chairman of the industry lobby.
“It is not that because it is priced lower, there is higher chance of non-performing assets. It’s not lower than our cost of funds and we have other products priced at similar rates,” Bhatt said, when asked about the comments from the central bank official.
For most banks, nearly 75 per cent of the loans are priced below the benchmark prime lending rate (BPLR). A part of the reason for this is directed lending, while the rest is due to pressure from companies that use the competition in the market to drive down interest rates.
The central bank had set up a committee under Executive Director Deepak Mohanty to review the BPLR framework. The panel has recommended that the system be replaced with base rates, which are linked to one-year cost of funds. In addition, it has said that only 15 per cent of the lending should be below the base rate.
Thorat also flagged liquidity risks from the huge flow of bank funds to mutual funds. Bank investment in schemes offered by mutual funds had exceeded Rs 1,60,000 crore due to low demand for credit.
She also defended the decision of making banks meet 70 per cent loan loss coverage ratio by September 2010. She said this decision factored in increase in non-performing assets in future and likely slippages in restructured assets.
RBI would soon issue guidelines prescribing the minimum period for which banks should hold assets on their books before securitising these.
Business Standard, January 13, 2010, Page 6
BS Reporter / Mumbai
For the first time since fixed-cum-floating rate home loan schemes, branded as teaser rates, were introduced in December 2008, the Reserve Bank of India (RBI) today cautioned banks about the risks in offering such loans, as consumers might experience payment shocks when interest rates rose.
Bankers said there was no reason to worry because they had factored in the payment capabilities of borrowers even after the rise in interest rates. Besides, they said, the lending norms had not been eased and the schemes were being clearly explained to borrowers.
Under the fixed-cum-floating rate schemes being offered by almost all large banks and mortgage companies, banks have fixed interest rates at 8-8.50 per cent for a period of 1-5 years. Subsequently, borrowers would shift to a floating rate scheme that is linked to the prevailing market rate.
When State Bank of India (SBI) launched the fixed-cum-floating option, HDFC, the largest home loan player, had said the teaser rates could spoil the market. SBI executives today said the scheme was launched to push credit at a time when demand for loans was absent. Besides, they said the real estate sector was under stress and the government had asked banks to formulate schemes to help the sectors most affected by the global financial crisis.
RBI Deputy Governor Usha Thorat today said at the Bancon conference that the teaser rates did cause some concern. “Banks should ensure that income of borrowers is adequate to service the loan when recovery picks up and interest rates return to normal levels,” she said.
The scheme has now been expanded from home loans to other consumer loan segments like car finance.
SBI Chairman O P Bhatt defended the scheme, saying RBI paid 3.25 per cent for funds parked at reverse repo window, while this money could earn 8 per cent if lent for buying homes.
The bank has managed to scale up its market share in home and auto loan businesses on the back of the fixed-cum-floating rate schemes. HDFC, which had originally opposed the scheme, has also opted for it, though it has called it a limited-period offer.
Last week, ratings agency Fitch flagged the teaser rates for home loans as an area of concern. It said the interest rate, which was set artificially low for initial period, could give a “payment shock” to borrowers, as the equated monthly instalment (EMI) shot up after lenders began to charge regular interest rates.
The sub-prime crisis in the US was triggered by banks offering mortgage loans at ultra-low rates to borrowers who couldn’t repay them when rates rose. RBI’s concern comes at a time when local banks have said there could be some pressure on their loan portfolio, as companies are yet to recover fully from the impact of the financial crisis. Ratings agency Crisil estimated that gross non-performing assets of the Indian banking sector could touch 5 per cent by March 2011, from 2.3 per cent in March 2008.
Referring to underpricing of loans in a market awash with liquidity, Thorat said there was risk in lending at below prime lending rates. Banks had to ensure that funds were used by clients for productive purposes.
Admitting to the risks of underpricing, Union Bank of India Chairman and Managing Director M V Nair said banks were competing for lending in a low credit growth environment. “We will take up the issue at the (Indian Banks’) association level to sensitise banks,” said Nair, who is also the chairman of the industry lobby.
“It is not that because it is priced lower, there is higher chance of non-performing assets. It’s not lower than our cost of funds and we have other products priced at similar rates,” Bhatt said, when asked about the comments from the central bank official.
For most banks, nearly 75 per cent of the loans are priced below the benchmark prime lending rate (BPLR). A part of the reason for this is directed lending, while the rest is due to pressure from companies that use the competition in the market to drive down interest rates.
The central bank had set up a committee under Executive Director Deepak Mohanty to review the BPLR framework. The panel has recommended that the system be replaced with base rates, which are linked to one-year cost of funds. In addition, it has said that only 15 per cent of the lending should be below the base rate.
Thorat also flagged liquidity risks from the huge flow of bank funds to mutual funds. Bank investment in schemes offered by mutual funds had exceeded Rs 1,60,000 crore due to low demand for credit.
She also defended the decision of making banks meet 70 per cent loan loss coverage ratio by September 2010. She said this decision factored in increase in non-performing assets in future and likely slippages in restructured assets.
RBI would soon issue guidelines prescribing the minimum period for which banks should hold assets on their books before securitising these.
FDI curbs put brakes on growth
FDI curbs put brakes on growth
The Financial Express, January 13, 2010, Page 4
fe Bureau, Mumbai
Despite the retail sector accounting for 10% of the country’s GDP and around 8% of the country's workforce, equity investments seem a distant dream for the industry since government rules do not allow foreign direct investments (FDI) into the sector. Even debt financing is a Herculean task for the industry, due to unfavourable equity support prevalent in the sector, said speakers at the National Retail Summit 2010 organised by the CII on Tuesday.
Pankaj Jaju, executive director, Enam Securities, said, “The sector needs around Rs 50,000 crore equity but has seen investments of only Rs 4,000 crore.” He further said private group houses like the Reliance Group, the Birlas and the Tata Group have collectively invested Rs 2,000 crore in their separate retail ventures and the remaining Rs 2,000 crore has been raised through capital markets by fashion and lifestyle stores Shopper’s Stop Ltd and Kishore Biyani-led Pantaloon Retail etc. “If private equity is allowed in the sector, growth in retail will be even more faster,” added Jaju. The sector is considered the largest in India after agriculture, and is amongst the fastest growing industries with several players entering the market.
Explaining how procuring loans for the retail venture is difficult, Asim Dalal, managing director, The Bombay Store, said, “A year and a half ago when I approached a bank for funds to fuel our expansion plans, I was asked whether I can pledge my property as a collateral for the loan. Retaillers either have leased or a rented property. In such a scenario, one can’t offer a rented property as collateral and hence bank support is difficult.”
However, largely, whatever investments the sector has seen is either through internal accruals or by an individual.
“Previously, no banks supported the telecom sector, but today banks have a positive approach towards the sector due the enormous growth potential, said Jitendra Balakrishnan, advisor, IDBI.
The Financial Express, January 13, 2010, Page 4
fe Bureau, Mumbai
Despite the retail sector accounting for 10% of the country’s GDP and around 8% of the country's workforce, equity investments seem a distant dream for the industry since government rules do not allow foreign direct investments (FDI) into the sector. Even debt financing is a Herculean task for the industry, due to unfavourable equity support prevalent in the sector, said speakers at the National Retail Summit 2010 organised by the CII on Tuesday.
Pankaj Jaju, executive director, Enam Securities, said, “The sector needs around Rs 50,000 crore equity but has seen investments of only Rs 4,000 crore.” He further said private group houses like the Reliance Group, the Birlas and the Tata Group have collectively invested Rs 2,000 crore in their separate retail ventures and the remaining Rs 2,000 crore has been raised through capital markets by fashion and lifestyle stores Shopper’s Stop Ltd and Kishore Biyani-led Pantaloon Retail etc. “If private equity is allowed in the sector, growth in retail will be even more faster,” added Jaju. The sector is considered the largest in India after agriculture, and is amongst the fastest growing industries with several players entering the market.
Explaining how procuring loans for the retail venture is difficult, Asim Dalal, managing director, The Bombay Store, said, “A year and a half ago when I approached a bank for funds to fuel our expansion plans, I was asked whether I can pledge my property as a collateral for the loan. Retaillers either have leased or a rented property. In such a scenario, one can’t offer a rented property as collateral and hence bank support is difficult.”
However, largely, whatever investments the sector has seen is either through internal accruals or by an individual.
“Previously, no banks supported the telecom sector, but today banks have a positive approach towards the sector due the enormous growth potential, said Jitendra Balakrishnan, advisor, IDBI.
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