Indian Banks

Equity investments have slowed, with drop in Ulips.In a last-ditch effort to match last year’s investment figures, Life Insurance Corporation of India (LIC), the largest domestic institutional investor in the country, is looking to invest Rs 80,000 crore in debt and equities during the Jan-March period of this financial year. Of this Rs 15,000-20,000 crore would be invested in equities, with the rest going to debt instruments, a top official said on Thursday.

During 2011-12, it invested Rs 1.15 lakh crore, of which Rs 25,000 crore was in equities, said LIC chairman-in-charge D K Mehrotra. “Of around Rs 90,000 crore debt investments, a large part of it has gone to government securities, whereas 25-30 per cent went in corporate instruments. Our total investment would remain close to last year’s figures,” Mehrotra added on the sidelines of a press conference.

 In 2010-11, LIC invested Rs 1.95 lakh crore, of which Rs 43,000 crore was in equities.

Equity investments by life insurers has slowed in the current financial year, largely because of the drop in sales of unit-linked insurance products, which accounted for nearly 80 per cent of the industry sales. For LIC, too, the product mix between traditional and unit-linked insurance plans (Ulips) has come to 70:30 from 55:45 earlier.

In Ulips, 90 to 95 per cent of the funds are deployed in equity, whereas for traditional plans only 10 per cent goes into equities.

During the April-November period, LIC’s premium collection dropped 18 per cent to Rs 45,759 crore. In the same period, the life insurance industry premium collection was down 19 per cent to Rs 62,429 crore largely on account of the new regulations by Irda, which had impacted the sales of unit-linked policies across the industry.

Housing Finance to raise Rs 500 cr 
LIC Housing Finance (LICHF), the mortgage financing arm of LIC, is going to raise Rs 500 crore via its maiden venture capital fund, an urban development one. LICHF has already mopped up Rs 200 crore in the first tranche and would be looking to achieve the final closure in the next seven-eight months.

“We have already raised Rs 200 crore and will start deploying soon. The fund aims to make investment in companies involved in development of mid-income affordable housing, income yielding to micro infrastructure assets including industrial and IT parks, SEZ and other allied segments through equity and equity related instruments,” said V K Sharma director and chief executive, LICHF. Both LIC and LICHF has invested Rs 50 crore each in the fund, he said.

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Bank saw 30 per cent rise in savings deposit balances in the last two months.YES Bank on Thursday intensified the deposit rate war, increasing the interest rate on savings deposits for the second time in two months. The private sector lender would now offer seven per cent interest on savings deposits above Rs 100,000 to strengthen its low-cost deposit base.

YES Bank was the first bank in the country to raise the savings deposit rate, after it was deregulated in late October. The bank had increased the interest rate by 200 basis points to six per cent. The lender said for deposits below Rs 100,000, it would continue to pay six per cent interest.

According to Rana Kapoor, founder, managing director and chief executive of YES Bank, the lender recorded a 30 per cent rise in savings deposit balances in the last two months, after it increased the savings deposit rate. “We will build on this momentum and accelerate further. It is critical to our strategy,” he said.

YES Bank’s savings deposits accounted for only two per cent of its total deposit base as of September-end. Low-cost current account and savings account deposits accounted for 11 per cent of total deposits. At the end of the July-September quarter, the bank’s deposit base stood at Rs 44,076 crore.

In October, the Reserve Bank of India had deregulated the savings deposit rate, the last bastion of administered rate regime. All banks were paying a uniform rate of four per cent on savings deposits till then.

Earlier this week, Karnataka Bank had raised its savings deposit rate by 100 basis points to five per cent. Three other private sector banks, Kotak Mahindra Bank, IndusInd Bank and Ratnakar Bank, along with Saraswat Bank, had raised their savings deposit rates.

Public sector banks, including the country’s largest lender, State Bank of India, and large private lenders like ICICI Bank, HDFC Bank and Axis Bank have not raised their savings deposit rate, as these said savings deposit accounts were typically used for transactional purposes.

Even banks that have raised the rates are not in a hurry to revise their savings deposit rate anytime soon. “We are pretty comfortable with our current rate. We have seen significant traction in our new account acquisitions after we raised the savings rate in November. Beyond a point, rates have to be seen along with other features and services being offered, as savings accounts are predominantly transaction accounts. At this point, we don’t see a real need to react,” said Rajeev Ahuja, head of strategy and financial markets, Ratnakar Bank. The bank offers 5.5 per cent interest on its savings deposits.

Kotak Mahindra Bank said it had no immediate plans to raise its savings deposit rate further. The bank pays six per cent interest on deposits above Rs 100,000 and 5.5 per cent for deposits up to Rs 100,000. “We have not decided on a further hike in our savings deposit rate,” said K V S Manian, group head of consumer banking, Kotak Mahindra Bank.

IndusInd Bank said the balances in its savings accounts had shown good growth after it raised the rate and there was no immediate plan to raise the interest rate on these accounts.

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The Reserve Bank of India has been buying back government securities to ease liquidity.

The Reserve Bank of India (RBI) on Thursday said it would take all the necessary steps to ease liquidity constraints in the money market.

RBI has been buying back government securities to ease the liquidity situation, after having raised key policy rates 13 times since March 2010. So far, RBI has bought back securities worth about Rs 25,000 through open market operations (OMOs). Also, upcoming advance tax payments by companies are likely to add to the liquidity constraint in the market, given companies have to pay advance taxes for the third quarter by December 15.

“In order to ease the situation, so far, we have carried out open market operations for Rs 25,000 crore. We would take all necessary steps to see that liquidity is eased. We are aware of the advance tax payment situation. We will take that into account while assessing the liquidity situation,” said RBI Governor, D Subbarao, at a press conference after its central board meeting in Kolkata.

According to RBI’s guidance, liquidity should remain remain between plus/minus one per cent of net demand and time liabilities, which translates into about Rs 60,000 crore. “In the last few weeks, it has gone beyond that, which means there is liquidity constraint across the system, or for certain banks,” Subbarao said.

In its last policy statement, RBI had hinted at a pause in its hawkish policy stance.

“Further rate action, whether it would be paused, depends upon any unanticipated development. Certa-inly, supporting growth remains our objective,” Subbarao said.

Since November 24, banks have been drawing an average of Rs 1 lakh crore daily from RBI, at a repo rate of 8.5 per cent under the liquidity adjustment facility (LAF). “Whatever instruments we have, OMO and LAF are there…If anything else is required, we would do that for liquidity management,” he added.

There has been a debate over the use of the cash reserve ratio (CRR) as a tool to manage liquidity. The CRR, currently at six per cent, is the proportion of deposits banks need to set aside with the central bank as cash.

“The consideration that goes into a CRR cut, or CRR action, has to be kept in mind. The consideration fundamentally is CRR is not just a liquidity tool, but also a monetary policy signal. And, we are, as of now, still in a situation in which inflationary pressures are high. For the moment, while we want to address the liquidity situation, we don’t want to do it in a way that compromises our monetary stance. So, the use of these tactical measures like OMOs is clearly the way we are going to go,” Subir Gokarn, deputy governor, RBI had said at the bankers’ meeting yesterday.

On the possibility of a cut in CRR in the next RBI policy statement, Subbarao was cautious, saying, “I cannot really react to what the market is expecting outside the context of the policy. Whatever we might decide, on the CRR or otherwise, you would have to wait for our mid-quarter statement.” RBI would meet on December 16 to review its monetary policy. To ease inflation, RBI has been raising key policy rates over the last one year.

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Royal Bank of Scotland (RBS) on Thursday said the Reserve Bank of India (RBI) had not rejected its proposal to sell the bank’s retail and commercial banking businesses in India to Hongkong and Shanghai Banking Corporation (HSBC).

“We can confirm the Reserve Bank of India is agreeable to the transfer of our retail and commercial businesses in India to HSBC. We continue to work closely with HSBC and the regulators to complete the transfer in a manner that is in the best interest of our clients and employees,” RBS said in an e-mailed statement.

The deal, announced in July, 2010, was part of RBS’ plan to retreat from some of its business in foreign markets. HSBC had agreed to pay premium of up to $95 million over the tangible net asset value of the businesses, once the deal was completed. The actual price, however, would depend on the quality of assets. The transaction was scheduled to be completed by September 30.

RBI, however, has not approved the deal yet. According to sources, the banking regulator was not comfortable with RBS selling its branches to HSBC, though the lender would continue its wholesale banking operations in India. Sources said the banks were re-working the structure of the deal.

Currently, HSBC has 50 branches in India, the second-most among foreign banks in the country. RBS has 31 branches.

HSBC has maintained the bank continues to “engage positively with the regulator” for this transaction. In an interview with Business Standard, Naina Lal Kidwai, country head for HSBC in India, said the regulatory approval was taking time due to the unprecedented nature of the deal.

RBS said India would continue to remain the third-largest employment centre for the group globally. “India remains one of the top three priority markets in the Asia-Pacific region for the RBS Group…Our commitment to India remains focused. We have been, and will continue to, invest strategically in India across our ‘go forward’ businesses,” it said.

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Asharp rise in provisioning for bad loans lowered the net profits of public sector banks in the second quarter of this financial year. Most banks saw an increase in non-performing assets (NPAs) on back of rising interest rates and migration to an automated recognition system.

Mumbai-based Bank of Baroda (BoB) posted an increase of 14.4 per cent in net profit at Rs 1,166 crore in the quarter ended September, provisioning for bad loans more than doubled to Rs 298 crore as compared to same quarter, last year. “Increase in NPAs was seen from all sectors and geographies,” said M D Mallya, chairman and managing director. He said Rs 663 crore worth of assets were restructured quarter and 10-11 per cent of the total restructured portfolio slipped into NPAs in July-September.

All government banks were mandated to shift to an automatic NPA recognition system by the end of September. Also, adding to the pressure on banks’ asset quality was the monetary tightening by Reserve Bank of India as it raised policy rates 13 times since March, 2010.

Higher provisioning dragged Bangalore-based Canara Bank’s net profit 15.4 per cent, to Rs 852.2 crore during the reporting period. The higher provisioning was because the bank has migrated all accounts to the automated NPA recognition system. “We have taken a hit on our net profit mainly because of higher provisions towards NPAs to the tune of Rs 553 crore, higher by 3.5 times over the corresponding quarter,” S Raman, chairman and managing director, said.

New Delhi-based Oriental Bank of Commerce which has seen provisioning for bad loans and writeoffs more than double to Rs 485 crore in July-September this year, reported 58 per cent decline in net profit to Rs 167 crore.

An increase in bad loans also weighed on Corporation Bank which reported 14 per cent rise in net profit at Rs 401.11 crore. The gross NPAs of the bank rose 1.32 per cent at end-September from 1.05 per cent in the same period of the previous year. According to the management, the major source of addition to bad loans were small and medium enterprises and the agriculture sector.

Led by a higher yield on advances and lower provisioning, Kolkata-based UCO Bank posted a 94 per cent rise in net profit to Rs 231 crore for the quarter ended September 30, against Rs 119 crore in the same period last year.

Dena Bank reported 20.8 per cent rise in net profit at Rs 193.58 crore for the quarter ended September 2011. Its net interest income was up 16.43 per cent at Rs 514.9 crore.

United Bank of India posted a 13.7 per cent rise in net profit to Rs 124.77 crore for the quarter ended September against Rs 109.7 crore in the same period last year. The bank’s slippages more than doubled at Rs 623 crore in the last quarter, against Rs 203 crore in the same period last year. “More than 50 per cent of the slippages are on account of mid-corporate accounts; the rest is contributed by small ticket advances,” said Bhaskar Sen, MD and chairman.

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ICICI Bank, the country’s largest private sector lender, on Monday said its consolidated net profit for the quarter ended September 30 surged 43 per cent to Rs 1,992 crore, compared with Rs 1,395 crore a year ago. The rise was aided by higher earnings of the bank’s life insurance arm, ICICI Prudential Life Insurance Co.

ICICI Prudential Life Insurance Co reported profit after tax of Rs 350 crore during the quarter, compared with Rs 15 crore a year earlier. The higher profit was primarily due to the change in accounting for non-participating policyholders’ funds.

On a standalone basis, the bank’s net profit stood at Rs 1,503 crore during the three-month period, up 22 per cent from Rs 1,236 crore a year earlier. The growth in standalone profit was driven by lower provisions and higher interest income from advances.

Net interest income, or the difference between interest income and interest expenditure, rose 14 per cent year-on-year to Rs 2,506 crore. Fee income rose seven per cent to Rs 1,700 crore. The bank’s net interest margin was 2.6 per cent, unchanged from a year ago.

“We had a very healthy growth in profit, clearly keeping in line with our strategy of resuming growth from this year. Our aim would be to keep the net interest margin stable. The lending rates may rise if there is any increase in the cost of funds,” Chanda Kochhar, managing director and chief executive officer, ICICI Bank, said in her post-earnings comments.

Asset quality
The bank cut its provisions by 50 per cent, compared to a year ago, to Rs 319 crore during the quarter, due to improvement in the quality of its assets. The lender closed the quarter with a provision coverage ratio of 78.2 per cent. Net non-performing advances narrowed to Rs 2,184 crore from Rs 3,145 crore a year ago, leading to a 69-basis point rise in net bad loan ratio at 0.93 per cent. The gross non-performing loan ratio also rose by 89 basis points to 4.14 per cent as of September 30.

Net restructured assets stood at Rs 2,501 crore. The bank restructured Rs 743 crore of loans during the quarter, a significant share of which was accounted for by the microfinance sector.

Kochhar said the bank’s asset quality appeared to be stable and dismissed fears of the deteriorating quality of loans to the power sector. Advances to power companies accounted for about seven per cent of the bank’s loan portfolio.

Balance sheet
The bank’s advances increased 20 per cent year-on-year to Rs 233,952 crore, driven mainly by growth in corporate loans. “There has been some moderation in the growth of retail loans. While we are seeing growth in both corporate and retail advances, the growth is clearly higher on the corporate side,” Kochhar said. ICICI Bank aims to increase its advances by 18 per cent this financial year. The bank’s deposits rose about 10 per cent year-on-year to Rs 245,092 crore as of September 30.

The share of low-cost current account and savings account deposits to the total deposits improved sequentially to 42.1 per cent. Savings account deposits stood at Rs 70,149 crore, while current account deposits were Rs 32,997 crore.

The bank’s capital adequacy ratio was 18.99 per cent, while its Tier-I adequacy ratio was 13.14 per cent.

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The Reserve Bank of India’s decision to automate the process of filing regulatory reports appears to have opened a door of opportunities for technology firms. Industry players expect banks to invest over Rs 500 crore over the next one year to migrate to the new system of automated data flow. Mid-sized software companies are also sensing an opportunity to cross-sell their other banking software products along with the automated data flow solution.

For instance, iCreate Software, a Bangalore-based information technology firm, has already secured contracts from HDFC Bank, IndusInd Bank and Dhanlaxmi Bank within three months of launching their automated data flow solution Biz$core ADF. IndusInd Bank has decided to use iCreate’s enterprise business intelligence solution along with the automated data flow software. While the latter will help the bank in meeting compliance needs, the business intelligence solution will aid in managing information effectively for business requirements.

Vivek Subramanyam, chief executive officer of iCreate, stressed the need for a technology solution to remove manual intervention in regulatory reporting. “Automated reporting increases the level of confidence on data, and decision-making becomes more accurate,” he told Business Standard. “There are 150 to 250 types of regulatory reports that banks have submit to RBI at periodic intervals. We are completely focussed on this opportunity and are engaging with the entire banking fraternity to position our Biz$core ADF solution.”

He said the company’s automated data flow solution cost “single to early double digits” crore of rupees.

In August, Ramco Systems, a software firm in Chennai, launched an automated data flow solution to help banks adhere to RBI guidelines on submission of regulatory reports without manual intervention. “Our ADF solution,” says Kamesh Ramamoorthy, chief operating officer of the Chennai-bases software firm, “can be deployed on any database management system. It can go live within weeks.”

However, some banks are likely to rely on their in-house teams to develop this software instead of outsourcing it to a technology firm. According to a senior official of a Mumbai-based private sector bank, if the in-house technology team of a bank is strong, then developing the software makes more sense as the lender can customise the solution according to its requirements. Another option is that the bank will build the software on its own, but will seek assistance of a technology firm for integrating it with the main system.

But most banks are expected to use third-party software as they have to comply with RBI’s guidelines within a specified time period. “It is not their core operations,” says an industry expert. “Hence, they will choose products of software companies to meet the guidelines.”

The new guidelines on automated regulatory report filing were released after the central bank was alarmed by the trend of eroding profitability of state-run banks soon after the retirement of the chairman. The move is aimed at minimising the scope of errors and manipulation in reports that are submitted to RBI at periodic intervals by banks.

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Indian insurance companies would spend $1.8 billion on information technology (IT) products and services in 2012, an increase of 11.7 per cent over the expenditure of $1.6 billion in 2011, according to Gartner Inc. The forecast includes spending by insurers on internal IT, hardware, software, external IT services and telecommunications.

Telecommunications represents the biggest spending category, and expenditure on this is estimated to touch $566 million in 2012, up from $512 million in 2011. However, spending on IT services is expected to grow the fastest in 2012, with the expenditure standing at $447 million in 2012, a rise of 15.8 per cent compared with $386 million in 2011, according to the study.

Indian insurers are faced with an opportunity to transform significant aspects of their operations through technology, across the entire insurance business value chain.

“Indian insurers have shown they are particularly forward, with regard to considering alternative delivery models such as business process outsourcing,” said Derry Finkeldey, principal analyst, Gartner. “External factors, such as regulatory change, uncertain economic conditions and the increasing frequency of catastrophic events, are forcing insurers to reassess their approaches to business processes and the IT applications that enable them to derive greater efficiency and achieve more with less.”

“Insurers are looking for ways to streamline their processes, from the front office to the back office, and are investing in the next generation of core solutions to help them do that,” said Finkeldey. “These solutions often integrate business process management and analytics capabilities, or are offered in an ‘as a service’ model,” he said.

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