Indian Banks

Private lender ING Vysya Bank today said it plans to raise funds by issuing up to 28 million equity shares to the promoters and qualified institutional players.

The bank did not specify the amount to be raised from the proposed offers. At the today’s closing price of Rs 342.25 apiece on the Bombay Stock Exchange (BSE), the bank would raise up to Rs 976 crore through the offer.

“Shareholders of the bank have approved a fund raising by bank through further issue of capital up to 28 million shares by way of preferential issue to promoters and qualified institutional placement to institutional buyers,” ING Vysya Bank said in a filing to the BSE.

The filing said up to 15 million shares will be sold to institutional buyers through a qualified institutional placement and up to 13 million equity to the bank’s promoters, ING Mauritius Holdings and ING Mauritius Investments I.

Last month, the board of the bank approved the fund raising plan.

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State Bank of India (SBI), India’s largest public sector lender, is likely to complete a proposed rights issue of Rs 20,000 crore by December.

A rights issue is a capital raising instrument in which shareholders are offered additional shares at a discount to the market price, without diluting the promoter’s holding in the company.

“Out of the proposed issue size of Rs 20,000 crore, government’s share would be Rs 12,000 crore. Currently, we are in talks with the government to get their share of the contribution. We have a very supportive stand from them,” SBI Chairman Pratip Chaudhuri said on the sidelines of a function organised by the State Bank of Mysore. He said the government would maintain the public sector nature of all nationalised banks. Currently, the government’s holding in SBI stands at 59 per cent. SBI’s proposed rights issue is expected to augment the bank’s lending operations by boosting its capital adequacy ratio.

On the merger of subsidiary banks, Chaudhuri said, “We had merged State Bank of Indore in 2010. It takes a minimum of two years to absorb a bank into the system. So, we would take a view on further mergers after 2012.”

Chaudhuri said financial reporting standards of banks were in compliance with Reserve Bank of India (RBI) guidelines. “Financial reporting standards prescribed by RBI are in compliance with old-world standards. All banks have recruited chartered accountant firms to comply with the reporting standards. I don’t think there is anything lacking in the reporting standards of banks,” he said.

RBI Deputy Governor K C Chakrabarty had, earlier this week, taken a dig at financial reporting standards of Indian banks after some banks saw their profits decline following a change in leadership. SBI, under new chairman Pratip Chaudhuri, had reported its lowest fourth quarter profit in a decade. The drop in profit was primarily attributed to high provisioning. SBI’s total provisions rose 82.1 per cent to Rs 6,059 crore, while provisioning for bad loans rose to Rs 3,264 crore during the fourth quarter of the last financial year.

The bank is, however, hopeful of recording good numbers in the first quarter of the current financial year. “We were slightly taken by surprise at the provisioning for pension in the fourth quarter. Now, provisioning has been carried out, and initial indications show earnings would be better in the first quarter,” Chaudhuri said. He added the bank’s net interest margin would be better, despite a rise in deposit rates, since the bank had recently raised its base rate. In May, the bank has increased its base rate by 75 basis points to 9.25 per cent after the policy rate increase by the central bank.

“We expect credit growth rate to be 16-19 per cent in the current financial year in rupee denomination. We are also seeing a strong demand for foreign currency loans,” he said. He ,however, added with rising interest rates, companies may opt for external commercial borrowings to raise money, and this would hurt credit growth.

SBI is also likely to raise funds through medium-term notes (MTN) in the second quarter. “We had a $5-billion MTN programme, which was raised to $10 billion. We will hit the market when there is a visibility of assets. Hopefully, we should do it in the second quarter of the current financial year,” he said. He added the bank would open a wholly-owned subsidiary in Australia next year with an investment of $75. The bank would also open branches in London and Singapore.

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While everyone else is revising the Indian economy’s growth estimate for the current financial year, the Reserve Bank of India (RBI) sticks to its projections since it has already factored the moderation in economic expansion in its annual monetary policy. However, the central bank feels that non-performing assets of banks are rising, which is a matter of concern, but is not alarming.

“We have said growth will moderate… We stick to our target,” RBI Deputy Governor K C Chakrabarty told reporters on the sidelines of a convocation function of International Management Institute (IMI).

Considered conservative, RBI has projected the Indian economy to grow by eight per cent this financial year, against the Economic Survey’s prediction of nine per cent.

However, rising inflation and elevated global fuel prices have forced the finance ministry to revise down its projections. It will come out with the revision some time this month.

Last year, the economy grew by 8.5 per cent, but the growth in the last quarter of the year fell down to over a year low of 7.8 per cent.

The latest PMI survey also showed that services sector growth has plummetted to a 20-month low in May this year.

When asked that industry chambers are blaming RBI for stiffling growth by rising policy rates, Chakrabarty said, “It is because of high inflation. We have to strike a balance between inflation and growth.” Inflation, though down to 8.66 per cent in April from 9.04 per cent in March, is still at elevated level. Besides, petrol price hike of Rs 5 a litre is yet to be factored in. Decision on increasing prices of diesel and LPG is yet to be taken.

The central bank has raised policy rates for the ninth time in its annual policy for 2011-12 announced in May since early 2010. This time the rates were hiked steeply by 50 basis points.

He skirted a query whether RBI will press the pause button on raising repo and reverse repo rates (short-term lending and borrowing rates) at its monetary review on June 16, saying, “Wait for the governor’s statement that day.”

On apprehensions that lower growth and high global crude prices will widen fiscal deficit much more than 4.6 per cent of GDP as predicted by the Finance Ministry for the current financial year and this may militate against RBI’s tight monetary policy, the deputy governor said, “Why should I not believe the Finance Ministry?” It is confident that it will rein in fiscal deficit at 4.6 per cent of GDP, despite many economists casting doubts about the optimism.

On the rising NPAs of banks, the deputy governor said they are rising and it is a matter of concern. However, he hastened to add that NPAs are not as high and still manageable. “The situation is not alarming, but the banks will have to raise their risk management capabilities. Banks will have to take corrective steps to contain NPAs,” he said.

Last month, Finance Minister Pranab Mukehjee had also said that bad debts of PSU banks in the last financial year was a matter of concern.

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The Reserve Bank of India (RBI) has asked banks to furnish details of the portfolio management services offered by them.

RBI had, earlier this week, sent mails to various chief executive officers of banks, asking for the details of their operations. It sought to know under what name various products were sold — whether they came under portfolio management, wealth management, private banking or investment advisory. RBI guidelines pertain to portfolio management services.

“RBI has asked us to furnish details of the various parameters of portfolio management services like nomenclature, the products offered and the disclosures we make to clients about risks and returns” said a senior official of a public sector bank. Most foreign and private banks, along with a few public sector banks, offer portfolio management services.

RBI also wanted to know if there was any actual, perceived or potential conflict of interest in offering such products and a bank’s responsibility or obligation towards its clients. It also asked whether the people selling these products were qualified and whether there was a proper criterion for employees offering such services. Banks would also have to provide information on the number of complaints and the performance of their grievance-redressal mechanism.

Portfolio management services offered by banks are classified into four categories — referral services, investment advisory, non-discretionary and discretionary. Sources said the current norms do not clearly distinguish between investment advisory and non-discretionary portfolio management services.

Currently, to offer portfolio management services, banks need RBI’s approval. They also have to be registered with Sebi. Registration with Sebi is also required to offer investment advisory services, which are non-discretionary in nature (the client’s approval is required for investment).

The RBI communique follows a fraud in Citibank’s branch in Gurgaon in December 2010. The fraud was allegedly committed by its employee, Shivraj Puri, who had siphoned off Rs 400 crore by selling financial products not authorised by the bank. The investment products were allegedly sold to high net-worth individuals, with a claim that these would generate very high returns.

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A working group of the Reserve Bank of India has recommended that derivative deals — both forward and swap — worth $1,00,000 or more should be reported to the agency working as repository.

The Clearing Corporation of India Ltd (CCIL) should be made a reporting platform for such over-the-counter (OTC) derivative deals in interest rates and foreign exchange for confidentiality, the RBI group said in its report. The report of RBI’s working group on interest rate and forex derivatives is available on RBI’s website. The group was headed by P Krishnamurthy, chief general manager, RBI.

Repository services under CCIL may come under a separate entity, subject to economic viability. This would help segregate the repository activity from clearing and settlement activity and ensure better governance and compliance with standards. All interbank forex forward transactions may be reported to CCIL, under the mandate of RBI, which already has a platform for the purpose.

The working group said the non-transparency of the OTC market led to risks in the system. This was widely believed to be one of the causes of the recent financial crisis. While India had arrangements for the reporting of various derivative transactions, there was a need to consolidate the reporting arrangement. Consolidated reporting would improve transparency, facilitate comprehensive monitoring and improve the efficiency of post-trade processing infrastructure. The current system of reporting interbank interest rate swaps (IRS) and forward rate agreements (FRA) transactions to CCIL may be formalised, by reporting to a trade repository. Reporting of client trades in FRA and IRS to CCIL may also be mandated, with the necessary safeguards.

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HSBC Holdings Chief Executive Officer Stuart Gulliver on Thursday said the bank would do well to trim staff and cut less profitable operations outside Asia. This, he said, would help the bank meet its target of saving $3.5 billion.

Gulliver said the lender’s retail banking operations in China and India were still recording losses, but the bank would continue to run its business there, since it needed a substantial yuan and rupee deposit base. “Asia is not the problem,” Gulliver told a shareholders’ meeting in Hong Kong. “There are some parts of the world that need sorting out, and Asia is not one of them.” HSBC planned to increase the number of its employees in the region, while looking to cut costs in other non-staff expenses, Gulliver said.

The lender had, earlier this month, said it intended to cut back on its retail banking business and that it may sell its US credit card arm in a move that could cut $3.5 billion in costs and revive flagging profitability.

Many banks such as HSBC and Standard Chartered have seen their staff costs rise sharply in Asia, partly because of intense competition for talent in the fast-growing region.

HSBC also expects an interest rate rise in the United States by the end of June 2012, a move it said would have a positive pact on its net interest margin.

HSBC, which is currently headquartered in London, would look at where it is domiciled by the end of this year, a process it engages in once every three years, said Chairman Douglas Flint. Hong Kong was among the places suitable for a bank of HSBC’s size, he said. “We need to be in a location where we have a substantial presence, where the economy itself is substantial,” Flint said. “We would probably come down to no more than three or four or five cities, and Hong Kong is one of those cities.”

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Bangalore-based public sector lender Vijaya Bank plans to ramp up its merchant banking services by setting up a syndication unit in Mumbai.

The bank also plans to work as a co-syndicator with a consortium of banks in the near future. “We are taking some significant steps to ramp up our merchant banking business, which will increase the bank’s fee-based income. As the first step, we will open a syndication unit in Mumbai to cash in on emerging opportunities in this space,” said Chairman and Managing Director, H S Upendra Kamath.

Kamath, however, declined to give any earnings target from the merchant banking segment. “We are not looking at acquiring any brokerage firm for complementing this kind of a service. We want to provide these services on our own,” he added.

Currently, Vijaya Bank has a capital market service branch in Mumbai, which handles interest and dividend payments. However, after electronic fund clearing services were introduced, this business facility failed to record good growth.

Owing to their popularity, most banks across the country are increasingly offering merchant banking services. Under these services, financial institutions usually provide services like portfolio management, credit syndication and advice on mergers and acquisitions. This helps banks raise their fee-based income and boost net profit.

Vijaya Bank also plans to foray into the life insurance business. “Currently, we are planning to enter the life insurance business along with a few partners. However, anything concrete is yet to emerge in this regard,” Kamath said. The bank had earlier pulled out of its joint venture with Punjab National Bank in the life insurance space. Currently, as a corporate agent, it sells Life Insurance Corporation of India’s products. The public sector lender had reported a 58.5 per cent decline in its net profit at Rs 54.23 crore for the quarter ended march, owing primarily to provisions for wage revision.

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Reserve Bank of India Governor Duvvuri Subbarao on Thursday said India would find it difficult to achieve its fiscal deficit target this year, unless it made adjustments to account for the rise in fuel and fertiliser prices. The comments sparked market concern that the government would need to step up borrowing to fund the gap.

In Budget 2011-12, the government had announced a fiscal deficit target of 4.6 per cent of the gross domestic product. This was widely considered to be ambitious, after its 5.1 per cent deficit target for last year was met by high one-time revenues.

“Since crude fertiliser prices have gone up since the Budget announcements, unless some adjustment is made, either on the expenditure side or the tax side, it is difficult to deliver on a 4.6 per cent target,” Subbarao said, after RBI’s board meeting here. “It is difficult to say whether the government can deliver on a 4.6 per cent target. It depends on what decision they take and a number of issues — the adjustment of fuel prices being the most important one,” he said, adding fighting inflation remained the central bank’s priority.

The government had said it would borrow a gross Rs 4.17 lakh crore in the current financial year, of which it would raise Rs 2.5 lakh crore in the first half.

Subbarao’s comments, which came after the markets closed, raised concerns among bond dealers that the government would increase its borrowing in the second half of the current financial year. “The governor’s remarks on fiscal deficit raise doubts that borrowings in the second half of the current financial year could be increased. However, there should not be any impact on markets now, since the concern for the market is immediate supply. We will cross the bridge, as and when it comes,” said Manish Wadhawan, director and head (rates), HSBC India.

Last June, the government had allowed state-run oil firms to fix the price of petrol, but had continued to control the prices of diesel, kerosene and cooking gas to shield the poor and try to tame inflation. State-run oil firms increased petrol prices by about 8.6 per cent from Sunday, a record rise, that is expected to fuel inflation in the country.

RBI had, on May 3, raised interest rates for the ninth time since March 2010, by a sharper-than-expected 50 basis points. It had also said fighting inflation was its priority, even at the expense of some short-term growth. “This is our priority and I only want to reiterate what we said in the annual policy — that we need to bring inflation down to an acceptable level for growth to be sustainable,” Subbarao said.

The wholesale price index has remained stubbornly high for months and rose 8.66 per cent annually in April. The prospect of higher energy prices would exert pressure on RBI to raise interest rates in June and maintain a hawkish stance. RBI expects inflation to stay high in the first half of the current financial year before easing to six per cent by the end of the year.

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