Indian Banks

Banks in India will need about $100 billion (Rs 5 lakh crore) of capital over the next decade as the system grows to meet credit requirements of an expanding economy, Om Prakash Bhatt, chairman of the State Bank of India said here today.

“I see a huge amount of growth across sectors and geographies, driven mainly by younger people,’’ Bhatt said at a three-day conference organised by the Indian Banks’ Association and the Federation of Indian Chambers of Commerce & Industry.

The head of the nation’s biggest bank said there was a huge requirement for capital. Urban infrastructure alone would require $1 trillion in five years. Home loans, the fastest growing segment in the banking sector, could top $1 trillion over the next decade, Bhatt said. India would have to build a banking structure bigger than what we have today, he told the gathering.

The number of hits in automatic teller machines remained unchanged even after SBI doubled their number, evidence of the need for more financial services. The need for bank branches could grow as much as four times, as more people used banking services, he said.

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The home-loan battle between State Bank of India (SBI), the country’s largest lender, and Housing Development Finance Corporation (HDFC), the largest mortgage financier, shows no signs of ending.

Less than a week after its teaser home loan scheme expired, HDFC has re-launched it at slightly higher rates. And, SBI is also likely to extend its own teaser rate scheme, due to expire on September 30, a top official said yesterday.

n HDFC’s latest offer, customers who apply before September 30 and take part-disbursement before October 31 will be charged an interest of 8.5 per cent up to March 31, 2011, and 9.5 per cent for the period between April 1 and March 31, 2012. Thereafter, the prevailing floating rate will apply. The scheme is available to all customers irrespective of loan amount, said an HDFC statement.

Last week, HDFC had raised its retail prime lending rate by 50 basis points (bps) to 14.25 per cent for the first time in two years.

According to a senior HDFC official, 75 per cent of the mortgage financier’s lending is done at floating rates.

Yesterday, SBI Managing Director S K Bhattacharya said the bank might extend its teaser home loan scheme. “Our home loan scheme has been immensely successful, and why should we not continue with it?” he told reporters on the sidelines of a banking event in Kolkata.

“It is a good scheme. We have overtaken all others in home loans. Till now, we have not taken any decision on extending the scheme. The final decision will be taken at the ALM (asset-liability management) meeting in September,” he added.

SBI’s scheme was originally supposed to end by April 30, but was extended till June and then again till September. For the first year, home loans carry an eight per cent interest rate, which rises to nine per cent in the second and third years. From the fourth year on, home loans up to Rs 50 lakh will be charged 9.25 per cent, while higher loans will be charged 9.75 per cent.

While most banks have withdrawn fixed-cum-floating rate schemes, SBI and HDFC have persisted with the teaser rates.

LIC Housing Finance has a scheme which offers 8.9 per cent till March 31, 2012, and a floating rate thereafter. LICHF Director and Chief Executive R R Nair said the mortgage financier reviews its scheme at the end of every month.

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Government bank executives got a pleasant surprise today, which came from none other than the governor of Reserve Bank of India (RBI). While mentioning the issue of compensation of private bank chief executive and board members, RBI Governor D Subbarao emphasised the need for competitive compensation for public sector banks or they may lose talent to their private sector counterparts.

“If public sector banks are required to compete with private banks on a level playing-field, there is a good case for compensating them, too, on a competitive base,’’ said Subbarao. “There is also the risk that if the public sector bank compensation is not improved, the public sector may lose talent to the private sector.’’

The governor’s comments come at a time when the central bank is battling with the finance ministry on the issue of revising the salaries of its own employees. The central bank typically revises these salaries and then informs the ministry. The ministry now wants RBI to seek prior approval of the changes.

“Executive compensation in the public sector, as is well known, is lower than that in the private sector,’’ said Subbarao. “Notwithstanding the historical reasons for this, there is, perhaps, a good reason to revisit this.’’

The central bank in July released draft guidelines regarding compensation of whole-time directors, chief executive officers, risk takers and control staff, as the regulator wants to ensure effective governance of compensation and alignment with prudent risk taking.

The guidelines require banks’ boards to formulate and adopt a comprehensive compensation policy covering all employees (risk takers and control/compliance staff). Limit on variable pay is, however, not proposed.

Since public sector banks account for 70 per cent of the Indian market, where compensation is determined by the government, the variable component is very limited.

“The proposed reform to compensation structures is relevant in India only to the remaining 30 per cent of the non-public sector industry segment,” Subbarao said.

In its July communication, RBI said flawed incentive compensation practices in the financial sector were one of the important factors contributing to the recent global financial crisis.

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State Bank of India on Thursday opened an exclusive branch — the first-of-its-kind in the country– for the ultra high networth individuals (HNIs) here.

“Accounts will be opened through invitations by the bank. We are targeting around 250 upper elite customers by March 2011 for this branch,” said Shiv Kumar, chief general manager, (Hyderabad circle) SBI.

The bank expects a turnover of Rs 100 crore from the branch, named as Kohinoor Banjara Premium Banking Centre, in the coming six months. It is planning to set up such branches across the country and in other places in the state.

“As the economy has come out from the recession, we have upgraded our banking service to meet the current demand. The centre, with state-of-the-art technology-enabled facility, will provide the customers a feel-good ambience in terms of space and personalised services,” said Diwakar Gupta, deputy managing director and group executive – Rural Business, SBI, while inaugurating the branch.

SBI has invested Rs 80 lakh in the centre. “The branch is the first-of-its-kind in India where banking service would be available throughout the year with an extended timing of up to 8 pm. It will have a business centre and a conference room,” said K Venugopal, general manager (Network-1), SBI.

The locker facility, (500) would be available 24/7 with prior appointment. Among others, it would also provide cheque/draft pick up, deliver services, video conferencing, financial planning, forex services, SBI e-Tax, e-invest and online trading facilities.

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Volatility in WPI inflation due to supply shocks makes it less effective.

A study by Reserve Bank of India staffers has favoured updating the price statistics, particularly consumer price, to improve the effectiveness of monetary policy.

The large divergence between Consumer Price Inflation (CPI) and Wholesale Price Inflation (WPI) trends, and significant volatility in headline WPI inflation due to supply shocks limit the use of price data for monetary policy making.

The Indian inflation path has been significantly conditioned by two major supply shocks — oil and food. The common man is primarily affected by these two items. Hence, exclusion of these two items will make measurement of core inflation less representative, it said. The CPI captures the effects of a rise in oil and food prices more accurately at the customer end, some analysts say.

RBI on Thursday released a staff study ‘Measurement of Inflation in India, Issues and Associated Challenges for the Conduct of Monetary Policy’.

The authors, G V Nadhanael and Sitikantha Pattanaik, said year-on-year inflation has been much less volatile than the sequential month over month (seasonally adjusted) inflation. Hence, the former is more relevant for conduct of monetary policy.

A wide dispersion in inflation across commodity groups within WPI and the weakly representative nature of price indices also complicate matters, the study said.

In the Indian context, measures like month-over-month seasonally adjusted inflation and core inflation are significantly volatile. Hence, they can’t become the key reference indicators in monetary policy, it said.

The share of significantly volatile items like, fuel and metals in total transactions have increased over time.

The distribution of inflation across different commodities within the WPI exhibits large changes during supply shocks. Understanding the variability within the commodity basket is critical to analyse the underlying price pressures and respond with appropriate policy action.

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ICICI Venture Funds Management Company Ltd, the private equity arm of private sector lender ICICI Bank, plans to deploy its $400-million (approximately Rs1,880 crore) India Advantage Fund-III in the next three years, according to its managing director and chief executive officer Vishakha Mulye.

Launched in 2009, the sector-agnostic, equity-linked fund made its maiden investment of $27 million (Rs126 crore) in Chennai-based Star Health and Allied Insurance Company Limited in April this year.The new fund follows the $810-million India Advantage Fund-II, which was capped at $583 million. The company raised $245 million in the first round.

“We believe that India offers an opportunity in the next decade as its economy is bound to grow over 8 per cent by then. The growth will mainly continue to be driven by consumption-driven segments. And, clearly pharmaceutical, media, pharmaceutical and financial services look promising today,” she told media persons here on Thursday.

ICICI Venture, which has three practices — private equity, real estate and mezzanine, recently made its first debt investment of Rs20 crore in People Combine Group’s Oakridge International School in Hyderabad.

Stating that education was clearly an upcoming segment, Mulye said ICICI Venture’s

investments in this sector would probably start from now. “We are bullish on the education sector, particularly vocational, and we will definitely look at education very closely to invest in from the India Advantage Fund-III as well,” he added.

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The Reserve Bank of India (RBI) is set to have a new deputy governor in November, when the present term of Usha Thorat comes to an end. Thorat, 60, will complete her five-year tenure in November and may not be reappointed.

According to RBI sources, the government — which appoints deputy governors — is of the view that it will do away with the practice of reappointment to important posts like chairman of the Securities and Exchange Board of India, RBI, National Bank for Agriculture and Rural Development.

However, there is no rethinking on allowing extensions of term. According to RBI rules, a deputy governor is appointed for five years or until he or she attains the age of 62, whichever is earlier. The retirement age of RBI governor is also 62.

Though there was no norm on how many deputy governors can be chosen from RBI internally, the practice usually followed is to have at least two from within the central bank. The third deputy governor is usually a public sector bank chief, while the fourth is an economist. Apart from Thorat, Shyamala Gopinath is from RBI while Subir Gokarn is an economist and K C Chakrabarty is a commercial banker.

Technically, Thorat was also eligible for re-appointment as she will still have two years before the retirement age kicks in. But for Thorat to continue, mere extension will not do and the government has to form a search committee and shortlist at least three candidates for the deputy governor’s post.

In September last year, the government had allowed the reappointment of Shyamala Gopinath, who had completed her five-year term. She was reappointed for two years up to June 2011. It was the first occasion when a deputy governor was reappointed.

Thorat oversees the department of banking operations and development, banking supervision, currency management, rural planning and credit department, among others.

Among the internal candidates that could replace Thorat are V K Sharma, the senior-most executive director, and Anand Sinha, another ED.

Gopinath’s reappointment followed observations made by the Delhi High Court in 2007 on the need for proper norms and criteria for the appointment of a deputy governor.

The court made those observations in a case filed by P K Biswas — an executive director of RBI — who challenged the appointment of Thorat as deputy governor. Biswas challenged the appointment on the grounds that despite being senior to Thorat, his case was ignored. The court had dismissed Biswas’ plea.

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The government is likely to appoint State Bank of India as the clearing bank for the proposed Goods and Services Tax (GST) and National Securities and Depositories Ltd (NSDL) as the clearing corporation for implementing the infrastructure required for inter-state tax administration.

A special purpose vehicle (SPV) would be set up for information technology infrastructure in GST. Called ‘GST N’ (Network), it would have the Union government, state governments and technology partner NSDL as stakeholders. Sources say the government is likely to make these appointments official to prepare ground for quicker implementation of GST.

NSDL and SBI will have to ensure the tax, especially in inter-state transactions, is collected and processed without procedural delay and distributed to states on a set schedule.

P Chidambaram, former Union finance minister, aimed to get GST rolling by April 1, but the deadline was re-set to April 1, 2011. The appointment of the two lead organisations would help them prepare and test their systems much in advance, an official said.

Introduction of GST will probably be India’s most ambitious tax reform to bring all states on a par and ensure higher and more transparent collection of taxes by the government. It is hoped that the system can check tax evasion at any level.

Central sales tax will be replaced by the consumption-based GST. In case of inter-state transactions, NSDL might be given special powers to distribute taxes to the states concerned after making a collection in any other state, said an official with knowledge of the matter. The IT network of NSDL and the vast branch network of SBI made them natural choices to ensure that all states get the taxes due to them fairly and quickly, the official said.

NSDL has the experience, as it had set up the tax information network for the income tax department, which is running well.

In 2004, the Task Force on Implementation of the FRBM Act, chaired by Vijay Kelkar, had also said that the existing systems should be used for GST implementation, both at the Centre and at the state level. As the tax information network was set up by NSDL, it seemed a natural choice for GST.

Tax experts believe this is a step in the right direction, but the challenge will be implementation. “At some stage, the system would need to have the ability to process, verify and reconcile the dealer/invoice details uploaded by inter-state suppliers. The other big challenge would be to expand the coverage to states where IT penetration is relatively low, to facilitate online registrations/filings/payments for all taxpayers,” said Pratik Jain, executive director, KPMG.

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