Indian Banks

Presidents of the Urban Co-operative Banks (UCBs) of the three districts of Mysore, Chamarajanagar and Mandya have appealed to the Reserve Bank of India (RBI) to withdraw the new norm introduced recently reducing the NPA calculation period to 90 days from the earlier 180 days.

At a joint meeting in Mysore recently, heads of 14 UCBs have opined that the new norm was difficult to be implemented for a number of reasons. They have described the drastic reduction in NPA norm as too short a period for the loanees to pay their overdues within 90 days. This would particularly hit the middle and lower middle class whose numbers are generally high in the co-operative banks.

The number of women borrowers is also quite big and most of those who obtain loans are housewives or engaged in small jobs. Generally, they depend on their spouses. Apart from women, agriculturists have seasonal income and they repay in bulk when they sell their harvested produce and get big sums.

Professionals like advocates, doctors, auditors and small business community engage themselves in seasonal business. All these sections would be badly hit by the reduced NPA period.

Added to this, the present natural calamities have contributed towards high rate of overdue amounts making it impossible to recover the outstanding amounts immediately. They need more time to repay their loans and overdue amounts. Overall, the new norm affects all sections of clientele of the co-ops, they said.

These sections are generally prompt re-payers though they may not pay the installments regularly. They pay amounts in lumpsum when they get bulk amounts. The new norm would put pressure on them resulting in increase in overdue and heavy losses to the banks.

For the UCBLs, the NPA provision would be a double loss as they have to pay income-tax as well on the 33.3 per cent provision. When a loan becomes overdue after 90 days default, not merely the installment becomes NPA but also the entire loan amount, piling the NPA amount considerably. Because of the loanees default, the Bank would suffer heavily owing to the new NPA provision, affecting their profits and turning them sick over a period, Graduates’ Co-operative Bank President P V Narahari, who presided over the meeting, told Business Standard.

The UCBs have to deposit the earmarked provision amount with the District Co-operative Bank or the Apex Bank, which yields hardly 7 to 8 per cent interest. If utilised for the UCBs business, the same amount would earn 14 to 15 per cent interest. Here too, the UCBs are affected, he said adding overall the new NPA norm would fail to serve the RBI’s intention.

A delegation of the UCBs chiefs will meet the RBI authorities soon and request them to restore the previous norm of 180 days and help better growth of the co-operatives in the country, Director Anantharam added.

(BS)

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Banks withdrew heavily from mutual funds (MFs) in the last fortnight of December. The reason: High credit growth and provisions for liquid funds at the end of the quarter.

According to the Reserve Bank of India (RBI) data, banks withdrew Rs 1,04,851 crore from MFs during the fortnight ended January 1 and their MF investments now stand at Rs 42,428 crore.

Credit offtake grew Rs 79,000 crore during the period while deposits grew Rs 82,769 crore (fastest since January 2008).

Banks either lend their surplus funds or invest in instruments like mutual funds, reverse repo and call money. Since credit demand has revived over the last four fortnights, banks have been reducing their investments in liquid schemes of mutual funds, which fetch returns of close to 4.31 per cent. Call rates are at 2.10-3.35 per cent while the reverse repo rate is 3.25 per cent.

(BS)

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India’s foreign exchange reserves went up by $741 million to $284.26 billion during the week ended January 8, mainly due to revaluation of currencies. According to the latest data by the Reserve Bank of India (RBI), foreign currency assets went up by $772 million to $259.41 billion during the week. In rupee terms, the reserve declined by Rs 19,151 crore to Rs 13,03,529 crore. While gold remained unchanged in the reserve, SDRs dropped by $24 million to $5.14 billion.

(BS)

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Axis Bank today announced the appointment of Adarsh Kishore as non-executive chairman. Kishore, who just returned to India after completing his term as executive director at the International Monetary Fund, replaces PJ Nayak, who was chairman and chief executive till July. In addition, former LIC chairman S B Mathur has been appointed an additional independent director.

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With bank FDs offering little, the risk-averse need to check company deposits or even balanced MFs.

With inflation on the rise, risk-averse investors who prefer parking their money in bank fixed deposits will soon find themselves in a fix.

The returns on offer from banks are now quite low. Most private and public sector banks’ one-year fixed deposit rates are between 6 per cent and 6.25 per cent. For instance, State Bank of India, ICICI Bank and Canara Bank offer a one-year deposit at 6.25 per cent. HDFC Bank is offering one-year deposits at 6 per cent.

The inflation rate in November had already reached 4.78 per cent. Last month, C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, had reportedly said the rate is likely to reach 7 per cent by March. In which case, getting yourself locked into deposits that are offering 6-6.25 per cent isn’t good policy. In such a scenario, financial advisors say even risk-averse investors need to look at other avenues, that will give inflation-adjusted returns of 4-5 per cent at least.

One answer could lie in company deposits and balanced funds. “A number of investors, who are unwilling to take higher risk, yet want to earn safe returns, have been consistently parking funds in fixed deposits of good companies,“ said C Saravanan, president, Bluechip India.

Well-known names such as Mahindra and Mahindra (M&M) and Jindal Steel and Power have issued fixed deposits at more attractive rates. M&M is offering an annual rate of 8.5 per cent, while Jindal Steel’s rate is 8 per cent.

If that’s not enough, you can opt for mid-caps and non-banking finance companies, that offer rates as high as 9-10 per cent. Examples of such companies are KCP (10 per cent); Pudumjee Pulp (9 per cent) and Dewan Housing (8.9 per cent).

“But before investing in company deposits, investors need to understand that as the rate of return goes up, so do the risks. When investing in such companies, a proper check on their financial health needs to be done,” said Gaurav Mashruwala, a certified financial planner.

There are several ways to judge the company’s financial health. For one, when a company seeks funds from you, instead of a bank, it is because the cost of funds would be cheaper.

For instance, if SBI’s prime lending rate is 11.75, it is much cheaper for a company if it can garner funds at 8-9 per cent from retail investors. But, if a company is willing to offer 14-15 per cent, it clearly has a problem in raising cash.

Similarly, if there is a large rate disparity between a company and a bank fixed deposit, one should avoid it. “Be wary of firms that have interest rates more than 5-6 per cent of the prevailing fixed deposit rates of large banks,” said a financial planner. In the current scenario, go for companies that offer rates below 10-10.5 per cent.

Then, one has to look at the ratings assigned to these company deposits by agencies such as Crisil, Icra and Fitch Ratings. Ratings of AAA or AA+ indicate the companies are in sound financial health.

While looking at the balance sheet could be a cumbersome process, if you are investing in a company that is offering surprisingly higher rates, take a look at its books. Parameters like profitability and the debt already on the books will give you a fair idea about its finances.

Taking all these steps is necessary because these deposits are unsecured. In other words, these deposits are not backed by any assets. If a company goes into liquidation, as has been the case many times, company deposit investors are treated as unsecured creditors The liquidator will first pay back the secured lenders, usually institutional bodies. After that, unsecured debtors are paid. Finally, equity holders will be repaid, because they are part-owners of the company.

Further, these deposits are not protected by any insurance, unlike banks. If a bank goes into liquidation, investors are assured that they will get back at least Rs 1 lakh.

Several companies have defaulted in the past. Known names who did this include Morepen Laboratories, DCM and Modern Industries, where such investors lost money.

Also, check the tax liability before investing in a company fixed deposit.

“Most of the time, FDs make little sense for people in the highest tax bracket,” said Brijesh Dalmia, director, Dalmia Advisory Services.

The average post-tax returns of short-term debt schemes or floating-rate debt funds are around 5-5.5 per cent.

For similar returns, a company deposit should give pre-tax returns of 8-8.5 per cent for people in the top tax bracket.

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The last fortnight of 2009 brought back smile on the face of bankers, as outstanding credit in this period grew at the quickest pace in the financial year so far.

Bank credit grew by Rs 79,515 crore to a total outstanding of Rs 30,20,807 crore in the fortnight up to January 1, 2010, according to data released by the Reserve bank of India (RBI).

The year-on-year increase in credit for the reporting fortnight was 13.66 per cent compared to 11.25 per cent in the previous fortnight.

Bankers said the figures were encouraging even after discounting the fact that this was the last fortnight of the quarter when banks usually push disbursals to build their books.

“The spike could be on account of some lumpy disbursals in the telecom, infrastructure and oil & gas sectors. But we have been seeing a sequential growth in disbursals since November, and this looks like the beginning of a trend,” said Abheek Barua, chief economist at HDFC Bank.

The spurt in disbursals in the fortnight pushed the quarterly credit growth figure to its highest level since March 2008, when the Indian economy was running at full steam.

In the three months to December 31, 2009 (December quarter), credit outstanding grew by Rs 147,652 crore, nearly double the Rs 77,407 crore recorded in the September 2008 quarter.

While this trend indicates an increase in credit offtake, bankers have lowered their growth estimates for the current financial year ending March 2010. The Reserve Bank of India in its second quarter review had lowered the estimate for non-food credit in 2009-10 to 18 per cent from 20 per cent.

There was positive news on resource gathering. Deposits, too, grew at their fastest pace since January 2008, increasing by Rs 82,768.51 crore in the fortnight up to January 1, 2010.

In the previous fortnight, bank deposits had shrunk by Rs 21,873 crore on account of advance tax payments by companies.

A senior executive of a large public sector bank said the deposit growth was normal given the current market scenario. He added that low-cost deposits had grown at a higher pace compared to fixed deposits.

The unexpectedly good credit numbers come a day after the announcement of Industrial Index of Production (IIP) for November 2009, which grew at its fastest pace in the past two years.

“Credit offtake is slowly increasing, although it has not picked up fully yet. There is good demand from infrastructure and power sectors on the corporate side, and auto and home loans on the retail side,” said a senior executive of a large public sector bank.

The numbers come as a welcome relief to public sector banks who have almost given up on meeting the 20 per cent credit growth target they had set at the start of the current financial year.

(BS)

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Ahead of State Bank of India’s proposed bond issue for retail investors, the Reserve Bank of India (RBI) today asked banks to ensure floating rate instruments were delinked from fixed-deposit rates.

In addition, the regulator mandated that banks issue a warning and went to the extent of specifying the wording and the font size that needed to be inserted in offer documents and application forms.

Besides, it wanted banks that raised Tier-II capital through the subordinated debt route to ensure the distinction between fixed deposits and bonds was clearly understood.

Tier-II capital is reckoned as part of the overall capital base of a bank and is included in calculating the capital adequacy ratio. In contrast, deposits are liabilities which do not reflect the strength of the bank. Retail deposits up to Rs 1 lakh come with an insurance cover.

In case of liquidation of a bank, depositors with a balance of up to Rs 1 lakh would get priority in collection of their dues over bond holders.

“All the publicity material, application form and other communication with the investor should clearly state in bold letters (with font size 14) how a subordinated bond is different from fixed deposit, particularly that it is not covered by deposit insurance,” RBI said in a circular issued this evening.

While SBI, the country’s largest lender, is yet to firm up its plans for a retail bond issue, it has indicated its intent to raise up to Rs 5,000 crore through the route. The capital-raising will be done in tranches and the bonds are expected to have a 10-year tenure. So far, SBI is the only bank to have announced its intention to tap retail investors to bolster its capital base.

“This will help us to communicate the difference and keep the expectation of prospective investors under check,” said a senior SBI executive.

RBI said the steps mentioned in the circular were important from the point of view of enhancing investor education related to risk characteristics of regulatory capital instruments.

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Government-owned Union Bank of India has initiated preliminary discussions with three-four small-sized Indonesian banks for a possible acquisition, a top bank official said.

“We are talking to three-four small banks in Indonesia for potential acquisitions. Talks are at very preliminary level and nothing has been finalised so far,” the official said.

Union Bank’s board has already approved a strategy for its overseas expansion, which includes acquisitions in geographies like Indonesia, Africa, Europe and UK, the official said. Once the bank identified a target, the lender would seek regulatory approvals from RBI and the Indonesian banking regulator to go ahead with the proposal, the official added.

“Through the acquisition of a local bank, we aim to assist Indian entities operating in that region, facilitate trade financing and offer retail banking services to local clients,” the official said.

At present, Union Bank’s overseas presence is limited in Hong Kong, where it has a full-fledged branch. Besides, it has four representative offices abroad. The repo offices are Shanghai, Beijing, Abu Dhabi and Sydney.

Another state-run lender IDBI Bank had yesterday said that it was talking to a private sector bank for possible acquisition and has completed the due diligence. “It is a private sector bank. Talks are on. Due diligence has been done. I cannot commit on the time frame,” Agarwal said.

Major Indian banks having presence in foreign countries include State Bank of India, Bank of Baroda and ICICI Bank.

(BS)

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