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Saturday, September 10, 2011

Prepaying to cost Less

Home loan borrowers soon may not have to pay any penalty for prepayment of loans linked to floating rate of interest. Banks currently charge anywhere between 1% and 3% of the principal if customers want to pay back the loan amount before the tenure ends. However, for fixed-rate loans, banks will continue to charge the prepayment penalty. The removal of the prepayment penalty will make it easier for customers to shift loans to other banks if they get a better interest rate and, most importantly, increase competition among banks.

The RBI's recent banking ombudsman conference threw up a host of proposed measures to improve banks' customer service and has said that banks should offer long-term fixed-rate housing loans to their customers and address their asset-liability match issues by taking recourse to the interest rate swaps market. It pointed out that, currently, floating rate loans pass on the interest rate risk from banks, which are much better placed to manage such risk, to borrowers. The central bank has also asked the lenders to revive fixed-rate home loan products, which have become almost a thing of the past. It stressed that banks are increasingly focusing on floating rate schemes to protect themselves from interest rate fluctuations. Analysts say around 80% of the outstanding home loans are floating rate loans.

Last month, a committee headed by former Sebi chief M Damodaran had also suggested banning the penalty charged by banks on prepayment of loan, and various consumer groups have in the past urged the central bank to ban the practice by banks. Bankers say that by charging for prepayment, they can manage their asset-liability gaps better and stop borrowers from shifting to other banks. The central bank feels that lenders should be in a position to absorb the asset-liability mismatch as the cumulative prepayment is a small fraction of the overall loan portfolio.

Currently, some banks do not charge any penalty if the borrower pays from her own source of funds and does not take any fresh loan to prepay the existing loan. In some cases, no prepayment charge is levied on the borrower if she pays up to 25% of the principal outstanding in the first two to three years of taking the loan.

Prepayment done above that attracts a penalty of 1-3%, depending upon the bank and the initial clause set up in the agreement. In fact, in May last year, the government had advised public sector banks, the Indian Banks’ Association and the National Housing Bank not to levy prepayment charges when the loan amount is paid by the borrowers out of their own funds. If any prepayment charges are to be imposed on housing loans, it need to be reasonable and transparent and not out of line with the average cost of providing the services.

In a written reply to a question raised in the Rajya Sabha, minister of state for finance Namo Narain Meena said that public sector banks have reported that, by and large, they do not levy any prepayment charges when the amount is paid by the borrowers from their own sources. Own funds means money generated by the borrower from her personal source and not through borrowing from a bank or non-banking financial institution.

Financial planners say partial prepayment of a loan makes sense at a time when interest rates are going up. It will bring down the tenure or even reduce the monthly instalment. Typically, for a housing loan, borrowers start doing the prepayment after the fifth year of the advance. Some banks like ICICI Bank charge up to 2% of the outstanding balance plus service tax and surcharges in case of full prepayment.

According to the banking regulator, some banks even charge as high as 5% on foreclosure of loans.

Financial planners also advise that prepayment must be done from the borrower's own funds after setting aside money for emergencies. They also say borrowers often take a personal loan or a credit card loan to prepay a housing loan, which in the long run is much more expensive. “The priority of a borrower should be to repay unsecured loans like credit cards and personal loans where interest is high. On the other hand, a borrower gets a tax incentive on interest paid up to R 1.5 lakh every year on housing loan and the benefit is much more,” says Brijesh Damodaran, founder of Zeus WealthWays, a wealth management company.

Borrowers should also keep in mind that they can bargain with the bank for reducing the prepayment penalty rate if one has a good credit history. Even for a select few, the bank can waive the penalty depending on the competition among banks. Financial planners also suggest that it is better to do part prepayment regularly as some leading banks do not charge any prepayment penalty if the loan is prepaid partially. By doing this, they say, borrowers can not only save on the prepayment penalty charge but also save on high interest costs on the outstanding loan.

Source: Financial Express
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LIC HFL launches 'New Advantage 5'

Mumbai: LIC Housing Finance on friday launched 'New Advantage 5', a new home loan product that offers fixed rates of interest for the first five years and floating rates thereafter.

The floating rates will be linked to the LHPLR (LIC HFL Prime Lending Rates) prevailing at the time of the switch, country's largest housing finance company said in a release issued here.

For loans up to Rs 30 lakh, the fixed rate offered is 11.15 percent, for loan above Rs 30 lakh and less than Rs 75 lakh, rate is 11.40 percent and for loans of between Rs 75 lakh and Rs 150 lakh, the rate is 11.65 per cent, it said.

The scheme is available till December 31 with a condition that the first disbursement should be availed by the customer on or before January 15, 2012.

Source: Financial Express
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Banks can lend below base rate to tribals, disabled: RBI

Mumbai: The Reserve Bank on Friday said banks can lend below the base rate, or the minimum lending rate, to tribals and physically challenged persons.

“Such lending (to tribals and handicapped), even if below base rate, would not be considered as a violation of our base rate guidelines,” the central bank said in a circular.

At present, banks get refinanced from National Scheduled Tribes Finance and Development Corporation (NSTFDC) and National Handicapped Finance and Development Corporation (NHFDC) for loans extended to tribals and differently-abled people.

Such lending would not be in contravention to the apex bank’s rule, which restricts lending below base rate to borrowers, the RBI added.

Banks may charge interest at the rates prescribed under the schemes of NSTFDC and NHFDC to the extent refinance is available.

As per micro credit scheme of NSTFDC, banks can provide subsidised loans at interest rates not exceeding 8 per cent, where refinance at 3-5 per cent from the corporation is available.

Similarly, under various schemes of NHFDC, loans are provided at a concessional rates to beneficiaries, subject to refinance option from the development corporation.

At present, base rates of banks are hovering around 10 per cent and the lenders are not allowed to lend below this rate.

Source: Financial Express
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Lenders to GTL Infrastructure agree to clear a proposal to restructure its debt

MUMBAI: Lenders to GTL Infrastructure, the troubled tower company, on Friday agreed to clear a proposal to restructure its debt on condition that promoters provide a personal guarantee and infuse fresh equity.

Bankers would also evaluate proposals to sell the tower business during the implementation of the corporate debt restructuring package, said a source aware of the development.

"Lenders have agreed to clear the GTL Infrastructure debt restructuring scheme. The reduction in interest rate and tenure of the loan are yet to be finalised. The reduction in interest rates asked by the promoters is not viable. We are yet to reach an agreement on this,'' said a source involved in the negotiations.

Restructuring a loan typically involves a reduction in interest rates, an increase in the numbers of years in which it has to be repaid, or both.

"We have also decided to evaluate the proposal to sell the tower business eventually. There will be a second round of meetings to decide on the equity capital the promoters would have to pump in,'' the person added.

ICICI Bank, which holds around 28% stake in GTL Ltd, the parent company, is in talks with investors to find a buyer for the tower business.

"The panel of bankers is in dialogue with potential investors, including Viom Network and some private equity players," said a senior bank official involved in the debt recast process.

On July 29, ET had reported that Viom had offered to buy out GTL Infrastructure, part of the Global group promoted by Manoj Tirodkar. The company had subsequently denied any negotiations with Viom.

Source: Economic Times
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Friday, September 9, 2011

Government seeks PSU bank role in speedy project approvals

MUMBAI: Agovernment desperate to halt the slide in economic growth rate has directed state-run bankers to wear the hat of a middleman and negotiate with bureaucrats for faster project clearances.

Public sector banks, which account for more than three-fourths of the industry, have been ordered to clear loan applications within 30 days in some cases, which bankers fear may lead to slack due diligence that will turn into bad loans in future.

"The loan application pending for want of response or information from different state governments may be followed up by zonal offices concerned with the respective state government department for expeditious clearance," abureaucrat in the finance ministry has written to chiefs of public sector banks.

The letter may have come after firstquarter gross domestic product (GDP) growth came in at 7.7%, compared with 9.4% in the fourth quarter of fiscal 2010. Growth has been slowing as the Reserve Bank of India has raised interest rates 11 times since March last year to tame inflation. The central bank believes demand is still robust since corporate earnings growth remains strong, though profitability has eroded a bit.

"State-level bankers' committee may also consider requesting the chief secretary of respective states for expeditious clearance of projects coming up in the state, where banking and financial institutions have sanctioned their projects but disbursement is pending for want of clearance," the letter to bank chairmen says.

Banks wary of bad loans

While the government may be worried about the slowdown in credit growth, which was at 2.7% between April and August 2011, compared with 3.8% in the year-earlier period, banks are careful in lending to projects that have not received clearance from different departments.

"Since this is merchant banking activity expected out of a bank, they should be compensated for it likewise," said Hemindra Hazari, head of equity research at Nirmal Bang Institutional Equities. "But more importantly, the onus is on the state government to pursue projects because they benefit from them more in terms of development of the state."

Source: Economic Times
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Swiss open to taxing Indian deposits

New Delhi: The lure of Swiss bank deposits for Indians wanting to keep their unaccounted money away from the taxman’s glare could end as the Swiss government is ready to discuss a formula with India to tax such funds.

Switzerland recently agreed to tax the money held by British and German citizens in Swiss banks and the idea is to replicate the model for India too.

Responding to queries sent by FE, the Swiss Federal Department of Finance, the counterpart of India’s Union finance ministry, said: “Switzerland is open to explaining the Swiss model of a final withholding tax to other interested countries (including India).” It, however, said that any decision on concrete negotiations could only be done after it finalised the agreements with the UK and Germany.

As per the arrangement that Switzerland and UK are about to agree on, UK citizens will have to make one-off tax payments or else the Swiss authority would disclose their account details in Swiss banks. This would be a retrospective tax. Future investment income and capital gains of British clients in Switzerland will be subject to a “final withholding tax”, and the proceeds of this will be transferred to the British authorities by Switzerland. The tax rate has been set between 27% and 48% depending on the category of capital income.

India is currently renegotiating the tax treaty with Switzerland to enable sharing of banking and tax-related information. If the two agree, a separate model could also be worked out for taxing money deposited in Swiss banks. Hundreds of billions dollars are believed to be stashed in Swiss banks by Indian nationals.

Asked how would they react to the Swiss offer, government sources here preferred to remain non-committal, but there were takers for the Swiss move among senior political leaders.

Former finance minister Yashwant Sinha said: “The international opinion on tax havens has changed completely in the recent past. We should carefully study what the Swiss government is doing with other countries (on the question of taxation of unaccounted money in Swiss banks) and put pressure on them for a similar arrangement. They are bound to respond.”

Almost echoing Sinha’s view, former union minister and Shiv Sena leader Suresh Prabhu said: “There is a flight of capital and loss of revenue due to the flow of black money overseas. The government should explore all options to bring black money back to India, including signing of such agreements (like the Swiss-UK pact) that taxes illicit money.”

According to Swiss National Bank data, the total “liabilities” of Swiss banks towards Indians were about Rs 9,295 crore as on December 31, 2010. Independent estimates including one by a BJP task force in 2009 and another by Global Financial Integrity had estimated the Indian black money stashed away in Swiss banks at hundreds of billions of dollars.

“Such agreements can enable money to flow back into the country to boost economic development,” Ernst & Young tax partner Rajiv Chugh said. “Without entering into debate on the efficacy of voluntary disclosure scheme, India had in the past come out with a VDS to bring unaccounted money into the tax ambit. Notwithstanding the disclosure scheme, a large amounts of money are still outside the tax system as per recent reports,” he said.

The government recently said that once the revised treaty with Switzerland becomes operational, India would start getting banking information from April 1, 2011. India and Switzerland, on August 30, 2010, signed a protocol amending the Double Taxation Avoidance Agreement. In July this year, the government received a list of some 700 bank accounts in Switzerland from the French government and investigations are under way to determine whether any of the account holders evaded taxes.

In May this year, the government had constituted the panel to look into strengthening of the law to curb black money generation and examine the existing legal and administrative framework. The committee is also considering declaration of the wealth generated illegally as a national asset. It will submit its report in six months.

Source: Financial Express
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ICICI Bank to hire 6,000 people

Mumbai: Country's largest private lender ICICI Bank will recruit up to 6,000 people this fiscal to help its business growth and expansion, a top official said today.

"Our business is growing between 18 to 20 per cent and we are also adding branches...its expected that we would hire between five to six thousand people in our workforce," the bank's Managing Director and chief Executive Chanda Kochhar told reporters.

Most of the recruitments will be at the entry level and will be done either directly or through institutes training graduates in banking and insurance where the bank has tie-ups, she said.

Asked about the Banking Ombudsmen's recent suggestion to ban pre-payments charges on floating rate loans and how ICICI Bank will be gearing up for it, Kochhar said, "I think its a recommendatory discussion about action points. So we should wait for the clarifications to emerge."

Though the suggestion of the Banking Ombudsmen are morally suggestive in nature, it is generally accepted by the banks. Technically speaking, their suggestions have to be followed up by a circular from the RBI.

Source: Financial Express
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HDFC Bank launches 'Swift' loan

New Delhi: Private sector lender HDFC Bank has launched personal loan 'Swift', a product that is processed in 24 working hours of receiving complete loan document.

Using cutting-edge imaging solution technology, the bank will now set the pace in this product category and ensure that loan processing will start the moment a customer steps into a branch in the morning and be complete in 24 hours, HDFC Bank said in a statement.

Swift will soon be available to all customers who hold salary accounts with the bank in 25 select branches across the country, keeping in mind customers' need for instant solutions to their financial needs, it said.

Source: Financial Express
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Bank of America mulls 40,000 job cuts: WSJ

Bank of America Corp officials have discussed slashing roughly 40,000 jobs during the first wave of a restructuring, the Wall Street Journal said, citing people familiar with the plans.

The number of job cuts are not final and could change. The restructuring aims to reduce the bank's workforce over a period of years, the Journal said.

The newspaper said BofA executives met Thursday in Charlotte and will gather again Friday to make final decisions on the reductions, putting the finishing touches on five months of work.

Bank of America could not immediately be reached for comment by Reuters outside regular US business hours.

Banks are shedding jobs worldwide as stricter regulations and a tough second quarter for trading income take their toll on investment banking units in particular.

Source: Business Standard
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RBS expands India equities team to boost growth

Royal Bank of Scotland has expanded its Indian equities team with eight new hires, the British bank said on Friday, as a part of its plan to boost growth in a highly competitive market for equities business.

RBS has hired five analysts for equities research, which include Harish Bihani from domestic brokerage Indiabulls Institutional Equities and Atul Rastogi who previous worked at Daiwa and UBS, it said.

The bank has also hired three more for equities sales to enhance its onshore equities platform, it said in a statement.

A host of global banks including Citigroup, Credit Suisse, JPMorgan and Standard Chartered compete with local firms in India in the equities business.

The sluggish market conditions have hit share sales and fierce competition has driven down fees.

Source: Business Standard
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Thursday, September 8, 2011

HDFC doubles issue size to Rs 10 bln

Mumbai: India's Housing Development Finance Corp has upsized its issue to 10 billion rupees, double its initial size, as it received strong investor demand, three sources with direct knowledge of the matter told Reuters on Thursday.

We are seeing very good demand from corporates, insurance companies and foreign institutional investors, two sources said.

The arrangers have already received commitments for 8.50 billion, the sources said.

The company has maintained the pricing at 9.65 per cent.

Deutsche Bank has joined as the arranger along with ICICI Bank to the deal, said sources.

Source: Financial Express
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Banks find it tough to hike loan term

NEW DELHI: Public sector banks are finding it tough to increase the tenure of housing loans to soften the impact of repeated increase in interest rates, despite the finance ministry advising banks to keep the equated monthly instalments constant.

Bankers said as far as possible they were trying to increase the tenure but in a majority of cases the extended term of the home loan was exceeding the working life of the borrower. Canara Bank chairman and managing director S Raman said in most cases the lender was extending the term to 65 years.

Asked about what SBI was doing, chairman Pratip Choudhuri said that the country's largest bank was analysing the government's circular as the lender was itself trying to ensure that borrowers were not impacted. "We are trying to see how we can implement (the circular ) for loans which are security based such as housing loans," said SBI managing director A Krishna Kumar.

In most cases, banks, apart from factoring in the maximum tenure of 20 years, have also linked loans to the working age, which is 60 years for most banks. Following the government advisory, this has been raised to 65 years.

For banks it makes sense to increase the tenure since the interest income goes up. For someone who had borrowed Rs 50 lakh at 9% for 20 years, the EMI worked out to Rs 44,985. But with rates rising to 10.5% or thereabouts, the instalment, keeping the tenure constant, now works out to Rs 49,919 a month, which represents an increase of 11% in a span of 15 months or so.

If the borrower wants to retain the EMI at Rs 44,985, the only option he has is to increase the tenure to 413 instalments or 34-and-a-half years, which most banks are unlikely to provide. Apart from everything else, it would roughly equal the working life of most borrowers.

But with the government advisory, banks would be more amenable to increase the term though not to over 34 years. The flip side is that the interest burden, which would have been around Rs 58 lakh with a 240-month term, would rise to Rs 1.36 crore if the tenure goes up to 34 years.

Source: Economic Times
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RBI seeks one-time tax relief to arm MNC banks

The Reserve Bank of India has sought a one-off tax exemption from the government for foreign banks that convert into local subsidiaries as it intensifies efforts to ring-fence the domestic financial system from global shocks.

The permission, if granted by the government that's already facing widening fiscal gap, may lead to thousands of crores of notional revenue loss.

"It is likely that the foreign banks which have attained a particular asset size may be asked to convert into wholly-owned subsidiaries. RBI is also expected to extend the branch licensing policy applicable for domestic banks to foreign banks. Like domestic banks, they would have to ensure that at least 25% of their branches are in unbanked rural centres," said a banker, familiar with the proposal.

Currently, it's not very easy for foreign banks to acquire branch licences from the regulator. On an average, the central bank issues about 14 branches to all foreign banks every year. Along with the national treatment, sources indicate that foreign banks would have to meet the 40% priority sector target.

At present, the priority sector limit for foreign banks is pegged at 32% against the 40% target set for domestic banks. Foreign bankers had asked RBI to consider relaxation in mandated farm lending targets, considering their limited reach.

"The central bank, along with the Indian Banks' Association, is relooking at the definition of priority sector, which should address foreign banks' problems. Hence, this should not be a show stopper any more," said a person familiar with the proposal.

"RBI has suggested that the government evaluate extending one-time tax relief to foreign banks that migrate to the wholly-owned subsidiary model," he said. Under tax rules, a branch of a foreign bank in India is treated as a foreign firm.

If a foreign bank chooses to convert into a subsidiary, it will have to transfer the business of the branches to the unit, requiring the parent to pay capital gains tax for the transaction. There are 34 foreign banks operating in India as branches, accounting for 7.65% of the total banking assets as on March 2010, up from 9.03% a year ago.

If the credit equivalent of balance sheet assets are included, their share was 10.52%. The share of top five foreign banks alone was 7.12%. Share in aggregate deposits and credit in December 2010 was 4.8% and 5.1%, respectively.

Source: Economic Times
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Banks' IT spending to surge 50% to Rs 10,000 cr annually

As Indian banks gear up for the second wave of technological enhancement, their spending is likely to shoot, a little over fifty per cent, to Rs 10,000 crore annually.

According to The Boston Consulting Group (BCG), the current expenditure on information technology (IT) for banks on the whole is Rs 6,500 crore per year, about 2.7 per cent of their revenues. The first phase of IT upgradation largely included migration of banks to a core banking system, which allowed for consolidation of banking services offered across regions and channels.

“We expect Indian banks’ IT expenditure to touch Rs 10,000 crore annually in four to five years as they get ready for their second wave of IT investments,” said Saurabh Tripathi, partner and director, BCG.

Currently, the IT spending of public sector banks, which form a major chunk of the banking sector is about 62 per cent of the total spending on technology by all banks. According to bankers, the increase in IT spend is likely to benefit them in the long term. The major areas of thrust will be automated data storage, compilation, upgradation and analysis, along with automated decision making that will involve loan sanctions as well.

Indian Bank is working to move towards the Client Relationship Model (CRM), which will allow comprehensive data analysis and decision making without manual intervention. Once we fully migrate to the CRM model, we will be able to increase the customer base by 30 per cent through comprehensive customer profiling and servicing,” said T M Bhasin, chairman & managing director. Indian Bank spent Rs 55 crore on technology last financial year and expects the total IT expenditure to be around Rs 92 crore this financial year.

M V Nair, chairman and managing director of Union Bank of India, said, “We need to catch up fast with IT improvisation to save costs and improve customer experience.”

Most banks are now looking to enhance customer experience, as well as return on investment (ROI) simultaneously through technology after they have fulfilled the minimum core banking requirements.

The Reserve Bank of India (RBI) has also laid ample emphasis on IT upgrade of the banks and come up with IT Vision 2011-17 for the financial sector. “In the banking industry, use of information technology is omnipresent. The Vision Document also sets priorities for commercial banks to move forward from their core banking solutions to enhanced use of IT in areas like management information systems, regulatory reporting, overall risk management, financial inclusion and customer relationship management,” K C Chakrabarty, deputy governor of RBI said in a recent speech.

However, experts said banks also need to look at return on their investment in information technology.

“For the next wave of IT investments, an ROI framework is crucial. For this, the whole approach for IT projects has to undergo a dramatic change. It needs to start with identification of business value and IT projects have to justify themselves by bottom line value created in lower costs or higher revenues,” Tripathi of BCG said.

Although Indian banks are increasingly looking to spend on technology in the coming years, their expenditure remains quite low as compared to developed economies.

“Overall, the industry spends 2.7 per cent of its revenues on technology – including capital expenditure, operating expenditure and specialist employee costs. Globally, this number is as high as nine per cent. Part of the reason is that Indian industry has to move to a more value-added role of technology,” BCG said.

Source: Business Standard
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LIC & IIFCL to invest Rs 10k cr in take-out financing scheme

India Infrastructure Finance Company Ltd (IIFCL) and Life Insurance Corporation (LIC) have drawn up plans to invest Rs 10,000 crore during 2011-12 in the infrastructure sector, through the take-out financing route.

They have agreed to jointly buy out up to 40 per cent of infrastructure loan portfolios of banks, each having 20 per cent exposure.

IIFCL will take all the initiatives with the banks regarding the portfolios. We have earmarked a total of Rs 10,000 crore, each investing Rs 5,000 crore, for the current financial year,” S K Goel, chairman IIFCL told Business Standard.
Under the scheme, IIFCL is allowed to take up to 75 per cent of bank loans for an infrastructure project on to its books, thereby freeing banks’ capital and enabling them to lend in new projects.

Since IIFCL has inherent expertise in infrastructure financing, it will carry out all the due diligence of the projects, Goel added.

A senior LIC official said there are some issues that need to be addressed.

“The main issue is the sharing of the liabilities. We are yet to take a call on the extent of liability which LIC can bear in case an asset becomes non-performing. We need to understand the risk carefully before entering into a particular project. Then we also need to understand to what extent we can invest under the sector investment norms,” the official added.

According to the Insurance Regulatory and Development Authority (Irda) guidelines, LIC’s exposure in a single project is capped at 10 per cent of the total investiable fund. The insurance regulator also mandates life insurers to invest at least 15 per cent of their controlled funds in infrastructure and social sectors.

According to sources, the idea of roping in LIC to partner IIFCL in the take-out financing scheme was mooted by the finance ministry in the wake of the lukewarm response of the take-out financing scheme floated by the infrastructure financier. So far, IIFCL has been able to disburse only Rs 90 crore of the total sanctioned amount of Rs 3,000 crore under the take-out financing scheme.

Source: Business Standard
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Once bitten, SBI says enough with teaser loans

MUMBAI: Country's largest lender SBI on Wednesday ruled out re-launching teaser rate loans, days after its private sector rivals HDFC and ICICI introduced special hoam loan schemes with interest rates fixed for initial few years.

"We have no plans as of now to launch any special home loans," State Bank of India (SBI) Chairman Pratip Chaudhuri told reporters here.

Reminiscing of the bank's earlier brush with the Reserve Bank in this regard, he said, "We have been through the teaser loan definition. We respect the regulator's stance."

The country's largest private lender ICICI Bank had recently launched a dual rate home loan product which offers fixed interest rate to start with after which the loan turns floating. The announcement was followed by the launch of a similar product by mortgage major HDFC too this Monday.

Industry observers had pointed out that both these products have some characteristics of teaser rate loans, pioneered by SBI in 2009.

Talking of the bank's earlier experience, Chaudhuri said, "We had tried to argue (with the RBI), to reason, but the regulator has a position and already we have provided 2 per cent on our teaser loan portfolio that is Rs 500 crore. I think it was a stiff enough penalty and we would not like to live through it again."

Fearing an asset bubble build-up and to contain the impact, the Reserve Bank had increased the provisioning for teaser rate loans by a steep five-fold to 2 per cent recently.

SBI, under the chairmanship of Chaudhuri's predecessor O P Bhatt, was the first lender to offer teaser products in the days of ample liquidity in November 2009. Courtesy the product, it gained a dominant position in the housing loan segment by overtaking HDFC.

Soon, other lenders also followed suit but all the banks, including SBI, discontinued the product after the RBI tightened the norms.

Source: Economic Times
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Wednesday, September 7, 2011

RBI hawkish ahead of review despite global gloom

The Reserve Bank of India (RBI) remains bent on fighting domestic inflation despite weakening global conditions, officials with direct knowledge of policymaking said, a week before it is widely expected to raise interest rates once again.

The RBI, which has lifted rates 11 times in 18 months, makes its mid-quarter review on September 16.

Though senior bank officials are hawkish, RBI Governor Duvvuri Subbarao will not make a final decision before the release of August inflation data on September 14, the sources said.

"We still have high food and non-food manufacturing inflation, good credit growth to industry and growth is also quite good according to our view," said an official with direct knowledge of the matter.

"So, domestic factors will continue to be the key driver for policy framing," the official said.

RBI officials have kept up the hawkish talk in recent weeks even as fears mount that western economies are slipping back into recession, although the central bank is widely believed to be nearing the end of its tightening cycle as its earlier actions exact a toll on demand in Asia's third-largest economy.

Also, the Finance Ministry is putting pressure on Subbarao, whose term was recently extended for two years, not to continue tightening for much longer. Finance Minister Pranab Mukherjee this week was quoted as saying that he hoped the RBI will not raise rates further.

Senior Finance Ministry officials said continued steady rate increases might not have the desired effect of cooling inflation without overly disrupting growth.

"Yes, inflation still remains the big concern but I see that peaking off at the end of the year, but growth will also come into sharp focus," one of the officials said.


Last week's jump in food inflation, high non-food manufacturing inflation, the knock-on impact of a June fuel price increase and resilient credit growth all point to a need for continued vigilance, several RBI officials said, declining to be identified given the sensitivity of the matter.

Headline inflation for July was 9.22%, much above the RBI's end-March 2012 projection of 7%. India's food price index rose 10.05% in the year to August 20, its highest in nearly six months, while the fuel price index was up 12.55%.

"Inflation has not yet peaked. To some extent the global developments will have some impact on the external sector. We are cautiously hawkish," the RBI official said.

While advanced economies are struggling to ward off stagnation, central banks in emerging markets are confronted with high inflation and cooling growth.

Brazil recently surprised with a rate cut despite still-high inflation, and market speculation that China may ease lending conditions for some small and medium sized companies has added to expectations the tightening cycle will soon end in emerging markets.

"Brazil cut rates after raising them sharply, so they had room to cut. We are anyway behind the curve," said another senior RBI official.

"So where is the room to even pause unless the global recovery concerns bring down commodity prices drastically?" the official said.

Gross domestic product growth in India slipped to 7.7% in the three months through June, and with high inflation persisting, many economists are scaling down their growth forecasts.

The RBI has raised its key rate by a total of 325 basis points to 8% since March 2010, including a sharper-than-expected 50 basis point hike in July, meaning its next move is not easily predicted.

The minutes of the July meeting of the RBI's advisory panel on monetary policy showed that the majority favoured a pause or a quarter point increase.

Source: Business Standard
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HDFC Bank, TVS Motor in pact for inventory funding

MUMBAI: Two wheeler maker TVS Motors has entered into a memorandum of understanding (MOU) with HDFC Bank for inventory funding for its dealers.

As part of this arrangement, HDFC will provide funding to over 600 dealers of TVS Motors across the country that would enable them to increase their working capital, boost vehicle stocks and consequently enhance retail sales, the company said in a statement today.

The agreement has features such as online fund transfers, online repayment, real time viewing of account status and considerably reduces transaction time, it said.

"We see this association as a value addition to our customers, as it provides an opportunity for our dealers to strengthen their working capital. Easy access to funds at attractive interest rates will help in growing their business and in turn offer better retail services to our customers," TVS Motor President-Marketing H S Goindi said.

HDFC Bank's Vice President-vehicle loans, Ashok Khanna said, "As one of the leading banks in the country with over 1,588 hub and spoke locations pan-India, signing of this MOU will ensure maximum coverage of all dealers of TVS Motor across the country."

Source: Economic Times
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Poor are much better at loan repayment: K C Chakravarty

MUMBAI: Banks should offer services to the poor with a profit objective rather than a social objective and this is possible by adopting an appropriate business model, said a top RBI official. He also underscored the need of combined efforts by the entire society to achieve financial inclusion.

"The poor is more creditworthy than the rich," said deputy governor KC Chakravarty, while addressing students in a college in Mumbai. "Business for poor is viable provided you have the ability," he said.

The deputy governor called for an integrated approach by involving a combination of brick and mortar model as well as information and communication technology, or ICT model.

He said financial inclusion has failed to take off till now because of the absence of technology, reach and coverage, a proper business model and a viable delivery mechanism, among others.

"Brick and mortar and click and mouse model, both fail independently. We have to use a combination of both. All villages up to a population of 2,000 per village must be provided with banking services either through a branch or a business correspondent," the deputy governor said.

But at the same time he also highlighted that technology makes it possible to produce goods and services at a very low cost.

Chakrabarty advised domestic helps should be paid through banks' "pay your maids and servants bank accounts only". He suggested that some of the payments to the poor such as food & fuel subsidies or NREGA payments could be made through bank accounts.

Source: Economic Times
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RBI to reintroduce inflation-indexed bonds

Mumbai: RBI Governor Duvvuri Subbarao said the central bank is planning to introduce inflation- indexed bonds, under which an investor would get a return on the basis of the prevailing inflation at the time of maturity.

"One cause of concern is whether in a period of relative high inflation ... whether they (inflation-indexed bonds) will be successful. We will think through this... but certainly we will introduce that," Subbarao told a national finance symposium organised by the Indian Institute of Foreign Trade and the Bombay Chamber of Commerce here.

When bonds are indexed to inflation, the return on them will be linked to the prevailing rate of inflation at maturity of the instrument on both the coupons as well as on the principal repayments at maturity.

The existing bonds are capital-indexed and only protect the capital/principal against inflation, but an IIB (inflation-indexed bond) will be offering investors inflation-based returns. The index in this case will be based on the monthly wholesale price index.

Pointing out that the past experience with such an instrument was not received well, the Governor said, "We have diversified the instruments for government borrowings now.

The zero coupon bonds, capital indexed bonds and now there is a proposal to introduce inflation indexed-bonds.

"We tried those inflation indexed bonds earlier, but it did not work out very well but now we want to reintroduce them".

Source: Financial Express
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Don't levy pre-payment fee on floating loans: RBI

The Reserve Bank of india (RBI) in a release on Tuesday barred banks from imposing pre-payment charges on floating rate loans and also asked them to offer long-term fixed rate housing loans.

In an annual conference of banking ombudsman, the RBI laid down 10 action points to improve customer service of banks and suggested banks should address their asset liability mistmatches by participating in the interest rate swap market.

"Floating rate loans pass on the interest rate risk from banks which are much better placed to manage it to borrowers and, thus, banks only substitute interest rate risk with potential credit risk," the RBI said in the release.
Banks can, however, levy pre-payment charges on fixed rate loans.

The central bank directed banks to compensate customers for losses arising out of non-authorised transactions on ATMs.

In case of ATM or internet banking transactions related to monetary dispute, the onus of proving the customer's negligence or mistake should be on the bank, the RBI said.

Source: Business Standard
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Reducing CRR, SLR rates necessary to unlock funds: RBI

The Reserve Bank is committed to bringing down the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) in a "calibrated manner" to increase availability of credit, Governor D Subbarao today said.

"It's not that SLR should be thrown away but certainly we should bring it down, so that there is credit availability and the private sector is not crowded out," he said on the sidelines of an event here.

CRR is the portion of deposits that banks are required to keep in cash with the the Reserve Bank of India (RBI), while SLR is the amount that banks have to park in government securities.

SLR, at present, is 24% and CRR 6%, meaning that banks have to keep about 30% of their deposits aside.

"It is (CRR and SLR) still considered high and there is an objective in the Reserve Bank that it must be brought down... It has to come down gradually in a calibrated manner," Subbarao said.

RBI has kept the CRR unchanged for over a year now while it reduced the SLR by one percentage point due to stress on liquidity last year in December.

RBI, Subbarao said, is also considering a proposal to re-introduce inflation-indexed bonds.

"One cause of concern is whether in a period of relative high inflation...Whether they will be successful. We will think through this but certainly we will introduce that (the inflation indexed bonds)," he said.

Subbarao also reiterated the RBI's intention to go in for for full capital account convertibility but added that it was not in a hurry to do so.

Quoting a Latin proverb, he said, "Make haste slowly...We will of course open up capital account but we will liberalise slowly", adding that there were no benign solutions to complex problems and one had to make choices in such situations.

Managing monetary policy, he added, was a key challenge, given the increased interconnectedness between the world economies and mushrooming of trouble spots in different regions like Europe.

Source: Business Standard
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