Base Rate & Banks- update

As per available information from my beloved bankers;

base rate will not be applicable to:

a)Staff loans

b)Differential Interest Rate Loans

 and

c)Loans against Deposits

Base rate & banks

From next week, the base rate will replace the BPLR in all the Indian banks. What’s the implication it will have on the banks, its customers and how the dynamics will change in the market with the introduction of base rate.

Back ground:

Earlier( till today) banks,used to arrive at a number called PLR- Prime Lending Rate( only they know how they arrived at that figure- today a PSU bank declared its base rate as 7.5% who use to keep its PLR at 12% till last week!!) , and they are not controlled by RBI on their lending rates, they can lend at rates more than PLR or lend at rate much lower than PLR.. ( if u are a small customer asking for loans, u would have heard bank officials saying, we cannot lend below PLR sir.., but the story is different).

The recession in 2008-2009 and the period after gave a wonderful insight to RBI regarding the lending patterns of banks. Most of the banks did not reduce the PLR rate, but were borrowing at a lower cost. They passed on the benefits of lower cost to few preferred clients, who are obviously bigger corporates and not the smaller companies or individuals. They have always been given a rate which is above the PLR. So, to increase transparency, RBI directed all the banks to follow a base rate model, where in the banks can never lend below a particular rate (base rate) to any of its customers. The base rate will be arrived factoring in the cost of borrowing and the admin costs. The banks can now design product specific rates, wrt base rate.

So, from now on,

1) All categories of loans will be priced only with reference to the Base Rate. 2) The Base Rate could also serve as the reference benchmark rate for floating rate loan products like home loans. IF the bank keeps a different /market benchmark, then the floating interest rate based on external benchmarks should be equal to or above the Base Rate .

 3) Banks cannot lend below base rate

 4) Calculation of lending rate will be – base rate+ product specific operating cost+ risk premium etc.

Effects :

The home rates will not change drastically, because, the risk premium is lesser when compared to other sector lending, and the NPA rate is very minimum compared to corporate loans.

The personal loan will not move upwards any further, because, it is already in its highs, and the risk premium is also high for the product category. But, for any individuals, the credit score will help them to bargain loans from banks, provided the credit bureaus are approachable by individuals. (Now as a recent development, there is one more credit bureau getting developed in India, other than CIBIL).

With the huge potential and competition in both these segments, banks will not hike their rates..

If you are about to take a home loan, go for floating rate, since, they will be more transparent now.

The Small company owners will now get to access more loans at a better rate than what they are offered now. Till now, they were charged more to offset the lower interest charged to their bigger cousins..

Who will get affected? Few industries in high risk sectors will get affected, like real estate developers, will now pay more interest for loans on their so called land banks.

The most hit will be the PSU officials who used to sanction loans with lesser interest rate for some corporate and get kickbacks. This will be reduced to a great extend. ( I have seen ppl borrowing loans on their company and invest in stock markets earlier..!!)

On a whole it will improve the transparency involved in banking system, and will empower the customers more.

Export and DRI :

Still RBI is yet to come clear on the loans to export sector. The Differential rate of Interest ( DRI) scheme, will not be based on base rate; since they are aimed at weaker section of the society, to make them financially included.

 Bank Employees:

Am also not clear on the employee benefits offered to bank staffs regarding loans; they were given home loans and personal loans at half the interest rate charged in the market. Will this base rate be applicable to them as well? Have asked with few of my ex colleagues in banks.. will update once I get any response

Rupee appreciation

For the last week, there was a lot of discussion on rupee appreciation, a sudden drift of the media from Yuan appreciation. This is because, if you see the trend of rupee from July 2008, till now, there was a wide swing against the greenback – from below 42 levels then, it moved up to 51/$ exactly a year ago, and now coming down to 44.2 /$, a drastic swing ever in a shorter period of time.  What is triggering the appreciation of rupee and its effects in an unusual Q& A style. (This is bcos, one of our readers has asked me these questions and I have added a few more to her list)

Is the rupee appreciation because of dollar depreciation?

 No, not completely. Might be a slight effect because of dollar losing its value. But rupee is not only appreciating against dollar, but against all major currencies – Euro, Pound etc.

 

Is there any relation between stock market performance and currency?

 There is a greater relation to stock market and currency. Stock market in India moves up when there is a large amount of FII inflows. FII inflows obviously brings in lot of dollar and demand for rupee goes up , thus making the rupee appreciate. If you see the currency value in Feb – Mar 2009, it was around 52/$, and the stock market was at its lower levels. After March, the trend reversed, Indian market started attracting more foreign money and every month, the net FII inflow was greater and rupee started appreciating.

 

What is the reason behind this huge inflow of money ?

 This is the effect of carry trade. Remember we discussed this… FII’s now borrow money from US, at a near zero interest rate and invest the money in Indian markets, which gives a wonderful spread . This is the main reason for FII’s to pump in money to India, to make quick return of investment and also to set of their losses which they made in their homeland J

 

Will there be any effects of Yuan appreciation on Rupee?

 First of all, there is no question of Yuan appreciating significantly. As the Chinese economists say, they will accommodate.. Ok, if at all china appreciates Yuan, this will have a positive impact on Indian exports, since Chinese firms will lose price competency and India might get more exports, which will result in pulling down or slight depreciation of Rupee.

 

Does RBI have any role in stopping the currency appreciation?

 Yes, RBI can decide the ups and downs of Rupee.

 

What methods can it adopt to stop currency appreciating further?

As an act to stop rupee appreciating further, RBI can start buying dollars and add it to its reserves, but it will lead to lot of other operations which it should perform as a whiplash effect.

This is how it can happen:

 RBI will add more dollar to its Forex reserves, which will result in stemming the rupee appreciation and monetary flow in the market, which will move inflation to higher levels, and again to control this RBI should issue more government bonds/ MSS to absorb the excess money from the market. Amusing right…

And the question is it will pose excessive burden on the government to service those debts. And this is why RBI has not yet intervened the currency market by mopping reserves as it usually does…

How will it impact the economy?

 The impact of Rupee appreciation in the economy will be quiet balanced. On one hand it will ease the imports, and cost of imported goods to come down as most of the payments are dollar denominated. But this will have a big impact on export oriented sectors like textiles, software etc, where in their revenue comes down when accounted in INR.

What levels will the rupee reach further? Will it go down below 40?

 Voila… If I could answer this question right, I have a fair chance of replacing CFO of TCS who usually loses about hundreds of crores in Forex positions, every quarter

There is a wide spread news that, govt will direct RBI to intervene when the rupee goes below 42 levels…chances are fairly less for the rupee to go below 40.

ICICI and HDFC are now foreign banks

 

Last week was a surprise to millions of share holders (needless to say – account holders and staff) of few private banks in India. Suddenly they have been branded as foreign banks and most of us were unclear whether they were sold to some foreign banks…(Given the reputation of one of them, who often faces charges of running out of cash in ATM and balance sheet issues, no wonder ppl thought in this line..) The banks affected (?) by this news are ICICI Bank, HDFC bank, YES bank, IndusInd bank, ING Vysya bank and DCB. The issue is as simple as this – shareholdings pattern shows that the majority stake of these banks are with foreign investors. What’s behind all these noise and how will it affect account holders and shareholders and the bank.
The controversy started when the govt (CCEA) issued a press note stating that investments by an Indian-owned company would count as Indian equity. An Indian-owned company is one where the beneficial foreign ownership is less than 50% and where the right to appoint the board is with resident Indians. The issue is as per the law, the foreign ownership is more than 50% and these companies say the right to appoint the board is with the resident Indians… interesting clash, huh…??

Let’s come to the law:
 
Any company in India is allowed to raise money from public through public issues. When they want more money to expand their business, they are allowed to raise money from foreign nationals through various options. As the FDI policy document issued by the GOI,
 FDI up to 74% from all sources will be permitted in private sector banks on the automatic route, subject to conformity with the guidelines issued by RBI from time to time.
b. For the purpose of determining the above-mentioned ceiling of 74% FDI under the “Automatic route” in respect of private sector banks, following categories of shares will be included.
·          FDI investment under Portfolio Investment Scheme(PIS) by FIIs,NRIs
·          IPOs,
·          Private placements,
·          ADRs/GDRs, and
·          Acquisition of shares from existing shareholders.
 
First of all, the FDI limits of these companies have not breached 51% all of a sudden. In December, the FDI holding pattern of ICICI stood at 64 % ( 36% by FII and 27 % thru ADR) and HDFC stood at 74% the maximum they could reach.
 
Coming to the voting rights,
Both the banks states, the voting rights are with the resident Indians to choose the board and the entire management lies with Indians. Say for example in the case of ICICI, it says at least 27 % of the shareholdings is held by a custodian (custodian for ADR holders), which in turn will vote in accordance with the board’s decision, and the board consists of Indians only. Sounds logical. Also they add that whatever be the holdings percentage, the voting rights will be restricted to 10, so as the banks say, nothing will change that they are Indian banks (by origin, operation, management, but not ownership :-)  ).
 
So if nothing is a problem, what’s the issue all about? It comes to affect their subsidiaries, especially insurance arms run by both the big players. ICICI prudential and HDFC standard life. The FDI limit in insurance is not at the same levels of FDI limit for banks , and it is controlled at 24 %. So far, all the insurance companies have reached their cap of 24% of FDI limits, and when ever capital is needed the domestic firm ( say for ex; ICICI in this case ), can pump in money to the subsidiary firm, as the capital would be considered coming from an Indian firm.
 
Now this practice cannot be continued , since as per the holdings pattern, these banks will be regarded as foreign banks, and every penny added will be considered as foreign money coming in….so , the expansion plans of these insurance firm will now be funded by themselves and cannot be supported with capital from the parent firms. This is the only and major problem for the banks .
 
With my limited knowledge, I cannot see any trouble for the account holders , as what ever the bank’s holding pattern are, be it PSB, private bank or foreign bank, our reserve bank assures not more than a lac of rupee for the depositor, in case of failure. I strongly feel, that this deposit insurance cap to be at least raised substantially , not to mention the full coverage. And for the employees of these banks, even though they are foreign banks, as their CXOs mentioned, they will still function as Indian banks.. So don’t expect a big pay check and bonus…