BOB HIKES BASE RATE BY 50 BPS TO 9.5%

Bank of Baroda increased its base rate, the minimum lending rate, by 50 basis points to 9.5 per cent.

It has also hiked the benchmark prime lending rate (BPLR) by 50 basis points to 13.75 per cent.

BoB said the base rate and BPLR (the best rate offered to customers) are being increased in response to RBI's another money tightening signal in its January 25 quarterly monetary policy review.

The banking regulator had increased both short term lending (repo) and borrowing (reverse repo) rates by 25 basis points each to tame inflation.

BoB's decision to hike rates follows similar moves by other lenders like Indian Bank, Indian Overseas Bank, Bank of India , Dena Bank and HDFC earlier.

While the higher deposit rates would provide better returns to savers, rise in base rates would increase the EMIs of auto and home loan borrowers.

Besides, corporate loans too would become expensive. The base rate system has replaced the BPLR system with effect from July 1, 2010. However, BPLR regime continues for the old borrowers.

SOURCE: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/bob-hikes-base-rate-by-50-bps-to-95/articleshow/7424825.cms

S. KARUPPASAMY IS RBI'S NEW EXECUTIVE DIRECTOR

Mr S. Karuppasamy has assumed charge as an Executive Director at the Reserve Bank of India. As Executive Director, he will look after Department of Expenditure and Budgetary Control, Department of Information Technology, Legal Department and Urban Banks Department.

Prior to his elevation, Mr Karuppasamy was Regional Director of RBI's Kolkata office. He fills up the vacancy arising from Mr Anand Sinha's elevation to the post of Deputy Governor earlier.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1150802.ece

RBI KEEN TO AVOID ENCORE OF ‘SUBSTANTIAL WITHDRAWAL' OF FOREIGN BANKS FROM CREDIT MARKETS

The RBI would like ‘systemically important' foreign banks to consolidate their branches in India into ‘wholly-owned' subsidiaries, which would be easier to monitor and control.

Foreign bank branches would be considered to be systemically important once their assets (including off-balance sheet items) become 0.25 per cent of the total assets of all scheduled commercial banks in India.

The balance sheet assets of the 34 foreign banks operating in India through branches, dipped from 9.03 per cent of the total assets of scheduled commercial banks in March 2009 to 7.2 per cent in March 31, 2010 (10.52 per cent if off balance sheet assets are taken on board; seventy per cent of it accounted for by the top five banks).

‘substantial withdrawal'

This fall in market share was because of a ‘substantial withdrawal' of foreign banks from credit markets in India over 2009-10; so much so that y-o-y growth of credit was -7.1 per cent (as on July 3, 2009) and -15.9 per cent (as on October 9, 2009).

The RBI is aware that, “The insolvency of a parent or ring fencing of liquidity by the parent's home country regulator can have same effect on subsidiaries as on branches. Subsidiaries promoted by foreign banks, where they had large presence, have in some countries acquired a large share at the expense of domestic banks in the boom years and then, faced with troubles at home, substantially curtailed or withdrawn their operations in the host country.”

The RBI would, therefore, continue to ensure the domestic financial system does not come under the domination of foreign banks.

While deciding the approach towards conversion of existing foreign bank branches, India's commitments to WTO have to be kept in mind. In other words, since it is not possible to mandate conversion of existing branches into subsidiaries, it becomes necessary to ‘incentivise' this.

The main incentive the RBI has in mind is to liberally allow wholly-owned subsidiaries of foreign banks (WOS) to open branches in Tier 3 to 6 centres, while dealing with their applications for setting up branches in Tier 1 and Tier 2 centres ‘in a manner and on criteria' similar to those applied to domestic banks.

As a quid pro quo, priority sector targets for WOS would be upped from the 32 per cent stipulated for their branches, to the 40 per cent mandated for private and public banks; phased out over five years in 2 per cent increments.

As is presently the case, shortfalls would have to be made good by subventions to institutions such as Nabard. For agriculture WOS's would be required to reach only 10 per cent (as against 18 per cent for domestic banks), with the condition that indirect advances do not exceed one quarter of this amount.

The full text of the RBI's proposals is available on its Web site.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1150800.ece

RBI KEEN TO AVOID ENCORE OF ‘SUBSTANTIAL WITHDRAWAL' OF FOREIGN BANKS FROM CREDIT MARKETS

The RBI would like ‘systemically important' foreign banks to consolidate their branches in India into ‘wholly-owned' subsidiaries, which would be easier to monitor and control.

Foreign bank branches would be considered to be systemically important once their assets (including off-balance sheet items) become 0.25 per cent of the total assets of all scheduled commercial banks in India.

The balance sheet assets of the 34 foreign banks operating in India through branches, dipped from 9.03 per cent of the total assets of scheduled commercial banks in March 2009 to 7.2 per cent in March 31, 2010 (10.52 per cent if off balance sheet assets are taken on board; seventy per cent of it accounted for by the top five banks).

‘substantial withdrawal'

This fall in market share was because of a ‘substantial withdrawal' of foreign banks from credit markets in India over 2009-10; so much so that y-o-y growth of credit was -7.1 per cent (as on July 3, 2009) and -15.9 per cent (as on October 9, 2009).

The RBI is aware that, “The insolvency of a parent or ring fencing of liquidity by the parent's home country regulator can have same effect on subsidiaries as on branches. Subsidiaries promoted by foreign banks, where they had large presence, have in some countries acquired a large share at the expense of domestic banks in the boom years and then, faced with troubles at home, substantially curtailed or withdrawn their operations in the host country.”

The RBI would, therefore, continue to ensure the domestic financial system does not come under the domination of foreign banks.

While deciding the approach towards conversion of existing foreign bank branches, India's commitments to WTO have to be kept in mind. In other words, since it is not possible to mandate conversion of existing branches into subsidiaries, it becomes necessary to ‘incentivise' this.

The main incentive the RBI has in mind is to liberally allow wholly-owned subsidiaries of foreign banks (WOS) to open branches in Tier 3 to 6 centres, while dealing with their applications for setting up branches in Tier 1 and Tier 2 centres ‘in a manner and on criteria' similar to those applied to domestic banks.

As a quid pro quo, priority sector targets for WOS would be upped from the 32 per cent stipulated for their branches, to the 40 per cent mandated for private and public banks; phased out over five years in 2 per cent increments.

As is presently the case, shortfalls would have to be made good by subventions to institutions such as Nabard. For agriculture WOS's would be required to reach only 10 per cent (as against 18 per cent for domestic banks), with the condition that indirect advances do not exceed one quarter of this amount.

The full text of the RBI's proposals is available on its Web site.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1150800.ece

RBI KEEN TO AVOID ENCORE OF ‘SUBSTANTIAL WITHDRAWAL' OF FOREIGN BANKS FROM CREDIT MARKETS

The RBI would like ‘systemically important' foreign banks to consolidate their branches in India into ‘wholly-owned' subsidiaries, which would be easier to monitor and control.

Foreign bank branches would be considered to be systemically important once their assets (including off-balance sheet items) become 0.25 per cent of the total assets of all scheduled commercial banks in India.

The balance sheet assets of the 34 foreign banks operating in India through branches, dipped from 9.03 per cent of the total assets of scheduled commercial banks in March 2009 to 7.2 per cent in March 31, 2010 (10.52 per cent if off balance sheet assets are taken on board; seventy per cent of it accounted for by the top five banks).

‘substantial withdrawal'

This fall in market share was because of a ‘substantial withdrawal' of foreign banks from credit markets in India over 2009-10; so much so that y-o-y growth of credit was -7.1 per cent (as on July 3, 2009) and -15.9 per cent (as on October 9, 2009).

The RBI is aware that, “The insolvency of a parent or ring fencing of liquidity by the parent's home country regulator can have same effect on subsidiaries as on branches. Subsidiaries promoted by foreign banks, where they had large presence, have in some countries acquired a large share at the expense of domestic banks in the boom years and then, faced with troubles at home, substantially curtailed or withdrawn their operations in the host country.”

The RBI would, therefore, continue to ensure the domestic financial system does not come under the domination of foreign banks.

While deciding the approach towards conversion of existing foreign bank branches, India's commitments to WTO have to be kept in mind. In other words, since it is not possible to mandate conversion of existing branches into subsidiaries, it becomes necessary to ‘incentivise' this.

The main incentive the RBI has in mind is to liberally allow wholly-owned subsidiaries of foreign banks (WOS) to open branches in Tier 3 to 6 centres, while dealing with their applications for setting up branches in Tier 1 and Tier 2 centres ‘in a manner and on criteria' similar to those applied to domestic banks.

As a quid pro quo, priority sector targets for WOS would be upped from the 32 per cent stipulated for their branches, to the 40 per cent mandated for private and public banks; phased out over five years in 2 per cent increments.

As is presently the case, shortfalls would have to be made good by subventions to institutions such as Nabard. For agriculture WOS's would be required to reach only 10 per cent (as against 18 per cent for domestic banks), with the condition that indirect advances do not exceed one quarter of this amount.

The full text of the RBI's proposals is available on its Web site.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1150800.ece

LONG-TERM RATINGS FOR BANKS STABLE IN 2011: FITCH

The outlook on long-term ratings for Indian banks remains stable in 2011, after a negative bias in 2009 following the credit crisis, said Fitch Ratings.

The stable outlook reflects easing asset quality concerns, together with an improving loan loss reserves position and expectations of further infusions of common equity by the government, said the Fitch report.

India's strong growth environment and improved corporate credit profiles are likely to ease asset quality concerns for a large part of banks' loan portfolios, although a few vulnerable sectors, including commercial real estate, may see rising delinquencies.

Fitch expects profitability to exhibit neutral to negative trends. Narrowing net interest margins in a rising interest rate regime is likely to moderate profit growth, but this will be balanced by a possible reduction in provisions as non-performing loan accretions begin to ease.

Higher pension provisions could be a drag on the profitability of public sector banks, although the quantum and the accounting treatment are yet to be announced.

Strong loan growth may result in a rising proportion of wholesale funding, partly from refinancing institutions. While some of these are long-term in nature, the overall funding profile could deteriorate if short-term non-repo borrowings are used to boost balance sheet size, Fitch said.

Banks with improved competitiveness and tested risk management systems may see upgrades in individual ratings and, in some cases, in national long-term ratings.

Though unlikely now, above average loan growth and sharp rises in system interest rates together with any macroeconomic shock could result in the outlook turning negative for some banks, the report said.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1150799.ece

LONG-TERM RATINGS FOR BANKS STABLE IN 2011: FITCH

The outlook on long-term ratings for Indian banks remains stable in 2011, after a negative bias in 2009 following the credit crisis, said Fitch Ratings.

The stable outlook reflects easing asset quality concerns, together with an improving loan loss reserves position and expectations of further infusions of common equity by the government, said the Fitch report.

India's strong growth environment and improved corporate credit profiles are likely to ease asset quality concerns for a large part of banks' loan portfolios, although a few vulnerable sectors, including commercial real estate, may see rising delinquencies.

Fitch expects profitability to exhibit neutral to negative trends. Narrowing net interest margins in a rising interest rate regime is likely to moderate profit growth, but this will be balanced by a possible reduction in provisions as non-performing loan accretions begin to ease.

Higher pension provisions could be a drag on the profitability of public sector banks, although the quantum and the accounting treatment are yet to be announced.

Strong loan growth may result in a rising proportion of wholesale funding, partly from refinancing institutions. While some of these are long-term in nature, the overall funding profile could deteriorate if short-term non-repo borrowings are used to boost balance sheet size, Fitch said.

Banks with improved competitiveness and tested risk management systems may see upgrades in individual ratings and, in some cases, in national long-term ratings.

Though unlikely now, above average loan growth and sharp rises in system interest rates together with any macroeconomic shock could result in the outlook turning negative for some banks, the report said.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1150799.ece

LONG-TERM RATINGS FOR BANKS STABLE IN 2011: FITCH

The outlook on long-term ratings for Indian banks remains stable in 2011, after a negative bias in 2009 following the credit crisis, said Fitch Ratings.

The stable outlook reflects easing asset quality concerns, together with an improving loan loss reserves position and expectations of further infusions of common equity by the government, said the Fitch report.

India's strong growth environment and improved corporate credit profiles are likely to ease asset quality concerns for a large part of banks' loan portfolios, although a few vulnerable sectors, including commercial real estate, may see rising delinquencies.

Fitch expects profitability to exhibit neutral to negative trends. Narrowing net interest margins in a rising interest rate regime is likely to moderate profit growth, but this will be balanced by a possible reduction in provisions as non-performing loan accretions begin to ease.

Higher pension provisions could be a drag on the profitability of public sector banks, although the quantum and the accounting treatment are yet to be announced.

Strong loan growth may result in a rising proportion of wholesale funding, partly from refinancing institutions. While some of these are long-term in nature, the overall funding profile could deteriorate if short-term non-repo borrowings are used to boost balance sheet size, Fitch said.

Banks with improved competitiveness and tested risk management systems may see upgrades in individual ratings and, in some cases, in national long-term ratings.

Though unlikely now, above average loan growth and sharp rises in system interest rates together with any macroeconomic shock could result in the outlook turning negative for some banks, the report said.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1150799.ece

STRONG NET INTEREST INCOME LIFTS SYNDICATE BANK PROFIT

Buoyed by a 60 per cent income in net interest income, Syndicate Bank posted a 24.5 per cent jump in net profit to Rs 256.19 crore during the third quarter of this fiscal, compared with Rs 205.74 crore recorded during the corresponding quarter of last year.

Its net interest income stood at Rs 1,150.28 crore (Rs 717.97 crore) boosted by a significant jump in other interests earned at Rs 36.46 crore (Rs 1 lakh). Operating profits also went up over 67 per cent to Rs 712.2 crore (Rs 424.74 crore).

During the quarter, the bank had also significantly increased its provisions to Rs 427.11 crore (Rs 143.94 crore), while at the same time bringing down the provisioning for taxes to Rs 25.52 crore (Rs 75.06 crore).

Gross NPAs stood at 2.32 per cent (2.43 per cent), while net NPAs had come down to 0.95 per cent (1.02 per cent). The bank's provision coverage ratio was 73.15 per cent.

The bank's cost of deposits has come down to 5.44 per cent (5.88 per cent), and yield on advances has gone up to 9.57 per cent (9.36 per cent). As a result, its net interest margin has seen an increase by 108 basis points to 3.58 per cent (2.5 per cent). The bank has reported a CASA (current account savings account) growth of 27 per cent.

Syndicate Bank's capital adequacy ratio stood at 11.74 per cent (13.48 per cent).

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1147472.ece

BANKS FACE HEAT OVER HOME LOAN PREPAYMENT PENALTY

The Reserve Bank of India has expressed its displeasure with a section of banks levying high prepayment penalty on foreclosure of housing loans. The central bank is also weighing options to tell banks to ease the burden on borrowers willing to prepay the loan fully, even as the Competition Commission of India finds such penalty legally valid.

Banks like ICICI Bank asks home loan borrowers to pay 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. For instance, IndusInd Bank charges up to 4% of the principal outstanding in some cases.

RBI's customer care committee discussed this issue last week. "RBI is clearly not happy with high prepayment charges. But should the regulator put a ban on prepayment charges is still a matter of further discussion,” said a senior RBI official, who was part of the discussion.

Responding to a query under the Rights to Information Act exactly a year ago, the banking regulator had said it does not approve of penalties on foreclosure of loans. But it has done little to stop it.

If it does now, it will follow its subsidiary National Housing Bank, which has directed housing finance companies (HFCs) in October last year not to levy any penalty in the event of foreclosure of housing loans, if the borrower pays if from its owned resources.

Banks charging the penalty justify it by saying that prepayment of loans creates gaps in their asset-liability management. But the central bank feels that banks should be in a position to absorb it as the cumulative prepayment happens to be a small fraction of the overall loan portfolio.

Despite the absence of specific guidelines for banks on foreclosure of loans, the country’s largest lender, the State Bank of India , spares its home loan borrowers from paying prepayment charges.

HFCs or SBI, however, levy a penalty if the loan is prepaid out of borrowed money.

This issue has attracted absorbing debateaftertheCompetitionCommissionof India’s ruling that imposing penalty for pre-closure of home loans is in tune with the existing laws. The commission has, in fact, set aside its investigation wing’s observations that such clauses were anticompetitive in nature and hence contravention of some sections of the Competition Act.

SOURCE: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/banks-face-heat-over-home-loan-prepayment-penalty/articleshow/7409393.cms