MINT-Jan 6 2011
Bank Credit May Become Costliest In A Decade
The latest round of rate hikes by Indian banks has taken loan rates
closer to their pre-credit crisis peak in 2008 and rates could even go
up further, making money costliest in a decade for corporations as well
Bank analysts say that lending rates have room to go up by 25-75
basis points (bps) in 2011.
Many banks, including the country’s largest lender State Bank of India
(SBI) and second largest ICICI Bank Ltd, hiked their lending rates this
With the latest round of rate hikes, the gap between the policy rate of
the central bank and the lending rate of banks is at the highest ever.
The pre-crisis level policy rate of the Reserve Bank of India (RBI) was
at 9%, which made the gap between the policy rate and the prime
lending rate (PLR) of public sector banks 4.25 percentage points. Now
RBI’s policy rate is at 6.25%, and the gap has widened to 6.5
For technical reasons, Indian banks have two loan rates. PLR,
theoretically meant for the best customers of the bank, is still in vogue
even as the base rate, or the minimum lending rate, came into effect
in July. All fresh loans are linked to the base rate whereas the old
customers are serviced through PLRs. Any change in PLRs affects the
old customers of the banks. According to a rough estimate by the
analysts, around 70-75% of the loans in the banking system are still
linked to the PLR system.
SBI hiked its base rate by 40 bps to 8% last week and PLR by 25 bps
to 12.75%. The bank’s pre-crisis level PLR was 13.25%—a level that
analysts expect will soon be reached.
With the recent hike, ICICI Bank’s PLR stood 0.25% higher at 17%,
just 25 bps lower than its 2008 rate. The bank raised its base rate by
0.50% to 8.25%.
Many banks have raised their loan rates twice in the past one month.
The lending rate hikes are accompanied by deposit rate hikes.
Banks have been forced to hike lending rates to maintain their margins
because scarce money in the banking system has forced them to pay
more to garner deposits.
Banks are looking to keep their net interest margins at 2.5% at the
minimum and since some of them are offering deposit rates at 9%, the
lending has to be at at least 11.5% to maintain margins.
The PLR of private sector banks has generally remained 100-125 bps
above the PLR of the public sector banks during the period March 2004
to June 2007, before expanding to 200 bps during June 2007 to June
Post September 2008, the gap has increased by 300-400 bps.
However, much of the lending during this period was below PLR.
Lending rates are likely to go up further as expectations are that RBI
will hike its policy rate by at least 25 bp in its monetary policy review
later this month.
The hike could increase pressure on credit growth and year-on-year
growth may fall further as lending may not keep pace with the year-
The last quarter of 2009-10 saw a robust 22% growth and this time
it’s going to be much lower. Demand for credit from small- and mid-
cap companies has not been there this year as companies have put
their plans on hold because of global uncertainties. And now with rates
at historic highs, they cannot take loans because it will hit their
According to the latest RBI data, credit in the banking system is
growing at 23.7%, but deposits are growing at 14.7%. Hence, banks
are unable to fund this credit growth through the deposits they are
garnering. To attract more deposits, they are forced to hike their
deposit rates, which again pushes up the cost of funds.
Banks’ dependence on wholesale deposits, or high-cost deposits from
firms, has risen. She estimates that around 25-30% of the banking
system’s time deposit base is constituted by wholesale deposits.
Banks’ dependence on such deposits and the increase in short-term
certificate of deposits—their proportion in bank balance sheet has
increased from 3% to around 9%—have ensured that any deposit rate
hike is instantaneous.
Banks’ reluctance to increase deposit rates even when inflation was
ruling at double digits forced retail depositors to shun the banking
It was definitely a serious mistake in resource management by banks
that they did not hike the deposit rates. Now it is late and banks have
to depend on wholesale deposits for some more time as retail
investors will take time to put their money in the banking system,
expecting more deposit rate hikes in the future.
To attract depositors, SBI has increased its deposit rates by 50-100
bps. A 555-day deposit with the bank now attracts 9% interest against
8.5% earlier. Also, for deposits between 7 days and 14 days, and 15
days and 45 days, the bank is offering interest rates of 4% and 5%.
This will in time result into customers withdrawing their money from
savings deposits, which give an interest rate of 3.5%.
It will be interesting to see how savings account customers behave. If
they start withdrawing money from the savings account for these
schemes, it will affect many banks’ profit margins.
A research note of Edelweiss Securities Ltd said smaller public
sector banks will be more affected than larger public sector banks and
The Economic Times: 2011 Jan 06
Each ATM transaction will need PIN entry
NEW DELHI: Next time you go to a bank ATM, be ready to re-enter your PIN
afresh for every transaction you wish to conduct, such as money withdrawal,
balance enquiry and checking account details. In order to check misuse of
ATM cards by unauthorised people, RBI has asked banks to allow only one
transaction at ATM machines for one entry of PIN (Personal Identification
Number), which acts like a password for ATM transactions.
Property prices to rise in next one year, then correct: NHB
NEW DELHI: The National Housing Board, which is awaiting $500-million
loan from the World Bank for low-cost housing, on Wednesday said property
prices would rise in the next one year, but that would result in correction in
these rates in all the metros subsequently. “In the next one year, property
prices would be moving northwards, which will create a dampening impact
on demand, resulting in correction of prices in the metros,” NHB chairman R
V Verma said .
MFIs continue to face tough time in Andhra Pradesh
HYDERABAD: Fresh lending by microfinance companies in Andhra Pradesh
has virtually come to a standstill after the October 15 ordinance which was
issued to regulate the sector, government officials said on Wednesday. The
loans, otherwise, would have been running into several hundreds of crores
under normal circumstances, said the Microfinance Institutions Network .
The Economic Times:2 011 Jan 06 11
SUBSIDISING FUELS & WHAT IT MEANS FOR THE ECONOMY
LAST year, the government dismantled the administered price mechanism
for petroleum products. It deregulated the price of petrol, but stopped short
of doing the same in the case of diesel and cooking gas, saying higher prices
of these fuels could hit the poorer sections of the society. The government
continues to pay huge amounts as subsidies to fuel retailers to sell
petroleum products below cost. ET takes a look at the practice of subsidising
fuels and its impact on the economy.
How are prices set in India?
While prices of most goods and services in India are market determined,
administered pricing exists in certain sensitive sectors. The government
offers subsidies on some goods and services, changing the price at which
they are sold. It works in the opposite direction of a tax, by decreasing the
final price rather than increasing it. For example, diesel is sold at a lower
price than petrol, as it is used by the railways and trucks. An increase in
transportation costs would directly lead to an increase in the prices of most
food items, which would, in turn, hurt the vulnerable sections of the
Is this the ideal way?
Economic theory says prices should be left to the forces of demand and
supply and should not be tampered with as they reflect relative scarcities.
But even in advanced market economies, governments offer subsidies to
protect weaker sectors of the economy.
How does the government finance subsidies?
The government funds these subsidies using part of its revenues from taxes
on goods and services.
What are problems with the current system?
Whenever the government offers subsidies it alters the final consumer
prices, affecting the consumption patterns in the economy. For example,
people buy diesel vehicles because they can obtain the fuel at a lower price.
Are there other ways of supporting those in need?
There are other solutions where prices would be left untouched and people
would be given direct support through cash transfers. But this raises other
issues such as setting criteria for selection of people who deserve support.
There could also be problems in identifying people for cash payouts.
The Economic Times: 2011 Jan 06
Short-term interest rates fall with rise in liquidity
Three-Month CDs Drop To 8.73% From 9.05%, But Long-Term Rates Still High
SHORT-TERM interest rates eased as liquidity returned to the system. However,
long-term rates still continue to remain high.
Interest rates on the 3-month certificate of deposit, or CD rates, dropped to 8.73%
from the previous close of 9.05%. One-year CD rates slipped to 9.48% at the turn
of the year from the previous close of 9.70%. But at the same time, the yield on
the benchmark 10-year government bond fell only by 1 basis point, closing at
Bond market dealers said the central government transferred around . 40,000 crore
to states between December 27 and December29,whichfounditswayinto the banking
system, adding to the liquidity. Besides, RBI also bought back four government
securities worth . 10,000 crore, releasing an equivalent amount into the system.
Bankers think the liquidity is here to stay, though upward bias in interest rates is
likely to continue. Ramesh Kshirsagar, head of treasuries, Bank of Maharashtra,
said: “The borrowing from RBI has come down from . 108 lakh crore to almost half
of it. But it’s only the short-term rates which have
comedown,ratesinthesecuritiesmarket are still soaring.”
According to a senior official from the Corporation Bank, “It is the
governmentspendingwhichhaseasedthe liquidity in the system. This has little to do
with RBI’s efforts in easing liquidity, except its open market operations. Also, the
credit growth is slowing as the cost of credit has gone up.”
Market players are sceptical about the responsiveness of the securities being
bought back by RBI. “Bankers are doubtful about the responsiveness of these
securities, due to large gap in the holding costs of these securities and the market
prices,” said Mr Kshirsagar.
The banks borrowed a sum of . 87,890 crore from RBI against government
securities, which was slightly higher than the borrowing on the previous day, which
was about . 68,150 crore. The liquidity in the system had eased on back of
government spending from a net borrowing of . 1.02 lakh crore even on January 3.
According to Mr Khirsagar, this liquidityiswellwithinthecomfortofRBI, though the fear
of rate hikes remains.
The four securities bought back by RBI were, 17% 2015, 7.99% 2017, 6.90% 2019
and 7.94% 2021 bond.
The Economic Times: 2011 Jan 06
How to close a depository account
YOU need a depository or demat account if you want to buy or sell shares.
When you buy shares, a stock broker transfers the shares to your depository
account. And when you sell them, your shares are transferred to the
broker's account. Investors keep shares in the electronic form in two
depositories: the Central Depository Services Limited (CDSL) or National
Depository Services Limited ( NSDL). Depositories receive shares from
depository participants who could be brokers like Religare, Geojit BNP
Paribas, India Infoline or banks like HDFC Bank, ICICI Bank and so on. Many
a times we open multiple depository account, without realising that there are
annual maintenance charges levied for every account that we hold. So here
is how you could close or transfer your demat account.
The Process: If you have no shares lying in your depository account
(because you sold them off) or if you are unhappy with the services of your
depository participant you can consider closing your account. However, to
close your depository account first and foremost there should be no shares
lying in it. If there are shares lying in the account, you need to transfer them
to some other account or remat them (get them back in physical form).
Besides this, you also need to ensure there is no negative cash balance in
your account. Negative cash balances may arise due to non-payment of
annual maintenance charges or past transfer charges not paid up. If you
request for an account closure without settling the negative balance, the
depository can reject your application.
To transfer your depository account to another depository of your choice you
need to submit an application in the prescribed format, along with annexure
Q to your depository participant. The details of the new depository account
have to be mentioned in the application form. Along with that you also have
to submit all the unused delivery instruction slips issued by the depository
participant. Once this request is received the depository will transfer all the
shares to the new depository account within 3-5 working days.
If your current depository account is in the name of Mr A and Mrs B and if
the new account is also in the same order i.e. Mr A and Mrs B, then there
are no charges which will be levied by the depository for the transfer.
However if the new account order is not the same but in a different order
say Mr A and Mr C, then the depository participant could levy a charge for
transferring each stock to that account, based on the rate that he charges.