Wednesday, July 30, 2008

Bankers see hike in interest rate after RBI’s credit policy

After the Reserve Bank of India’s credit policy, bankers have started hinting for further hike in interest rates. On Tuesday RBI in view of restricting current inflationary trends and to tighten credit growth has revised the Cash Reserve Ratio (CRR) by 25 basis points and the repo rate by 50 basis points.

Expressing his views Bank of Baroda chairman and managing director MD Mallya told IANS said, "It is too early to comment on a rate hike but the pressure seems inevitable. We will have to analyze this soon before taking any decision".

Mallya further added that in view of current condition of the market, one needed to be very cautious. "By hiking repo rate and CRR, RBI has clearly indicated that it is serious about curbing inflation," he added.

Bank of India chairman and managing director T.S Narayanasami in his statement said RBI wanted inflation to be under control rather than moderating it, and added: "We expect an increase of minimum 50 basis points of prime lending rates (PLR)."

On the other hand Punjab National Bank chairman and managing director KC Chakrabarty said bankers will be passing on the burden to customers.

"I expect a raise in interest rates in coming weeks," Chakrabarty said.

Commenting on RBI’s hike in CRR, ABN AMRO country executive Meera Sanyal said as she expected a CRR hike to tighten liquidity conditions, "the repo rate hike clearly signals that RBI wants the credit growth to ease off".

Similar views were expressed by Indian Overseas Bank chairman and managing director S.A. Bhat. He told IANS, "We expected increase in cash reserve ratio but not the repo rate". "The credit policy measures have come as a bolt from the blue."

He, however, informed that his bank will not increase interest rates on deposit, as existing rates had factored in changes in the RBI policy

While giving her views ICICI Bank vice chairman Chanda Kochhar told television channel her bank will "definitely" look at further hike in interest rates, but agreed bankers will have to come up with tightening measures.

Tuesday, July 29, 2008

RBI hikes interest rates in credit policy, loans may turn costlier

The Reserve Bank of India today held its credit policy meeting in which it announced strict measures to be taken to face the challenge being put by inexorable inflationary pressure. The central bank said it has become necessary to hike mandatory cash reserve of the banks and its short-term lending rates to suck up an estimated Rs 8,000 crore (Rs 80 billion).

On Monday, RBI Governor Y. V. Reddy while presenting the first quarter review of the annual statement on Credit and Monetary Policy for the year 2008-09 announced the hike in reserve repo rate by 0.25 per cent to 8.75 per cent and the short-term lending (repo) rate by 0.50 percent to 9.00 per cent. The rates will come into effect from the fortnight beginning August 30, 2008

As per the analysts this move of central bank can make loans dearer for housing, car and personal expenses as also to the industry.

The central bank has kept its other rates such as the Bank Rate and CRR unchanged at 6 per cent and 5 per cent respectively.

RBI has maintained the GDP growth projection for 2008-09 at 8.0-8.5 per cent to around 8.0 per cent, barring domestic or external shocks in its first quarterly review of the Monetary Policy announced on Tuesday. Governor added the policy actions will aim to bring down the current distressing level of inflation to a bearable level of below 5.0 per cent as soon as possible and about 3.0 per cent over the medium-term. He added at this time the practical approach of the policy will be to bring down inflation from the current level of about 11.0 – 12.0 per cent to a level close to 7.0 per cent by March 31, 2009.

In the press conference Dr Reddy said though there are early signs of some moderation in money supply and deposit growth but they continue to expand above the analytic projections necessitating for continuous vigilance and appropriate and timely policy responses.

"Monetary policy may not be unidirectional. Global economy and financial markets are changing swiftly. As far as global developments are concerned, we should be prepared to move in either direction in the longer term," Dr Reddy said.

Dr Reddy added in view of the developing environment of increasing uncertainty in global markets and the dangers of potential spillovers to domestic markets, liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead.

Expecting the emergence of any adverse and unexpected developments in various sectors of the economy, assuming that capital flows are effectively managed and taking in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in 2008-09 will broadly emphasize in ensuring a monetary and interest rate environment which is mainly concerned with price stability, credit quality as well as credit delivery, especially for employment-intensive sectors, while pursuing financial inclusion.



RBI hikes interest rates in credit policy, loans may turn costlier

The Reserve Bank of India today held its credit policy meeting in which it announced strict measures to be taken to face the challenge being put by inexorable inflationary pressure. The central bank said it has become necessary to hike mandatory cash reserve of the banks and its short-term lending rates to suck up an estimated Rs 8,000 crore (Rs 80 billion).

On Monday, RBI Governor Y. V. Reddy while presenting the first quarter review of the annual statement on Credit and Monetary Policy for the year 2008-09 announced the hike in reserve repo rate by 0.25 per cent to 8.75 per cent and the short-term lending (repo) rate by 0.50 percent to 9.00 per cent. The rates will come into effect from the fortnight beginning August 30, 2008

As per the analysts this move of central bank can make loans dearer for housing, car and personal expenses as also to the industry.

The central bank has kept its other rates such as the Bank Rate and CRR unchanged at 6 per cent and 5 per cent respectively.

RBI has maintained the GDP growth projection for 2008-09 at 8.0-8.5 per cent to around 8.0 per cent, barring domestic or external shocks in its first quarterly review of the Monetary Policy announced on Tuesday. Governor added the policy actions will aim to bring down the current distressing level of inflation to a bearable level of below 5.0 per cent as soon as possible and about 3.0 per cent over the medium-term. He added at this time the practical approach of the policy will be to bring down inflation from the current level of about 11.0 – 12.0 per cent to a level close to 7.0 per cent by March 31, 2009.

In the press conference Dr Reddy said though there are early signs of some moderation in money supply and deposit growth but they continue to expand above the analytic projections necessitating for continuous vigilance and appropriate and timely policy responses.

"Monetary policy may not be unidirectional. Global economy and financial markets are changing swiftly. As far as global developments are concerned, we should be prepared to move in either direction in the longer term," Dr Reddy said.

Dr Reddy added in view of the developing environment of increasing uncertainty in global markets and the dangers of potential spillovers to domestic markets, liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead.

Expecting the emergence of any adverse and unexpected developments in various sectors of the economy, assuming that capital flows are effectively managed and taking in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in 2008-09 will broadly emphasize in ensuring a monetary and interest rate environment which is mainly concerned with price stability, credit quality as well as credit delivery, especially for employment-intensive sectors, while pursuing financial inclusion.

Thursday, July 24, 2008

Co-operative banks demand change in loan waiver scheme

Co-operative banks across the Bengal state want changes in the existing guidelines for selecting farmers under the Center’s loan waiver scheme. The authorities of the cooperative banks said the existing guidelines should be changes so that those farmers who have repaid their loans by selling either their farm lands or ornaments should be brought under this scheme and a percentage of money should be exempted and returned to them as relief.

Regarding this the bank authorities have submitted a memorandum before the state cooperation minister Mr Rabin Ghosh at a state conference of the cooperative banks held at Mecheda in Midnapore East district.

The bank authorities have submitted a memorandum at the time when the loan waiver scheme is awaiting for implementation of the Rs 71,000 crore farm debt waivers and relief scheme is in progress with public sector banks, regional rural banks and cooperatives displaying names of the beneficiaries at branches. The Contai Cooperative bank, Mr Sisir Adhikari, said that those farmers who have been repaying their loans on time and regularly have now said that they will not be doing so as it looks like the government is helping only those who have defaulted with their payments. Because of this unwavering attitude of the farmers, majority of co-operative banks in the state are now facing an acute fund shortage. He said this situation has arisen due to the surge in kharif loan demands from fresh eligible borrowers in the wake of the Centers debt waiver scheme.

Mr Adhikari also said: “We have asked the government to exempt a percentage of the loan amount for repayment for those who have returned their loan amounts to the banks during the stipulated period”. During his speech before the delegates, Mr Ghosh said: “The state has already asked the Centre to include in the scheme names of those farmers who had paid their loans and also those farmers who had rescheduled their loans.”

Friday, July 18, 2008

Restrictions on agents make loan recoveries difficult NPAs on rise

Since the Reserve Bank of India (RBI) has formulated rules for the recovery agents of the banks, banks have been facing difficulty in recovering from the loan defaulters. And in turn this has led to an increase in their NPAs.

Adhikrut Jabti Evam Vasuli, a Mumbai-based authorized seizure and recovery Agency Company engaged in collection of loans from offending bank customers has been forced to cut down its workforce by half due to restrictions on agents. Whereas mounting defaults should have made it a time to expand rather than reducing the staff. The reason behind this is clear the state-owned commercial lenders have to go soft on defaulting borrowers after the central bank stepped in on the complaints of harassment and threats.

After the restriction the lenders including State Bank of India (SBI), the nations largest have to deal with the bad loans problem in their credits at the time when inflation has moved up to double digits to 13-year high and increasing interest rates have made credit more expensive said, “Most of the public sector banks are going slow on recovery. We have reduced our staff strength from 400 to 200 beginning 2008.” SBI is now running most of its collection activity in – house, and other state-run banks.

“The bank (SBI) has started stress asset resolution centers all over the country. This has definitely taken away some business from us,” Shah said.

In the last fiscal year, his company started employing only women as recovery agents which has resolved stressed assets worth Rs400 crore and has been able to make cash recoveries of Rs110 crore, which he anticipates will more than halve to Rs50 crore this year.

After some customers took banks to courts and filed police complaints against bank employees and agents for alleged use of force RBI disciplined loan collection agents who have been using tactics ranging from ceaseless phone calls to use of eunuchs to embarrass defaulters or thugs to beat them up.

In rules and regulation for recovery agents the apex bank in April made police verification and training of agents mandatory. Banks were also required to inform the customer before handing over a loan recovery case to a collection agent.

Fearing the risk on their reputations several banks shifted the bulk of loan collection work in-house. This has brought down the business of the collection agencies, which earn commissions ranging from 3.5% to 20% of the amounts they recover. In India there are about 146,000 recovery agents engaged by banks across the country.

With credit becoming cheap and abundant, and income level increasing India has seen more than 35% annual growth in retail loans to finance the purchases of apartments, cars and other consumer durables in the past few years. While mortgage costs had fallen to as low as 7.25% and personal loan rates dipped to 8%.

Recently there has been rise in interest rates, so the customers have started defaulting on their equated monthly installments, or EMIs, on unsecured personal loans and credit card payments. Delinquency as a percentage of loans outstanding has gone up to 5.9% from 4.5% last year for banks handled by Omega Alliance Recovery Solutions Pvt. Ltd, a Mumbai-based collection agency.

“We get at least 10 calls a day from consumers who say they do not have the capacity to pay and they want a settlement. This means we have to compromise even on the principal amount. Forget earning interest on loans,” said an executive at a foreign bank in Mumbai who did not want to be named.

According to RBI data personal loan growth has halved. The outstanding personal loans grew by 13.2%, or Rs58,669 crore, in last fiscal year as on 15 February 2008, after expanding by 30.6%, or Rs1.04 trillion, a year earlier.

There are various reasons for defaults. One is the personal loans have been used for investment in a stock market which has slumped after a five-year rally. The benchmark index of the Bombay Stock Exchange, the Sensex, lost some 37% since January; the borrowers who used their personal loan for purchasing shares have been unable to pay back their loans.

The owner of a Mumbai-based collection agency, who did not want to be named, told that “Banks have not ensured the end-use of funds, particularly when they extended a personal loan”. “NPAs are the highest in personal loans,” he added.

Banks are trying out new ways to educate borrowers to pay their loans on time. Banks are launching nationwide campaigns to persuade borrowers to pay their loans on time.

But “the atmosphere is not conducive for recovery (of bank dues)”, says a private bank executive who did not want to be named. “Collection efforts are now largely restricted to making phone calls.”

Pointing to the figures of NPAs he said the percentage of NPAs in personal loans at some banks has increased to 12-15% of total lending from 6-8% earlier.

“The growing number of defaulters has forced us to tighten our lending norms,” said the same bank executive. “Earlier, we were comfortable lending to an individual with an annual income of Rs60, 000 but now we don’t lend unless one has an annual income of Rs1 lakh.”

In the past few years, many borrowers took multiple loans but now they are finding difficult to pay back their loans after banks raised their lending rates. “Customers are prioritizing,” said another banker. “They pay their home loan EMIs on time but they don’t mind defaulting on a personal loan or their credit card dues.”

Although some of the private banks and foreign lenders are still hiring collection agents, such as Alliance, which has 150 employees on its pay roll and wants to OMEGA, expand. In fact its director Pankaj Joshi, wants to start another agency.

Joshi said he is willing to pay well. “A collection agent’s salary has gone up by 20-25% this year and it’s comparable with any sales executive employed with a corporate house.”

But he is finding problem recruiting people: only few want the job of a collection agent.

“There is a level of stigma attached to this job,” Joshi explains.

“Additionally, there are alternate job opportunities available which are socially accepted. People prefer to work as sales representatives with corporate houses.”

He added that recent instances of police complaints brought by defaulters against bank-recruited collection agents have also turned people against the profession.

Wednesday, July 16, 2008

Banks are selling insurance policies to loan seekers

The banks especially who have an insurance arm of their own or that are marketing the products of an insurance provider are selling insurance products to the loan seekers.

The loan seekers who are applying for the loan are finding themselves in a tricky situation as they are being asked to take insurance policy and the reason they are giving that this will enhance the ‘chances’ of loan approval. The policy is on the life of the borrower against accident and other risks.

Amongst the customers some of them are finding insurance cover useful and some feel that they are being forced to take policy by banks which is against the norms set by Insurance Regulatory and Development Authority.

Mr P. Muneeswara Rao, a small-time employee in IDL told Business Line, “I was forced to go for a shield policy when I took a personal loan of Rs 1.3 lakh by a branch manager of a public sector bank, which cost me about Rs 12,000. I was told that the loan application would be approved only if I go for it.”

Mr Sesha Rao, a software professional with Google, agrees: “When I approached State Bank of India for a housing loan of Rs 25 lakh, I was told curtly to buy insurance as well, though I have a very reasonable cover for life.”

Mr Ravi, an IT professional working for Computer Associates, informed that the customers don’t have any choice either. He said, “Even though I have many insurance polices, I was made to go for another policy when I took a home loan from ICICI Bank.”

In fact in some of the banks loan application forms carry a column for insurance that even says explicitly that “efforts will be made to pursue the loanee to go for insurance”.

According to the sources selling of insurance policy is becoming a trend as the bank officials are being pressurized to sell banc assurance products in order to increase the fee-based income and the safe recovery of loan amount, among others.

According to a leading private bank official, “It is a fact that some pressure is put on the loan applicants for insurance. It sure is a drain on the purse for them but its adds to our performance if we could convince them to go for insurance cover.”

Monday, July 14, 2008

Banks introduce reset clause to home loan

Over the past few months number of factors has been responsible for the hike in home loan interest rates. The Reserve Bank of India (RBI) has increased the repo rates and reverse repo rates which has added to the interest rate increase process. Hence interest rates on housing loans are no exception.

Till now, it was believed loans carrying a fixed rate of interest did not get affected with interest rate movements. They were supposed to remain neutral to the market movements. But with the recent continuous increases in the interest rates, this has led to loss for banks. Therefore many banks have searched a way out by introducing a reset clause in their fixed home loan documents to effect a change in the interest rate at a future date.

The reset clause will allow banks to review rates at the end of certain time period. Some banks have set the reset clause as applicable at the end of certain number of years - usually two to three.

Most banks have started introducing these clauses in their home loan documents since the interest rates started moving upwards. With this reset clause the fixed rate loans become equivalent to floating rate ones and nothing remains fixed in the strict sense of the word.

From the viewpoint of banks and financial institutions, such a step may be necessary as they no longer have access to relatively cheap long-term lines of credit to offer long tenure fixed rate loans. In case of most of the banks, the average tenure of deposits is less than four years, and if they lend for a longer period, their cost of funds strike high as also the yields. Over the past the interest rates have become unstable.

Following the increasing instability in the interest rates, the banks are not ready to take a view on where interest rates are headed in the times to come, as banks are already under pressure to protect their margins. Because of all these factors banks are forced to review the pricing and product structure of loans.

With reset clauses Bank would be able to revise the interest rates on loans in case of certain circumstances. The banks will have the discretion to increase the interest rates in case the market rates of interest increase. This tends to evade the banks against interest rate increases at a future point in time. But this is going to put the borrower in a disadvantageous position. In any case the fixed rate of interest is higher than the floating rate.

The criteria that can trigger the rest clause have been specified in the loan document. Reset clause depicts changes in interest rates to the fixed rate borrowers. The only difference in respect of a floating rate loan is that changes in the interest rate don't happen frequently.