PSBs to offer cheaper loans to farmers to buy tractors

Government is trying to get cheaper loans for farmers to buy tractors. The government is having talks with Indian Banks’ Association (IBA), the apex banking body to provide loan for this segment. An anonymous senior government official told that the government has formed a special cell, to examine credit flow into this segment. The cell will have officials from the ministry of heavy industries and IBA.

After the approval of this proposal the leading public sector banks will offer cheaper loans for tractors to boost farming which is facing set back due to slow economy. In India nine out of every 10 tractors bought are financed by banks.

He added, “The government is in talks with all leading public sector banks to make sure loans are easily available. A formula can be worked out to lower the interest rate or a special scheme can be put into place”. Even IBA official confirmed that such a proposal was under consideration.

It is expected cheaper loans may come as a big help for tractor manufacturers in the current slow down. Tractor Manufacturers’ Association president LD Mittal informed, “We have been pushing for a special scheme for tractor loans as farmers are being denied credit. Apart from bringing down the interest rates, relaxing the borrowing norms is very important. If the norms are not relaxed, it would be difficult to give a boost to agriculture credit”.

Bankers pointed out loans through this facility might be available at 10%-11% as against the prevailing rate of 14%-15%. In the beginning some banks such as State Bank of India and Punjab National Bank may start the offer.

Banks suggest for restructuring loan out standings for small-loan borrowers

The Reserve Bank of India (RBI) has received suggestions from several banks regarding lower provisions on restructuring loan out standings with small-ticket borrowers. Earlier the apex bank had directed the banks to make a provision of 5% on all restructured loans with an out standing due of Rs 1 crore or less.

In an interview given to the ET senior bankers said that as a large number of restructured accounts are below Rs 1 crore, a 5% provisioning will damage the profits. According to some banks the provisioning should be reduced to 2%.

For reorganized accounts with outstanding dues of over Rs 1 crore, banks will require to calculate the net present value in order to arrive at the provisioning requirement. For instance if a borrower has to make a higher net payment to the bank post restructuring (than what it would have had to pay if the loan was not restructured) no provision is required.

But if the net payment to the bank post restructuring is less, the bank has to formulate a provision based on the loss it suffers on the account.

Indian Overseas Bank executive director G Narayanan pointed out, "On one hand, RBI allows restructuring of loans to revive the economy and on the other hand, steep provisioning norm pinches the profit and loss of banks".

Union Bank of India executive director TY Prabhu explained, "For the banking sector, a bulk of accounts, which would be restructured, belongs to the less-than Rs 1 crore categories. But that does not necessarily mean that the economic loss incurred by banks in restructuring these loans is as steep as 5%. There is a case for lowering the provision".

On the other hand RBI has given banks the choice to either calculate the provision on each account of Rs 1 crore or make a provision on the portfolio, which comprise loans of less than Rs 1 crore. But banks prefer making a flat provision on the portfolio as calculating the provisioning amount on each account is a tiresome process.

According to sources the decision to make a 5% flat provision was taken on an RBI study, which depicted losses suffered by banks, while as per past data are about 5%. In August ’08 RBI had taken a decision to fix a 5% provision.

As per circular issued by RBI: "If due to lack of expertise/appropriate infrastructure, a bank finds it difficult to ensure computation of diminution in the fair value of advances extended by small/rural branches, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair value and providing therefore, at 5% of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than Rs 1 crore till the financial year ending March 2011. The position would be reviewed thereafter."

PSU Banks take leading position in auto loan segment

Public sector banks are leading in auto loan segments. PSBs have lent Rs 22,000 passenger car and two-wheeler loan market. Thus the private sector banks who used to be the leading lenders have been overtaken by their public sector counterparts. The increased delinquencies has led the private sector reduce their coverage in the auto loan segment.

Big PSU banks such as SBI, Bank of Baroda, PNB, Canara Bank, Syndicate Bank, Bank of India and Union Bank of India every month in cooperation are lending around Rs 1,000 crore in the Rs 1,800 crore auto loan market whereas the remaining amount is being lent by the private banks. Earlier a year ago the private banks were the leader of the auto loan market with a joint market share of 75-80%.

The loans offered by the PSU banks are largely in the range of up to Rs 3 lakh and are thus lending to two-wheelers in addition to smaller cars like Alto, WagonR, Santo and Indica.

Hyundai Motor India senior vice-president (sales & marketing) Arvind Saxena notify, "PSU banks are offering lower interest rate and so customers are opting for them. Secondly, these banks restrict their ticket size of loans and thereby mostly finance small cars, which form around 76% of the total auto market. Besides they have a wide reach in small cities and rural areas where there is growth."

Although PSU banks have become the higher lenders in the auto segment then also the HDFC Bank is maintaining its lead as the single largest player in auto loans with 30% market share. But the sharp reduction done by other private banks such as ICICI, Kotak Mahindra and Axis has brought down the share of private banks considerably over the past few months.

Till early 2008 ICICI bank held the position of market leader in auto loans later it significantly cut down the lending. ICICI Bank's Head vehicle finance N R Narayanan told, "We have decreased our exposure in the market and now our total loan size is now reduced to around Rs 500 crore annually. We have a large portfolio of the auto vehicles already financed in the past and are focusing on managing it."

According to General Motors vice-president (marketing & sales) Ankush Arora, "Competitive interest rates and easy lending being offered by PSU banks has increase their share. For instance, the share of cars financed by SBI alone has now gone to 15 % for our cars from mere 2% of last year."

Syndicate Bank has just made an entry into the auto financing and initially it has recently entered the auto finance market in the initial stage has kept a portfolio of Rs 1,000 crore for auto finance. Syndicate Bank general manger (Retail Banking) B R Pai notifies, "Auto loan forms a small component of our total consumer finance portfolio of Rs 20,000 crore, but we will increase it subsequently.

We are offering one of the most competitive interest rate of 12% to our priority customers like Hyundai Motors and aim to grab a market share of 10% in the next few years."

HFCs, banks sign agreement to boost home loan segment

To boost home loan segment banks and housing finance companies (HFCs) have decided to get into partnership. Usually banks and housing finance companies (HFCs) are known to compete sternly on the home loan segment.

In fact they have agreed to work together to grow business by using their respective expertise and sharing the loan books.

Recently an agreement has been signed between Mumbai-based Dewan Housing Finance Corp and state-run Punjab & Sind Bank (PSB).

Dewan Housing is also carrying out talks with Kolkata-based United Bank of India (UBI) for inking a similar arrangement. General Insurance Corporation (GIC)-promoted GIC Housing Finance (GICHF), in a row, said in a statement that it is open to exploring this model.

Dewan Housing vice-chairman & managing director Kapil Wadhawan told ET, “This is first time that banks and HFCs are coming together to grow business through a loan syndication model. We will originate and process home loans by leveraging these banks’ extensive branch network.”

Not easy to get loans from banks

Now getting loans from banks have become difficult as banks are closely scrutinizing your credit history. This will be applicable even though you have defaulted in repaying a paltry loan sum taken several years ago.

Banks are logging on to data supplied by the Credit Information Bureau of India (CIBIL). CIBIL provides information on the credit history of commercial and individual borrowers to its members that include all banks, financial institutions, non-banking financial companies and housing finance companies.

A HDFC Bank official stated, “Even if a person had defaulted on a payment of Rs 500 several years ago, we will take that into consideration. Recently we rejected a loan application because the person defaulted on an amount of Rs 28,000 in 2006. We checked his record from CIBIL”.

While a year ago, banks would have pursued you to take loans irrespective of your ‘track record’. But now it has become history, and this is causing heartburn among consumers. Leading auto dealers like Magnum Honda and Cauvery Ford have informed of a 15%-20 % decline in new loan distribution to potential customers of mid-size cars on the basis of CIBIL data. While the rejection figure in the purchase of small cars have gone up by 25%-30 %.

Banks are also rejecting home loans on account of this. A real estate developer stated, “Though there are genuine home buyers, what is affecting the market now is the fact that they are not getting loans.”

CIBIL collects data from all members and categorize borrowers into two broad categories: a positive and a negative list. In case you default on payments or have outstanding dues even to credit card companies, your name is moved from the positive list to the negative list. And it is this negative list to which banks refer while issuing fresh loans now.

B R Pai, GM (retail banking) of Syndicate Bank remarked, “We don’t lend to people if their names appear in the negative list of CIBIL, unless they come with a clean chit or a no-dues certificate from the bank”.

Incidentally, names can be shifted in the negative list even though the borrower has cleared the entire amount as CIBIL updates the list only on a quarterly basis.

PSU bank request relaxation in 75% risk weight on small home loans

The public sector banks are requesting the Reserve Bank of India (RBI) to either completely waive or substantially relax the 75 per cent risk weight that banks are required to attach to such home loans. Banks are following in line with Government’s diktat to extend home loans of up to Rs 20 lakh at concessional rates of interest thus they are ‘sacrificing their interests’ by offering home loans at subsidized interest rate of up to 9.25 per cent.

Dr K. Ramakrishnan, Chief Executive, Indian Banks’ Association pointed out, “Besides paring interest rates on home loans up to Rs 20 lakh, public sector banks have also brought down the loan-to-value ratio, and are providing borrowers free life insurance. Hence, banks have sought relaxation in risk weights on home loans to free up capital.”

At present the Government is not giving any subvention (financial support to make good the gap between market rate and the rate at which they expect these banks to lend) to public sector banks (PSBs) for offering home loans at subsidized interest rates. Banks argue that if the central bank gives relaxation on risk-weights, which will ease pressure on capital.

Banks want this relaxation in risk weights in their consultation with the RBI Deputy Governor, Dr Rakesh Mohan. On January 15 a meeting was organized, it was a part of the central bank’s exercise to consult stakeholders before the third quarterly review of monetary policy on January 27.

As per the housing loan scheme launched early last month by PSBs, interest rate on home loans of up to Rs 5 lakh of 20 years’ tenure would not exceed 8.5 per cent for the first five years, while the same for loans from Rs 5 lakh to Rs 20 lakh will not exceed 9.25 per cent.

As homes are reasonably priced in Tier-II cities and Tier-III towns, therefore PSBs are receiveing a good response to the concessional scheme for loans up to Rs 20 lakh. But this is not true in the case of the larger cities.

As per PSB official, as per the current deposit rates and statutory allocation towards SLR and CRR, most PSBs have to finance the interest rates they offer on home loans up to Rs 20 lakh.

Thus Bankers are of view that the RBI is more likely to reduce the risk weight to 50 per cent rather than waive the risk weight.

HDFC, BoR, Canara Bank announced cut in lending rates

Private sector lenders HDFC and Bank of Rajasthan following the RBI lines rolled down the lending rates giving relief for both existing and new borrowers while the state-owned Canara Bank has cut the rate for SME.

HDFC country's largest housing finance company has cut the lending rate by 50 basis points for loans of more than Rs 20 lakh for both existing and new customers and has also introduced a new slab for sub-Rs 20 lakh.

After this the loans of up to Rs 20 lakh will draw an interest rate of 10.25 per cent and the rates for loans above this level has been set at 11.25 per cent, down from 11.75 per cent. The new rates will come into effect from Monday.

According to a bank statement Bank of Rajasthan has reduced the rates on its home loans under 'Apna Ghar Scheme' by 1.50 per cent on maturity tenure of up to 10 years and one per cent for maturity tenure of over 10 years.

While the Bangalore-based Canara Bank reduced lending rates as much as 100 basis points for micro enterprises while for small and medium enterprises the reduction will be 50 basis points.

HDFC Ltd has also announced cut in deposit rates by 50 basis points across all maturities.

"The advantage of a cut in retail prime lending rates (RPLR) will accrue to all the existing floating rate customers over a period of next three months based on their respective reset dates," HDFC said in a statement.

Banks announcement of reducing rates has come within 24 hours of Home Minister P Chidambaram announcing in Parliament that the government will convince banks to reduce loans for existing home loan borrowers as well.