Dead Presidents! - India Equity Research: Interest Rates

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Sunday, November 22, 2009

Relax interest rates by 2%: ASSOCHAM

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has urged the Finance Minister to urgently direct commercial banks to relax lending rates by at least 2% in a bid to inspire corporates to increase credit off take from them.

According to information received by the ASSOCHAM, corporates have started devising alternate means to access liquidity to support their diversification plans to channels like Qualified Institutional Placements (QIP), Private Equity (PE), Venture Capital (VC), Mutual Funds (MFs) and foreign capital in absence of the fact that commercial banks are refusing to adhere to softer lending regime.

The cost of funds in Indian economy is much more expensive even now than anywhere in world, despite huge liquidity available with the system. This has also adversely impacted exporters, who have to compete with neighbouring countries, where cost of funds and other sops are much more attractive than at home, feels the ASSOCHAM.

In an SoS sent to Finance Minister, Mr. Pranab Mukherjee, the ASSOCHAM has argued that despite the fact commercial banks are flushed with funds, credit off take has not been happening as intended and therefore, there is a strong case to reduce lending rates by at least 2%.

In a statement, President ASSOCHAM, Dr. Swati Piramal pointed out that growth in deposit rates has gone up by about 22% up to October end, as against their credit off take of around 9% up to the corresponding period, which has hardly kept pace with growing deposit rates. Commercial banks’ lending rates vary at 12-15% as of now.

The ASSOCHAM Chief further pointed out that since lending rates continue to be on higher plane, Indian corporates have found alternate means to access credit at cheaper and reasonable rates to fund their expansion plans. The instruments on which corporates are turning their reliability to raise resources as compared to commercial banks include QIP, PE, VC, MFs and foreign capital etc.

This is due to the reason that processes and procedures for raising funds in above identified instruments are virtually cumbersome less and lending rates there are much more reasonable. These channels have put up stiff challenge for commercial banks and until interest rates are brought down in them, whatever access liquidity they have acquired due to growing deposit rates and other factors, the money will stagnate with the system without being use to Indian industry.

Dr. Piramal also said that commercial banks are being avoided by domestic players as a good number of them are offloading the promoters equity by roping public participation in their entities. This is another channel that the corproates have discovered to raise money.

Thus, it is in the interest of commercial banks that they relax lending rates to avoid accumulation of liquidity with them. Still other reason as to how money and liquidity keeps accumulating with the commercial banks is because their excessive deposits and incremental credit is parked with government securities at a rate of return of around 3.25% in the form of repo rate and mutual funds. Rs.1,50,000 crores of money of commercial banks is parked with RBI in the form of repo rate and in government securities, mutual funds, bank’s investments exceed Rs.1 lakh crore.

These accumulated funds have limited income unless lent and such funds can be flushed out provided there is a taker for them. Thus, the ASSOCHAM has advised the Finance Minister to immediately issue directives so that commercial banks reduce interest rates as suggested by at least 2% which will also be in line with the monetary policy rates relaxed by RBI.

Saturday, September 05, 2009

NSE launches trading in interest rate futures

Trading in interest rate futures began on the National Stock Exchange (NSE) on Aug. 31. The contracts are based on 10-year government bonds bearing a notional coupon of 7% per annum, compounded every six months. Banks and companies can hedge against interest rate risks using interest rate futures. "The launch of interest rate derivatives means a lot to the NSE, its constituency of brokers and all economic entities who face interest rate risk," NSE Managing Director Ravi Narain said. The contracts would be settled in March, June, September and December. The maximum maturity will be 12 months.

Interest rate futures clocked trading volumes of Rs2.76bn in their very first day of trade. Trade in the newly-launched derivatives is expected to pick up with regulators and government officials stating that the exchange-traded instruments are superior to over-the-counter overnight index swaps. Close to 15,000 contracts of the two bond futures were traded on Aug. 31 - based on the 10-year notional bond maturing in December 2009 and March 2010.

The Reserve Bank of India (RBI) has laid down detailed guidelines for trading in the interest rate futures. Commercial banks are allowed to take trading positions for themselves but can not trade on behalf of their clients. The Bombay Stock Exchange (BSE) has received regulatory approval for interest rates futures while the Multi Commodity Exchange's foreign exchange derivatives bourse has also sought permission to launch trade in interest rate futures.

Interest-rate futures are the first major product to be introduced in India after the launch of currency futures in August 2008. Currency futures have steadily picked up, with the combined daily turnover across exchanges totaling more than US$2bn.

Sunday, November 30, 2008

Banks to further cut lending rates

Auto and home loan seekers can expect further cut in the lending rates with the public sector banks gearing up for the second round of cut in the benchmark lending rates by up to 50 basis points during December.

Banks have already started reducing the deposit rates and with more liquidity infusion by the Reserve Bank there would be more scope for cutting lending rates to spur demand, said a senior banker.

Banks have started assessing asset liability situation in the light of the cuts in deposit rate coming into effect from next week, he said.

Another senior banker said, further cut in Benchmark Prime Lending Rate (BPLR) in between 25-50 basis points by various banks is likely to be announced in December.

In the first round, several public sector banks have reduced their BPLR by 75 basis points following an appeal by the Finance Minister P Chidambaram earlier in the month.

Chidambaram had said lowering of lending rates by the state-owned banks would also put competitive pressure on their private sector counterparts to announce similar cuts.

"Competition from public sector banks will force private sector banks to reduce their lending rates sooner than later. It will happen sooner than later," Chidambaram had said.

Taking the lead, country's second largest lender Punjab National Bank has already decided to reduce BPLR by 100 basis points to 12.5 per cent, which would automatically reduce PLR-linked loans by the same margin.

The revised BPLR will be applicable to all existing and new accounts, PNB said, adding, the decision to reduce rate was taken "in response to monetary measures taken by RBI in November such as reduction of repo rate from 8 to 7.5 per cent, CRR (Cash Reserve Ratio) from 6 to 5.5 per cent and SLR (Statutory Liquidity Ratio) from 25 to 24 per cent."

The first round of lending rate cut by Punjab National Bank came into effect during the first week of November.

The BPLR was then revised downward by 50 basis points to 13.5 per cent.

Currently, most of the banks have BPLR around 13 per cent.

The reduction of interest rates by the PSU banks follows a number of steps taken by the RBI to inject into the banking system Rs 2,70,000 crore since October and cuts in the short-term (repo) rates, signaling soft interest rate regime.

Saturday, November 08, 2008

Govt pressures state-run banks to cut rates

With the economy on a downswing, and India Inc. complaining of credit crunch, the Government asked all nationalised banks to cut rates after the RBI's aggressive monetary easing measures last week. Most public sector banks, including the State Bank of India (SBI) obliged the Government by slashing their prime lending rates by up to 75 basis points, but private banks were still reluctant to do so, though they promised to take up issue shortly.

Finance Minister P. Chidambaram said that Indian banks will be able to meet credit demand for crucial sectors such as housing and SMEs, and were on track to achieve the annual target for agriculture loans. Speaking to reporters after a meeting with the head honchos of nationalised banks in New Delhi, Chidambaram said that Indian banks will be able to ensure adequate flow of credit at appropriate price.

The Finance Minister held the meeting to review the liquidity situation and quarterly performance of the state-run banks. He held wide-ranging consultations with the PSU bank executives relating to the impact of the global financial meltdown on the Indian banking sector. The meeting came a day after the captains of Indian industry met Prime Minister Dr Manmohan Singh, and demanded steps for enhancing liquidity, besides further steps to create an environment conducive for lowering of interest rates.

The Reserve Bank of India (RBI) will keep a close watch on liquidity and public sector banks will report credit delivery every two weeks, Chidambaram said, adding that he expected encouraging decisions on credit pricing and delivery. Public sector banks are facing higher credit demand and they have been asked to assess capital requirements for the next three years. Five nationalised banks have Capital Adequacy Ratio (CAR) of under 12%, he added.

The Finance Minister also said that the National Housing Bank and SIDBI have sought a credit line of Rs100bn from the Government. The RBI will consider the demand for credit line from the NHB and SIDBI, he said. Chidambaram also announced that the credit guarantee on loans will be extended to Rs10mn.

Separately, Finance Secretary Arun Ramanathan said that private sector banks were expected to consider reducing lending rates in the next few days and will support credit lines to non-banking finance companie

Tuesday, August 26, 2008

Interest rates can hurt

Apex industry chamber CII on Tuesday warned that rising interest rates may hurt new investments even though resources to the tune of USD 700 billion are in the pipeline over the next three years.

"While the existing investments in the pipelines were being adhered to... May be, newer projects which were at concept stage, which were at the backburner may not come to the front burner," CII President K V Kamath told reporters after a meeting of industry leaders with Finance Minister P Chidambaram.

Kamath said investors were concerned whether high inflation would mean that consumer demand would slowdown, whether high interest would mean that consumers could afford to buy or purchase what they wanted to purchase.

The CII President said he did not see any easing of monetary tightening so long as high inflation persists.

"If inflation is an issue...till we see inflation easing, then it would be unrealistic to expect any easing of monetary policy," Kamath, who is CEO and MD of ICICI Bank, said.

He, however, quoted the Finance Minister as assuring the industry that they "should look at it very positively that an 8-9 percent growth is here to stay and this is backed by numbers."

Kamath said Chidambaram reported figures from CMIE, which talks of a monthly accretion to new projects to the tune of Rs 150,000-170,000 crore that would be around USD 40 billion, which on an annualised basis would be USD 450-480 billion.

"Now this should augur very well if all these projects come to the front burner," he added.

Friday, August 15, 2008

FM asks PSBs not to hike home loan rates

Finance Minister P. Chidambaram asked public sector banks not to increase interest rates on home loans up to Rs3mn (both old and new) and lend more to consumers even as the Reserve Bank of India (RBI) is trying to moderate credit growth to contain inflation. The Finance Minister also asked the state-owned banks to increase disbursement of auto loans as well as personal loans, including education loans by keeping interest rates affordable, according to reports. Most public sector banks have increased their benchmark primary lending rate (PLR) by 75 to 100 basis points, but agreed not to raise interest rates on existing home loans, auto loans and education loans.

Saturday, September 08, 2007

Home loan interest rates cut

Here’s some good news for all those people who dream of buying their own house but have been deterred from doing so by soaring interest rates. Home loan rates are finally showing a downward trend after nearly three years, thanks to banks suddenly finding themselves flush with funds.

Three lenders have already kicked off rate cuts. HDFC Ltd had cut its floating rate by a quarter of a percentage point (0.25%) to 11% under its special monsoon offer, in addition to lowering the processing fee. Last week, Bank of Baroda pruned rates by 50 basis points to 11% for loans up to Rs 20 lakh and 11.25% on loans above Rs 20 lakh.

Allahabad Bank too joined the party, cutting its rate by 1 percentage point to 12% for 25-year loans. But there’s a catch: the offers have so far been confined to new borrowers. Existing home loan customers will have to wait for a while to enjoy a reduction.

Several other lenders, including the likes of SBI, are expected to follow in the coming weeks. Initially, it will be pitched as a festival bonanza, but bankers say the reduction will continue even later as they plan to pass on the decline in the cost of funds — with deposit rates having already been slashed — to borrowers.

Interestingly, several lenders have already cut rates without making any announcements . The reduction — for new borrowers — is in the form of a discount on the benchmark rate by 50 basis points.

The interest on floating rate is pegged to a benchmark reference rate, known as prime lending rate or floating reference rate. None of the banks have decreased their benchmark reference rate. But many have increased the discount they offer on the reference rate, effectively lowering the home loan rate for fresh borrowers.

Existing borrowers will only benefit once the reference rate is lowered. But bankers suggest that people who have already borrowed should not lose hope as continued high liquidity in the system will lead to lowering of benchmark rates over the next couple of months.

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Bankers said there was abundant liquidity , forcing them to scout for good customers . With bad loans accounting for less than 1% of the home loan portfolio, the segment is once again emerging as a lucrative option for bankers and prompting them to offer lower rates.

The current round of rate reduction will be the first since November 2004. Between then and March 2007, home loan rates were revised eight times, with interest rates rising from 7% to 12% during the period. As a result, EMIs have increased nearly 40% since 2004-end.

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Friday, July 20, 2007

Are Interest Rates Going to Fall?

Today's papers speak of the finance minister stating that the country will maintain a "fairly tight monetary policy". He cited inflation concerns caused by rising fuel prices, rising commodity prices and high demand in China and India.

But if you have hopes of bank deposit rates staying high, you could be disappointed. Thanks to rising cash flows, the high rates that prevailed earlier this year are on their way down. Newspaper reports state that a number of banks, including Corporation Bank, Indian Bank and Punjab National Bank lowered rates this month. A number of private and public banks are planning to follow suit. The reason banks are being cautious in lowering deposit rates is because they will have to do so on the credit side too.

But a clearer picture will emerge on July 31, when the Reserve Bank of India comes out with its monetary policy statement. They have the unenviable task to keeping inflation within acceptable limits and simultaneously prevent the rupee from appreciating too much.

So if you want to block your money in a fixed return instrument, now is the time to do so.

Sunday, July 15, 2007

RBI may retain interest rates

The Reserve Bank is likely to keep key interest rates unchanged in its quarterly review of credit policy on July 31, but may increase the requirement for banks to keep cash with it to absorb excess liquidity in the system, economists and industry players feel.

"Inflation concerns have been mitigated and interest rates are at peak. However, the desire to mop up liquidity remains and a hike in Cash Reserve Ratio (CRR) cannot be ruled out," Abn Amro Country Executive (India) Romesh Sobti said.

After touching a 14-month low of 4.03 percent, inflation has been on an upward trend on account of rising prices of food, especially vegetables. For the week ended June 30, the wholesale price index stood at 4.27 percent. Even at this level, the index is within RBI's limit of five percent for this fiscal and medium term target of 4-4.5 percent.

On the other hand, there is ample liquidity in banking system. The overnight rate at which banks borrow from each other in the call money market has been below one per cent for sometime now. On July 13, the rate was 0.49 percent.

"I expect RBI to raise CRR in the policy review to manage liquidity," HDFC Bank Chief Economist Abheek Barua said.

Cash Reserve Ratio (CRR), the requirement for banks to keep a certain portion of their deposits with RBI, stands at 6.5 percent. Between December 2006 and March 2007, the ratio was increased thrice by half a percentage point each, which sucked more than Rs 45,000 crore from the system.

Barua said the advantage of a CRR hike was that it worked dynamically. While the initial impact is to absorb liquidity, it dampens the entire process of money creation that works through successive rounds of lending, he said.

Echoing similar views, Crisil Principal Economist D K Joshi said there was no need to change key lending rates, but a CRR hike was a possibility to rein in liquidity.

Oriental Bank of Commerce Executive Director Allen C A Periera also said interest rates should be left unchanged for the time being.

Although economists and banking experts agreed that some action from the RBI to curb liquidity was due, they differed on the methodology it should adopt. Some experts said a CRR hike will be too much for the banking sector to take.

Joshi also said instead of a CRR hike, the RBI might use another tool -- Monetary Stabilisation Scheme (MSS) -- more aggressively for liquidity management.

Rbi Governor Y V Reddy had recently said that taking into account high expansion of money supply worldwide, and given the monetary overhang of 2006-07, it was important to contain monetary expansion at around 17 percent this fiscal, in consonance with the outlook on growth and inflation.

High funds inflow, which is leading to excess liquidity, might see some moderation due to tightening of norms for external commercial borrowings by the government recently and pick up in credit off take by August.

"In the given scenario there is no need for tinkering with the interest rate as well as CRR rate as inflation is low and credit demand has slowed down," Punjab National Bank Executive Director K Raghuraman said.

MSS auction is a better option to manage liquidity since an increase in CRR could push up interest rates. This could lead to higher inflow of foreign funds as they would find Indian market more attractive. This would lead to further appreciation of rupee, he said.