Tides of 27.05.2010

1. Jaipur Stock Exchange (JSE), the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have sent show cause notices to Bank of Rajasthan (BoR). These question the bank for the delay in informing them about BoR’s merger with ICICI Bank.“However, there will not be any impact on BoR’s deal with ICICI Bank, as the board has approved it and all legal procedures have been followed. However, if the regulator feels, it can fine those who delayed in informing the stock exchanges,” said independent equity advisor S P Tulsian.
2. State Bank of India (SBI), which is struggling to meet the regulatory mandate of 70 per cent provision coverage ratio (PCR) by September, has sought a one-year extension to comply with the norm. According to sources close to the development, the country’s largest bank has written to the Reserve Bank of India (RBI) seeking an extension of the deadline till September 2011 to meet the new stipulation. They, however, added RBI was yet to take a call on the issue. Recently, the regulator has provided six months extension, till March 31, to ICICI Bank for achieving the PCR norm. According to State Bank’s internal estimates, it will have to make additional provision of Rs 2,800 crore for non-performing assets to reach a PCR of 70 per cent. At March-end, its PCR was 59.46 per cent, including advances under collection accounts (AUCA). Without AUCA, SBI’s loan-loss coverage is 44.36 per cent, and is seen as a pressure point by analysts tracking the sector.
3. With non-performing assets (NPAs, or bad loans) in the banking sector expected to rise and banks required to achieve a 70 per cent provision coverage ratio by September 30, asset reconstruction companies (ARCs) are preparing for an increase in business. International Asset Reconstruction Company (IARC) is in the process of raising a Rs 400-crore fund to buy distressed assets, with a greenshoe (over-allotment) option to raise Rs 100 crore, according to its Chairman, M S Verma. Domestic investors are expected to contribute Rs 200 crore to the fund. The country’s first ARC, Asset Reconstruction Company (India) Ltd, or Arcil, has already raised Rs 400 crore of its proposed Rs 2,000-crore fund, according to Managing Director & CEO S Khasnobis. Others such as JM Financial ARC and Invent Assets Securitization and Reconstruction are also in the process of drawing up fund-raising plans. There are 13 ARCs in the country. Banks and other financial institutions sell a portion of their bad loans at a discounted rate to ARCs to clean their balance sheets. ARCs pay for these distressed assets either in cash or by issuing a portion of the security receipts (SRs). SRs are interest-bearing securities which entitle the holder to a portion of the recovered amount.
4. The guessing game by banks on each other’s base rate is expected to be over soon when country’s top bankers meet – at the behest of State Bank of India (SBI) – to discuss the new loan pricing mechanism. The meeting would precede SBI’s base rate announcement on June 15, a fortnight before its roll out, SBI Chairman O P Bhatt said today. Most banks are yet to decide about their base rate and the parameters to be taken into account for calculating the new benchmark. A key parameter is the cost of funds, which can cause a huge variance across banks. For example, if a bank takes overnight cost of funds, which is very low, its base rate will also be significantly lower from a bank, which, for example, takes one-year average cost of funds into account. As a result, most banks are eagerly awaiting the move by the country’s largest lender, SBI. This meeting assumes significance, as bankers will get to know what their colleagues in other banks are contemplating and help put in place an industry-wide consensus. Last year, the Reserve Bank of India (RBI) had constituted a committee under Executive Director Deepak Mohanty to review the present system of benchmark prime lending rate. The move was aimed at bringing about greater transparency in risk pricing. The regulator issued the final guidelines in April, but the decision about mechanism was left completely in the hands of banks.

Tides of 26.05.2010

1. Borrowing by telecom companies, which have to pay licence fees to the government, has led to a shortage of liquidity forcing banks to hunt for large deposits. Banks say that by next week lenders may have to seek refinance from the Reserve Bank of India. Reliance on refinance will immediately bump up overnight rates by two percentage points from the prevailing 3.75% to 5.75%, which is the rate at which RBI lends to banks.
2. Govt may allow 100% foreign NBFCs to set up subsidiaries, removing the curbs introduced by the FDI guidelines issued last year.
3. Five-year old Ujjivan Financial Services, a Bangalore-based micro lender with 6.5 lakh poor customers, said it will reduce lending rates by up to 290 basis points from July, as it has earned a profit for the first time since inception. Ujjivan’s announcement comes within a month of Bandhan’s decision to cut interest rates. Bandhan Financial Services is the country’s fourth largest microfinance institution (MFI) with nearly 26 lakh borrowers.
4. The European crisis that plunged global equity markets into the red appears to have deeply impacted the Standard Chartered IDR issue that opened on Tuesday.Of the 20.4-crore Indian Depository Receipts, only 1.11 crore IDRs, or 5 per cent of the total, were subscribed for.This being the first issue where qualified institutional buyers (QIB) had to pay 100 per cent money upfront could have been a reason why institutional response remained subdued, according to analysts. About 12 per cent of the shares on offer to QIBs were bid for.Brokers said that despite their efforts to persuade retail participants to subscribe to the issue, there were few takers. “There is just no excitement for this issue, people think they will not make gains on listing in such a market,” said a retail broker.
5. Lodha Group bids Rs 4,053 cr for MMRDA plot; plans residential complex. The Mumbai-based real estate developer Lodha Group has bid Rs 4,053 crore or Rs 81,818 a sq metre for a 25,000 sqm plot in an auction conducted by the Mumbai Metropolitan authority.
6. The two tribal development programmes, popularly known as Wadi, launched recently by National Bank for Agriculture & Rural Development (Nabard) in Bankura district of West Bengal, are targeted to benefit 1,000 families with sustainable livelihood, according to a Nabard release.The total assistance sanctioned under the programmes is Rs 5.12 crore, including a grant of Rs 4.34 crore and loan component of Rs 40 lakh.The cumulative sanctions under Wadi in West Bengal comprise Rs 33.73 crore of grant and Rs 2.25 crore of loan covering 14 projects in seven districts, totalling 8,566 families.The State Government, through its Backward Classes Welfare Department, has partnered with Nabard in six of the projects with Rs 8.87 crore of grant assistance.
7. Private insurers led by Reliance General are expected to take a hit of around Rs 450 crore from the Air India Express plane crash in Mangalore. The companies had earned a premium of around Rs 110 crore from Air India this year. This was the first time that private insurance companies had provided a comprehensive cover to the country's national carrier. Earlier, public sector players led by New India Assurance provided the cover. Apart from Reliance General, HDFC Ergo, Iffco Tokio and Bajaj Allianz were part of the consortium. Like any large risk, the general insurance companies had reinsured the risk, with Sumitomo being the lead reinsurer, a first for the company. ICICI Lombard had also participated as a reinsurer.
   
   

Tides of 25.05.2010

1. The RBI data shows that bank investment in mutual funds stood at Rs 111,956 crs as on May 7. Banks essentially park funds in liquid mutual fund schemes as the return is a shade better than the return earned by deploying funds in the overnight call money market. Fortnightly trend in data shows that there is a secular rise in such investments over the past three fortnights. According to Andhra Bank executive director Anil Girotra, this a pure fund management strategy by banks and surplus funds are deployed with mutual fund only until there are visible signs of pick-up in loan demand. A recent report by Deutsche Bank notes that there could be demand for funds on account of payment of around Rs 67,000 crore as licence fee by telecos towards payment of license fees for 3G spectrum, besides another Rs 15000-20,000 crore toward the upcoming auction of the broadband wireless spectrum. In addition, there is a likely outgo of around Rs 30,0000-35,000 crore because of advance tax payments starting in the middle of June.

2. The Tirupati Temple in Andhra Pradesh has for the first time deposited 1,075 Kgs
of gold with the State Bank of India (SBI) owing to security concerns.The Tirumala Tirupati Devasthanams (TTD) is an independent trust, which manages temples in Tirupati. TTD officials said they were extremely happy about taking the step due to security reasons, and also for wanting to convert idle gold into a source of income. "This is a great occasion. This is a win-win situation for both SBI and as far as TTD is concerned, this is the best part of it. When the proposal came and we were looking into it, some one or two other counterproposals came which made the SBI to up its interest rates also," said D. K. Adikesavulu, TTD Board Chairman.

3. ICICI Bank, which will see its presence in western India grow with the acquisition of Bank of Rajasthan, has said no to foreign takeovers as it wants to focus on becoming India's top bank in terms of profitability and productivity. "No overseas (acquisition). We are not looking at any prospect (abroad). Internally, our growth strategy is quite India-linked. We are doing just one prospect (deal). I think it is too early to talk of any other prospect," ICICI Bank CEO and Managing Director Chanda Kochhar told when asked which domestic or overseas deals were on its radar. Asked if the latest deal would help her achieve the dream of putting ICICI ahead of number one State Bank of India, she said, "The number one position could be in many ways like productivity, efficiency and profitability. "We are the number one in many of these parameters. Clearly, profits will be a key area to our operations," she said, adding that Bank of Rajasthan would help ICICI Bank not only in terms of branch expansion by 25 per cent but also greater visibility in western and northern parts of the country.

Tides of 24.05.2010

1. SBI has set aside Rs 20,000 crore liquidity for lending to telecom companies that have recently won the bids for 3G spectrum. This will reduce its liquidity to half, assuming that there would be no further outgo other than the Rs 20,000 crore earmarked for telecom operators. Disclosing this to the media in Hyderabad on Saturday, SBI chairman OP Bhatt said for the year ended March, 2010, SBI will be left with 50% of its existing liquidity. Bhatt mentioned that some of the telecom operators, who have bagged 3G spectrum licences, have approached SBI seeking lending. On interest rates, he said it has not hardened so far. But if money for the 3G auctions goes out of the banking system to the government, the liquidity would dry up resulting in the interest rates going up.
2. The boards of ICICI Bank and Bank of Rajasthan (BoR) on Sunday approved the merger of the latter with India's largest private sector bank in a no-cash deal that is valued at about Rs 3,000 crore. The banks have agreed on a final swap ratio of 1: 4.72 one share of ICICI Bank for 4.72 shares of BoR- for the merger. The board considered the results of due diligence covering advances, investments, deposits, properties and branches and employee-related liabilities, and the valuation report of Haribhakti & Co, to arrive at such a swap ratio, said Chanda Kochhar, managing director & CEO of ICICI Bank, adding the bank has to seek permission from RBI and will hold its EGM on June 21 "As per our legal advise we do not need to go to the government for the approval of the Foreign Investment Promotion Board," said Kochhar. This is the first take over by ICICI Bank after Kochhar took over as CEO. Speaking to FE, Kochhar said BoR is a value buying and not a bailout proposition. BoR will add 3 million customers and start contributing to the profit of ICICI Bank from next year. "By diluting 3% equity , we are adding 25 % of more branch network at one go. BoR will augment ICICI Bank's loan book and deposits by around 8% each. We have now the largest number of branches among the private sector banks," she added. ICICI Bank's valuation of BoR is on the basis of Rs 6 crore per branch On BoR's sticky assets, Kochhar said, "We have verified all the details". Pravin Tayal, who was asked by RBI to dilute family's over 55 % equity to about 10%, said "no decision" has been taken on his representation the ICICI board after the merger. "I respect the amalgamation scheme decided by the Board," he said. With BoR board approving the swap ratio the proposal will now go to the Extraordinary General Meeting (EGM) slated on June 21, BoR director KN Bhandari said. Asked whether the merger will adversely impact BoR employees, Bhandari said, "All BoR employees will be retained and there will no job losses."
3. Standard Chartered on Sunday said it has fixed the price band for its proposed issue of 240,000,000 Indian Depository Receipts (IDRs) at between Rs 100-115 per IDR. The issue, which will remain openfrom May 25 to May 28, will raise up to $588 million. The bank has revised the target, which was earlier set at $750 million. Retail investors and eligible employees subscribing to the IDRs under the retail and the employee portion respectively, and whose bid amount does not exceed Rs1,00,000, will benefit from a further 5% discount to the final issue price, a bank statement said. Allotment of the IDRs is scheduled to be completed by June 7, with listing on the Bombay Stock Exchange and the National Stock Exchange shortly thereafter. In late March, StanChart said it aimed to raise at least $500 million and not more than $750 million in its IDR sale. Since then, London-listed shares in the lender have fallen nearly 9% amid a broader global selloff. Ten IDRs will represent one underlying share of the company, and the new shares issued in aggregate would constitute 1.16 % of its post-issue paid up capital,the statement said. "The issue of IDRs is a more brand-building exercise than capital mop up," the bank said. Capital Markets Ltd has been named as the co-book-running lead manager (co-BRLM). The Co-BRLM will only be involved in the marketing of the issue, the statement said.

Tides of 19.05.2010

Why is Greece in trouble?

The Greek government went on a spending spree during the past decade. Public spending soared and public sector wages practically doubled during that time. Thus while the government was spending away its reserves it was unable to replenish the same through tax collections due to widespread tax evasion. All this has placed a huge strain on the country's economy which is in a state of constant debt.

How big are these debts?

Greece's budget deficit (the amount by which a government's spending exceeds its income) last year was 13.6% of its GDP in 2009 (Gross Domestic Product is the value of all the goods and services produced in a year). This deficit is one of the highest in Europe and more than four times the limit under euro-zone rules.

Greece's high levels of debt mean investors are wary of lending it more money, and demand a higher premium for doing so. This is particularly troublesome as Greece has to re-finance more than 50bn Euros in debt this year. As a result, the country needs as much as 45bn Euros in emergency loans from euro-zone governments and the IMF this year. The IMF loan has been approved subject to the approvals from national governments in euro-zone.

Why is it a concern outside Greece?

The euro-zone, officially the euro area, is an economic and monetary union (EMU) of 16 European Union (EU) member states which have adopted the 'euro' currency as their sole legal tender. It currently consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

Everyone in the euro-zone and anyone who trades with the euro-zone is affected because of the impact on the common European currency. The most immediate impact is on the other euro-zone economies who have agreed to loan Greece up to 80 bn Euros over the next year. In other words, taxpayers of these countries will effectively share a part of Greece's burden.

There were also fears that Greece's troubles in the international financial markets may trigger a domino effect, toppling other weak members of the euro-zone, namely Portugal, Ireland, Italy and Spain as well - all of whom face challenges in balancing their books.

Those fears had driven up the interest rates on government debt, meaning it is more expensive for these countries to borrow on the open market. Finally, many major banks have invested in Greek debt. So the economic crisis could affect their shareholders, many of whom are ordinary investors or people who own their shares through pension funds.

What is Greece doing about it?

Greece has outlined plans to cut its budget deficit by 30 bn euros over 3 years. In order to do that, the Greek parliament has approved an initial package of austerity measures to save 4.8bn Euros. It wants to freeze public sector workers' pay and raise taxes, and it has also announced a rise in petrol prices. It also intends to increase the average retirement age in an attempt to save the cash-strapped pensions system.

How has this been received in Greece?

Not too well. There has been a series of public protests, some of them violent. Strikes have hit schools and hospitals and brought public transport to a halt.

Many public sector workers believe that the crisis has been engineered by external forces, such as international speculators and European central bankers.

So what’s the latest development to avert spreading of this crisis to rest of Europe?

To prevent that from happening, the European Union along with the European Central Bank and the International Monetary Fund (IMF) came out with a $962 bn (euro 750 bn) rescue package. The rescue package consists of euro 440 bn in guarantees from euro area states, euro 60 bn in European instruments, and euro 250 bn from the IMF, making for a total of euro 750 bn.

Loans will be given out from this pool of money to those European Union countries that are having trouble with repaying the accumulated debt. The rescue package is just short of $1 trillion at current euro-dollar exchange rates. The idea is to use some of the funds to buy up government bonds, so that the markets for these bonds stabilize.

In addition, the European Central Bank announced buying public and private bonds to lower borrowing costs and increase liquidity.

Meanwhile, the US Federal Reserve restarted its dollar swap operations, in which it offers billions of dollars overseas to boost banks' cash positions in return for foreign currency. Central banks around the world were also involved.

Why is the rescue package being worked out when only Greece is in great trouble?

This rescue effort is being worked out primarily in countries like Germany and France to whose banks the PIIGS economies owe a lot of money. As a matter of fact, Portugal owes Spain — and Spain, in turn, owes a great deal to France and Germany. Italy owes a whopping $511 bn or 20% of its GDP to France and $190 bn to Germany. Spain in turn owes Germany $238 bn and France $220 bn. Ireland owes $184 bn to Germany and $60 bn to France. Portugal owes $47 bn to Germany and $45 bn to France. And the smallest of them all, Greece, owes Germany $45 bn (euro 58 bn) and France $75 bn. Therefore, Greece is not the only country in trouble.

How will this plan work?

The economies in trouble looking to get a loan from the $962 bn pool will have to follow structural reform and fiscal management programs monitored by the IMF. The IMF is known not to lose its money anywhere. One of the norms required from countries using the euro is to maintain a fiscal deficit of less than or equal to 3% of GDP. However to make this plan work one can expect dissent among the people as they would be forced to conform to austerity measures which in turn could have adverse political ramifications for the government.

Could Greece devalue the euro?

One of the ways of handling this problem is currency devaluation. When the currency is devalued it makes goods and the services a lot of more cheaper and hence, more competitive. This in turn would mean the country could export more and earn more dollars or whatever foreign currency they had their debt in. This could then be used to pay off the accumulated debt.

But would this formula work here?

Many of Greece’s most important trading partners share the euro, so there is very little scope for a change in an exchange rate’s value to improve competitiveness. Thus, the only way Greece can improve its competitiveness is through a compression in domestic prices and costs. Thereby products made in the PIIGS countries will become competitive only if they are able to control costs. Controlling costs may mean cutting salaries of employees, which may not be palatable for politicians.

The million dollar question here is ‘Is Europe out of the woods yet’?

The main problems the European economy faces are with rigid labor markets and overblown welfare states. The problems have been compounded by a declining birth rate, which can only be mitigated by allowing freer immigration. Its problems are structural in nature, and these cannot be tackled with financial bailouts.

In fact, the package may create its own recessionary dynamics, since the main conditions attached are that economies with excess debt need to start reducing their public expenditures drastically. The political consequences arising out of this could make things tougher for these countries. Against this backdrop, it would be hasty to conclude that Europe’s troubles are over. It may take a while to set things right.

What can be the likely impact on India?

Some experts are of the opinion that India will be less affected from the downside in global growth due to its relatively balanced economic model with a large contribution from domestic demand to GDP growth. However, it will be important to have stabilization in global capital markets soon, to ensure that the growth momentum is not affected sharply because of reversal in capital inflows.

(From the net)

Tides of 10.05.2010

The Reserve Bank of India (RBI) and the Union government are working in tandem to make banks push the agenda on inclusive growth, both in numbers and spirit.
The finance ministry has asked public sector banks to list their achievements and targets for financial inclusion for 2010-11. RBI has asked for board-approved plans for financial inclusion.
The ministry has asked banks for a provisional statement of intents (SoIs) for 2010-11 this week, which should also mention their plans for financial inclusion, bankers said. The final SoI will go after board approval.
This is the first time banks’ SoI will have such a parameter. According to a chairman of a public sector bank, the government wants to know how many villages having more than 2,000 people are being adopted by the banks and the number of accounts opened so far, and the target for 2010-11.
In addition, the ministry has asked banks to specify performance and plans for regional rural banks (RRBs). However, the latter is only applicable for those banks which sponsor RRBs. Bankers see the government’s move in sync with the larger vision of its owner of providing banking services to all villages having a population of more than 2,000 by March 2012. There are about 64,000 villages, out of 600,000 in the country, which have a population of more than 2,000 but are deprived of a formal banking channel.
Over the past two weeks, the government also held two rounds of meetings with senior officials of public sector banks to take stock on their financial inclusion efforts and had discussed implementation issues. Bankers have highlighted the establishment cost of setting up banking service in rural areas, as they may not earn money for at least three years on their investments. The government said it was open to the idea of providing a subvention in the initial years.
In December last year, government told the banks to send their SoIs for 2010-11. Now the government wants a fresh SoI, with these two additional targets. All other targets remain the same. Like last year, on the business front, the government asked for the target on current and savings account deposits, not total deposits — a practice started last year.

Banking Tides 7.05.2010

SBI seeks services of two U.S. firms
MUMBAI: State Bank of India on Wednesday said it had selected U.S.-based Elavon Incorporation and Visa International as its joint venture partners for merchant acquiring business.
Merchant acquiring business is facilitation of payment through debit or credit card at the retail outlets.
The terms of arrangement are being worked out, SBI informed the Bombay Stock Exchange. The RBI has already approved the setting up of a wholly-owned subsidiary for conducting merchant acquiring business by SBI in the name of SBI Payment Services, it said. Last year, the bank had floated Request for Proposal (RFP) for selection of joint venture partner for merchant acquiring business.
The business would include acquiring bank identification numbers (BINs) from the schemes, as well as managing services for point of sale (PoS) terminals among others.
Managed services
The managed services would include deployment of PoS terminals at customer locations, their replacement, merchant training and maintenance, to name a few.
Meanwhile, SBI is planning to place about 1.50 lakh PoS terminals for debit and credit card payments across the country in the next fiscal.
It plans to deploy six lakh PoS terminals in the first five years of its operations. The business penetration of the new line of operation is envisaged on a pan-India scale, with metro, urban, semi-urban and rural centres. — PTI