Banking stocks have been in the limelight since August 28 on news of the merger of State Bank of Saurashtra with State Bank of India. Since the last three trading sessions the BSE Bankex is up 1.51% as compared to the Sensex, which has been up only 1.36%.
The Reserve Bank tightening of external commercial borrowings also augurs well for the sector, as the new norms will definitely divert corporate credit from international to domestic market, thus boosting the banks' profitability.
However, the markets ignored the regulator discomfort with banks setting up intermediary holding company. This move would make it difficult for ICICI Bank and SBI to attract foreign investors in their proposed holding companies, which will own their insurance and asset management companies. In the last one-week, both ICICI Bank and SBI are up 7.65% and 13.71% on the BSE respectively.
So, is it time for investors to add banking to their portfolio?
Gautam Shah, Technical Analyst, JM Financial Services, expects midcap and smallcap banking stocks to outperform. "Banking has been our favorite for a very long time. Every time there has been a correction, we have been looking at opportunities in the banking space to play the recovery. We’ve done the same in the last couple of weeks and barring an ICICI Bank, which has really been an underperformer in the recent banking rally, most frontline stocks have participated. From current levels, you will see the midcap and smallcap banking do well, which was the case 3-4 weeks back. Banking is a sector which one has to aggressively trade into and any decline should be used as a buying opportunity to add largecap and smallcap stocks," he added.
Kunj Bansal, CIO of Religare Securities has a view that the market turmoil is mainly governed by international factors not domestic factors. He adds that banking as a sector has been outperformers and will continue to be outperformers, not only over a medium to long term, but also in short term.
Excerpts from the exclusive interview with Kunj Bansal:
Q: Where does the value lie now?
A: It is very difficult to specifically pinpoint where the value lies but I think the impact that we have been seeing in the market for about last fortnight is mainly governed by the international factors. There is absolutely not a single domestic factor which is affecting the market, in fact the latest ramblings in Delhi about the government’s stability and all, is finding it difficult to create a market share for itself in the market movement upward or downward. So that’s where things are and if one is looking for value, one has to still wait for some more time.
Q: Banks have reacted quite positively to what the Fed has done both on the US as well as over here. Is that a sector that you see much value and the leadership coming from that sector going ahead?
A: Banking as a sector has been outperformers and it will continue to be an outperformers, not only over a medium to long term, but also in short term like in today’s recovery we continue to see recovery happening on and off. Banking will be one sector, which will continue to see recovery. Ofcourse along side it will be falling if we see gap down opening like last week, then we will see the banking shares falling also in equal proportion.
Q: The fact that we will be looking at rallies off and on, what are you factoring in terms of an investment strategy over the next three months? How much time you think this problem would take to play out completely?
A: At the outset, it would be anybody’s guess to pinpoint the number of days or months to tell that this problem seems to be settling. But I think the one boost or the dose of injection given by Fed by reducing its discount rate is not enough. We could still see some more things, especially if we see more skeletons falling out of cupboards of some other institutions. One has to wait to be really sure before taking fresh positions in the market or before committing any more money. If one wants to start taking a call, not in today’s market but any corrections like those of last week are an opportunity to start looking at buying into the market.
Q: Apart from banks what else would you buy?
A: I think Telecomm is the another sector which looks very good to us and is beta with the market or maybe higher than market. So that’s another sector, which looks very good to us.
Q: What is fair value on the Sensex or the Nifty right now, which are the one you track more closely?
A: Fair value is more of a perception issue so I don’t think I can comment on that but as I said we see market taking some more time to stabilize in the short term.
Q: How much do you see earnings growth sustaining over the next 3 quarters of FY08 and in light of what’s happened you mentioned the US, how much bottom could this market see before it actually goes up?
A: In terms of earnings growth, I don’t think anything has changed in India because of these issues except the fact that last week we saw the news coming out that some BPOs might get affected because their clients have got into the subprime trouble. But other wise we see the earnings continuing to grow in the range of around 20% and I don’t think there is any issues there.
Ten days after being blamed for the suicide of 38-year old Prakash Sarvankar, ICICI Bank has given his family an ex-gratia payment of more than Rs 15 lakhs, reports CNBC-TV18.
Six-year old Prajakta was witness to her father being harassed by recovery agents of ICICI Bank, when he defaulted on a loan of Rs 50,000, which the bank describes as “small ticket”. Fed up of the insults, on September 17, Prakash Sarvankar hanged himself and blamed recovery agents of the ICICI Bank in his suicide note.
The incident evoked strong reactions from activists, who blamed the bank for using strong arm tactics. Now the bank has announced an ex-gratia payment to Sarvankar's family, which includes a fixed deposit, which will give them about Rs 9,500 a month and insurance of Rs 25 lakh over 20 years.
But Sarvankar's widow is still inconsolable.
“ He is not going to come back,” said Priyanka Sarvankar, Prakash Sarvankar's widow.
Consumer organisations welcome the move, but demand stricter checks and balances on banks.
"Even the senior most official, in this case the CEO of the bank, is responsible for this,” said Vinod Chand, General Secretary, Credit Consumers Association of India.
The payment may be an unusual move for, but police say that it will not affect investigations against the bank.
For now four men are under arrest for abetting Sarvankar's suicide. One of them is the owner of the recovery agency, and another, Kailash Choudhary, is an employee of I-Process. The police are investigating whether senior officials of the bank are responsible as well.
An inquiry has been launched into that alleged incident of harassment. The RBI backed Banking Codes and Standards Board of India has stepped in. According to sources, BCSBI has shot off a letter to ICICI Bank asking if it had done adequate due diligence before appointing the collection agency.
BCSBI also asked ICICI Bank to spell out the action taken against the agency and produce details of tangible evidence, which show that such incidents do not recur.
Sources say the Bank has in its reply, assured due diligence while appointing collection agents. It has also said none of those arrested in this case are employees of ICICI Bank and that it has suspended all business with the accused agency.
ICICI GROUP signed a Memorandum of Understanding (MoU) with Manipal Academy of Banking and Insurance to expand the horizons of learning by offering specialized banking and insurance skill sets to graduates. The MoU was signed by Mr. K. V. Kamath, Managing Director & CEO, ICICI Bank and Dr. Ramdas M Pai, Chairman, Manipal Education & Medical Group.
The ICICI Manipal Academy will expand the pool of industry ready resources and provide inclusive employment opportunity to capable, young graduates. The training offered by the academy will make a difference to the customers by ushering in first day first hour productivity. As a part of the course ICICI Group recently announced the “Probationary Officer Programme”, a first of its kind, nation wide initiative to attract bright graduates to pursue a career in banking and financial services. The one year residential program is aimed to acculturize the students into ICICI Group ethos and work ethics. Post the training the students will be awarded a Post Graduate Diploma in Banking & Insurance and absorbed in managerial position at ICICI group. The initiative has received an encouraging response from students across the country.
Speaking at the occasion Mr. K. V. Kamath, Managing Director & CEO, ICICI Bank, said, “To fulfill India's global aspiration and sustain the growth trajectory its imperative that industry invests in preparing industry- ready talent. A high proportion of highly capable and able Indians have no means to quality specialized education and are hence excluded from employment with top brands in the country. This initiative of ours with Manipal endeavors to fulfill the dreams of many such young Indians and also to expand the industry ready talent pool to deliver high quality customer experience. “
Speaking at the occasion Dr.Ramdas M Pai Chairman, Manipal Education & Medical Group said, “For all of us at Manipal Education this event is an affirmation of both our values and vision, and the trust that ICICI has chosen to place on us. One of the prime drivers of the Indian economic growth engine is the services sector. I am truly glad that we at Manipal Education are getting this significant opportunity to play a role in accelerating the growth of the banking and insurance industry through its undisputed leader – ICICI Group.”
Banks under fire on misconduct of their recovery agents
Source : Moneycontrol.com
An inquiry has been launched into that alleged incident of harassment. The heat is turning on banks on misconduct of their recovery agents. The RBI backed Banking Codes and Standards Board of India or BCSBI has stepped in after the recent alleged suicide by an ICICI Bank customer Prakash Sarvankar in Mumbai. Sarvankar had alleged in his suicide note he had been driven to take the extreme step after alleged threats and harassment by the bank appointed recovery agents. Police has already made arrests in the matter and is probing the death. According to sources, BCSBI has shot off a letter to ICICI bank asking if it had done adequate due diligence before appointing the collection agency. And whether or not it had entered into a written contract with it that binds it to the "Code of Banks' commitment to customers".
BCSBI has also asked ICICI Bank to spell out the action taken against the agency and produce details of tangible evidence, which show that such incidents do not recur. Sources say the bank has in its reply assured due diligence while appointing Collection agents. It has also said none of those arrested in this case are employees of ICICI Bank and that it has suspended all business with the accused agency.
BCSBI is going beyond the recent case. It has sent a letter to all banks directing them to lay down a written and well-defined recovery procedure to their customers at the time of sanctioning a loan. Banks are already bound by a code that prevents them from using force to recover dues.
CNBC TV18'S economic crime show ‘Uncovered’ had recently exposed rampant abuse of norms for recovery and shown how brazenly muscle power and abuse is being used on customers. At that time, before the recent ICICI bank customer incident, BCSBI chairman KJ Udeshi had assured action against wrongful recovery procedures by banks.
While the law is already in place, and places the onus on the board of a bank to ensure strict compliance, cases of harassment by recovery agents, only seem to be growing. It remains to be seen whether the recent crackdown by BCSBI stems this rise.
SBI and UTI Mutual Fund have bagged the lion's share of the pension-fund kitty. They, alongwith LIC, have been named fund managers for the new pension system and the National Investment Fund, reports CNBC-TV18.
Rs 1,400 crore is how much UTI MF and SBI each will manage, as fund managers to the National Investment Fund and the new pension scheme.
LIC, which has also been appointed fund manager for the schemes, will manage assets worth Rs 200 crore.
CNBC-TV18 has learnt that of the Rs 1,000 crore under the National Investment Fund, UTI MF will manage 60%, SBI 30% and LIC 10%.
On the other hand, of the Rs 2,000 crore under the new pension scheme, SBI will manage 55% , UTI MF 40% and LIC 5%.
SBI, UTI MF and LIC were shortlisted as fund managers by PFRDA in July. They will have to set up separate companies to manage the funds.
The allocation of funds has been decided on the basis of the fund management fee that each fund manager will charge. Most of the funds in the new pension scheme will be invested in debt and only 10-15% in equity.
MUMBAI: A pressure point is building in the world of Indian banks. The outcome will decide how much you get for deposits or pay for loans in the coming days. The interest rate uncertainty has split the bankers’ club into two: Big Daddy State Bank of India (SBI) versus the rest.
While most banks are inclined to cut interest rate on deposits, SBI, country’s largest bank in terms of assets and branches, is in no mood to do so. Having lost market share to aggressive private and foreign banks in the past few years, SBI now wants to regain lost ground at any cost. It is willing to pay a higher rate to mobilise more deposits and increase market share.
“We have opened the tap; it’s difficult to close it,” said SBI chairman OP Bhatt said at a bankers’ meeting last week at the Reserve Bank of India (RBI). With the biggest player taking such an aggressive stand, other banks are finding it difficult to lower deposit rates.
The biggest private bank and the second biggest player, ICICI Bank, is keeping its cards close to its chest, though its CEO KV Kamath said that RBI should consider a rate cut in the wake of weak IIP numbers. Currently, SBI is offering a maximum of 9-9.5% on bulk deposits and 9.25% on the special retail deposit scheme.
This has forced other banks to offer at least 9% on deposits. MBN Rao, chairman of Canara Bank and chief of Indian Banks’ Association said that banks are unable to lower deposits rates since competition for resources is still quite strong. In a somewhat lighter vein, he also pointed out at the meeting that it is difficult to lower rates, since the Big Daddy is offering 9%.
Responding to this, Mr Bhatt expressed his inability to lower rates on the grounds that SBI has launched various deposit schemes for retail customers and these can’t be closed abruptly. But more significantly, SBI is eyeing a bigger market pie.
SBI has mobilised Rs 50,000 crore fresh deposits since March. This has helped the bank increase its market share from 14.83% by end-March 2007 to 15.54% till mid-August 2007.
However, the pressure to cut rates may intensify, with the country’s biggest mortgage lender HDFC announcing its decision to cut lending rates this week. In fact, HDFC had plans to cut rates earlier in the year, but had to drop the idea after RBI hiked the cash reserve ratio.
The interest rate issue also cropped up in a recent IBA meeting. ICICI Bank CEO K V Kamath, who made a rare appearance, had said that high interest rates may hurt growth and eventually result in defaults among borrowers. At the meeting some bankers said that interest rates on loans can be lowered only if larger banks cut rates which will prompt other banks to follow the suit.
Banks wake up to the art of winning retail customers
NEW DELHI: Banks are reaching out to you. This is clearly reflecting in their ad spends. Even if service may not be a differentiating factor, non-rational factors are influencing customer decisions, according to admen. Banking sector seems to be finally learning the art of selling to retail customers.
The sector has seen a significant increase in its ad spend, critical in reaching out to customers, over last two years. Aggregate spend for about 80 banks has grown at about 56% CAGR during 2005-2007.
Partha Sinha, regional strategist, Asia Pacific, Publicis, which handles the Citibank account, told ET, “Traditionally bankers did not engage in brand building. It was perceived as waste of time. Once all products were on the same technological platform, there was very little to differentiate, they became comparable.
It is no longer a function of product efficiency because there is a fair degree of parity amongst products offered by banks. The surge in ad spends in the past five years has been because hard core bankers finally are buying into the concept. This has been the biggest change.”
Growth is even higher at 74% for top ten spenders. However, most of the growth was seen in fiscal year 2006. Further, it is still not broad based, with top ten spenders accounting for 75% of total spends, against a share of 45% in operating profit. Further, their share has gone up from 60% in 2005.
There are only three public sector banks present among the top ten. Further, ad spends for these three banks have risen by only 33% against 56% growth overall. Their share in spends of top ten banks stands at only 15% against 57% share in operating profit.
“For state-owned banks there is an implicit acceptance about their lack of efficiency. It is evident in their body language, and that is precisely reflected in their communication,” a senior advertising executive associated with banks said. Even after the impressive growth, the spend is still small at 0.95%, as a percent of operating profit.
For Citibank, the top spender, it account for 7.8% of operating profit, whereas it is 23.4% for American Express. “The bottomline is relevance. It is clear that relationships with customers are not purely transactional. Customers preferring a particular bank, can have much to do with non-rational, non-transactional processes,” Mr Sinha said.
BANGALORE/MUMBAI: ICICI Bank is leveraging its size and international clout to grab a big chunk of private equity investments, by launching a fund of funds — the first by any Indian entity. The country’s second-largest bank, which has successfully sold the ICICI Bank story abroad by raising $11 billion through debt and equity during the current fiscal, is seeing an unsatiated appetite for Indian paper.
Although the size is yet to be finalised, the bank is looking at eventually a multi-billion dollar fund to invest in other India-related funds — an area which has been the domain of multinational institutions. FoFs are essentially investor groups that invest in private equity funds in order to provide investors with a lower-risk product through exposure to a large number of investment vehicles across sectors and even geographies. It would also help investors to route investments in some funds, which could be closed to them.
An ICICI Bank official confirmed the move, which is still in its early stages, adding that the fund will be launched by ICICI International Mauritius, a subsidiary of the bank. The Mauritius subsidiary is an investment and fund management company of the group. Both the $2 billion infrastructure fund, which is in the pipeline, and the fund of funds are being launched by the same entity.
The fund of funds will initially target at investing in those private equity funds which have an India focus. Sources said there is a lot of interest among international investors in India-related paper. The bank is currently in talks with a host of potential investors and funds.
Though bank sources said it would be very early stage to comment on the size of the issue, industry officials said the bank is likely to start with an around $500 million fund and expand it to around $2.5 billion. The fund is likely to have a multiple closing. In other words, the subscription will be closed after it hits various subscription milestones and reopen after the initial funds are invested and new avenues become available.
Sources also added that the fund is likely to be launched either by the end of 2007 or by the start of the next calendar year. As far as the bank is concerned, it will earn fees and will also be able to forge better relationships with these investors. The investors in the fund would be a mix of high net-worth individuals, corporates and institutions.
The fund of funds provides an investor with access to a range of fund managers and investment schemes. The FoF is said to be already in the market for raising funds and is also said to be scouting around for investments. If market sources are to be believed, ICICI Bank is likely to kick off the FoF with five-six investments and appears to be in talks for exposure in IDFC’s upcoming $400 million fund and Baring’s next India Fund.
It is also seen eyeing investments in Ashok Wadhwa and Rajiv Aggarwal-floated $100-million Ambit Pragma PE and CDC-sponsored Aureos India Capital, which is currently operating $100 million-plus fund. However, these could not be confirmed with individual fund houses.
ICICI Bank is raising the FoF at a time when Capvent and Thomas Weisel are also reportedly showing up with FOFs estimated at $500 million and $300 million, respectively. ICICI Bank’s FoF will begin with investing in mid-sized India-focused PEs, but could unfurl a play in the global PE fund-raising market later. Sources said ICICI could invest around $20-$30 million in PEs like Aureos and Ambit Pragma, while its exposure in IDFC could be in the $50-$100 million bracket.
According to UK-based Private Equity Intelligence, FoFs accounted for nearly 14% of the commitments made to PEs globally in 2006. The major investors in PEs are public pension funds, banks and financial institutions. Private equity investments touched $135 billion in 2005 and are seen growing at double digits with Asia-Pacific accounting for over 12% of the investments and about 8% of the fund raised globally.
MUMBAI: There is a growing concern in the government over banks offering high rates to mop up deposits. The finance ministry this week has asked public sector banks (PSBs) to give details on their deposits structure — the tenure of the liability and the interest paid on it. According to bankers, the government fears that high rates will endanger banks’ books and also discourage investments in small savings schemes.
However, if banks respond to the query by reporting only their card rates displayed at the branches, it will not reflect the true cost of funds in the industry. This is because a large part of bank deposits are bulk placements by institutions and corporates, who are offered discretionary rates, which are significantly higher than card rates offered to retail savers. For instance, as late as last week, two state-owned banks offered between 9.99-9.97% to get Rs 1,000 crore bulk deposits from a Delhi-based state-owned company. At the individual level too, banks have two sets of rates — one under special schemes and the other their regular rates.
Already, the interest rate offered by banks is far more attractive than that offered by the government. Currently, the government is paying 9% to senior citizens and a maximum rate of 8% on other schemes, post office monthly income saving scheme, NSC and PPF. Against this, banks are offering a maximum rate of 9 to 9.25% to retail deposits.
If banks are to offer higher rates on deposits, they have to price their loan likewise in order to earn adequate margins. Bankers feel that the government is apprehensive that if banks offer higher rate on deposits, it will put pressure on the overall interest rate structure in the system. This will also hurt the government’s borrowing programme and cost its pays for completing the infrastructure project it undertakes.
Interest rate structure is widely debated not only among bankers at meeting among the chiefs of large private and public sectors at Indian Banks’ Association (IBA) — a body of bank management, but also in meetings between bankers and RBI as well as bankers and the FM.
In fact, IBA had issued an advisory note to all banks in July asking them not to charge over 9% for more than 400 days. However, with the State Bank of India — the country’s largest bank in terms of total assets — on a massive deposit drive, there are fears that banks may undercut others to win back market share. Banks have been increasing their market share by 25 basis points every quarter.
NEW DELHI: Banks are looking at introducing a clause, unconditionally cancellable, into loan contracts that will exempt them from allocating capital against the loan amount still to be drawn. The clause will also give them the right to cancel disbursement unconditionally.
This will help banks save on allocation of capital under the new capital adequacy norms that will come into force from March 2008.
Banks will soon need to allocate capital against unavailable loan limits under the norms. At present, banks allocate capital only against amount outstanding.
“It does not make sense for banks to set aside capital against unavailable loans. Banks need to have more information on the borrowing schedules of customers. This will help banks gauge their capital requirement. Banks can now introduce the unconditionally-cancellable clause that will decrease the amount of capital to be allocated,” a banker said.
Banks will need to take an undertaking from borrowers who are included in this clause, in the terms and conditions of the loan documents. Banks say that legally, this clause will give them the authority to cancel further disbursements unconditionally. At the time of taking a loan, borrowers are given a sanction letter for the duration of the loan, this is a practice globally.
“RBI has indicated that if a clause allows banks to unconditionally cancel unavailed loans, there will be no capital charge for the undrawn amount. But at this stage it is not clear how will banks operationalise such a clause. RBI has to approve internal practices of banks as far as this is concerned,” a banker said.
The guidelines issued in April 2007 set the stage for implementing Basel II norms. Spearheaded by Punjab National Bank, a group of bankers team has been constituted under the Indian Banks Association to oversee the implementation of Basel norms in the banking sector. The group meets every quarter.
RBI has said that the it will not extend the deadline for banks to implement the next stage of capital adequacy norms. Under the new norms, banks will have to set aside more capital on account of credit, market, and operational risks.
Local commercial banks with overseas offices have to adopt the Basel II norms latest by March 2008. Banks, which only have the local presence, can implement them by March 2009 to fulfill these norms.
Basel norms which have been put in place by the Bank for International Settlements (BIS), which is the central bank of all central banks.
It is estimated that the new capital adequacy norms might increase the overall regulatory capital requirement. The capital allocated on account of operational risk will be 15% of the gross income. A part of this increase can be offset by the relief due to credit risk on account of lower risk weights, bankers say. A rough estimate put a capital requirement of Rs 50,000 crore for banks to implement the norms.
The guidelines prescribe a risk weight of 150 basis points for sub-investment grade borrowers and a 100-basis-point increase on unrated corporate borrowers.
This festive season your dream home may just be within your reach. The slowdown in retail asset growth and competitive pressure have forced banks to reduce rates on retail loans.
After HDFC reducing floating home loan rates by 50 basis point, it is now the turn of Axis Bank, which has reduced its floating home loan rates by 50 basis points to 10.50 per cent for existing and new customers.
Kotak Mahindra Bank has also reduced its floating home loan rates by 50 basis points. ICICI Bank, the largest private sector bank in the country, last week cut its retail loan rates, except for home loans, by 50 basis points.
However, it is important to note that the reduction in rate is on floating rate loans, which can be increased at the discretion of the bank depending on the market situation.
"We are offering a discount to both existing and new customers. The bank's home loan portfolio constitutes around 54 per cent of the bank's total assets. A majority of the home loan portfolio comprises floating rate loans. Competition in the home loan market among other factors prompted us to take this decision,'' said Imtiaz Ahmed, assistant vice-president, mortagages, Axis Bank. The bank's mortgage reference rate is pegged at 13.25 per cent.
"The 50 basis points reduction will not have any major impact on the bank's cost of funds. This offer is on floating rate loans, which can be hiked if cost of funds increase over time,'' said Asok Kumar, executive director, Axis Bank.
"These are marketing tricks to increase demand as interest rates on retail loans are far from easing. The interest rate stance will depend on the Reserve Bank of India's mid-term monetary policy steps. There is no hope of the regulator reducing rates,'' said a banking analyst. The RBI will announce the mid-term annual policy statement on October 30.
Public sector banks are under pressure from the government to reduce interest rates as there are signs of a demand slowdown. State Bank of India's (SBI) asset liability committee will be meeting next week to take a call on interest rates.
At present, SBI offers 50 basis points discount on home rates plus a reduction in processing charges in Mumbai and Goa circles since Ganesh Chaturthi. Bank of Baroda, Industrial Development Bank of India and State Bank of Bikaner and Jaipur have also revised mortgage rates downwards.
Meanwhile, Dena Bank has decided to cut its lending rates for fresh home loans, by 50 basis points from October 10.
The discount on lending rates, fixed as well as floating rate options, will be applicable till December 31, 2007. Canara Bank has also slashed its home loan rates by 50 basis points across tenures for fresh loans.
IDBI reduces floating home loan interest rate by 0.50 per cent
MUMBAI: IDBI Bank has reduced its home loan floating interest rates by 0.50 per cent to 10.50 per cent.
The new rate will be applicable on fresh home loans disbursed between October 12 and December 31, the bank said in a press release issued here on Monday.
IDBI has also launched a special "buy now, pay later" scheme wherein buyers of properties under construction can choose to avail of a moratorium period of up to 18 months for payment of equated monthly installments.
The bank has also decided to reduce its processing fees to a nominal Rs 1,000 during this period.
For a change, both lenders and borrowers willing to float
MUMBAI: For years when bankers offered floating rate loans, corporate borrowers haggled for fixed loans. It was the other way round when banks insist on a fixed rate. Now, for the first time, lenders and borrowers are thinking alike on interest rate. Both want to do business at floating rate, thanks to the uncertainty. Lenders as well as borrowers are clueless which way rates will move in the coming months.
Borrowers are opting for floating rate, betting on a possible softening of interest rates; lenders on the other hand fear that due to the global imponderables and growing uncertainties around liquidity, it may be risky to fix the return they earn on the loan. As a result, after several years, lenders and borrowers are comfortable with floating rate loans.
Between end 2000 and early 2005, when interest rate plummeted — by over 500 basis points — banks were keen on giving fixed rate loans while corporates were interested only in paying a floating charge. Both were trying to derive the benefits of a change in the interest rate cycle.
When the rate cycle turned in late 2005, corporates began demanding fixed rate loans to prune their costs while banks were pushing floating rate loans. In absence of adequate loan demand, many large banks had disbursed loans to oil companies at a fixed rate of 7% for 3-5 years in early 2005. At that time, many banks which were not comfortable with fixed rate structures, agreed to offer fixed rate loans with a reset clause after six months to one year. But by late 2006, when liquidity had tightened, banks were offering only floating rates, anticipating interest rates to move up while corporates demanded fixed rate loans.
Currently, banks feel that they would be in a better position to lend on floating rate basis to protect their margins despite improved liquidity and expectations of a possible dip in interest rates. They fear that if rates move up in the next few years, they would lose out on a 5-year rate asset since the cost on deposits would be higher than the returns from the loan, resulting in negative margins. “We have always lent on a floating rate basis. That is a business we know better,” said a credit head of large public sector bank.
Bankers say there are too many uncertainties on the interest rate front, which has prompted them to lend on a floating rate basis even as there are expectations that interest rates may fall. “Liquidity can tighten anytime. If there is a capital flight from India, if the credit demand improves or if the central bank raises the cash reserve ratio, liquidity may dry. At that point, a floating rate loan book would protect our margins,” said a chairman of another bank.
Top rated corporates, however, continue to bargain for best rates. Most corporates with over Rs 10-crore credit limit have multiple banking facility and are thus in a position to switch to another bank even if the difference is that of five basis points.
Union Bank of India plans to add 200 branches this fiscal
MUMBAI: Public sector lender, Union Bank of India (UBI), on Tuesday said that it plans to add more than 200 branches during the current fiscal.
On an expansion drive and having opened 124 branches last fiscal, UBI has chosen the organic route for growth, it said in a statement issued here today.
With the economy expected to grow at unprecedented levels, there is a growing need for banking products and services in many parts of the country.
"Not only are segments of the population hitherto out of the ambit of the banking system, approaching banks for their banking needs, but existing customers are also in need of newer banking products and services," the bank said.
It was in anticipation of this need, that UBI planned to add more than 200 branches during this fiscal, the bank said.
Australian pension funds may invest Rs 1,300 cr in KGPL
MUMBAI: Four Australian pension funds — Westscheme, Statewide Superannuation Trust, SAS Trustee and Public Officers Superannuation Fund — are in advanced talks to invest over Rs 1,300 crore in Konaseema Gas Power (KGPL), a gas-based power project in Andhra Pradesh.
The deal is expected to close shortly, people familiar with the matter said. This will be followed by an IPO in the first half of 2008. If concluded, this would be one of the largest power sector investments by any Australia-based superannuation fund. Senior company officials confirmed the fund-raising plans in response to an email questionnaire, but declined to reveal any detail.
People close to the matter said Access Economics, an Australia-based economic consulting firm, is advising investors for the pre-IPO placement. The funds will be utilised for setting up a 820-MW plant at a cost of about Rs 3,000 crore. This would be the second phase of the project.
The project is likely to be implemented by June 2009. The four funds are likely to take about 74% equity in the company, which would result into about 32% stake post placement. Sources added that about 26 crore shares would be placed to the funds at a price of about Rs 45-50 per share. Further, BSE-listed VBC Ferro Alloys, that holds about 11 crore shares constituting 28% in the company, would also be allotted additional three crore shares in the second phase.
The company has been promoted by leading players such as L&T, IL&FS, LIC, GIC, IDBI, International Power Vision, The Infrastructure Fund of India (TIFoI) and VBC Ferro Alloys among others. Each of these institutions holds about 5% to 10% in the company with Hyderabad-based VBC Ferro Alloys holding about 28%.
The KGPL plant is located near the Krishna-Godavari basin. In its first phase, KGPL has already implemented a 445-MW power plant supplied by Siemens, while engineering, procurement & construction (EPC) is by L&T and operation & maintenance is by NTPC.
The project cost of Phase-I was about Rs 1,400 crore. Phase-I is ready to become operational, but gas supplies have not yet started. As a result, project cost increased to about Rs 1,800 crore.
KGPL has tied up for gas supply which is likely to commence from March 2008. The company has also signed an MoU with Power Trading Corporation for sale of power generation and has the option of other possibilities like Maharashtra, Karnataka, Gujarat for sale if it is successful in getting better pricing.
The IPO is expected to be announced in the first half of 2008, once KGPL gets gas supply and power generation starts in June 2008. However, details about the equity dilution have not been finalised at this stage.
ICICI Bank sees 70% growth in pvt banking business
NEW DELHI: ICICI Bank is expecting, on an average, a surge of 65-70% in its private banking business, with the first generation Indian entrepreneur coming of age, 15 years after economic reforms kicked in 1991. The demand is driven by the need to segregate private wealth from professional wealth, inheritance of large properties and ESOPs to executives, officials said.
"With the ongoing bull run at the Indian stock markets and the number of domestic entrepreneurs maturing after 15 years of liberalisation, we expect a growth of 65-70% in the domestic private banking market," ICICI Bank's global private banking head Anup Bagchi told reporters here on Monday. This business usually consists of managing wealth of those who have surplus investment income of over Rs 10 lakh annually.
He said the personal wealth industry of the Asia-Pacific region is estimated at around $7.6 trillion, and as per estimates, India has witnessed the second largest growth in its high net worth individual (HNIs) population at 18.3%, with Singapore leading with 20% growth.
He said the bank was already catering to over 1.5 lakh customers in this market, out of which a significant number was from the fast-growing millionaire club in India. However, he declined to disclose the total business of the ICICI Bank's private banking division. The term HNI refers to individuals and families that have an asset base of Rs 1 crore to Rs 5 crore.
The services offered by the bank include transaction banking, credit requirements, surplus investment management and protection products. Equity, structured products, real estate, private equity investments are other avenues. The bank also helps in diversifying risks for concentrated stock holdings.
The division was recently presented the 'Outstanding Regional Private Bank-Asia Pacific' award at the 17th Private Banker International Wealth Management Summit 2007, he said.
Mr Bagchi said since India does not have any inheritance tax, investors could diversify their income by investing in unlisted companies apart from the traditional private trust route. Considering the number of people buying houses worth Rs 1-1.5 crore, growing number of S-Class Mercedes cars and block deals of over Rs 100 crore at stock exchanges, one could imagine the potential in this market, he said.
"The bank has also successfully developed global capabilities in offering a wide range of banking financial solutions from our offshore offices which span 18 countries," Mr Bagchi said. He said ICICI Bank is well poised to offer private banking with a large branch network and its capability to offer various kinds of services.