Raghu Mohan says GE Capital’s decision to exit its joint venture in plastic with SBI Cards is a clear indication that portfolio sales and buyouts is set to gain momentum as we go down the road In April, the US financial giant GE had taken a strategic decision to exit part some of its financial services to focus on traditional business lines (See box on 'GE Capital: Divesture Update’) which range from aircraft engines and locomotives to medical devices and power generation. SBI Cards is a joint venture (JV) between SBI and GE Capital in which the State Bank of India holds 60 per cent -- the rest with GE Capital. The JV runs through two entities -- SBI Cards & Payment Services (marketing and distribution of SBI credit cards. And GE Capital Business Processes Management Services which is in to technology and processing. With a current customer base of over 2.7 million, SBI Cards operates through a footprint of 63 cities in the country. What It MeansPortfolio buyouts – as opposed to buyouts of an entire financial services firm – is a good way to jumpstart a particular business vertical. The last major deal of this kind was done in the summer of 2011 when IndusInd Bank picked up the Indian credit card business of Deutsche Bank for Rs 224 crore. In one fell swoop, the buyout gave IndusInd access to nearly 200,000 card holders; 200 sharp suits who know how to run operations; and the entire back-end paraphernalia. Plus, something that money alone can’t buy. “The deal helped cut down on a rollout time of nearly 12 to 18 months if we had started out to issue plastic from scratch”, says Romesh Sobti, managing director and CEO of IndusInd Bank. Source: Active Charter Investors AssociationIt had dawned on Deutsche Bank that a mass product like credit cards cannot be built out of 15 branches. Sure, Citi and StanChart did vend plastic with a small branch network in the 1990s. But back then, plastic had just got off the blocks; it was about lifestyle, not utility. You just had 200,000 credit cards, not the hundred of millions that floats around now. The German bank had little room to ramp up; the cross-sell window (where you sell multiple products and services to a customer to up your share of the wallet) is a small one for a niche player. You can also get burnt when you hawk unsecured credit; rivals felt the pain at the end of a three-year boom in 2008. The bank decided to revisit then India boss Gunit Chadha’s bet to ride on high-end retail in 2005. Cherry-picking is set to gain momentum from now on. It’s driven by the realisation that you cannot be all things to all comers. If you cannot stay on top of the pole, call it quits. Capital will quote at a huge premium from now on and there are competing businesses and markets for it. An added fillip is that many state-run banks will find capital hard come by from the Centre as pressures mount on account of Basel-III which kicks in from fiscal 2019. They will be forced to exit businesses.
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Reserve Bank of India (RBI) Deputy Governor R. Gandhi said on Tuesday there was an "urgent" need for banks to reduce their stressed assets, given the impact on liquidity and capital in the sector. The RBI had received a proposal to limit the number of banks in a lending consortium as a way to improve recovery of loans, Gandhi said in a speech at an industry event in Mumbai. He, however, said such a move would have also drawbacks. His comments come as the central bank has been pushing banks to reduce the amount of their non-performing assets and start lending again. The government said in July it plans to inject $11 billion of capital into lenders over the next four years in a bid to help them clean up their balance sheets.
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Bankers Chanda Kochhar and Arundhati Bhattacharya have been ranked as top two in a list of most powerful women in Asia-Pacific prepared by the global magazine Fortune. Kochhar, 53, who heads the country’s largest private sector lender ICICI Bank, has been ranked at the top, up from the second position last year, the magazine said on its website. It has credited Kochhar with reshaping banking in the country, and for building ICICI Bank into the “nation’s largest and most profitable private sector lender’’. She is followed by Arundhati Bhattacharya, Chairman of the country’s largest lender State Bank of India, whose ranking has also moved up from the fourth spot where she was last year, the magazine added. State-run oil marketing company Hindustan Petroleum Corporation’s Chairman and Managing Director, Nishi Vasudeva, has also made it to the list at fifth rank, same as the previous, it said. The country’s third largest private sector lender Axis Bank’s Managing Director and chief executive, Shikha Sharma, came in at the ninth spot in the list. Singapore-based chief executive of International Goldman Sachs Asset Management, Sheila Patel, has also made it to the list at the 23rd position. The list includes key executives from over six countries in the region. With 11 names, Chinese women lead the list.(PTI)
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India's inflation probably cooled further in August, data on Monday is expected to show, adding pressure on the cautious Reserve Bank of India (RBI) to cut interest rates again as soon as this month to spur economic growth. With price pressures at record lows, expectations are building that the RBI will lower borrowing costs by at least 25 basis points (bps) at its next policy review on Sept. 29, after three cuts earlier this year. Calls for a rate cut have grown louder after annual economic growth slowed to 7 percent in the April-June quarter from 7.5 percent in the previous quarter. And some economists fear real growth is more sluggish than official figures suggest. Arvind Panagariya, a top policy adviser to the government, said last week said the economy needed 50-100 bps of rate cuts. Similar calls were made by Indian business leaders at a meeting with Prime Minister Narendra Modi last Tuesday. Annual consumer price inflation, which the central bank tracks to set rates, likely eased to 3.6 percent in August due to lower fuel prices, from a record low of 3.78 percent in July, according to analysts polled by Reuters. Wholesale prices, another inflation gauge, are expected to have fallen for a 10th straight month, tumbling 4.40 percent on-year compared with a 4.05 percent fall in July. Indeed, the rapid deceleration in prices has ignited a debate in New Delhi whether Asia's third-largest economy is heading towards deflation. Arvind Subramanian, Modi's chief economic adviser, early this month warned of looming deflation and called for measures to boost consumer demand and step up investment. RBI Governor Raghuram Rajan, however, is worried about a resurgence in price pressures in a country where inflation has been notoriously volatile. While food inflation has remained in check despite below average summer monsoon rains, prices of some staples such as onions and lentils are racing up. Entrenched expectations of high inflation also are feeding into higher wages. "Yes, there has been moderation in some prices, but that's not signalling deflation," said N. Bhanumurthy, senior economist at the NIPFP policy think-tank in New Delhi. "In fact, we are not anywhere near that." But for the RBI, as for many other central banks around the world facing sluggish growth, much will depend on whether the US Federal Reserve raises interest rates this week for the first time since 2006. Easing policy at the same time as the Fed is tightening, however modestly, could spur further capital outflows from emerging markets. While some analysts believe the chances of a September hike have eased amid fears of a China-led global slowdown, any fresh burst of financial market volatility following the Fed's decision on Sept. 17 could force the RBI to stand pat. "If there is a (US) hike, then market reaction will need to be monitored," said A. Prasanna, an economist with ICICI Securities Primary Dealership Ltd. "I still expect markets to calm down by the time of RBI policy date." "Indian industry continues to be under the grip of deflation. With the WPI falling by 4.9 per cent compared to its level a year ago, price pressures are at a record low. The index has declined for the tenth consecutive month indicating slackness in economic activity across sectors. Given that CPI inflation has also been declining, the RBI needs to reduce interest rates sharply to drive a recovery in demand," said Chandrajit Banerjee, director general, CII.The RBI has lowered rates by a total of 75 bps since January. However, it left the policy repo rate on hold at 7.25 per cent at its last meeting, tying future cuts to the inflation outlook. Rajan has criticised banks for not passing on the entire benefit of its 75 basis points. The lenders have reduced their base rates only by about 30 basis points in two to three installments, citing higher cost of funds for them. At the last policy announcement on August 4, Rajan had even linked next easing to banks cutting their rates more aggressively. (Agencies)
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Continuing its declining trend, the foreign exchange reserves declined by $2.889 billion to $349.037 billion in the week through September 4 due to the continuing fall in foreign currency assets. In the previous reporting week, the reserves had fallen sharply by $3.433 billion to $351.920 billion. In the last two reporting weeks, the reserves had come down by a whopping $6.322 billion. Reserves had touched an all-time high of $355.46 billion in the week to June 19. Foreign currency assets, which are a major component of the overall reserves, were down by $2.650 billion to $325.656 billion in the week, according to the latest Reserve Bank of India data. Foreign currency assets, expressed in dollar terms, include the effect of appreciation and depreciation of non-US currencies such as the euro, pound and the yen, held in the reserves. After remaining unchanged for many weeks, the gold reserves slightly declined by $214.8 million to $18.035 billion. The country's special drawing rights with the International Monetary Fund fell by $18.6 million to touch $4.049 billion in the week under review, while the nation's reserve position with the Fund declined by $5.9 million to $1.289 billion. (PTI)
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Reserve Bank is likely to cut interest rate as the wholesale price-based inflation is expected to decline further to 4.3 per cent in August, Moody's Analytics said on Friday (11 September). "India's wholesale prices likely fell 4.3 per cent on year-on-year in August, a further decrease from last month's surprise 4.1 per cent decline. Energy and manufactured-good costs are expected to continue their decline, while food prices will likely fall steeply as a result of base effects," it said. At the same time, retail inflation also slipped to a record low of 3.78 per cent in July. It further said "the Reserve Bank of India paused its monetary easing cycle, but we expect there will be further cuts in 2015 as inflation continues to fall." RBI mostly tracks the consumer price inflation for its policy decisions and its bi-monthly monetary policy review is due on September 29. India Inc has been pitching for a rate cut by the RBI to spur growth and investment. In a recent meeting with Prime Minister Narendra Modi industry made a pitch for cut in interest rate by RBI citing record low inflation. Even the government is in favour of interest cut as inflation is low. Finance Minister Arun Jaitley had expressed hope that RBI will consider factors like low inflation and commodity prices. In a scenario where inflation is under control, the quantum of interest rate cut is "the prerogative of the RBI", the minister had said.
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The total value of India's strongest brands has risen by a third (33 per cent) over the last year, according to the second annual BrandZ Top 50 Most Valuable Indian Brands ranking by WPP and Millward Brown. This is the highest rate of growth achieved by any BrandZ ranking in the 10 years since valuations began, exceeding that of the Global Top 100 as well as the rankings for China, Latin America and Indonesia.David Roth, Chief Executive Officer of WPP's The Store commented, "The 2015 study shows that India is a market of great opportunities where consumers are feeling empowered, and this is increasingly reflected in their brand choices. The new Modi government is committed to creating an environment in which brands can flourish. India is distinct in many ways from other fast-growing markets, however, so simply applying strategies that have proved successful elsewhere will not work in India. Any brand intending to compete in India must gain deep insights into its nuances - such as the need to modernise while respecting the past, and the desire to remain fundamentally Indian."India's Top 50 brands are now worth $92.2 billionn (up from just under $70 billion in 2014). The record-setting value increase has been driven by brands' successful response to the rising sense of empowerment among Indian consumers, and the government's efforts to create a more conducive business environment.Prasun Basu, Millward Brown's Managing Director, South Asia said, "India's top brands are strong, and getting stronger - but there is no room for complacence. The top four had to grow their value by 37 per cent on average to hold on to the same positions as last year, and close to 10 per cent of the brands that made the Top 50 in 2014 have dropped out. To benefit from the continuing rise in consumer confidence and optimism brands need to understand the changing consumer, respond with innovative products and breakthrough communication, and experiment and invest in new media that reflect the spirit of the country today."Brands in the financial sector with more than 49 per cent growth made the largest contribution to the overall increase in value, but significant lifts were also seen across most other sectors, indicating the broad strength of India's economy and Indian brands. Home and personal care brands achieved a combined increase of 32 per cent, followed by the auto aftermarket sector at 28 per cent, automobile brands at 27 per cent and telecom providers at 21 per cent.Private companies, state-owned enterprises and brands owned by multinational corporations that are publicly traded in India all experienced growth, illustrating how receptive the market is to brands of all kinds. This is evident from the fact that more than half of the brands in the Top 50 are privately-owned, tracking India's entrepreneurial energy. Furthermore, 30 per cent of the brands are owned by multinationals, which have successfully adapted to the needs of Indian consumers, becoming so embedded in their lives that they are perceived as 'local'.Ranjan Kapur, Country Manager, at WPP India, added: "Building a successful brand in India also means helping to build India itself. Consumers are trustful of brands, but trust can crumble overnight. Brands must work hard to sustain trust by connecting with the country's communal sense of responsibility. Brands need to find ways to support the national agenda, and help to develop a more modern, prosperous and equitable society."BW Online
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Export-Import Bank of India (EXIM) Bank has provided a $35-million line of credit to Guinea to construct and upgrade hospitals in the country."Export-Import Bank of India, at the behest of the Government of India, has extended a Line of Credit (LOC) of $35 million to the government of Guinea for construction and upgradation of regional hospitals at Kankan and Nzerekore in Guinea," EXIM Bank said in a statement today.An agreement for the LOC was signed here between Alexandre Cece Loua, Ambassador of the Republic of Guinea to India and Regional Head of EXIM Bank, Tarun Sharma on Wednesday, it said.This is EXIM Bank's first LOC to Guinea.With the signing of this agreement, EXIM Bank has now in place 199 LOCs, covering 63 countries in Africa, Asia, Latin America, Oceania and the CIS, with credit commitments of over $12.19 billion, available for financing exports from India, it added.(PTI)
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The Bank of England said on Thursday (10 September) its rate-setters felt the threat to the world economy from China's stock-market slump did not signal a slowdown for Britain, as they left interest rates at a record-low of 0.5 percent.Policymakers voted 8-1 to keep rates unchanged, as expected, and they broadly agreed with Governor Mark Carney, who has said that, so far, China's slowdown is unlikely to derail the plan to gradually raise British rates.Sterling jumped to a two-week high against the dollar after the rate decision and the publication of the minutes of the Monetary Policy Committee meeting, which ended on Wednesday.Economists said a rate hike looked on track for early 2016."The MPC doesn't appear too shaken by recent global developments, which it said did not materially alter its central view," said Vicky Redwood, from the consultancy Capital Economics. "Indeed, the minutes highlighted that inflation should still pick up around the turn of the year."The BoE's decision followed a month of declines on global stock markets, driven by financial turmoil in China, and signs of some weakness in Britain's economic recovery.Investors are also uncertain about whether the US Federal Reserve will raise rates next week for the first time since the 2007-09 financial crisis. Such a move would be likely to have knock-on effects across global financial markets."Although the downside risks emanating from overseas had risen, it would be premature to draw strong inferences from this month's events for the likely path of activity in the United Kingdom," the MPC said in minutes of its monthly policy meeting.Domestically, the MPC is balancing a relatively robust recovery with inflation that is far below target due to past oil price falls and subdued wage pressure.But a minority of policymakers saw a danger that near-zero inflation could rise faster than forecast and exceed its 2 percent target in a couple of years, suggesting they would not take much more persuading to back a rate hike.For one policymaker, Ian McCafferty, this risk was already big enough that he voted for a second month in a row for an immediate rate rise to 0.75 percent, arguing it would help ensure rates rise only gradually.Carney, the BoE's governor, said last month the decision on when to raise rates was likely to come into "sharper relief" around the turn of the year, and that China's problems did not appear poised to have a big impact on Britain.However, figures on Wednesday showed an unexpected drop in British industrial output, partly due to faltering overseas demand. Broader surveys have pointed to a slowdown in growth in the third quarter to around 0.5 percent.The central bank's staff trimmed their forecast for third-quarter growth to 0.6 percent from 0.7 percent, roughly in line with Britain's average rate of growth.(Reuters)
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Merger of weak banks with strong has its downside. Is it worth the pain? Raghu Mohan explores It’s an idea which has been spoken about in the past, and finance minister Arun Jaitely has thrown up the same again -- that the Centre is not averse to merging weaker state-run banks with stronger ones. On Wednesday (9 September), Jaitely said that while steps to shore up the financial strength of state-run banks has been done through capitalisation, “After this (measures) if there is a fragile bank, we are looking at consolidation with stronger banks. So it's not that banks don't get a priority. In fact, after inheriting the banks in a fragile situation, we are systematically trying to address each of these problems”. The reference is to concerns that the weaker among state-run banks may be too fragile to continue to do business in the emerging landscape – that’s even after the steps taken to capitalise them and re-engineer their innards with the “Indradhanush” initiative. The Triggers NowThe number one headache for Jaitely and team is the mess as ariticulated S S Mundra, Deputy Governor-RBI (Indian Banking Sector: Emerging Challenges and Way Forward; 5th May 2015). That while the banking system is adequately capitalised, he saw challenges on the horizon (for some of banks). For the system as a whole, capital adequacy has steadily declined; as at end-March 2015, it stood at 12.70 per cent from 13.01 per cent a year earlier. “Our concerns are larger in respect of state-run banks where it has declined further to 11.24 per cent from 11.40 per cent over the last year”, he said. He went on to add that even the best performing state-run banks have been hesitant to tap the markets to raise their capital levels; that it would be difficult for the weaker to raise resources from the market. “There is a constraint on the owners insofar as meeting the capital needs of these banks and hence, the underperforming banks are faced with the challenge of looking at newer ways of meeting their capital needs. A singular emphasis on profitability ratios (based on RoA and RoE) perhaps fails to capture other aspects of performance of banks and could perhaps encourage a short term profitability-oriented view by bank management”. Mundra made it clear that he did wish to get into the merits of this approach, “but from a regulatory stand point, we feel that some of these poorly managed banks could slide below the minimum regulatory threshold of capital if they don’t get their acts together soon enough.. The need of the hour for all banks, and more specifically, in respect of state-run banks, is that capital must be conserved and utilised as efficiently as possible”, Mundra explained. And given the state of fisc, Jaitely will do well to conserve the Centre’s wallet too; but as to whether it should be done by merging the weak with the strong is a moot point. But let us step back and look at the historical to get a grip on what we are on. Blast From The PastFrom the early days of reforms, banking sector consolidation has been detailed in various reports – M Narasimham Committee -I (1991), S H Khan Committee (1997), M Narasimham Committee-II (1998), S S Tarapore Committee on Fuller Capital Account Convertibility (2006), Raghuram G. Rajan Committee (2009) and the Committee on Financial Sector Assessment (CFSA-2009; chairman Rakesh Mohan who was deputy governor-Reserve Bank of India). In his inaugural address on the annual day of the Competition Commission of India on May 20th 2013, P Chidambaram as finance minister alluded, inter alia, to the need for restructuring of banks through mergers. To quote “ ... some banks, including some public sector banks among the 26 public sector banks that we have, may be better off merging. The need for two or three world-size banks in an economy that is poised to become one among the five largest in the world is rather obvious”. What should not be missed is Chidambaram’s reasoning for this: that we need globally competitive large banks; it was not to “bailout” weak banks! Since 1961 till date, there have been as many as 81 bank mergers out here of which 47 took place before the first phase of nationalisation in July 1969. Out of the remaining 34 mergers, in 26 cases, private sector banks were merged with state-run banks; and in the remaining eight cases, both the banks were private sector banks. The spate of mergers before and immediately after nationalisation is not relevant to the times we live. Let’s come to the post-reform period -- there have been 31 bank mergers. And mergers prior to 1999, (under Section 45 of the Banking Regulation Act, 1949) – and this is the most critical period -- were primarily resorted to in response to the weak financials of the banks being merged. Of this lot, the merger of Global Trust Bank with Oriental Bank of Commerce must find particular mention – that of a basket case new-generation private bank being merged with a state-run bank or of tax payers paying for private loot! Whatever be the colour of capital, the bottomline is there is no reason for a good bank pay to for the sins of a rotten apple. In the post-1999 period, however, business sense led to voluntary mergers between healthy banks under Section 44A of the Act. The merger of New Bank of India with Punjab National Bank (way back in 1993); and the acquisition of State Bank of Saurashtra (2008) and State Bank of Indore (2010) by the State Bank of India are the only instances of consolidation among state-run banks. All involved pain. Bank Mergers The Pros: • Larger banks may be more efficient and profitable than smaller ones and generate economies of scale and scope. Furthermore, the reorganisation of the merged bank can have a positive impact on its managerial efficiency. The efficiency gains may lead to lower cost of providing services and higher quality as the range of products and services provided by larger banks is supposedly wider than what is offered by smaller banks. Experience in some countries indicates cost efficiency could improve if more efficient banks acquire less efficient ones.• Consolidation may facilitate geographical diversification and penetration towards new markets. *• Big banks are usually expected to create standardised mass-market financial products. The merging banks may try and extend marketing reach and enhance their customer-base.• The common criticism against consolidation is that it will have an adverse effect on supply of credit to small businesses, particularly, those which depend on bank credit, as consolidated big banks would deviate from practising relationship banking. But, there is recent evidence that reduced credit supply by the consolidating banks could be offset by increased credit supply by other incumbent banks in the same local market.• The transaction costs and risks associated with financing of small businesses may be high for small banks. Large and consolidated banks can mitigate the costs better and penetrate through lending into these sectors.• One of the arguments cited against consolidation is that it may result in rationalization of branch network and retrenchment of staff. However, rationalisation may lead to closure of branches in over banked centers and opening of new branches in under banked centers where staff can be redeployed. And the Cons:• It can result in neglect of local needs leading to reduction in credit supply to some category of borrowers, particularly small firms. The consolidated bank may rather cater to big ticket business, in the process adversely affecting financial inclusion.• Not all customers are treated in the same way by the big banks. There is empirical evidence that one consequence of the merger wave in US banking in 1990s has been that loan approvals for racial minorities and low income applicants have fallen and the extent of this decline was more severe for large banks.• The consolidating institutions are found to shift their portfolios towards higher risk-return investment.• Consolidation could also result in less competition through structure-conductperformance-hypothesis giving fewer choices to the customer and arbitrary pricing of products.• Empirical evidence suggests that financial consolidation led to higher concentration in countries such as US and Japan, though they continue to have much more competitive banking systems as compared with other countries. However, in several other countries, the process of consolidation led to decline in banking concentration, reflecting increase in competition. Source: RBI Discussion Paper on Banking Structure in India -- The Way Forward (2013). Prepared by the Department of Banking Operations and Development; and Department of Economic Policy and Research. A working group set up by Indian Banks’ Association (IBA;2004) “Consolidation in Indian Banking System: Legal, Regulatory and Other Issues” was of the view that it made sense to bring all banks under the Companies Act so as to ensure that legal dispensation for mergers in banking sector is akin to that of corporate mergers. But it never made a case for a merger between weak and the strong. It can take down both!
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