With inflation under control, lending rates will gradually come down as India is moving towards softer interest rate environment, largest private sector lender ICICI Bank CEO Chanda Kochhar said on Tuesday (18 August). ICICI Bank was the first lender to start cutting base lending rates, she said adding "a lot of transmission" of monetary easing to borrowers has already happened. "... directionally we can say that a lot of factors and parameters have come under control, whether it is in current account (deficit) or fiscal side. Inflation is coming under control. So overall we are moving towards a softening interest rate environment," she said. Kochhar added "clearly a lot of transmission has happened because if you see when the monetary policy rates gets cut then the deposit rates fall and the deposit form a only part of cost of funds for the banks." She said 30 basis points (0.30 per cent) rate cut has already happened "which is quite in line with the reduction in the cost of funds." The Reserve Bank of India has cut its benchmark rate by 75 basis points to 7.5 per cent in three tranches so far this year. At the bi-monthly monetary policy earlier this month, RBI Governor Raghuram Rajan wanted banks to transmit more interest rate cuts to borrowers before he further eases monetary stance. "Not only we were the first ones to cut rates we had actually cut them by a much larger amount than any other bank," Kochhar said. She said "gradually as cost of funds keep going down you would see interest rates coming down. Directionally, definitely we are in a softening environment but when and how much that is not something we can say.
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North Block’s strategy to rehaul the affairs at state-run banks is commendable, but execution will be the key, says Raghu Mohan Raghu MohanThe first step came almost a week ago when it was announced that the Centre will infuse Rs 25,000 crore each during fiscal’s 2016 and 2017; and Rs 10,000 crore each over the next two fiscals. Last week (Friday), it said that the infusion of Rs 20,088 crore into thirteen state-run banks will be done in a month's time with the State Bank of India guzzling Rs 5,531 crore. The urgency is reflective of the precarious situation at several of these banks which are capital deficit ahead of Basel-III implementation which kicks in from fiscal 2019. Ananda Bhoumik, Managing Director & Chief Analytical Office, India Ratings & Research points out that while most state-run banks will be relieved at the end to uncertainty on the government's contribution, these banks will need to raise an additional Rs 15,000 crore from the equity market together with Rs 40,000 crore in bonds (additional tier-1 bonds) during the year. “In addition, our research suggests provisioning gap due to overleverage in distressed corporates, which may need to be filled in by equity. It is, therefore, imperative for these banks to improve performance and market valuations”, says Bhoumik. The issue of distressed assets in banks can’t be taken care of by mere provisioning – that's mere accounting for bad debts. To get back these assets in to “working” mode much more needs to be in the realm outside banking at the policy implementation level – they pertain to fuel supply, the poor state of discom’s financial health; and issues akin in aviation, steel and infrastructure. Until, these bottlenecks are resolved, recapitalising banks may turn out to be an exercise that throws good money after bad. Mint Road’s estimates had put the total amount of capital – equity and non-equity – for Basel III at closer to Rs 5 lakh crore; it is a dynamic numbers and depends on a whole range of factors – credit growth, dud loan provisioning and the technicalities under Basel III. Raman Uberoi, Business Head-CRISIL Ratings (Large Corporates) qualifies that “success will depend on relentless implementation, and staying the course no matter the obstacles. What’s encouraging is that the government has hit the ground running”. It was pointed out that conceptually, Indradhanush takes cognisance of both internal and external factors that influence the performance of state-run banks. The internal ones are better governance, greater efficiencies and a performance evaluation framework that incentivises management focus on capital conservation and credit rating. The external factors are linked to legal, recovery and dispute resolutions such as coercing promoters to sell non-core assets, setting up fraud resolution processes and six new Debt Recovery Tribunals, and enhancing the role of asset reconstruction companies. “We believe the clear timeline given for the setting up of a Bank Board Bureau and the announcement inducting professionals as non-executive chairmen will eventually drive qualitative changes in governance, strategy formulation, capital efficiency, and human resource practices. And allowing bonus and stock options for senior management will make public sector banks competitive and go a long way in attracting right talent”, adds Uberoi. The steps announded by the Centre is a summation of what has been articulated over time; just that it has been put in a neat capsule. On paper, Indradhanush looks as impressive as a rainbow; but it all depends on execution. A failure here can make it a rainbow chasing effort!P.S. Mission Indradhanush was to immunise kids against seven vaccine-preventable diseases. The latest one is to immunise banks!
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India has brought in private sector executives to run two of its largest state-owned banks, the first such appointments in a broad reform plan to shake up the country's dominant but often inefficient government-backed lenders. Earlier this year, the government announced steps to overhaul its state banks, including the appointment of five new chief executives, with applications welcome from both public and private sector candidates. The government hopes these changes can help the banks to improve governance and boost earnings, important measures as they prepare to tap the markets for capital to strengthen their balance sheets. The move also fits with Prime Minister Narendra Modi's preference for modernising the management of state-run firms, rather than privatising them, a policy he honed in his home state Gujarat where he made failing state industries profitable. India had previously always picked bosses for public sector banks from the state sector, which makes up more than 70 percent of the country's banking assets but has lagged private rivals in profitability and has amassed bad loans at a faster pace. India's banking sector, dominated by more than two-dozen state-run lenders, has been hobbled by its highest bad-loan ratio in a decade as slower economic growth hurt companies' ability to service debt. The government on Friday named Rakesh Sharma, head of private sector bank Laxmi Vilas Bank, as chief executive of Canara Bank Ltd, and appointed P.S. Jayakumar, chief executive of real estate developer VBHC Value Homes Pvt Ltd, as head of Bank of Baroda. It also named chief executives for Bank of India, IDBI Bank Ltd and Punjab National Bank from within the state sector. In addition to senior jobs, financial services secretary Hasmukh Adhia said that the government was also considering allowing public sector banks to hire mid-level executives from outside the state banking sector. "We are very hopeful as the process unfolds that we will have other really, really good people coming in and being part of the public sector," junior finance minister Jayant Sinha told CNBC TV18 network. The bank reforms, expected to help to revive India's sluggish growth, also included more details of a so-called bank board bureau that will help state banks with strategies for growth and development. They were announced following a parliamentary session in which Prime Minister Modi's reform agenda suffered a setback on important tax and land reforms.? The finance ministry on Friday also reiterated its plans to provide public sector banks with more capital. These include providing 250 billion rupees ($3.9 billion) each in the current and next fiscal year, while 200 billion rupees would be provided during 2017/18 and 2018/19. Of 250 billion rupees allocated for this fiscal year, about 200 billion rupees will be allocated to 13 state lenders soon, a ministry statement said. The allocation of remaining 50 billion rupees would be decided in the March quarter. The country's big six banks, State Bank of India (SBI), Bank of Baroda, Punjab National Bank, Bank of India, Canara Bank and IDBI, will get 146.8 billion rupees ($2.3 billion), the ministry said. (Reuters)
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The government on Friday (14 August) unveiled a seven point plan to evamp public sector banks with focus on appointments, Bank Board Bureau, capitalisation, destressing, empowerment, accountability and governance reforms. According to MoS for Finance Jayant Sinha, "the Indradhanush plan for revamp of Public Sector Banks (PSBs) is the most important step in this direction since the bank nationalisation measure in 1969-70, said Finance Mos Jayant Sinha. "This would give banks the strategic space for adequate competitive positioning," he said . Now each PSB would be monitored; their key performance indicators will also be monitored. Finance Arun Jaitley said that the PSBs have been facing a challenging situation in the last few years, but there’s no cause for panic or alarm. Though for some time, the problem went unattended, the situation improved after the Narendra Modi -led BJP government came into power, said the finance minister. India needs to minimise political interference in public sector banks, Finance Minister Arun Jaitley said, as the government announced measures to improve the performance of state-run banks that are struggling with rising bad loans. India's banking sector, dominated by more than two-dozen state-run lenders, has been hobbled by its highest bad-loan ratio in a decade as slower economic expansion hurt companies' ability to service debt. While the pace of additions to bad loans has started slowing for most banks, higher provisioning is hurting their profits. State-run lenders also account for a majority of the sector's bad loans. Political interference in the functioning of PSBs has to be minimised, he said. Secretary, financial services, Hasmukh Adhia later said that political interference in the functioning of the PSBs had minimised to a great extent after the Prime Minister addressed a gyan sangam of top PSB heads in Jan early this year, and this government went going in reforming the banking sector. CapitalizationWhile calculating the capital requirement of extra capital for the next four years up to FY2019 likely to be Rs 1,80,000 crore, the government of India proposed to make available Rs 70,000 crore out of budgetary allocation for four years. Improved valuation coupled with value unlocking from non-core assets as well as improvements in capital productivity is expected to enable PSBs to raise the remaining Rs 1,10,000 crore from the market. Adhia also announced the appointment of new heads of five banks, including two from the private sector, as part of fresh measures to improve the performance of the state banks, which are struggling with rising bad loans. Indian banks may need up to 1 trillion rupees to manage the risks from their exposure to debt-stressed firms, Fitch's Indian unit said this month, on top of the tens of billions of dollars in capital they need to comply with global banking rules. Problem of NPAsFinance Minister Arun Jaitley said there have been problems with the banking sector and they were compounded by problems in sectors like steel, power, highways, discoms, sugar. As the seven-step reform progamme unfolds, these different sectors too need attention and their problem have to be dealt with to solve the ultimate banking problems. There has been some positive movement in the highway sector and some steps have been taken in the steel sector, but the problems here are more of external nature. In case of sugar, one package has already been announced; it’s more of work in progress in this sector;
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Sutanu Guru argues how the lowest inflation rate in a decade must lead to lower interest rates Wholesale inflation based on the Wholesale Price Index (WPI) has plummeted to a 10 year low of – 4.1 per cent for the month of July. This, after the consumer price inflation too falling to an almost record low of 3.7 per cent in the previous month. In comparison to a negative 4.1 per cent, wholesale inflation stood at 5.4 per cent in July 2014. People, that category includes so called pundits and intellectuals will argue that the numbers are hogwash and point out to rising prices of onion, milk and pulses to claim inflation is not coming down. They will insist that the RBI Governor Raghuram Rajan is doing the right thing by not cutting interest rates. But the fact is; numbers don’t lie. They don’t even mislead. It is now a year since inflationary pressures have eased in the Indian economy. And there really is no excuse left anymore for Rajan and the RBI to not cut interest rates anymore. Prior to August 4 this year, realists as compared to pundits hoped that Rajan will tone down his inflexible stance and reduce interest rates. But he kept repo rates unchanged at 7.25 per cent. Let’s leave the esoteric jargon aside at take a common sense look at the issue. All students of economics are taught some fundamental things. One is that inflation can be caused by factors called demand pull or supply push. The second is that higher inflation rates hurts the poor more than others. And the third is that high cost of capital makes companies less competitive. On all three common sense counts, the Rajan policy of being inflexible in cutting interest rates looks more fundamentalist than realistic. Supply constraints play a huge role in inflation in developing countries like India. Keeping interest rates at artificially high levels is not going to solve the supply problem; though it does tend to have a dampening effect on demand. Even during the UPA regime, the critics were wrong when they slammed the government for rising prices of food items like milk, eggs, poultry and some vegetables. The fact is, rising household incomes have meant that more and more “poor” Indians now consume such “elitist” food items. The solution is not to look at interest rates, but at ways and means of improving farm productivity. Even now, those who criticize the NDA government for the rising prices of such food items are wrong. And keeping interest rates will worsen the supply problem rather than ease them. That is because such high rates of interest makes a majority of Indian companies globally uncompetitive. Not every company is a Reliance Industries Ltd that can tap global capital and financial markets for cheap capital. For the thousands of enterprises in the small and medium industries category, high interest rates are a fatal burden on expansion plans. Lastly, persisting with high interest rates means there is little chance of an economic stimulus through increased consumer demand. Survey after survey has shown that investors and consumers have been postponing buying homes and cars because the interest rates are deemed too high. In developed economies where financial inclusion and penetration is virtually 100%, interest rate can indeed be the most powerful tool to send signals. But in a country like, the same can be folly. It is time, Rajan stopped persisting with this folly.
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Indian refiners have got the green light to prepare to pay Iran $1.4 billion in oil dues, two sources with knowledge of the issue said, in one of the first signs that last month's nuclear deal is helping Tehran unlock frozen funds. The landmark nuclear deal between Iran and six major world powers was struck on July 14 and sanctions could begin to be removed later this year if U.N. inspectors confirm Tehran is complying with its provisions. Finance Secretary Rajiv Mehrishi asked refiners this month to prepare to pay Tehran two installment of $700 million, part of the money owed for oil imports, said the sources, who declined to be identified due to the sensitivity of the issue. Iran is desperate for funds and investment to help its economy, crippled by decades of sanction. Mehrishi last month led a delegation of officials from the Reserve Bank of India and state-run UCO Bank to Tehran to discuss oil payments. The exact timing of the payments is unclear since the finance ministry is seeking clearance from the Office of Foreign Assets Control (OFAC) of the U.S. Department of treasury to go ahead, one of the sources said. The office of India's finance secretary did not immediately respond to a request for comment. The U.S. Treasury said it did not comment specifically on countries or institutions involved in payments. But in a statement said "the U.S. government has committed to render non-sanctionable the release in installments of certain Iranian restricted funds held overseas in an amount consistent with installments provided under previous JPOA relief periods." JPOA, or Joint Plan of Action, refers to an interim nuclear pact. The Indian payments are likely to be conducted using a mechanism based on a series of back-to-back transactions in different currencies that are initially channelled through the Reserve Bank of India, the sources said. Iran would eventually get the payment in dirhams from the United Arab Emirates' central bank. India is Iran's biggest oil client after China, though New Delhi has reduced purchases under pressure from sanctions and Tehran has slipped to the seventh biggest supplier from the second before sanctions. Indian refiners Mangalore Refinery and Petrochemicals Ltd, Essar Oil, Indian Oil Corp, Hindustan Petroleum Corp and HPCL-Mittal Energy Ltd (HMEL) together owe Iran more than $6.5 billion. This represents just over half of the bill for crude bought since February 2013, when a route to pay for Iranian oil through Turkey's Halkbank was stopped. Under an interim nuclear deal in November 2013, some of Iran's blocked funds were released by Asian buyers, including India. Indian companies have deposited 45 percent of their oil payments in a rupee-denominated account at an Indian state bank that Iran is allowed to use to buy goods not covered by sanctions such as food and medicines. About 170 billion rupees ($2.62 billion) are in Iran's account with UCO Bank. (Reuters)
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RBI Governor is unlikely to expose the country to avoidable risks, says Sumit SharmaWith the Reserve Bank of India (RBI) declaring Consumer Price Inflation (CPI) as its primary target there was good news for those looking for a repo rate cut. The CPI decelerated to 3.78 percent in July, compared with 5.4 percent in the previous month. The increasing divergence of CPI rate from RBI’s target rate of 6 per cent for January 2016 added to the industry’s joy. Another seemingly good news was an improvement in the Index of Industrial Production (IIP) numbers for June. IIP improved to 3.8 percent compared with 2.5 percent in May and 3.36 percent in April. Since January, the highest that IIP rose was 4.8 percent in February and has remained below 4 percent in the other five months. Yet, what the IIP doesn’t show is that capital goods fell 3.6 percent, and rose on the back of consumer goods and manufacturing. Consumer goods too rose on the back of a lower base. The two numbers guide one to agree that its time the central bank gave a hard look at reducing its repo rate to help industry lower its borrowing costs, and probably cut selling prices, lift demand and hopefully investments over a period of time. Adding to the sentiment, on Thursday (13 August) finance secretary Rajeev Mehrishi told a television channel that India’s interest rates are out of sync with the rest of the world, and could attract hot money since they are too high. Most of the advanced countries have rates at a negligible level. He said a rate cut would also help domestically as it would improve credit improve and exports. So, will RBI go with a rate cut much ahead of Sept 29 policy? Opinions are divided. While some economists feel the RBI should be less conservative and spring a surprise, some others would rather prefer to wait until mid-September. Two major events by then would help RBI to be on a firmer footing. The U.S Federal Reserve is likely to make its move by then on its own interest rates. Data so far suggests that U.S could be track to announce its first interest rate increase after the global financial crisis in its next Federal Open Market Committee (FOMC) meeting on Sept 16-17. Also, by then the extent of monsoon rains and areas that are likely to remain deficient would be evident. Even as better supply management can help rein in prices, authorities have regularly faltered on this count. The sudden and sharp spurt in onion prices is a case in point. Minister in-charge of ensuring such supplies said it could take four months for onion prices to return to moderate levels. Such statements surely don’t inspire confidence. Then, the surprise devaluation of the Yuan by People’s Bank of China (PBoC) is no mean factor and will continue to hang like Damocles’ sword in the coming months. A rate cut has implications on foreign inflows into local assets. Currency disturbances globally could hurt India too even though Governor Raghuram Rajan has boosted India’s foreign exchange reserves, and the current account deficit is under control. Yet, it’s anybody’s guess whether one would like to play safe or rather be sorry. So for the moment one could safely bet the RBI may wait for the tide and impending storms to settle rather than expose the country to avoidable risks.
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Government proposes to infuse Rs 70,000 crore in public sector banks in four years from budgetary allocations, Finance Minister Arun Jaitley said on Tuesday (11 August). "If the internal profit generation is excluded, which is going to be available to public sector banks (based on the estimate of average profit of the last three years), the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs 1.80 lakh crore," he said in a written reply in the Rajya Sabha. The estimate is based on credit growth rate of 12 per cent for the current year and 12 to 15 per cent for the next three years depending on the size of the bank and their growth ability, he said. "Out of the total requirement, the Government of India proposes to make available Rs 70,000 crore out of the budgetary allocations during FY 2016 to FY 2019," he said. The government proposes to allocate Rs 25,000 crore in 2015-16 out of which 40 per cent of the amount will be given to those banks that require support to maintain their common equity at 7.5 per cent, he said. He further said that 40 per cent capital will be allocated to the top six big banks namely SBI, BoB, PNB, Canara Bank and IDBI Bank in order to strengthen them to play a vital role in the economy. The remaining portion of 20 per cent will be allocated to the banks based on their performance during the three quarters in the current year judged on the basis of certain parameters, he said. In reply to another question, Minister of State for Finance Jayant Sinha said the government has advised public sector banks (PSBs) to review their investment in different non-core banking activities and take suitable decision with regard to investment and disinvestment in existing as well as proposed non-core banking activities. "These decisions should be made by board of the PSBs as per corporate governance guidelines laid out in the Companies Act," he said. Replying to another question, Sinha said as of July 3, 47.73 lakh accounts were eligible for the overdraft facility of up to Rs 5,000 under the Pradhan Mantri Jan Dhan Yojana. As many as 0.70 lakh accounts have availed this facility if overdraft for aggregate amount of Rs 14.35 crore, he said. (PTI)
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Second edition of Natural Capital Awards held in Delhi. Simar Singh reportsIn an evening committed to the idea of collectivism and sustainability, Yes Bank honoured corporates and photographers who have exemplified ‘action for the environment’ in their own capacities. This was the second edition of the Natural Capital Awards which were held in the Capital on Monday (10 August). Ambuja Cement was declared as the winner in the ‘manufacturing’ sub category of the Eco Corporate award for becoming the first cement company to be water positive and Tata Coffee and Reliance’s Hazira Manufacturing Division came in a close second and third. Tata Coffee has been involved in the mitigation of human-animal conflict while Reliance’s Hazira Manufacturing Division has been active in the reduction of their carbon dioxide emissions and productively utilising whatever carbon dioxide they recover. In the ‘services’ category Capgemini India, Cognizant Technology Solutions and GE India’s Tech Centre in Bangalore were awarded. Throughout the evening what was constantly reiterated was the need for a model of partnership, in which corporates, individuals, groups and the government would collectively shoulder responsibility for the environment. “Open the doors, let everyone participate”, said Prakash Javadekar, MoS for Environment, Forest and Climate Change, who was chief guest at the event speaking about the underlying principle of inclusivity in about the initiatives his ministry had taken. He also announced his desire to start a ‘Green Channel’ to create awareness about the environment. “What you tend to ignore will eventually turn up at your door step”, said Dr. Jaco Cilliers, Director of UNDP India, emphasising on the immense responsibility the country shouldered, being the custodian of 8 per cent of the world’s biodiversity while possessing only 2 per cent of its landmass. ‘Responsible banking’ is something that, according to Yes Bank, has been a priority for them and under the leadership of their MD and CEO, Rana Kapoor, they have taken steps in this direction and aim to reduce their carbon emission to less than 5 per cent.
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State Bank of India (SBI) on Tuesday (11 August) said net profit rose 10.2 per cent on year in the fiscal first quarter, as bad loan provisions fell at the nation's biggest lender by assets which has been taking steps to reduce its pile of soured debt. Net profit was Rs 3,692 crore ($575.6 million) for the three months ended June 30, compared with the Rs 3,411 crore average estimate of 20 analysts polled by Reuters. Gross bad loans as a percentage of total loans marginally rose to 4.29 per cent from 4.25 per cent in the previous quarter, while SBI's net bad loan ratio rose 12 basis points. Bad loan ratios at Indian banks have near-doubled in the past four years as weak economic growth hurt companies' ability to repay debt. At the same time, demand for loans has slowed. The speed at which banks booked new bad loans has eased as lenders such as SBI have strengthened criteria for loan applicants and react quicker to early signs of trouble. Banks are still wary about lending to stressed sectors such as infrastructure and steel, industry insiders say. Following the announcement of results, shares of SBI were trading 3.25 per cent down at Rs 273.90 on BSE. (Reuters)
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