Consumers are set to earn more on their savings accounts with the Reserve Bank of India (RBI) on Tuesday de-regulating interest rates, the last administered bank rate in the economy. The move will push up cost of funds, sending bank shares sharply lower. It is felt that the time is appropriate to move forward and complete the process of deregulation of rupee interest rates," said Governor Duvvuri Subbarao during the second quarter review of the apex bank's monetary policy for this fiscal.Currently, the savings rate stands at 4 per cent, which was last raised in May after remaining unchanged for 8 years.For deposits up to Rs 1 lakh and irrespective of the amount in the account within this limit, a bank will have to offer a uniform interest rate.For savings bank deposits over Rs 1 lakh, a bank may provide differential rates of interest, if it chooses to do so."However, there should not be any discrimination from customer to customer on interest rates for similar amounts of deposits," said the RBI Governor.The market gave a thumbs down to the proposal with shares of major lenders State Bank of India, HDFC Bank, Axis Bank, Bank of Baroda, Allahabad Bank falling as much as 2-6 percent. The key banking sector index was down 2.66 percent in recent trade."It will definitely increase cost of funds for banks towards maintaining current account savings account deposit growth," Moses Harding, head of global markets group, IndusInd Bank said. IDBI Bank executive director R.K.Bansal said that he expects the savings rate to rise to 6 percent.Bansal estimates that banks with lower share of savings rate deposits will take a 10-20 basis points hit on margins, while banks with larger share of savings account deposits will see a 40-50 basis points fall.Already banks' cost of funds have gone up after the RBI mandated that banks calculate interest paid on savings deposits on a daily basis while the savings bank rate was last raised by 50 basis points.Savings deposits are a source of low-cost funds for banks, which form 22 percent of banks' total deposit base and 13 percent of savings of the household sector.This makes it a politically sensitive interest rate as savings deposits are held largely by households, particularly in rural areas where financial literacy is not widespread.New age private banks are likely to aggressively move now to mop up low cost deposits, which traditionally has been the prerogative of the larger banks.(Agencies)
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The government on Tuesday raised the housing loan ceiling for availing one per cent interest subsidy to Rs 15 lakh from existing Rs 10 lakh, a decision that will benefit borrowers by up to Rs 14,865 per annum.A meeting of the Union Cabinet approved the proposal to give one per cent interest subsidy for home loans of up to Rs 15 lakh provided the actual cost of the house is not exceeding Rs 25 lakh.Under a scheme introduced in 2009, home loan borrowers are getting one per cent interest subsidy on home loans of up to Rs 10 lakh, provided the cost of the house did not exceed Rs 20 lakh."A budgetary provision of Rs 500 crore has been made for the financial year 2011-12 for implementing the scheme," the Minister of State for Information and Broadcasting Ambika Soni reporters after the Cabinet meeting.With the increase in housing loan ceiling, the limit of subsidy for an individual borrower would go up to Rs 14,865 per year for a loan of Rs 15 lakh on reducing balance basis from the present limit of Rs 9,910 for a loan of Rs 10 lakh, Soni said.The government has designated the National Housing Bank as the nodal agency for implementing the scheme both for scheduled commercial banks and housing finance companies, the minister said.Finance Minister Pranab Mukherjee in his Budget Speech this year had announced liberalisation of the existing scheme of one per cent interest subvention on housing loans.The existing scheme of one per cent interest subvention of housing loan up to Rs 10 lakh provided the cost of the housing unit does not exceed Rs 20 lakh was approved by the Cabinet in September 2009, she said.The scheme provides interest subsidy on housing loans as a measure to generate additional demand for credit and to improve affordability of housing in the lower and middle income groups, Soni said.Earelir the Reserve Bank and NHB were designated as nodal agencies for implementing the scheme for scheduled commercial banks and housing finance companies, respectively. (PTI)
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Non-bank finance companies categorised as infrastructure finance firms will be now allowed to issue long-term bonds to foreign institutional investors, market regulator Securities and Exchange Board of India (Sebi) said on Friday.The total cap for foreign investors to buy corporate bonds under the long-term infrastructure category was raised by $20 billion to $25 billion in February.It had been earlier reported that the government is in talks with the Reserve Bank of India (RBI) and stock market regulator to allow infrastructure finance companies to issue bonds to foreign investors, four sources with direct knowledge told Reuters on Wednesday.Allowing foreign investors to buy such bonds is intended to increase funding available for big-ticket projects such as roads and power plants in India, where inadequate infrastructure drives inflation and acts as a brake on growth.India requires infrastructure investment of $1 trillion over the five years beginning April 2012, the government estimates.In its budget in February, the government raised by an additional $20 billion, to $25 billion, the limit on foreign institutional investment in corporate bonds of duration longer than five years issued by companies in the sector.Now, New Delhi is contemplating expanding the definition of eligible issuers to include infrastructure finance firms."There is a suggestion from the ministry of finance for relaxing the definition of infrastructure companies so that infrastructure finance companies can be included," one of the officials told Reuters.So far, just $500 million to $600 million of the existing quota for foreign institutions has been used up by FIIs due to the restriction, dealers said. Part of the sluggish interest results from lack of supply from top-rated issuers, they said."How do you raise money in this choppy market? This is a big question. The sector requires huge funds. So we have suggested any company registered as an infrastructure finance company should be allowed to issue such bonds," said a second official.Many infrastructure finance companies, including Power Finance Corp, Rural Electrification Corp and Indian Railway Finance Corp, are frequent issuers of bonds but foreign institutions are not allowed to buy such bonds under current rules. (Reuters)
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For big conglomerates and corporates hoping to get into the banking business, the wait just got longer. Corporates like Tatas, Birlas, the Anil Ambani group, Religare, Bajaj and Muthoot group among others, will have to wait longer for a banking licence after the RBI governor D. Subbarao raised a reg flag over handing out the much-anticipated licences. This came just days ahead of the scheduled release by RBI of the draft proposal on the entry of a new set of private banks into India's Rs 64-trillion banking industry. A discussion paper was floated last August and the RBI has received a lot of feedback.The Governor further said the RBI had already sent the draft amendment to the government, which was working on it. While the guidelines will be issued shortly, the amendment to the Banking Regulation Act is uncertain.Subbarao said though admittedly the strongest reason to allow corporates to get into banking was their easy access to large capital, the issue of 'self-dealing'— the fear that corporates will use the bank as a private pool of readily available funds — made him raise the red flag.For example, the Banking Regulation Act expressly prohibits banks from lending to directors on the board and to entities in which they are interested. Regulations also prohibit lending to relatives of directors without the prior approval or knowledge of the board. Directors, who are directly or indirectly interested in any loan proposal, are required to disclose such interest and to refrain from participating in the discussion on the proposal."There are still gaps," the governor said while addressing the Ficci-IBA summit in Mumbai earlier this week. This could be the first time the RBI has openly expressed its apprehensions about handing out new licences.Another apprehension that was raised during the public debate on the Discussion Paper was that it is not easy for supervisors to prevent or detect self-dealing because banks can hide related party lending behind complex company structures or through lending to suppliers of the promoters and their group companies, Subbarao said.There is a need for changes in statutes and regulations to address these concerns, he said.Although most bankers maintain that bringing in new banks will provide more competition to the PSU banks to up their ante when it comes to servicing, it remains to be seen how the corporates themselves react to this admission from the country's top most banker himself.
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Not too long ago, fund managers didn't talk about macroeconomic issues; most focus on stock market liquidity, net asset values and the Sensex (or the Nifty Fifty), not interest rates, the fiscal deficit or global economic crises. But increasingly, fund mangers have started looking at interest rates, credit market conditions and levels of public debt, in an attempt to better understand what drives capital flows into different asset classes. Take food inflation, for instance. Though it moved above 10 per cent for the week ended 6 October, Suyash Choudhary, Head-Fixed Income at IDFC Mutual Fund, feels 25th October would be the last time Reserve Bank of India would hike rates by quarter per cent and eventually pause following the slowdown in the economic activity. Talking to Businessworld's Mahesh Nayak he personally favours investing his moolahs in equities as he sees these are good levels to enter equities for the long term. While he sees short-end rates having peaked, his funds are investing in corporate bond with maturity of 1-3 years. Excerpts from the conversation: What are you expecting from Reserve Bank of India's (RBI) monetary policy on the 25 October 2011? And why?We are assigning an even possibility of a pause or a 25 bps hike. The RBI has been concerned with inflation remaining sticky at elevated levels. While momentum on inflation seems to be weakening, the print is still expected to be above 9 per cent for the months of October and November. Managing expectation in light of this may prompt another rate hike. Though on the other hand, there are compulsive reasons to pause. Global uncertainties have picked up further over the last couple of months. Domestic data continues to show that economic activity is slowing down. Finally, the lagged effect of previous rate hikes is yet to fully take hold. Importantly from RBI's stand-point, pausing now may not necessarily mean a reversal of stance. The central bank can make it clear via its communication that it is pausing to assess the effect of previous hikes in context of an uncertain global environment and may resume hiking down the road if inflation dynamics so warrant. Are we at the fag-end of rate hikes and why?Yes, in our view we are approaching the end of the tightening cycle. GDP growth this year and next will very likely print below the assessed current trend rate of 8 per cent. This should ensure that demand pressures continue to weaken. As the full effect of previous rate hikes gets felt in economic activity, this phenomenon will become more visible. Additionally, global growth is also facing a period of exceptional uncertainty which is likely to continue into the next year as well. This would tell on domestic growth as well. Market is expecting the 10-year government securities yield to touch 9 per cent. What is your take on the 10-year G-Sec yields and why?There have been two triggers for government securities (G-Sec) yields this year. The first was the expected additional bond supply much, if not all, of which has already fructified. This has caused the sharp rise in yields over the past few days. The other trigger is the anticipation of RBI's bond purchase which is very likely to happen before the end of calendar 2011. On its own, banking system liquidity will head towards negative Rs one lakh crore by mid-November or so on account of rise in currency with public. In order to bring it back towards its stated comfort zone of 1 per cent of net demand and time liabilities (NDTL) of banks, the RBI will have to infuse liquidity via purchase of bonds from the market (similar to what happened last year). This should provide some support to bond yields. Hence, even if 10 year G-sec yield were to touch 9 per cent, we do not anticipate that it will remain there for a long period of time. Near term direction for G-sec yields would depend upon RBI's rate decision on 25th October and the timing of its open market purchase of G-Sec's. However, over the medium term (6 months) we expect yields to be lower than current levels as market starts anticipating change in monetary policy stance towards early next financial year. Despite the system flooded with liquidity, why are bankers craving for more returns on their money—at least this comes to be seen from the latest RBI auctions. What is your view and why?With the additional borrowing amount, the net supply (excluding bond maturities) for second half of the year stands at Rs 2.05 lakh crore which is higher than the first half net supply of Rs 1.9 lakh crore. Given that second half is busy season on credit, demand for credit is expected to be higher than first half (though not as much as second half last year, as off take itself is slowing). Hence, banks may not be as keen buyers of government bonds as in the first half of the year, especially also as they have already built up significant excess SLR positions (over and above the mandated 24 per cent of deposits). The same is getting reflected in latest RBI auctions. In times of uncertainty where will you advice investors to invest? Currently where are you investing your money? And why?Asset allocation as a principle should serve investors, especially in times of uncertainty. So depending upon the risk profile of the investor, a mix of asset classes should be looked at. Fixed income and equities are two different asset classes with different risk versus reward profiles. While it is true that often fixed income gets looked at as a ‘defensive' option when one is not investing in equities, we believe that the right approach is to look at each asset class proactively in order to arrive at a desired composite risk versus reward profile on investments. In line with an endeavour to practice what I preach (!), I am asset allocated across fixed income and equities. At this juncture I am somewhat favouring equities for incremental allocations given that my personal judgement is that these are good levels to enter equities for the long term. This is also in line with the composite risk versus return profile that I am seeking on my investments. Is the fund house seeing a flow of money in to the fund house? How much of it is coming into fixed income and in which schemes? Institutional flows into money market funds have stagnated somewhat. This is a function of available investable surpluses with institutional clients. However, flows into other products like the short term fund have picked up significantly as the case for taking some duration risk has become quite compulsive. As a fund manager how are you managing the money in your portfolio and where are you investing in this market?We have had a view since March that short end rates have peaked and that the yield curve would incrementally steepen. The basis for the view was that, apart from expected rate hikes and system liquidity deficit, a major trigger for short end rates to rise was a sharp rise in credit to deposit ratio of banks in the last quarter of calendar year 2010. Owing to higher deposit rates since January – March quarter, we found that credit to deposit ratios had stabilised in that quarter and expected them to fall subsequently. We believed this would protect short end rates from rising much further despite incremental rate hikes from the RBI. Hence we have favoured the ‘front end' of the corporate bond curve (1 – 3 years). In line with our expectation, the yield curve has incrementally steepened. Thus, while the curve was inverted in March, it is almost flat now. We believe that this process will continue in the future as RBI pauses soon on rates and credit demand continues to slow relative to deposit growth. Hence, we remain of the view that the most compulsive trade is that of curve steepening and accordingly continue to favour investments in the 1 – 3 year segment of the corporate bond curve. We see the yield curve will continue to steepen over next year or so.
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The rupee was stuck in a narrow range on Friday as caution before US Federal Reserve head Ben Bernanke's speech around 7:30 p.m. kept traders on the sidelines.European shares and the dollar fell on Friday, with markets playing down chances of a major shift towards further economic stimulus from US Federal Reserve chairman Ben Bernanke later in the day.* Negative local shares and a ranged euro also offset comfort from positive Asian peers to hold back the rupee, traders said.* Now, while some traders hope new steps will be announced by Bernanke in his speech at Jackson Hole, Wyoming, to help achieve lift-off for an economy that is stuck on the runway, it is likely that he may only outline gradualist moves.* At 2:14 p.m., the partially convertible rupee was 46.06/07 to a dollar, little changed from Thursday's close of 46.04/05.* The euro was at $1.4435 from $1.4438 at the end of local forex trade on Thursday, while the index of the dollar against six major currencies was down 0.45 percent at 73.944 points, but higher from 73.961 points previously.* The local benchmark share index was down 0.87 down after rising 1 per cent in opening trades.European shares and the dollar fell on Friday, with markets playing down chances of a major shift towards further economic stimulus from US Federal Reserve chairman Ben Bernanke later in the day.Bernanke was to speak later in the day at a Fed conference in Jackon Hole, Wyoming.A year ago in the same place, he opened the door to a second round of quantitative easing. Although there was some belief that he would announce a third round of asset buying this year, he is not now expected to come up with a fresh dose of shock treatment for the ailing US economy.He is expected rather to acknowledge his disappointment over the pace of growth, possibly downgrade his outlook, and explain which medicines left in the Fed's cabinet are best suited to fortify the economy.The uncertainty about what is to come has put many investors in a cautious frame of mind."With many traders feeling like we're standing on the edge looking down into a global recession, Bernanke has the ability to significantly elate or deflate the markets today," said Jonathan Sudaria, dealer at Capital Spreads.World stocks as measured by MSCI were flat.The pan-European FTSEurofirst 300 lost 0.9 per cent, although an extension of a ban on short selling of financial shares and related derivatives was seen supporting hard-pressed banking stocks.Earlier, Japan's Nikkei closed up 0.3 per cent.Waiting For BenThe dollar eased as investors shuffled positions ahead of the Wyoming speech. Some traders expected the greenback to stage a short-term bounce if Bernanke does not signal further monetary stimulus.The euro edged higher against the dollar while higher-yielding currencies such as the Australian and New Zealand dollars also advanced."If Bernanke signals he is likely to be less accommodative about providing liquidity, we could see the dollar recover and depending on how Wall Street reacts to that, we could see some flows into the greenback," said Roberto Mialich, FX strategist at Unicredit."On the other hand, if he signals that he is ready to act and provide more support, then the dollar will weaken. If he says he is ready to act but not right now, I don't think the markets will be too disappointed."Core euro zone government bonds were flat.(Reuters)
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Warren Buffett showed again that his name and money is enough to give a struggling company instant credibility in the market. But the legendary investor also demonstrated his canny command of that reputation means that such deals can immediately generate profits.Bank of America Corp on Thursday said Buffett's Berkshire Hathaway would invest $5 billion in the bank, the largest by assets in the United States.Buffett, known for his grand gestures and his calls to buy American assets, may have looked like he was a lender of last resort -- or at least a lender of last credible resort -- but he was also turning a hefty profit, experts said."He's not doing it out of charitable motive or even out of a concern for the safety and soundness of the financial system," said Robert Reich, who served in three US governments, most recently as secretary of labor under President Bill Clinton."He's got a lot of shareholders and they depend upon him to maximize the value of their investments," said Reich, now a public policy professor at the University of California Berkeley.Bank of America's shares had been sinking on worries that it might need a massive injection of capital, a major concern given the importance of the bank to the American financial system.Buffett is buying preferred shares and receiving warrants. The deal guarantees Berkshire $300 million a year in dividends and offers a chance for huge returns if the stock climbs.At one point on Thursday the shares climbed 25.8 per cent. By the close those gains were trimmed back to 9.4 percent, but Berkshire was still sitting on a paper profit of nearly $3 billion.Berkshire Class A shares closed down 2.8 percent at $103,415 on Thursday, while its Class B shares closed 2.5 percent lower at $68.99.'Not Altruistic'In many ways, Buffett has perfected the art of swooping in at the last minute when he thinks an American icon is undervalued and has hit troubled times.Back in the late 1980s, Buffett purchased a stake in Salomon Brothers and even temporarily stepped in as chairman after a trading scandal threatened the company.The investment was ultimately profitable but for a while looked like it could turn into a bankruptcy, the inside story of which was described in an October 1997 Fortune magazine article.Since then, Buffett has continued to profit on financial stocks.During the 2008 financial crisis, he invested $5 billion in Goldman Sachs Group Inc and $3 billion in General Electric Co.Buffet got a 10 percent dividend on each of those investments.The investment in Goldman famously earned him the equivalent of more than $15 in dividends each second, or $500 million per year.In March, Goldman said it would buy back its preferred stock from Buffett at the agreed upon 10 percent premium.GE, which also has an agreement with Buffett that includes a 10 percent redemption premium, plans to buy back its shares in October. By then, dividends will have topped $900 million.In the Bank of America deal, the annual dividend may only be 6 percent, but that isn't bad at a time when an investor can only get a 2.2 percent yield on a 10-year Treasury note or next to nothing from a bank deposit or money-market fund."Mr. Buffett is a very shrewd investor and is not altruistic at all. The terms he gets are very favorable to him," said Richard Bernstein, former chief investment strategist at Merrill Lynch and current CEO of investment advisory Richard Bernstein Advisors."Too bad the government didn't do the same with TARP. Taxpayers got ripped off in comparison to the terms Mr. Buffett got," Bernstein said in an e-mail referencing the U.S. government's bank rescue plan, the Troubled Asset Relief Program, which was introduced in 2008.Buffett has shown he won't invest in a storied name just because it is in trouble, though. He turned down pleas from Lehman Brothers then-CEO Dick Fuld for an injection of capital before it collapsed.Powerful PlayerFinancial experts said Buffett at times may almost seem as powerful a player in financial markets as the government or the Federal Reserve."Warren is not the Fed and is not a branch of government, but he comes about as close as any private individual can come to having the power of public policy," Reich said.Mark Zandi, Moody's Analytics' chief economist and former adviser to 2008 Republican presidential candidate John McCain, said a lot of it has to do with confidence."Our most serious economic problem at this point in time is a lack of confidence. We've lost faith in our economy and I think (Buffett) is working really hard to shore up confidence."(Reuters)
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The government has freed Indian promoters of insurance companies to cut equity stakes to 26 per cent within less than the decade previously required, a senior finance ministry official said on Thursday, marking a step set to hasten industry consolidation."An Indian promoter can scale down its equity up to a level of 26 percent at any time after registration under the Act," S.K. Mohanty, an official of the finance ministry's department of financial services, said in a letter, a copy of which was obtained by Reuters.When contacted, Mohanty confirmed the letter, but declined further comment.The move, long sought by industry, could clear the way for a deal by Reliance Life Insurance, a unit of Reliance Capital, to sell a stake of 26 percent to Japan's Nippon Life Insurance Company for $680 million.The deal had hit a hurdle as Reliance Life had not yet completed the 10 years necessary for its promoters to dilute their stake.Current rules allow insurers to offer a stake of 26 percent to a foreign partner at the time a joint venture is incorporated. But an insurance firm wholly-owned by an Indian promoter had to wait 10 years to induct a foreign partner.The foreign direct investment limit would remain at 26 percent in Indian insurance firms, the ministry circular said, adding that the decision was made after talks with the Ministry of Law and the insurance regulator."The Indian promoter shall reduce its equity to a level of 26 percent after 10 years, if not done earlier, in a phased manner, for which rules are being issued," it added. (Reuters)
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