RBI proposes to ease bad loan norms for small firms

Export demand dropped significantly as recession hit the US and Europe. The small and medium sector had to face crisis due to this but now they might be able to get some relief from the banking industry.

The Indian Banks' Association and the Reserve Bank of India together are planning to allow easier restructuring of their non-performing assets by giving them a longer timeframe for repayment of debt.

Besides, a high-level committee will be setup by the government to review the situation and come up with guidelines to improve the sector, which generates large-scale employment.

The committee will be looking into the problems responsible for the slowdown and liquidity crunch, which have led banks to tighten their lending activities. The committee is also likely to act as a link between various ministries including finance and commerce.

In a recent meeting with Prime Minister Manmohan Singh, small and medium enterprises representatives had informed that banks have shown unwillingness in lending to the SMEs, which typically have low credit ratings.

As per the official data available, during the first six months of the current fiscal most banks have shown a deceleration in SME advances. In the April to September, state-run banks like the Central Bank of India and the State Bank of Bikaner and Jaipur have actually faced a negative growth in SME advances.

Anil Bhardwaj, secretary general, Federation of Indian Micro and Small & Medium Enterprises (Fisme) informed that a large number of these small enterprises are facing closure due to the global and domestic situation.

Fisme, in a letter to the Prime Minister, has informed that slowdown has resulted in repayment defaults by these enterprises.

RBI to grant approval for Banks foreign branches for structured products

Now the foreign branches or subsidiaries of Indian banks that plan to deal in structured financial products will be required to get prior approval from the Reserve Bank of India (RBI). This measure has been taken with regard to regulate overseas operations of Indian banks.

RBI has also elucidated that banks that are dealing in simple financial products do not require taking prior approval. The central bank’s measure is proposed to regulate the activities of foreign branches or subsidiaries of Indian banks, which to date were mostly controlled by the host country’s regulations.

As per this move, known as cross-border supervision, will require foreign branches or subsidiaries to provide full particulars of these products, including their regulatory treatment involving capital adequacy, valuation, pricing, exposure norms and the like as prescribed by the host country’s regulator.

According to banking sources RBI has extended its control over products and activities of foreign branches and subsidiaries of Indian banks following the requirements made by the banks for their exposure to planned products in subprime-hit markets of the United States and the United Kingdom. Structured products are exotic derivatives products.

Following subprime crisis — which broke out due to high defaults on personal or home loans offered to less credit-worthy borrowers for higher returns — foreign branches of several public sector and private banks were forced to make provisions for their exposure to structured products, like credit-linked notes or credit derivatives.

Credit derivatives are means wherein the primary assets are loans or bonds. If the value of the underlying loan or bond decreases, it will affect the profitability of banks as banks need to make a provision for the loss in their books to the extent of the fall in the value of the underlying loan or bond.

However ICICI Bank has reported an exposure of $1.5 billion to credit derivatives, other banks with exposure to such products are State Bank of India ($1 billion), Bank of India ( $300 million) and Bank of Baroda ($150 million).

On the other hand Bank of Baroda has offered around Rs 242 crore for exposure to structured products overseas, Bank of India has set aside Rs 161 crore. Earlier during the quarter (July-September 2008), ICICI Bank had made a stipulation for around $78 million for the investment portfolio of its UK subsidiary, which resulted in the operations of the arm reporting a loss of $35 million.

In April this year RBI in its annual monetary policy had mentioned about the cross-border supervision to control operations of Indian bank’s foreign branches. At present, the Banking Regulation Act, 1949, is administering most of the banking activities in India, whereas the overseas operations are guided by the host country’s regulations. At the time of final audit of the banks RBI gets reports of overseas operations.

RBI relaxed lending norms for tier-II urban co-op banks

The Reserve Bank of India (RBI) announced relaxation in the lending norms for tier-II urban co-operative banks (UCBs), under which it will become easier for them to lend to commercial real estate and non-banking finance firms (NBFCs).

Under the relaxation the central bank has streamlined and reduced the standard asset provisioning requirements for tier-II UCBs from 1 to 2 per cent earlier to 0.40 per cent across sectors. It has also reduced risk weights on lending to various sectors.

But it has not touched the provisioning norm in case of direct advances to agriculture and SME sectors are at 0.25 per cent.

As per the circular issued by the central bank, loans and advances to commercial real estate will now attract a risk weight of 100 per cent which was at 150 per cent.

The banking sector regulator has allowed UCBs to fund only asset-financing NBFCs and the risk weight on exposure to such companies remains unchanged at 100 per cent.

The central bank has not touched even the tier-I UCBs, the general provision norms on all their standard assets which are at 0.25 per cent.

Earlier on November 15, RBI had slashed the standard asset provisioning requirements of banks lending to NBFCs to 0.40 per cent from 2 per cent, leaving the direct advances to agriculture and SME sectors, where the provisioning requirement remains at 0.25 per cent.

Likewise, the central bank has also reduced banks’ risk provisioning for commercial real estate loans to 100 per cent from 150 per cent.

Debt to income ratio: Its Basic and Types

If you are planning to avail a new loan, it is important that you check your debt to income ratio. Lenders can also ask for debt to income ratio before offering funds, to ensure that the borrower will be able to repay the loan amount.

What is debt to income ratio?

Debt to income ratio is an estimate in which the percentage of a person’s monthly gross income is calculated that is used in paying debts, certain taxes, fees, premiums and more. This calculation not only helps the borrower to keep a track of his budget but also allows the lender to understand if the borrower will be able to pay back the loan money.

What are the types of debt to income ratio?

There are 2 types of debt to income ratio: front ratio and back ratio. Front ratio means calculating the percentage of an individual’s monthly income that is used in paying house rents, mortgage loans, insurance premiums, property taxes etc. On the other hand, back ratio means the percentage of monthly income that is used in paying debts, credit cards, child support payments, alimony and legal matters.

What is the need of DTI?

Debt to income ratio is equally important as the credit score. It helps consumers to maintain a monthly budget according to his income and expenditures. In this way, it becomes easier for the consumer to repay his debts systematically. If an individual’s DTI ratio is higher, it means he has more debt payments to make.

Calculating your debt to income ratio is easy. Follow the 3 steps given below to know your DTI ratio:

• Add up your net monthly income
• Add up the total amount you pay for debts every month
• Divide the debt amount by the income amount and you get your DTI ratio

As you know your DRI ratio, implement a proper budget accordingly and lead a stress free life.

ATM network expansion plan well on track

The Reserve Bank of India’s (RBI) has decided to make ATM usage free from April 2009 and with this India’s largest ATM machine manufacturer is well on track.

A senior official of NCR Corporation told that there has not been any significant slowdown in the sales as compared with large banks recently. Fears of forthcoming slump and resistance from some banks to co-operate with RBI’s plan have led to market assumption that ATM infiltration would hit the table in the coming months.

While speaking on the sidelines of a press conference NCR Corporation India MD India area Pradeep Sen said, “We have not seen any significant drop in demand from banks for ATM machines”.

“Embracing technology is perhaps the best way to acquire new customers for banks, especially since there is still demand for cost-efficient solutions in the market,” he added. Nevertheless, he warned that in case the demand slipped down drastically from here, then things can worsen any moment.

Earlier in the last year, large number of banks had opposed RBI’s proposal to phase out all ATM fees by April 2009 and gave the reason that they have made huge investment to build the network, and the proposal will effectively hand over this platform for free to other banks. But banks slowly appeared to be falling in line with RBI instruction and sticking on to their aggressive ATM infiltration targets, at least, as of now.

HDFC Bank country head of retail liabilities Rahul N Bhagat informed that his bank has not made any changes in the target for either banks or ATMs in the coming months. In a recent press meet, a SBI official, too, had hinted that the bank will be sticking on to its target of increasing ATMs from the existing 7,200 to 25,000 within three years. Four banks — SBI, ICICI Bank, HDFC Bank and Axis Bank — together make up for more than 60% of the 35,000-ATMs in India.

According to Mr Sen the ATM sharing proposal should not stop banks from setting up their own ATMs. He pointed out that banks will have to pay fees for using somebody else’s services. As well the all important brand visibility is at risk when you allow a customer to visit a competitor’s ATM. “There’s a trade off between the costs of setting up an ATM and these two factors,” he said.

According to market experts ATM is one of the easiest ways by for the banks to contribute to financial inclusion (59% of rural India does not have financial assistance). According to them when the cost of setting up a branch is high and prospects of business are uncertain, banks should do best to make use of technology like ATMs.