Banks continue to park surplus funds with RBI, earn profits of 50-100 basis points a day

Last week the Reserve Bank of India (RBI) had cut reverse repo rate by 25 basis points, the funds which banks park with RBI. In spite of the cut the options seems to be attractive among the banks.

Banks, especially Government owned, borrow against their excess holdings of government securities at a lower rate under Clearing Corporation’s Collateralized Borrowing and Lending Obligation (CBLO) mechanism and invest these funds at a higher rate with RBI.

By doing so banks are making profits of 50-100 basis points a day.

For instance: On Monday a bank borrows against its surplus government securities holding at the biased average interest rate of 2.72 per cent under CBLO and invest funds at RBI’s Reverse Repo (R/R) window at 3.25 per cent. Therefore bank makes gain of 53 basis points (100 basis points equals 1 per cent) in just a day.

However CBLO is a discounted money market device which allows banks and other market participants to borrow and lend funds via electronic book entry. It inflicts a responsibility on the borrower/lender to return the money borrowed/receive the money lent, at a specified future date. The principal charge on securities is held back (with CCIL) for the amount borrowed/lent.

As per banking sources, the central bank on April 21 had reduced the reverse repo rate with an aim to encourage banks to lend to the productive sectors of the economy. But, due to slack credit off take, banks with surplus Statutory Liquidity Ratio (SLR) portfolio are making the most of the arbitrage opportunity due to differential in the interest rate between CBLO and RBI’s R/R window.

In spite of the reverse repo rate cut, during the last four working days after the RBI’s rate cut, banks, on an average, have invested around Rs 1 lakh crore daily with the RBI.

As of March-end 2009, listed commercial banks’ investment in Statutory Liquidity Ratio (SLR) securities — the segment of net demand and time liabilities (NDTL) that banks have to park in government securities has increased to 28.1 per cent from 27.8 per cent a year ago.

As per RBI records Banks, as of March-end 2009, were holding excess government securities worth Rs 1,13,817 crore or 2.7 per cent over the prescribed SLR of 24 per cent of NDTL.

In view of that at the beginning of April CBLO has witnessed rates as low as 0.50 per cent, thus banks would have made a huge earning a clean return of 3 per cent in just a day.

A senior public sector bank official explained, “Feeble credit offtake coupled with the fear of bad loans going up in the current scenario of economic slowdown is prompting banks to park their surplus funds with the RBI. Not many bankable loan proposals are coming our way. So, it’s a Hobson’s choice for us.”

As per RBI’s statistics, scheduled commercial banks have together disbursed Rs 1,429 crore in the fortnight ended April 10, 2009. This, bankers believe, is an indication of a slowdown.

Market players believe that banks continue to flood the central bank’s reverse repo window with surplus liquidity in spite of the cut in the interest rate, therefore the regulator might move to limit surplus funds the banks park by imposing a cap.

RBI recommends uniform formula for restructured loans

The Reserve Bank of India has formulated a uniform formula to work out the reduction in fair value of restructured loans.

Reduction is the cut down value of loans that have come for restructuring.

Banks rate restructured loans differently in different economic cycles. This is because the reduction or depreciation in rate generally linked with the universal rise in the interest rates in the economy.

The formula was particularly required due to higher provisioning because of rise in the rate of interest during last few years which added to the financial difficulties when banks’ margins were already under stress because of the current downturn.

Thus, the RBI analyzed that the formula can be modified in such a way that the changes in fair value of the loan credited to the changes in market interest rates are not taken into account while calculating the reduction.

RBI rule

Last month the Reserve Bank of India had directed the banks to consider floating provisions as part of tier capital II instead of deducting them to arrive at net NPA position for the financial year ended March 2009. But on Thursday RBI postponed the implementation of rule that prevents banks from deducting floating provision (made for non-performing assets) from the Gross NPAs for the financial year 2009-10.

RBI formulate directives for PSU banks to get CBI nod for settlement of bad loans

For the one-time settlements of bad loans where criminal proceedings are underway the Reserve Bank of India (RBI) will soon issue new directives. Under these directives RBI has made it compulsory for all the public sector banks to attain clearance from the Central Bureau of Investigation (CBI) in bad loan cases involving criminal proceedings.

According to RBI sources, the central bank is ready with the new directive following a CBI proposal to this effect.

The sources informed few instances have come in the lime light where CBI had carried out prosecution against a company or an individual and it was found that those involved in bad loans had already made one-time settlements with their banks and got in writing from the lenders that all criminal proceedings against them had been withdrawn.

In one of such case, CBI had prosecuted a businessman for fake while obtaining loans from a public sector bank. Later, on investigation the agency found in the Supreme Court that the bank had made a one-time settlement for Rs 400 crore against Rs 525 crore and also given in writing that all criminal proceedings against him were withdrawn.

After this incidence CBI approached the bank through the Central Vigilance Commission (CVC) and a meeting with the Chairman and Managing Directors (CMDs) of the six public sector banks was held. In the meeting it was decided that the RBI would be approached for issuing such a circular to all the banks, making it compulsory for them to attain CBI clearance wherever a criminal case was pending.

In the meeting, it was pointed out by CBI that its corruption cases were pending in courts after banks reached out-of-court deals with individuals and corporate houses through one-time settlements.

The meeting was attended by Managing Directors of Punjab National Bank (PNB), State Bank of India (SBI), Bank of India (BoI), Bank of Baroda (BoB), Union Bank and Canara Bank.

The bank officials have been asked to restructure the one-time settlement mechanism, as well reframing their list of members comprising lawyers and property evaluators.

Cooperative bank to pay penalty of Rs 5 lakh imposed by RBI

Sonepat Urban Cooperative Bank has to pay a penalty of Rs 5 lakh for violating norms of the RBI. The penalty has been imposed by the Reserve Bank of India (RBI) for selling-cum-releasing the SLR investment bonds to the customers in violation of the norms laid down by the RBI in this regard.

As per information provided by official sources RBI has also issued a show-cause notice to the bank in which it has been asked as to why action should not be taken against the officials on the issue as they had violated the rules and norms laid down by it.

According to official sources the cooperative banks are free to sell of release only 10 per cent bonds the limit fixed by the RBI but the bank has violated the rules and norms of the RBI by selling or releasing 15 per cent bonds.

RBI cut in key rates to bring down interest rates on loans

It is expected after the Reserve Bank of India decision to cut key rates will again bring down the interest rates on loans for homes, cars and other kinds of consumer finance. The interest rates are expected to come down by another 0.5 percentage point following.

As per the sources of RBI the repo rate, the rate at which it lends short-term funds to banks, and the reverse repo rate — which it gives on funds parked by banks with the central bank — would be cut by 0.5 percentage point with immediate effect. After the reduction the new repo rate will be 5% and the reverse repo rate 3.5%.

Banks, till now have been aggressively cutting down rates have indicated that after the announcement they would pass on the RBI’s cuts to customers in the form of fresh reduction of interest rates. Moreover they will also be cutting down the interest rates on deposits by a corresponding amount.

UCO Bank chairman and managing director S K Goel stated, ‘‘Banks will soon decide to cut rates, which should help in reviving the economy’’. A senior official of ICICI Bank supported this view.

In the past, banks have occasionally cut rates for new borrowers without changing the rate paid by existing ones. But this time, banks are going to offer benefits to the old customers on floating rates. This will be possible as banks will perhaps cut their prime lending rates (PLR), to which the floating rate is benchmarked.

Currently home loan rates are around 10% for most public sector banks, and the private sector banks are maintaining rates of 11-12%.

SBI has emerged as the most hostile player by announcing a special scheme under which new home loan borrowers are being offered an 8% rate. Most likely after Wednesday’s announcement, other banks might use the opportunity to come closer to the SBI rate.

RBI organize campaign to educate school students about fake currency notes

To develop awareness amongst students about the fake currency notes, the Reserve Bank of India (RBI) launched an awareness campaign in late 2008 for the school students of urban as well as rural areas.

RBI launched the campaign under the financial education initiative program for school kids.

According to RBI figures the value of fake currency detected in 2007-08 at Rs 5.5 crore, a 137% increased on Rs 2.4 crore the previous year.

As per Delhi police sources, "In the last year we have seized fake currency worth roughly Rs. 5 lakh".

The campaign has been launched in 11 other regional languages besides English and Hindi. To make easy for students to understand various currency denominations posters are being used during the campaign.

In the campaign children are educated on how to differentiate between real and fake notes. To make easy young minds receptive essays, games and films are being used.

The RBI conducted online 100 all India scholars test for college students. The selected college students are also adopting three to five schools and making presentations on financial literacy.

R Gandhi, RBI's regional director, said, "The rise in the cases of bogus currency being detected is one of the reasons which encouraged RBI to include this sensitization and awareness program among school children."

According to sources the program will gain momentum once the board exams are over. After school students the campaign will be organized for College students.

RBI to switch to macro-prudential approach from micro-regulations regime

The Reserve Bank of India (RBI) will be renewing its regulatory stand for this it is planning to shift from a micro-regulations regime to a macro-prudential approach

The central bank's policy main focus will be on recurring which help it in dealing with recession.

Addressing a banking seminar in Mumbai, RBI executive director, Anand Sinha said, ''The policy (approach) needs to be modified from micro prudential to macro-prudential. The work is going on ensure that policies do not reinforce a downturn.''

Sinha told that across the world central banks have adopted the stance since the crisis.

He further added besides focusing on counter-recurring measures, the central bank will also take in consideration issues like compensation policies and the treatment of unregulated entities.

Sinha informed that the central bank will continue using both conventional and unconventional tools to maintain sufficient liquidity in the banking system.

He told that the country's economy is well protected from the current global disorder by the well-regulated banking industry and central banks across the world are working to avoid such a situation in future.

Sinha notified that banks should aim on capital-building in normal times; as they require more capital to survive in times of economic difficulties.

Speaking about loans he said that the reserve bank will prefer that banks should streamline loans, especially to small industries. He said that rather than looking for relaxation in non-performing assets norms, banks should be given more time for streamlining such loans.

RBI deputy governor Usha Thorat had expressed similar observations recently when she said that banks should set more time to restructure their loans to micro, small and medium enterprises (MSMEs). This would help in a win-win situation for both banks as well as customers.

The Indian overnight cash rates ended flat on Monday with lower second week reporting cycle demand for funds. However most of the banks have sufficient funds to meet reserve requirements.