The Reserve Bank of India (RBI) has raised serious concern over banks discriminatory retail loan pricing and has asked them why they are not passing the benefit of lower interest rates to the existing borrowers.
Last month, relating to this matter RBI issued a letter to the customer service department of the Indian Banks’ Association. In the letter the central bank has raised issues such as discriminatory pricing by banks for old and new customers and also raised concerns over teaser rates. The IBA has not sent a reply. An executive informed the matter will be discussed in the next management committee meeting.
A senior RBI official asked, “When the floating rate goes up, banks send notices to borrowers regarding the increase of equated monthly installment. If interest rate falls, then why do they not reduce?”
RBI said such discriminatory practices are totally against the principle of basic banking as a utility.
In recent weeks, RBI deputy governors Usha Thorat and K C Chakrabarty have publicly issued the statements showing concern over teaser rates, where the interest rate is fixed for the initial period of a loan and then moves to a floating rate structure and, on extending the benefits of a lower rate to all borrowers.
The banks while putting down the letter, said it was written before the third quarter monetary policy review, currently it is not possible for them to reduce rates for existing borrowers, because when the loans were sanctioned the cost of funds was higher.
Earlier also banks have informed that they cannot cut floating rates for existing customers because their liabilities are short term, with tenure of three to five years. But the regulator had refused to accept the argument put forward by the banks.
“That argument is not valid for the simple reason that all the deposits are not going out after three years. Around 70 per cent of bank deposits get renewed. So, that is permanent in nature. If that is not the case, then what is the meaning of core deposits?… We are asking why you cannot pass on the benefits of reduced rates to existing customers,” the RBI official said.
Regarding the teaser rates, the source said borrowers are being informed about the installment for the initial two or three years, when interest rates would remain fixed, before the loan process.
The official said, “For the remaining 18 years, nobody knows what the EMI (equated monthly installment) will be because it is floating. If it is floating, then it is fixed to what? Is the floating rate is fixed to bank rate, is it fixed to average deposit rate? They have to make it very clear”. RBI also wants to know whether banks worked out the cash flow levels when interest rates were increased.
Last year, State Bank of India was the first one to launch the teaser rates scheme offering a home loan product which had both a fixed and floating rate character. The product got good response from borrowers following which other banks also launched the similar schemes.
An SBI executive told that bank has not lowered the eligibility criteria and is clearly informing about the EMI and other terms to borrowers.
Friday, February 19, 2010
Wednesday, February 17, 2010
RBI express its concern over teaser rates
The RBI deputy governor Usha Thorat told that the central bank has made its viewpoint clear on teaser rates on home loans, and it expects banks to take required action on it.
When asked about further action of regulatory regarding teaser rates, Ms Thorat while speaking on the sidelines of a finance conference said, “Banks should have taken whatever message was given.”
The central bank has communicated its concern over teaser rates twice in less than 30 days. Last month, in the second week of January, Ms Thorat while warning banks had said, “Teaser rates are increasingly being offered which is a cause for concern.”
Last week, another deputy governor, KC Chakravarty had also highlighted RBI’s concern over the lack of uniformity in rates being offered to different customers of the same bank. Under teaser rates the pricing structure of loans is stepped up where banks offer a low fixed rate of interest in the initial years of the loan.
After initial years, i.e. 2-3 years of the disbursement of loan, the bank set the interest rate on the loan to the prevailing rates in the market. As going by this, if the interest rate does not change, the borrower will end up paying a higher rate of interest after the fixed rate period comes to an end. Such promotional offers are more common overseas.
But in India, it is first time the banks have launched such schemes. Banks launched these schemes as credit demand had failed to take off. Although the schemes were launched in early 2009, but as per data the improvement in loans could be seen only after mid 2009.
The annual y-o-y loan growth, in mid –May had touched to around 5%, had increased to over 7% by mid-Novemenber 2009, according to the latest RBI data. This year still the loan growth is low in comparison to the growth registered in the year-ago period during which home loans had registered a growth of 9.1%.
On the other hand RBI’s concern about teaser loans can probably be linked to the crisis in the US sub-prime mortgage market that mounted into a major global crisis which led to the failure of the entire banking system in the western hemisphere.
But the bankers in India think that RBI concern may be uncalled as at the time of processing of loan the repayment capacity is assessed on the overall liability and not on the first year’s rate
Recently many leading lenders, including SBI, ICICI Bank, Canara Bank, PNB and HDFC have launched such special offers with an aim to attract borrowers as the loan demand from individuals and industries has been quite moderate.
When asked about further action of regulatory regarding teaser rates, Ms Thorat while speaking on the sidelines of a finance conference said, “Banks should have taken whatever message was given.”
The central bank has communicated its concern over teaser rates twice in less than 30 days. Last month, in the second week of January, Ms Thorat while warning banks had said, “Teaser rates are increasingly being offered which is a cause for concern.”
Last week, another deputy governor, KC Chakravarty had also highlighted RBI’s concern over the lack of uniformity in rates being offered to different customers of the same bank. Under teaser rates the pricing structure of loans is stepped up where banks offer a low fixed rate of interest in the initial years of the loan.
After initial years, i.e. 2-3 years of the disbursement of loan, the bank set the interest rate on the loan to the prevailing rates in the market. As going by this, if the interest rate does not change, the borrower will end up paying a higher rate of interest after the fixed rate period comes to an end. Such promotional offers are more common overseas.
But in India, it is first time the banks have launched such schemes. Banks launched these schemes as credit demand had failed to take off. Although the schemes were launched in early 2009, but as per data the improvement in loans could be seen only after mid 2009.
The annual y-o-y loan growth, in mid –May had touched to around 5%, had increased to over 7% by mid-Novemenber 2009, according to the latest RBI data. This year still the loan growth is low in comparison to the growth registered in the year-ago period during which home loans had registered a growth of 9.1%.
On the other hand RBI’s concern about teaser loans can probably be linked to the crisis in the US sub-prime mortgage market that mounted into a major global crisis which led to the failure of the entire banking system in the western hemisphere.
But the bankers in India think that RBI concern may be uncalled as at the time of processing of loan the repayment capacity is assessed on the overall liability and not on the first year’s rate
Recently many leading lenders, including SBI, ICICI Bank, Canara Bank, PNB and HDFC have launched such special offers with an aim to attract borrowers as the loan demand from individuals and industries has been quite moderate.
Thursday, February 4, 2010
RBI says: Bank frauds on rise, especially in private sector banks
The Reserve Bank of India has pointed out that there has been increase in bank frauds, especially in the private banks, in comparison to public sector banks. More duplicitous game has been observed in the private banks. Therefore the customers have to be very careful with their bank deposits and banking transactions, particularly with private banks.
It has been observed that crores of rupees are being fraudulently with drawn from bank accounts or are being used deceitfully everyday. In a recent case, recklessness of a bank branch manager was highlighted in sanctioning housing loans for the purpose of flats. During the on spot verification the Central Bureau of Investigation (CBI) conducted on the request of the bank’s chief vigilance officer, it became apparent that the storeyed building was constructed as a hotel.
On further investigation it was found that the branch manager had also sanctioned many other housing loans against fictitious agreements of sale in fictitious names. By the time the investigation was completed the bank had lost around Rs 25 cr.
Mayur Joshi, chair-man of India forensic Research Foundation, a Pune-based consultancy which conducts fraud examination and forensic accounting in India said, "This is an alarming scenario. After all, it is people's hard earned money. Banks the world over keep a tight vigil as any slip will bring them down and even impact the economy."
According to information gathered by the CBI which Sunday ET is also having, bank frauds- investigated by the central investigation body values to around a crore or above – which has doubled in 2008-09 from Rs 659 cr in 2007-08 to Rs 1,404 cr.
The number of such frauds has also increased from 177 to 212. According to a CBI spokesperson "The focus is on expeditious completion of investigation, close follow up of under-trial cases to conclude them without delay." The CBI investigates through different wings like - the Anti-Corruption Bureau, Bank Securities & Fraud Cell and the Economic Offences Wing.
The central bank has also shown its concern over the rising number of frauds. An anonymous senior official of the bank told, "Its high time banks strengthen their fraud management practices. In their bid to quickly expand and grow, they are losing focus on risk control."
The RBI is very well aware of the rising trend. Last year, in September, it had pointed towards the senior management of banks for their failure in maintaining proper risk management mechanism. At that time, it had recommended banks to form a special committee chaired by their CEOs, who can supervise fraud investigation and make monitoring centralized instead of leaving completely to the regional centers.
It has been observed that crores of rupees are being fraudulently with drawn from bank accounts or are being used deceitfully everyday. In a recent case, recklessness of a bank branch manager was highlighted in sanctioning housing loans for the purpose of flats. During the on spot verification the Central Bureau of Investigation (CBI) conducted on the request of the bank’s chief vigilance officer, it became apparent that the storeyed building was constructed as a hotel.
On further investigation it was found that the branch manager had also sanctioned many other housing loans against fictitious agreements of sale in fictitious names. By the time the investigation was completed the bank had lost around Rs 25 cr.
Mayur Joshi, chair-man of India forensic Research Foundation, a Pune-based consultancy which conducts fraud examination and forensic accounting in India said, "This is an alarming scenario. After all, it is people's hard earned money. Banks the world over keep a tight vigil as any slip will bring them down and even impact the economy."
According to information gathered by the CBI which Sunday ET is also having, bank frauds- investigated by the central investigation body values to around a crore or above – which has doubled in 2008-09 from Rs 659 cr in 2007-08 to Rs 1,404 cr.
The number of such frauds has also increased from 177 to 212. According to a CBI spokesperson "The focus is on expeditious completion of investigation, close follow up of under-trial cases to conclude them without delay." The CBI investigates through different wings like - the Anti-Corruption Bureau, Bank Securities & Fraud Cell and the Economic Offences Wing.
The central bank has also shown its concern over the rising number of frauds. An anonymous senior official of the bank told, "Its high time banks strengthen their fraud management practices. In their bid to quickly expand and grow, they are losing focus on risk control."
The RBI is very well aware of the rising trend. Last year, in September, it had pointed towards the senior management of banks for their failure in maintaining proper risk management mechanism. At that time, it had recommended banks to form a special committee chaired by their CEOs, who can supervise fraud investigation and make monitoring centralized instead of leaving completely to the regional centers.
Bankers say: RBI hike of CRR has been a pleasant surprise and a master stroke
Bankers expressing their views on the Reserve Bank of India's move to hike the cash reserve ratio by 75 basis points have said it “has been a pleasant surprise and a master stroke.”
Different reactions were given by high officials of various banks on RBI’s move.
The Executive Director of City Union Bank, Mr N. Kamakodi, pointed out, “The banking regulator has proved that it is acting independently. We all thought unilaterally, but the RBI's master stroke has been in not increasing the interest cost while maintaining its cool on inflationary pressures.”
“Every bank had surplus liquidity throughout the year. So, the increase in CRR would only siphon out the excess liquidity in the system.”
According to Karur Vysya Bank Managing Director, Mr P.T. Kuppuswamy, they were expecting hike in CRR and the market had already discounted it. “It is an appropriate measure,” he said.
Dr V. A. Joseph, Managing Director and Chief Executive Officer, South Indian Bank, while expressing his views said, “Though a hike in CRR was expected, the 75 bps hike is slightly more than our expectation.” However he welcomed the reduction in credit growth targets from 18 to 16 per cent. He further added, “Credit growth differs from bank to bank. The current fiscal has, in fact, been the best year for us, so far as credit growth is concerned. We grew at 22 per cent. And considering the current growth pace, we will be able to achieve 25 per cent growth”.
When enquired how this hike would impact their bottom line, all of them replied, “It will not impact us. The impact if at all would be virtually low.”
Mr Neeraj Swaroop, Regional Chief Executive, India & S. Asia, Standard Chartered Bank said, “The RBI has adopted the right balance for managing inflationary expectations, while supporting a robust economic recovery. The 75 basis point hike in the CRR, the largest-ever increase, is a strong indication of the central bank's growing confidence in a recovery. In view of this, the move clearly indicates the beginning of monetary policy normalization. The central bank is adopting a calibrated approach towards normalization as liquidity management is essential for possible interest rate increases to be fully effective. Liquidity management also helps manage the two challenges we can foresee for the near future. One is keeping inflationary expectations in check. The other is managing liquidity as capital inflows could swell necessitating liquidity tightening while ensuring enough to support a potentially large government borrowing program.”
Mr R.S. Reddy, Chairman and Managing Director, Andhra Bank, pointed out, “Though the 75 bps increase in CRR is more than what we expected, it may not immediately impact lending to retail, MSME and agriculture, among others. Broadly the PLR would not be touched. However, there is scope of some tweaking sub-PLR lending which may be made more moderate.''
Ms Renu Challu, Managing Director, State Bank of Hyderabad said, “The RBI move was largely expected. By hiking CRR, the RBI has sent a signal that it is the end of easy money regime. The interest rates should start hardening now as the banks would face some tighter liquidity conditions to the extent of the rise in CRR.''
According to Mr P. Jayarama Bhat, Managing Director and Chief Executive Officer of Karnataka Bank Ltd, the RBI has done a balancing act. Giving his views he said the hike of 75 basis points in CRR might speed up credit release and, as there is enough of liquidity available in the system at present banks might not increase the interest rates.
Different reactions were given by high officials of various banks on RBI’s move.
The Executive Director of City Union Bank, Mr N. Kamakodi, pointed out, “The banking regulator has proved that it is acting independently. We all thought unilaterally, but the RBI's master stroke has been in not increasing the interest cost while maintaining its cool on inflationary pressures.”
“Every bank had surplus liquidity throughout the year. So, the increase in CRR would only siphon out the excess liquidity in the system.”
According to Karur Vysya Bank Managing Director, Mr P.T. Kuppuswamy, they were expecting hike in CRR and the market had already discounted it. “It is an appropriate measure,” he said.
Dr V. A. Joseph, Managing Director and Chief Executive Officer, South Indian Bank, while expressing his views said, “Though a hike in CRR was expected, the 75 bps hike is slightly more than our expectation.” However he welcomed the reduction in credit growth targets from 18 to 16 per cent. He further added, “Credit growth differs from bank to bank. The current fiscal has, in fact, been the best year for us, so far as credit growth is concerned. We grew at 22 per cent. And considering the current growth pace, we will be able to achieve 25 per cent growth”.
When enquired how this hike would impact their bottom line, all of them replied, “It will not impact us. The impact if at all would be virtually low.”
Mr Neeraj Swaroop, Regional Chief Executive, India & S. Asia, Standard Chartered Bank said, “The RBI has adopted the right balance for managing inflationary expectations, while supporting a robust economic recovery. The 75 basis point hike in the CRR, the largest-ever increase, is a strong indication of the central bank's growing confidence in a recovery. In view of this, the move clearly indicates the beginning of monetary policy normalization. The central bank is adopting a calibrated approach towards normalization as liquidity management is essential for possible interest rate increases to be fully effective. Liquidity management also helps manage the two challenges we can foresee for the near future. One is keeping inflationary expectations in check. The other is managing liquidity as capital inflows could swell necessitating liquidity tightening while ensuring enough to support a potentially large government borrowing program.”
Mr R.S. Reddy, Chairman and Managing Director, Andhra Bank, pointed out, “Though the 75 bps increase in CRR is more than what we expected, it may not immediately impact lending to retail, MSME and agriculture, among others. Broadly the PLR would not be touched. However, there is scope of some tweaking sub-PLR lending which may be made more moderate.''
Ms Renu Challu, Managing Director, State Bank of Hyderabad said, “The RBI move was largely expected. By hiking CRR, the RBI has sent a signal that it is the end of easy money regime. The interest rates should start hardening now as the banks would face some tighter liquidity conditions to the extent of the rise in CRR.''
According to Mr P. Jayarama Bhat, Managing Director and Chief Executive Officer of Karnataka Bank Ltd, the RBI has done a balancing act. Giving his views he said the hike of 75 basis points in CRR might speed up credit release and, as there is enough of liquidity available in the system at present banks might not increase the interest rates.
Tuesday, January 19, 2010
Soon RBI to allow withdrawing money using prepaid cards from PoS terminals
It is expected the Reserve Bank of India (RBI) will allow withdraw money from the point of sale (PoS) terminals using prepaid cards issued by banks.
A senior executive of a public sector bank said, “RBI is considering allowing open loop cards to withdraw money from a PoS terminal. RBI is working on issues, like the amount a PoS owner should charge. The decision may come soon.”
There are three types of prepaid cards. The prepaid cards issued by banks are generally open loop cards whereas the cards issued by non-banking finance companies (NBFCs) are semi-closed loop cards such as telecom companies issuing prepaid vouchers, and the gift vouchers issued by firms are close loop cards. However last year, RBI had brought close and semi-closed loop cards under the Payments and Settlement Act.
At present there are around 4.7 million PoS terminals in the country. Recently ICICI Bank has signed an agreement with First Data to set up PoS terminals.
A PoS terminal is mainly used to swipe card for payment of sale and purchase transaction, where as you can use ATM for several other services like balance enquiry.
In case of PoS the banks pays charges which are divided between card-issuing bank, the bank that owns the PoS terminal, the payment company, Mastercard or Visa, and the place where the PoS terminal is located.
Sachin Khandewal, senior general manager, ICICI Bank said, “We expect the growth to be around 50-70 per cent in the coming years. There is a huge potential in this industry, as it efficiently generates income for the issuers.”
A senior executive of a public sector bank said, “RBI is considering allowing open loop cards to withdraw money from a PoS terminal. RBI is working on issues, like the amount a PoS owner should charge. The decision may come soon.”
There are three types of prepaid cards. The prepaid cards issued by banks are generally open loop cards whereas the cards issued by non-banking finance companies (NBFCs) are semi-closed loop cards such as telecom companies issuing prepaid vouchers, and the gift vouchers issued by firms are close loop cards. However last year, RBI had brought close and semi-closed loop cards under the Payments and Settlement Act.
At present there are around 4.7 million PoS terminals in the country. Recently ICICI Bank has signed an agreement with First Data to set up PoS terminals.
A PoS terminal is mainly used to swipe card for payment of sale and purchase transaction, where as you can use ATM for several other services like balance enquiry.
In case of PoS the banks pays charges which are divided between card-issuing bank, the bank that owns the PoS terminal, the payment company, Mastercard or Visa, and the place where the PoS terminal is located.
Sachin Khandewal, senior general manager, ICICI Bank said, “We expect the growth to be around 50-70 per cent in the coming years. There is a huge potential in this industry, as it efficiently generates income for the issuers.”
Monday, January 18, 2010
Banks to suggest RBI to reduce savings a/cs interest rate
Last year the Reserve Bank of India (RBI) had issued directives to the banks that the interest rates on saving accounts to be calculated on daily balances and the new directive is to be implemented by April 2010. Ahead of the deadline to implement RBI directive, the banks have requested RBI to lower interest rate on savings accounts to make possible for them to implement the new directives. RBI fixes the interest rate on savings accounts and at present banks are giving 3.5%.
At present the interest is calculated on the average amount maintained from the tenth to the last day of the month as a result the interest cost comes to less than 3.5%. For most banks, the interest cost ranges between 2.5% and 3%. As per new directives when the interest rate will be calculated on a daily basis, the cost of savings account deposit will be the interest rate on savings accounts.
A senior executive from a large PSU bank said, “Banks are of the view that the interest outgo will increase by 50-75 basis points, which could be compensated if they hike the lending rates by 25 basis points. But at the same time, banks would not be comfortable hiking rates only to make up for this. Instead, banks would prefer to wait for RBI signals to hike rates”. In the forthcoming meeting some banks are going to suggest to RBI to continue with the current system i.e. the interest is to be paid on the minimum amount maintained with them.
He added, “Banks will take up this matter with RBI in the forthcoming meeting scheduled on January 14”. RBI deputy governor Subir Gokarn will be meeting CEOs of large commercial banks on Thursday before the credit policy.
For banks Current and Savings Account Deposits (CASA) are the core deposits as these are low-cost lend able resources. The banks having higher ratio of CASA deposits are considered to be strong in comparison to those who are dependent on fixed deposits and wholesale funds. It is believed after April 1, banks with higher CASA deposits will get badly affected. The low-cost deposits comprise more than one-fourth of bank deposits. For instance, SBI CASA ratio is as high as 42%, ICICI Bank has a CASA of 37% whereas PNB ratio is around 40%.
Bankers are not in favor of implementation of new directives on savings rates as they fear that this can generate a rate war as up coming banks are hiking interest rates on savings accounts to grow market share.
At present the interest is calculated on the average amount maintained from the tenth to the last day of the month as a result the interest cost comes to less than 3.5%. For most banks, the interest cost ranges between 2.5% and 3%. As per new directives when the interest rate will be calculated on a daily basis, the cost of savings account deposit will be the interest rate on savings accounts.
A senior executive from a large PSU bank said, “Banks are of the view that the interest outgo will increase by 50-75 basis points, which could be compensated if they hike the lending rates by 25 basis points. But at the same time, banks would not be comfortable hiking rates only to make up for this. Instead, banks would prefer to wait for RBI signals to hike rates”. In the forthcoming meeting some banks are going to suggest to RBI to continue with the current system i.e. the interest is to be paid on the minimum amount maintained with them.
He added, “Banks will take up this matter with RBI in the forthcoming meeting scheduled on January 14”. RBI deputy governor Subir Gokarn will be meeting CEOs of large commercial banks on Thursday before the credit policy.
For banks Current and Savings Account Deposits (CASA) are the core deposits as these are low-cost lend able resources. The banks having higher ratio of CASA deposits are considered to be strong in comparison to those who are dependent on fixed deposits and wholesale funds. It is believed after April 1, banks with higher CASA deposits will get badly affected. The low-cost deposits comprise more than one-fourth of bank deposits. For instance, SBI CASA ratio is as high as 42%, ICICI Bank has a CASA of 37% whereas PNB ratio is around 40%.
Bankers are not in favor of implementation of new directives on savings rates as they fear that this can generate a rate war as up coming banks are hiking interest rates on savings accounts to grow market share.
Thursday, December 31, 2009
RBI reports Indian bank loans growth up by 11.25 percent
On Wednesday the Reserve Bank of India (RBI) released the provisional data according to which, this year up till December 18 the Indian bank loans had grown to about 11.25 percent.
As on Dec. 18 the outstanding on loans was high up to 2.94 trillion rupees as against 2.64 trillion a year ago. As of Dec. 4 the bank credit had grown up to10.5 per cent. The central bank will be giving final figures for the week to Dec. 18 in its weekly statistical supplement on Friday.
Deposits had risen up 17.85 percent from a year earlier. According to supplement banks’ investments in government approved securities have increased to 24.21 percent during the year.
As on Dec. 18 the outstanding on loans was high up to 2.94 trillion rupees as against 2.64 trillion a year ago. As of Dec. 4 the bank credit had grown up to10.5 per cent. The central bank will be giving final figures for the week to Dec. 18 in its weekly statistical supplement on Friday.
Deposits had risen up 17.85 percent from a year earlier. According to supplement banks’ investments in government approved securities have increased to 24.21 percent during the year.
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