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Get ready for lower bank deposit rates
Shriya Bubna & Rajendra Palande / Mumbai October 26, 2007

After nearly three quarters of generosity , banks are now facing pressure to reduce deposit rates. Most face a margin squeeze with the rise in interest expenditure outpacing the increase in interest income at the start of the third quarter of the financial year.

Union Bank, a Mumbai-based public sector bank, has taken the lead. Irrespective of competitive pressures, the bank has cut rates on one-year deposits to 8.5 per cent from 9 per cent, the rate most banks are offering on one- and two-year deposits.

“The revision in deposit rates will help the bank contain the cost of resources and improve margins,” said M V Nair, chairman, Union Bank.

Union Bank of India’s interest income grew 27 per cent during the quarter from a year earlier but its interest expenditure rose faster at 38 per cent. As a result, the bank’s net interest margin (NIM) in the second quarter fell to 2.56 per cent, from 2.76 per cent a year ago.

Other banks are expected to follow suit. Banks like IDBI, ICICI Bank, HDFC Bank and Vijaya Bank have reported a sharper rise in interest expenditure than interest income in July-September 2007 from a year earlier.

ICICI Bank’s interest income, for instance, grew 37 per cent while its interest expenditure rose by 47 per cent.

Most banks are waiting for the mid-term review of the Reserve Bank of India’s monetary policy, due on October 30, before they take action.

“There is scope to reduce deposit rates 50 to 100 basis points but we are awaiting policy signals,” said a senior IDBI Bank official. Analysts suggest that cutting deposit rates is a fait accompli.

“Irrespective of the policy signals, based on the observation of growth in interest earned and interest expended, it would be rational for banks to reduce deposit rates by 25 to 50 basis points across maturities,” said Roopa Rege-Nitsure, chief economist, Bank of Baroda.

The sharp slowdown of credit growth will also require banks to cut deposit costs to sustain profit growth.

Since April 2007, bank credit grew only 5 per cent with just Rs 96,486 crore added to advances against Rs 1,54,000 crore a year earlier.

Poor credit off-take in the first half of 2007-08 has led to slower growth in banks’ net interest earnings.


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Posted By : anjalir on 26 October,2007
This is an expected move. Earlier also with the CRR hike by 50 bps in the first quarter review of the Annual Monetary Policy, many banks had to roll back high deposit rates being offered on tenures 1 year and above. In addition high interest rates domestically encouraged companies to borrow funds through ECBs from outside India. This also lowered credit offtake from domestic banks.

Posted By : anjalir on 26 October,2007
The ample liquidity in the market coupled with poor credit offtake and accelerating deposits are increasing the cost of banks, which will force them to reduce the deposit rates. However the condition will be clear after 30 October 2007.

My comment on Economic Times article

Industrial output rose 10.7% in August
13 Oct, 2007, 0031 hrs IST, TNN

NEW DELHI: The bulls may have left the Street for an early weekend but those buying the India Story were proved right on Friday. Industrial output rose 10.7% in August compared to 10.3% in August 2006. The output had slipped to 7.1%(now revised to 7.5%) in July fuelling concerns that economic growth was moderating.

What makes it sweeter is that the higher growth is on a high base of 10.3% in August 2006, which was mainly boosted by lower growth of 7.4% in August 2005.

“Last month’s drop in the index of industrial production (IIP) was an aberration. I expect the industry to average a growth of 9% this year,” economist Omkar Goswamy said.

The April-August industrial growth, however, slipped to 9.8% from 11% logged in the first five months of the previous fiscal year. Industrial output had been consistently at sub-10% levels in the past three months with higher interest rates slowing down manufacturing and consumer spending.

Optimism about the Indian growth story is all-pervasive. ADB, on Friday, upped India’s FY08 economic growth forecast to 8.5% against the earlier projection of 8%.

“The numbers are above our expectations and show that concerns about an impending slowdown are greatly exaggerated,” said ICICI Securities analyst A Prasanna.

All the three industrial sectors — mining, manufacturing and electricity — showed double-digit growth in August. The manufacturing sector notched 10.4% growth, marginally down from 11.9% in the same month previous fiscal year. It has, however, bounced back from last month’s 7.2%. Manufacturing contributes about 15% to GDP and nearly 80% to industrial output.

The industrial data released on Friday showed demand for consumer goods fell, hurt by monetary tightening, but was more than offset by demand for capital goods and a pick-up in mining activity and electricity generation. The mining sector showed stupendous recovery, recording a growth rate of 17.1% against a decline of 1.7 % in the corresponding month of 2006. Mining had grown by just 4.9% in July 2007.

Electricity generation during August grew by 9.2% compared to 4.1% a year ago.

In the manufacturing sector, the capital goods sector kept the flag flying with a robust 30% growth in August, compared to 16.6% in the corresponding month of 2006.

Consumer durables continue to remain a concern area declining 6.2% compared to 19% growth in August 2006.

Analysts hope the festival season will help consumer demand rebound. Some banks have cuts rates for consumer loans to push demand for homes, cars and TVs.

Basic goods and intermediate goods recorded growth rates of 13.3% and 12.3%, respectively, during August, compared to 4.8% and 8.7%, respectively, in the corresponding period last year.

With industrial growth showing signs of recovery, some analysts feel inflation may resurface. They said in this backdrop, the central bank may not go for cut in rates.

Anjali R,Pune,says:A good sign!! After registering a single digit growth in July 2007, the market expected a slow down in economy. But the impressive, above-expected growth in IIP in August 2007 has rebuilt more confidence in Indian growth story. India's industrial production growth exceeded expectations in August, accelerating for the first time in four months, as record investment in factories, roads and power plants boosted demand for cement and steel. The continuous slowdown in inflation, more efforts towards infrastructure development, rising income leading to rise in demand has all led to rise in IIP. However, the high interest rates have hit the consumer durable segment, which has registered a decline in August. Also the continuous appreciation in rupee and excess liquidity in the market is a cause of concern. RBI may increase the CRR to curtail the liquidity in the system after having low inflation and impressive IIP figures. But the central bank has to look at the decelerating credit off take from banks which may further get affected because of CRR hike.

13 Oct 2007, 1042 hrs IST

My comment on Business Standard news

IIP back to double-digit growth

BS Reporter / New Delhi October 13, 2007

Reversing a four-month trend, industrial growth rose sharply this August, pushing the Index of Industrial Production (IIP) back to double digits for the first time since June.

The rebound came on the back of robust manufacturing production, especially in capital goods. Even mining, which had lagged significantly, recorded a massive and unexpected growth during the month.

Mining accounts for 10.47 per cent of the index of which coal and crude oil account for the bulk.

The IIP rose 10.7 per cent this August against 10.28 per cent a year ago. Overall, for the first five months of the current fiscal, industrial growth stood at 9.8 per cent.

Manufacturing, which accounts for nearly 80 per cent of the index, grew 10.4 per cent in August, against 11.94 per cent in 2006. Although this is much better than the growth in the previous two months, it is lower than last year.

The good showing by manufacturing was dented only by consumer goods that continue to reel under the impact of high interest rates.

The sector grew 0.5 per cent in August against 5.69 per cent in July and much lower than a year ago. This is the lowest growth rate the segment has seen so far.

Experts said the decline in consumer goods was a cause for concern. “This indicates a slowdown in consumption,” said Siddhartha Roy, economic advisor, Tata group.

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Posted By : anjalir on 13 October,2007
A good sign!! After registering a single digit growth in July 2007,growth exceeded expectations in August, accelerating for the first time in five months, as record investment in factories, roads and power plants boosted demand for cement and steel. The continuous slowdown in inflation, more efforts towards infrastructure development, rising income leading to rise in demand has all led to rise in IIP. The growth in IIP in August 2007 has rebuild more confidence in Indian growth story.

Posted By : anjalir on 13 October,2007
However, the high interest rates have hit the consumer durable segment, which has registered a decline in August. Also the continuous appreciation in rupee and excess liquidity in the market is a cause of concern. RBI may increase the CRR to curtail the liquidity in the system after having low inflation and impressive IIP figures. But the central bank has to look at the decelerating credit offtake from banks which may further get affected because of CRR hike.

My comments on Business Standard news

Banks bow to big cos, cut short-term rates
Abhijit Lele / Mumbai October 8, 2007

Surplus liquidity, flat credit off-take make banks generous.

Faced with abundant liquidity and flat credit off-take, banks are reversing interest rate hikes charged to large companies a few months ago and providing them short-term loans at rates that just about cover their costs.

Most public sector banks’ prime lending rate (PLR) or benchmark rates range from 12.75 to 13.25 per cent. The PLR of ICICI Bank, the country’s largest private lender, is 15.75 per cent.

In the first three months of this fiscal, most blue chips could access loans at a maximum of one to two percentage points below the PLR. Today, short-term loans (that is, for less than one year) for such companies are available between 7.5 and 9 per cent.In the new supply-demand dynamics, many large companies that are in a position to negotiate are accessing short-term loans at rates that are even lower than working capital loans, which are priced closer to the PLRs.A senior banker with a large public sector bank said oil companies like Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) are accessing short-term loans at 7.5 to 8 per cent.

“The gap between the rate at which short-term loans are provided to companies and the benchmark rates has widened over the past three months ago. The gap had narrowed substantially in the early part of the current year when rates for AAA-rated borrowers had touched double digits following a series of PLR hikes,” said Bank of India (BoI) Executive Director K Kamath.

Added A C Mahajan, chairman of Allahabad Bank: “Three months ago, we were lending to companies with rising interest rates in mind, and now we are lending with a belief that there is no likelihood of rates hardening.”

PLRs of banks have increased 300-400 basis points in the past year as the Reserve Bank of India (RBI) increased the cash reserve ratio, the proportion of cash deposits banks must keep with the central bank, by 200 basis points to 7 per cent, raising banks’ cost of funds.

Short-term rates as low as 8 per cent barely cover the costs for those banks that have at least half their deposits in the form of current and savings account balances, which cost 2.8 to 3 per cent.

Bankers do not see anything wrong in lending to large companies at such low rates.

They argue that it is better to recover at least the costs—cost of funds plus cost of capital—rather than not lending at all and bearing the burden of the cost of funds.

Banks’ deposits are swelling with almost all of them offering peak interest rates of 9-9.5 per cent on deposits of one to three years.

Additional reporting by Shriya Bubna & Rajendra Palande.

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Posted By : anjalir on 08 October,2007
This will help companies to raise money in domestic markets. With the ECB norms tightened it became a bit difficult for the companies to raise loans outside India and also high interest rates domestically hindered their expansion and development plans. But now with credit growth decelerating and deposits accelerating the banks are ready to reduce lending rates to lower their cost. However the banks have to see that the loans is provided for some productive purposes only.

My comment on Business Standard news

Friday,Oct 05,2007

MSS limit increased; CRR hike concerns ease
BS Reporter / Mumbai October 05, 2007

The government today raised the limit on the Market Stabilisation Scheme (MSS) to Rs 2,00,000 crore, easing pressure on the Reserve Bank of India (RBI) to increase the cash reserve ratio (CRR).

The market has been abuzz with speculation over the last couple of days about the RBI considering the CRR hike.

The MSS limit has been raised from Rs 1,50,000 crore in the current financial year. This is the fourth time the government has raised the limit.

The move gives the RBI additional room to absorb excess liquidity in the system by issuing government bonds.

Under MSS, dated securities and treasury bills are auctioned by the RBI at the market rate and the cost of the coupon payments is borne by the government.

CRR is the proportion of deposits mobilised by banks and parked with RBI for statutory requirement. It currently rules at 7 per cent.

In the pre-credit policy meeting held earlier in the day, bankers had urged RBI not to raise the CRR and pay interest on the liquidity impounded through the earlier hikes.

Prior CRR increases have hurt banks since interest income through advances has been sluggish due to low credit offtake. Bank credit has grown only 21 per cent so far this year, against 31 per cent in 2006.

Surging foreign capital inflows have forced the RBI to mop up dollars to stem the appreciation in the value of the rupee.

In the process of buying dollars, the RBI released rupees that created excess liquidity in the system.


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Posted By : anjalir on 05 October,2007

It was an expected step from government for curbing liquidity in near term. RBI is not expected to raise CRR as it will further slowdown the credit offtake and increse the cost of banks. As deposits with banks are rising and growth in credit is decerelating, a further rise in CRR may increase this gap.Also the coming IIP data for August may clear the picture about credit demand RBI's stand towards CRR in the coming mid term credit policy review due on 30th October 2007.