NRI's to earn more from Indian Banks

Deregulation of Interest Rates on Non-Resident (External)Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) Accounts

Please refer to paragraph 4 of our circular DBOD.Dir.BC.42/13.03.00/ 2011-12 dated October 25, 2011 on Deregulation of Savings Bank Deposit Interest Rate and paragraph 1 of our circular DBOD.Dir.BC.59/13.03.00/2011-12 dated November 23, 2011 on Interest Rates on Non-Resident (External) Rupee (NRE) Deposits and FCNR (B) Deposits.
2. With a view to providing greater flexibility to banks in mobilising non-resident deposits and also in view of the prevailing market conditions, it has been decided to deregulate interest rates on Non-Resident (External) Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) Accounts (the interest rates on term deposits under Ordinary Non-Resident (NRO) Accounts are already deregulated). Accordingly, banks are free to determine their interest rates on both savings deposits and term deposits of maturity of one year and above under Non-Resident (External) Rupee (NRE) Deposit accounts and savings deposits under Ordinary Non-Resident (NRO) Accounts with immediate effect. However, interest rates offered by banks on NRE and NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits.
3. Prior approval of the Board/Asset Liability Management Committee (if powers are delegated by the Board) may be obtained by a bank while fixing interest rates on such deposits. At any point of time, individual banks should offer uniform rates at all their branches.
4. The revised deposit rates will apply only to fresh deposits and on renewal of maturing deposits. Further, banks should closely monitor their external liability arising on account of such deregulation and ensure asset-liability compatibility from systemic risk point of view.
5. An amending directive DBOD.Dir.BC. 63 /13.03.00/2011-12 dated December 16, 2011 is enclosed.
Yours faithfully,
(P. R. Ravi Mohan)Chief General Manager

---

DBOD.Dir.BC. 63 /13.03.00/2011-12

December 16, 2011

Deregulation of Interest Rates on Non-Resident (External)Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) Accounts

In exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949, and in modification of the directive DBOD. Dir. BC. 41/ 13.03.00/ 2011-12 dated October 25, 2011 on Deregulation of Savings Bank Deposit Interest Rate and DBOD.Dir.BC.58/13.03.00/2011-12 dated November 23, 2011 on Interest Rates on Non-Resident (External) (NRE) Deposits and FCNR(B) Deposits, the Reserve Bank of India being satisfied that it is necessary and expedient in the public interest so to do, hereby directs that banks are free to determine their interest rates on both savings deposits and term deposits of maturity of one year and above under Non-Resident (External) Rupee (NRE) Deposit accounts and savings deposits under Ordinary Non-Resident (NRO) Accounts with immediate effect. However, interest rates offered by banks on NRE and NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits.
(B. Mahapatra)Executive Director

Report on Trend and Progress of Banking in India 2010-11 : R.B.I

The Reserve Bank of India today released the statutory Report on Trend and Progress of Banking in India 2010-11. This Report reviews the performances of the global and Indian banking sectors and presents the salient policy developments relating to each of these sectors during 2010-11. Within the domestic banking sector, the Report entails a comprehensive analysis of commercial banks, cooperative banks, and non-banking financial institutions. The key messages of the Report are set out below: Perspectives on the Indian Banking Sector During 2010-11, banks were able to improve their profitability and asset quality. Stress test showed that banking sector remained reasonably resilient to liquidity and interest rate shocks (para 1.2, pages 1-2). Yet, there were emerging concerns about banking sector stability related to disproportionate growth in credit to sectors such as real estate, infrastructure, NBFCs and retail segment, persistent asset-liability mismatches, higher provisioning requirement and reliance on short-term borrowings to fund asset growth (para 1.23, page 8). At the present juncture, the key issues related to the Indian banking sector include: prospective migration to Basel III while upgrading the existing risk management practices under Basel II; transition to International Financial Reporting Standards (IFRS) and required upgradation in information technology and human resource infrastructure; improvement in corporate governance practices in banks; and the overall need to become more competitive on the back of scale, scope, prudence and knowledge to be able to efficiently serve the needs of the economy and to exploit emerging opportunities, particularly with regard to financial inclusion (para 1.4-1.9, pages 2-3; and para 1.14-1.17, page 5). Global Banking Developments The year 2010-11 was a difficult period for the global banking system, with challenges arising from the global financial system as well as the emerging fiscal and economic growth scenarios across countries (para 2.4, page 11). Global banks exhibited some improvements in capital adequacy but were beleaguered by weak credit growth, high leverage and poor asset quality. In contrast, in major emerging economies, credit growth remained at relatively high levels, which was regarded as a cause of concern given the increasing inflationary pressures and capital inflows in these economies (para 2.28, pages 23-24).  In the advanced economies, credit availability remained particularly constrained for small and medium enterprises and the usage of banking services also stood at a low, signalling financial exclusion of the population in the post-crisis period (para 2.21, page 20). On the positive side, both advanced and emerging economies, individually, and multi-laterally, moved forward towards effective systemic risk management involving initiatives for improving the macro-prudential regulatory framework and reforms related to systemically important financial institutions (para 2.33, page 25). Policy Environment Banking sector policy during 2010-11 remained consistent with the broader objectives of macroeconomic policy of sustaining economic growth and controlling inflation (para 3.2, page 32). The Reserve Bank introduced important policy measures of deregulation of savings bank deposit rate and introduction of Credit Default Swap (CDS) for corporate bonds. It initiated the policy discussions with regard to providing new bank licenses, designing the road-ahead for the presence of foreign banks and holding company structure for banks (para 3.6, page 32; para 3.29, page 39; para 3.31, page 40; para 3.97, page 53). The process of migration to the advanced approaches under the Basel II regulatory framework continued during 2010-11, while also facilitating the movement towards the Basel III framework (para 3.23, page 38). Financial Inclusion continued to occupy centre stage in banking sector policy with the rolling out of Board-Approved Financial Inclusion Plans by banks during 2010-11 for a time horizon of next three years (para 3.21, page 37). Operations and Performance of Commercial Banks The consolidated balance sheet of SCBs recorded higher growth in 2010-11 as compared with the previous year. This was in contrast to the trend observed during the last two years and signaled a revival from the peripheral effects of the global financial turmoil (para 4.4, page 60).  Deposits registered higher growth in 2010-11 but Current Account and Savings Account (CASA) deposits, which are least-cost sources, recorded deceleration. Loans and advances recorded a higher growth in 2010-11 despite widespread concerns with regard to slowdown in credit off-take in the context of tight monetary policy (para 4.6 and 4.11; pages 60 and 63). There was no significant shift in the maturity profile-wise composition of assets and liabilities of the banking sector in 2010-11 indicating the persistence of asset-liability mismatches (para 4.20, page 67). The consolidated net profits of the banking sector recorded higher growth in 2010-11 primarily attributable to increase in interest income leading to an increase in the Return on Assets (RoA) of SCBs (para 4.30, page 71). The Capital to Risk-Weighted Assets (CRAR) ratio under both Basel I and II frameworks remained robust and well above the required minimum of 9 per cent. There was an improvement in the asset quality of the banking sector in 2010-11 over the previous year (para 4.35 and 4.36, page 74). The process of financial inclusion improved in 2010-11 over the previous year in terms of various indicators of access and usage of banking services. Yet, in terms of percentage of population having deposit and credit accounts, the level of financial inclusion remained at staggeringly low levels (para 4.90, page 95).  Developments in Cooperative Banking As an outcome of the ongoing consolidation process, there was a further decline in total number of Urban Cooperative Banks (UCBs) in 2010-11. During 2010-11, the balance sheet of UCBs expanded mainly on account of growth in borrowings followed by growth in loans and advances (para 5.16-5.20, pages 110-112). Net profits of UCBs improved in 2010-11 as compared to the previous year owing to higher growth of their total income. During 2010-11, the gross as well as net NPA ratio of UCB sector declined. Almost 90 per cent of UCBs reported CRAR of more than 9 per cent in 2010-11 (para 5.21-5.24, pages 112-113). During 2010-11, net profits of StCBs declined mainly due to slower growth of income. There was a decline in NPAs of StCBs as at end-March 2010, both in absolute and percentage terms (para 5.37-5.41, pages 118-119). As at end-March 2010, almost 43 per cent of Primary Agricultural Credit Societies (PACS) operating in the country were loss-making (5.45-5.50, pages 120-122). Non-Banking Financial Institutions The financial performance of Financial Institutions (FIs) deteriorated during 2010-11 mainly due to decrease in operating profits and net profits. There was a sharp rise in operating expenses during the year mainly on account of wage revision (para 6.14, page 135). The financial performance of Non-Banking Financial Companies - Deposit taking (NBFCs-D) witnessed improvement as reflected in the increase in their operating profits during 2010-11 (para 6.35 to 6.37, pages 144-145). The financial performance of Non-Banking Financial Companies – Non-Deposit taking Systemically Important (NBFCs-ND-SI) improved significantly as reflected in the increase in their net profits during 2010-11 (para 6.45, page 148). In sum, the Report conveys that despite challenges, banking sector in India can look forward to enormous opportunities in their quest for long-term growth. In the long-term, banks need to build on four principles, viz., efficiency, stability, transparency and inclusion. The banking sector needs to focus on growth through inclusion, innovation and diversification while complying with domestic regulations and internalising international best practices. Alpana KillawalaChief General Manager Press Release : 2011-2012/749

Indian Banks to be affected by 2 % by BASEL III : CRISIL

 

Though the domestic banks are well placed to implement the Basel-III capital norms, higher requirement of liquidity and equity capital will have some adverse impact on their profitability, a study by rating agency Crisil has said. According to Crisil, return on equity for the domestic banks is likely to fall by two per cent to 12-13 percent from 14-15 percent now after implementation of Basel-III norms.


 However, the agency is of the opinion that the domestic banks are well capitalised for Basel-III transition. "(There will be) likely pressure on profitability given higher core equity capital and liquidity requirements as per the Basel-III norms," the study said here today. Basel III is the new regulatory framework designed to amend the deficiencies in the regulatory framework that led to the 2008 global financial crisis, following low capital reserves among others due to excessive leveraging. The new guidelines are proposed to be implemented in a phased manner between 2013 and 2019 in the domestic banking sector, which had a profit of around Rs 70,000 crore last fiscal. As per Basel-III norms, there will be an increase in the total capital adequacy ratio to 10.5 percent from the present 8 percent of risk-weighted assets or CAR for the domestic banks. Globally, these norms demand banks to significantly enhance their equity capital (equity and reserves) requirements to 7 percent from the present 2 percent. "Domestic banks are well-capitalised and will be able to meet the leverage and liquidity requirements," the firm said, adding banks would require around Rs 8 lakh crore of capital to maintain the current credit growth rate along with compliance to Basel-III norms by 2019. While public sector banks, which enjoy over 75 percent of the business, require around Rs 6 lakh crore of capital, private sector lenders will require around Rs 2 lakh crore by 2019, the firm said.

State Bank of India fails the stress Test of Moody's

 Moody's Investors Service downgraded the country's largest public sector bank's financial strength rating (BFSR), to D+ from C- on account ofasset quality concerns and capital situation. 

According to the note, the non-performing assets(NPA) are likely to continue rising in the near term and higher interest rates and a slower economy might weigh on the SBI's profitability and its creditworthiness.

The SBI reported a Tier 1 capital ratio of 7.60% as of 30 June 2011 which is below the 8% Tier 1 ratio that the government of India has committed for maintaining in public sector banks (PSB). 

The level pushes the bank into a lower rating band which might provide an insufficient cushion to support growth and to absorb potentially higher credit costs from its deteriorating asset quality. 

Further, Beatrice Woo, Moody's Vice President, said in the note, "Notwithstanding our expectations that SBI's capital ratios will soon be restored through a capital infusion by the government, SBI's efforts to secure this capital for the better part of the year demonstrates the bank's limited ability to manage its capital." 

The Rs 230 billion rights issue that SBI is currently seeking would raise its Tier 1 ratio to approximately 9.30%. However, according to Moody's note, the capital deployed for loan growth, assuming 15% per annum for the next three fiscal years, will cause the Tier 1 ratio to fall below 8%, thereby necessitating another capital exercise. 

Impact on stock price: 

Shares of State Bank of India plunged over 4% to touch their 2-year low of Rs 1751.35 on the BSE. At 02:00 p.m., the company's shares were trading 4.8% lower at Rs 1773. 

For the years the stock has slipped over 36%. 

NPA's and Profitability: 

The State Bank of India has a standalone business size of Rs 17 trillion. It enjoys a strong franchise and brand name in the country and has a market share of around 21%. 

The bank's net profit has been under pressure for the past couple of quarters. For the first quarter ended June 2011, the net profit fell 45.7% to Rs 1,584 crore because of higher provisioning and a tax rate of 50%. 

On the asset quality front, the bank's NPA, as of 30 June 2011, reached a 3-year high of 3.52% of loans and Rs 277,680 million on absolute basis. 

Inadequate Capital will now require the Bank to be capitalised by Indian government and the Bank will again have to Dilute its Capital Base. The probably of lower growth and rising NPA's may prompt the Bank to recapitalise and dilute further for at least next 3 Years. 

Rising Credit Risk in Indian Banks

CRISIL opines that the significant increase in interest rates over the past 18 months may adversely impact the asset quality and profitability of India’s banks. The banks’ gross non-performing assets (NPAs) ratio is expected to increase to nearly 3.0 per cent by March 31, 2012, from 2.3 per cent a year ago. The pressure on asset quality is expected to arise primarily because of weakening debt servicing ability of the corporate sector, especially the small and medium enterprises (SME) segment. The banks’ migration to system-based recognition of NPAs will also result in higher NPAs over the near term.

Moreover, CRISIL believes that the banks’ limited ability to pass on further increases in funding costs to borrowers may result in a sharp decline in their return on assets (RoA) to below 1 per cent in 2011-12 for the first time in five years. Says Mr. Pawan Agrawal, Director, CRISIL Ratings, “The deterioration in asset quality will be driven primarily by slippages in the banks’ corporate and SME loans portfolios.” This will be caused by increasing interest rates, high input prices, and an expected moderation in economic growth.

The sectors with weak demand-supply scenario, intense competition, and high leverage will be the most impacted. Also, sustainability of demand across industries, such as cement, automotive, construction, and textiles, will be a key monitorable for the credit quality of India’s corporate entities. The uncertain global environment can add pressure on the export-driven sectors. Adds Mr. Agrawal, “In a scenario of prolonged high interest rates, the banks’ retail advances segment may also see some delinquencies over the medium term.” Overall slippages to NPAs for banks are expected to increase to around 2.5 per cent in 2011-12 from an average of 2.1 per cent over the past three years.

Despite the aforementioned risks, CRISIL believes that gross NPAs will not significantly exceed 3.0 per cent over the medium term. This is because, despite some challenges, CRISIL expects the Indian economy to grow at between 7.7 and 8.0 per cent in 2011-12. Moreover, over the years, the banks have strengthened their credit monitoring and collection mechanisms to mitigate delinquencies. So far, the banks have been passing on increases in funding cost to their borrowers; this has enabled them to maintain their net interest margin (NIM) at around 3.0 per cent. Consequently, the banks’ reported a healthy RoA of about 1.1 per cent in 2010-11, despite higher provisions for pension liabilities. The banks will have limited room to pass on any further increases in funding costs to borrowers. This will result in the banks’ NIM reducing to less than 3.0 per cent, and RoA dipping to around 0.95 per cent in 2011-12. Says Mr. Suman Chowdhury, Head, CRISIL Ratings, “Despite deterioration in the banks’ asset quality and pressures on profitability, their comfortable capitalisation covers asset-related risks.

The banks’ overall capital adequacy ratio was around 14.0 per cent as on March 31, 2011. Moreover, the banks’ capital coverage for net NPAs is expected to remain adequate, at nearly 9 times, as on March 31, 2012.

Indian Banks Turning Titanic ..? A detail report

Indian Banks Turning Titanic- flash september 2011

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RBI seeks Value from Customer Service of Banks: Bonanza for Common Man

Unlocking Value for Common Man

Major recommendations of the Committee are:

• Creation of a toll free common bank call number
• Providing plain vanilla savings account without prescription of minimum balance
• Setting up of third party Know Your Customer (KYC) data bank
• Prescription of service charges for basic services
• Providing small remittances at reasonable price
• Providing floating rate housing loans on a non-discriminatory basis
• Compensation for delayed return / loss of title deeds in the custody of banks
• Zero liability against loss in ATM and online transactions
• Enhancement of DICGC cover up to  ` 5,00,000
• Prepaid instruments up to  ` 50,000/- for frequent travellers
• Differential merchant discount / fee for debit cards
• Self-personalisation of cards enabling customer to fix limits / area of operation / activation for international use
• Instant blocking of ATM card through SMS -BLOCK for lost / misused cards
• Transition to chip based card (EMV) with photograph
• Chief customer service officer (CCSO) for grievance redressal in every bank
• Submission of life certificate for pensioners in any Core Banking Solution (CBS) branch
• Automatic updation of senior citizen status in CBS
• Financial inclusion through branch expansions in the North -East
• Moving towards paperless fund transfers
• Ensure fulfillment of the tenets of customer service through inspections

Background
The Reserve Bank of India had constituted a Committee under the chairmanship of Shri M. Damodaran, former Chairman, Securities and Exchange Board of India, to look into banking services rendered to retail and small customers, including pensioners. The Committee was also required to look into -

• the system of grievance redressal mechanism prevalent in banks, its structure and efficacy and suggest measures for expeditious resolution of complaints,
• functioning of Banking Ombudsman Scheme, its structure, legal framework and recommend steps to make it more effective and responsive,

India's foreign exchange reserves decline-Reserve Bank Of India

 India's foreign exchange reserves declined by $112 million to $314.507 billion on the back of a dip in foreign currency assets (FCAs) for the week ended July 15. 

1. Reserve Bank of India - Liabilities and Assets
(` crore)
Item	2010	2011		Variation
	Jul. 16	Jul. 8	Jul. 15 #	Week	Year
	1	2	3	4	5
Loans and advances
Central Government	—	33,672	39,232	5,560	39,232
State Governments	—	247	629	382	629

2. Foreign Exchange Reserves
Item	As on Jul. 15, 2011		Variation over
			Week		End-March 2011		End-December 2010		Year
	` Crore	US$ Mn.	` Crore	US$ Mn.	` Crore	US$ Mn.	` Crore	US$ Mn.	` Crore	US$ Mn.
	1	2	3	4	5	6	7	8	9	10
Total Reserves	14,00,972	314,507	5,301	–112	39,958	9,689	68,618	17,173	82,074	32,606
(a) Foreign Currency Assets +	12,57,079	282,299	5,137	–115*	32,196	7,969	57,002	14,485	60,511	26,622
(b) Gold $	1,10,317	24,668	—	—	7,745	1,696	9,631	2,198	17,613	4,774
(c) SDRs @	20,414	4,584	100	2	13	15	–2,339	–494	–2,927	–403
(d) Reserve position in the IMF**	13,162	2,956	64	1	4	9	4,324	984	6,877	1,613
+ : Excludes ` 1,113  crore /US$ 250 million invested in foreign currency denominated bonds issued by IIFC (UK). * : Foreign currency assets expressed in US dollar terms include the effect of appreciation/depreciation of non-US currencies (such as Euro, Sterling, Yen) held inreserves. For details, please refer to the Current Statistics section of the RBI Bulletin. ** : Reserve Position in the International Monetary Fund (IMF), i.e., Reserve Tranche Position (RTP) which was shown as a memo item from May 23, 2003 to March 26,2004 has been included in the reserves from the week ended April 2, 2004 in keeping with the international best practice. @ : Includes SDR 3,082.5 million (equivalent to US$ 4,883 million) allocated under general allocation and SDR 214.6 million (equivalent to US $ 340 million) allocatedunder special allocation by IMF done on August 28, 2009 and September 9, 2009, respectively. $ : Includes ` 31,463 crore (USD 6,699 million) reflecting the purchase of 200 metric tonnes of gold from IMF on November 3, 2009.

3. Scheduled Commercial Banks - Business in India
(` crore)
Item		Outstandingas on Jul. 1 # 2011	Variation over
			Fortnight	Financial year so far		Year-on-year
				2010-2011	2011-2012	2010	2011
		1	2	3	4	5	6
Liabilities to Others
	Aggregate deposits	54,88,682	1,43,981	1,44,022	2,80,712	6,05,882	8,51,833
			(2.7)	(3.2)	(5.4)	(15.0)	(18.4)
	Demand	6,03,035	53,637	–30,134	–38,670	1,05,421	–12,440
	Time	48,85,646	90,343	1,74,156	3,19,382	5,00,461	8,64,274
Bank Credit		40,86,326	84,806	1,63,357	1,44,244	6,12,578	6,78,181
			(2.1)	(5.0)	(3.7)	(21.9)	(19.9)
	Food Credit	79,607	2,279	5,961	15,324	–3,224	25,157
	Non-Food credit	40,06,719	82,527	1,57,396	1,28,919	6,15,802	6,53,024

5. Accommodation Provided by Scheduled Commercial Banks to Commercial Sector in the form of Bank Credit and Investments in Shares/Debentures/Bonds/Commercial Paper etc.
(` crore)
Item	2011 – 2012			2010 – 2011
	Outstanding as on		Variation	Outstanding as on		Variation
	2011		(2) - (1)	2010		(5) - (4)
	Mar. 25	Jul. 1		Mar. 26	Jul. 2
	1	2	3	4	5	6
3. Total (1B+ 2)	40,25,401	41,48,581	1,23,180	33,14,370	34,81,866	1,67,496
Note : Data on investments are based on Statutory Section 42(2) Returns.

 India's foreign exchange reserves declined by $112 million to $314.507 billion on the back of a dip in foreign currency assets (FCAs) for the week ended July 15. 

The reserves had declined by $1.10 billion in the previous week to $314.62 billion. 

FCAs, the biggest component of the foreign reserves, were down $115 million to $282.30 billion for the week under review, the Reserve Bank said in its weekly data released this evening. 

FCAs, expressed in US dollar terms, include the effect of appreciation or depreciation of the non-US currencies such as the euro, pound and yen, held in the reserves, it said. 

The country's gold reserves remained unchanged at 24.668 billion, the apex bank data said. 

Both the special drawing rights (SDRs) and reserve position in the International Monetary fund showed an increase during the week, RBI said. 

The SDRs were up by $2 million to $4.584 billion, while India's reserve position in the IMF increased by $1 million to $2.956 billion, the RBI data showed.

Indian Banks Remain Out performers : Axis, Allahabad Bank firm up

Axis Bank and Allahabad Bank on Friday posted solid, forecast-beating growth in June quarter profit but mid-sized Union Bank disappointed with a drop in profit.

State-run Union Bank also cut its credit and deposit growth target for FY12 in the face of slackening demand after posting a net profit drop of 23 percent that lagged forecast.

"It was a lean season," M.V. Nair, chairman and managing director of state-run Union Bank told reporters at its earnings press conference.

"Also, the tight policy stance of the RBI and the weak investment climate impacted new project announcement and consumer demand," he added.

Indian lenders have warned of a slowdown in credit offtake this fiscal year as high interest rates curb demand for loans and have suggested to the central bank to pause its rate hike cycle.

Still, the Reserve Bank of India (RBI) is expected to raise rates further next week, a Reuters poll showed.

It has raised key lending rate 10 times since March 2010 to tame high inflation, forcing banks to pass on some of the increase to customers, hurting loan demand.

Earlier this week, India's No.3 lender HDFC Bank also said credit demand from corporates for new projects may be muted in Asia's third-largest economy.

However, private banks such as Axis, Kotak Mahindra and HDFC Bank expect loans to grow at a faster pace than the industry average led by deeper branch networks and stronger brand.

"We've seen fairly okay demand. We should definitely be doing better than the industry rate of 19 percent," said Somnath Sengupta, executive director, Axis Bank.

The bank's net interest margin slipped to 3.28 percent in the June quarter from 3.71 percent a year-ago on slower build-up in low cost, current account savings account deposits as people preferred high yielding term deposits.

Smaller peers Kotak Mahindra and YES Bank also saw a drop in NIMs on higher borrowing costs, but said the pressure could ease in the coming quarters.

Axis, like others, also does not see further pressure on margins, going forward and expects it to be around 3.3-3.5 percent.

Union Bank that saw its NIM dip to 3.1 percent from 3.44 in the previous quarter, said it will inch it up to 3.2 percent by the end of the fiscal as the lagged impact of passing on the increase in costs will aid.