The RBI governor Mr. D. Subbarao today announced the Annual Policy statement for the year 2011-12. Here’s a look at what the document contains.

“The annual policy has been created under very different set of conditions as compared to the last year” were the opening lines of the Governor.

According to him the new policy has been formulated on the basis of 3 factors

1.    The ever increasing commodity prices

2.    Fluctuations in Inflation

3.    Expectations of demand reducing

The Projections: Global

The experts believe that global growth will be lower in the coming year at around 4.4% as compared to 5% last year. The issue of concern will be that growth even in emerging economies will be lesser due to monetary tightening and commodity prices.

There are also expectations that inflation across the globe might rise to around 4.5% from3.7% last year. The issue could be even worse in emerging economies as they have to tackle both rising commodity prices and rising demand!

The projections: India

Growth will be lesser than last year due to a result of multiple factors including the RBI’s tightening of monetary policy. This could be seen in the very near future when the first quarter results are announced.

With global economy slowing down we could have a reduction in external demand too. Although oil prices have gone up, the same has not yet been completely passed on to the end user, which means that inflation as we know today is only in a suppressed form. The same story is repeated in the electricity domain too. Once these are actually passed on to the end user we will know the real state of inflation.

The biggest threat to the Indian economy right now seems to be from global commodity prices and food inflation in the country. Based on these factors the RBI has formulated the policy for the coming year.

“The Policy Stance”- What the RBI has proposed to do in the coming year:

• The RBI has proposed to maintain an interest rate situation which could help to moderate inflation as well as keep inflation under control.

• Focus on ensuring stability of prices so that growth can be maintained at least in the medium future.

• The RBI will also try to manage liquidity to maintain a sense of equilibrium.

To ensure that the above 3 targets are met the RBI has come up with various monetary measures as below:

1.    Reverse Repo has been retired:

As compared to the current state where the RBI announces two rates: one for the rate at which banks borrow from RBI and the other for the rate at which RBI will borrow from banks, in the future, there will be only one rate the Repo rate. The reverse repo will be calculated as a constant 100 points lesser than Repo rate.

2.    Banks can now borrow overnight at a new rate called Marginal Standing Facility which will be 100 basis points above the Repo rate.

3.    The Repo rate has been fixed currently at 7.25% which is 50 basis points above yesterday’s rate. Hence the Reverse repo will be 6.25% and MSF will be 8.25%

4.    The bank rate has been maintained at 6%. This is expected to ensure that there is not very high reactionary fluctuation in the markets.

5.    CRR has also been maintained at the current 6% of net demand and time liabilities.

6.    Hike in savings bank rate: there is cheer for small investors as the RBI has hiked the Savings deposit interest rate to 4% with immediate effect. This could change once there is a conclusion to the ongoing debate on deregulation of the Savings bank interest rates.

We can look forward to a controlled state of affairs: both growth and inflation being predominantly in a state of control!

Recently, RBI Governor, D Subbarao has indicated that RBI is in favor of deregulating the savings bank interest rate, which is currently fixed at 3.5% p.a. for deposits up to Rs. 2 lakh. Deposits over Rs. 2 lakh are currently deregulated allowing banks to fix their own rate.

Interest on savings bank account is the only type of deposit which is still regulated by RBI. This is a step in the direction of attaining the objective of financial sector reforms.

Banking space is on the cusp of changes with a revision in the methodology of interest rate calculation on savings account from 1^st of April, 2010 and now with base rate scheduled to replace prime lending rate kicking in from July 1^st onwards.

Recently, RBI Governor, D Subbarao has indicated that RBI is in favor of deregulating the savings bank interest rate, which is currently fixed at 3.5% p.a. for deposits up to Rs. 2 lakh. Deposits over Rs. 2 lakh are currently deregulated allowing banks to fix their own rate.

Interest on savings bank account is the only type of deposit which is still regulated by RBI. This is a step in the direction of attaining the objective of financial sector reforms.

Saving bank deposit is an important component of any banks deposit base (also part of CASA) because it comes at a low rate of interest i.e. lower than every other source of finance (bulk deposits, fixed deposits) excepting current account deposits. If RBI goes on to deregulate interest on savings bank account, it will increase competitiveness in the banking space, as banks with low savings bank deposits, will find this an excellent opportunity to build their saving deposit base, by attracting investors to it through attractive rate of interest in comparison to other banks. This would benefit customers because they will end up getting a higher rate of interest.

Having said that, any increase in interest rate on savings bank account will certainly impact the margins of banks if it is not accompanied by an increase in lending rates which no bank will like to settle in for. So while there may certainly be an increase in savings bank interest rate to attract deposits, (because even with an increase in interest rate, it may still end up being the lowest cost source of finance) the differential will be under check. Also, the repo rate, i.e. the rate at which banks borrow from the RBI, will be an automatic cap for the interest on savings bank because it does not make sense to borrow at high cost from saving account holders when the same is available from RBI at 5.25% currently. Thus, the rate of interest offered to customers will be a function of the liquidity conditions in the market, the cost structure and the need for funds.

Just as fixed deposits- a product whose interest rate is unregulated by RBI, is being offered by various banks at varied rates of interest depending on the cost of funds and need for funds, similarly, banks will be able to offer different rates depending on their objective and cost structure.

As it stands today, implementation is a long time away as the issue is yet to be debated and RBI still has to take a call on whether to free it completely or regulate it beyond thresholds. If savings bank interest rate were to be deregulated, banks will see movement in CASA among themselves and customers are likely to benefit with higher rate of interest on deposits. Watch this space to track this development.

Unlike most countries, multi-layers of loan securitisation, derivatives trading using deposit holder’s money, and lending to known sub-prime quality borrowers are not allowed in India. RBI has also been strict in monitoring the health of the banks using several measures and reports.

Greece has been under severe strain for the past few months due to bad debts carried by its banks. The episode is expected to come to a close soon with the investors losing money by the ton. This time around most of the investors are common citizens of Greece. Even before the Greek trouble could end, the Portugal banks are facing problems.

Are banks safe in India?

To answer this question we need to see the difference between the areas where banks can invest in India and in other countries. Indian banks are allowed to deploy their money only in traditional (prudent!) areas of investments and lending.

Unlike most countries, multi-layers of loan securitisation, derivatives trading using deposit holder’s money, and lending to known sub-prime quality borrowers are not allowed in India. RBI has also been strict in monitoring the health of the banks using several measures and reports.

Guarantee for deposit

In spite of these measures there is no guarantee that a bank will not fail. We have had instances in the past in India too where RBI and the Government has had to intervene in different ways to protect customers of banks that failed.

All banks also have to pay a premium to RBI for the Bank Deposit Insurance. This basically guarantees depositors money to the extent of Rs.100,000/- of deposit per account. This is an archaic amount that has not been revised for almost 2 decades now.

Public Vs Private Vs Foreign bank

“Which among the above is a safe bank category to invest in?” – is a question on many people’s mind. The answer each one has its own risk. Subject to the same RBI guidelines, each bank will have to be individually assessed to determine its stability. There is no guarantee that that one category of bank is safer than the next.

Even foreign banks have to be separately capitalized for their operations in India. That way even if the parent bank collapses abroad, technically the Indian entity will be able to function on its own.

Good governance

The strict regulations and close monitoring done by RBI is a blessing for the Indian banking industry. Even during the peak of the Global Financial Crisis, when hundreds of banks were collapsing in the USA, none of the Indian banks faced trouble.

The same act was repeated during the crisis in Dubai. Again now when the Greece crisis is playing it out, Indian banks are going road solid.

RBI is not resting on its laurels, it has recently further tightened the rules relating to loans securitization in India.

Possible cause for worry

There is some cause for worry though; in the past few years (over 3 years now) the income source for banks in India has shifted drastically. Earlier the main source of income was from the interest rate spread. This is the income that the bank gets from its core banking operations – borrow at a lower rate from deposit holders and lend at a higher rate to borrowers.

The second source of income started taking prominence about 5 years ago. This was from services. This is basically income form services offered to customers other than the core banking operations of the bank. Income from commissions by selling them products like debit cards, credit cards, life insurance, mutual funds, gold coins, forex services, etc also fall into this category.

The last 3 years or so, more than a third of the banks’ income is coming from treasury operations. These are income got by trading in bonds, forex, interest rate futures, etc. Some of these are highly speculative in nature and can cause as much (or more) loss than the bank is making. There are as of now regulations for the bank on what money can be used for these activities. But with banks being flush with money due to low interest rates and decrease in the CRR and SLR during the global financial crisis, more and more money has found its way to treasury operations.

Proper training for the personnel and closer monitoring of the treasury operations is required for all banks in India.

Conclusion

It is a given that Indian banking operations are much safer than the ones followed by banks abroad. Having said this, there is still scope for the regulator RBI and the Government to take further measures to protect the interests of the investors.

Get the best deals on loan offers

• Home loans
• Personal loans
• Car loans

Some useful personal finance calculators

• EMI calculator
  
• Loan repayment calculator

M D Mallya, CMD of the bank said, “By June, we will have a branch in Auckland and we will open our tenth branch in the United Kingdom. This fiscal, we also plan to expand in the African subcontinent and would open five branches there”. Presently, the bank has 78 overseas branches which Mallya anticipates to increase to 90 by the end of this fiscal.

The bank has just obtained banking license from Malaysia for launching a locally incorporated bank, jointly owned by BoB, Indian Overseas Bank and Andhra Bank.

BoB would be hold a 40% stake in the bank while Indian Overseas Bank and Andhra Bank would have a 35% and 25% stake, respectively.

Anil Girotra, executive director, Andhra Bank said, “We would start operations soon. It may be possible that we start operation in 2010 itself”.

The bank also intends to expand in the Gulf region. Mallya said, “These outlets will be an extension of ATMs with a couple of people. The bank is not permitted to lend money but they can mobilise resources”.

The bank would also be increasing its branches in the local market. It intends to start 400 branches in the country this fiscal. The bank has also detected regions in Uttar Pradesh and Rajasthan where it would start the method of financial inclusion.

Get the best deals on loan offers

• Home loans
• Personal loans
• Car loans

Some useful personal finance calculators

• EMI calculator
  
• Loan repayment calculator

Also Read:

• Bank of Baroda to open branches abroad
• SBI to open 23 branches abroad
• More articles

The main reason for this turnaround is the renewal of credit growth. The latest data released by the Reserve Bank of India (RBI) shows that the credit uptake went to 17% after sinking to 11% in December 2009. In the previous sector, analysts were worried about the banking sector’s capacity to boost lending. But with the recovery of credit growth all those worries are over. Also the difference between deposit and credit growth has disappeared. Now deposit growth is equal to credit growth

Of these 7 banks, HDFC Bank is anticipated to lead the race with about 31% growth. From the PSU banks, Punjab National Bank (PNB) is leading with an anticipated 26% growth. However BoI is anticipated to post a 39% reduction in its profits, thus continuing its bad run.

Get the best deals on loan offers

• Home loans
• Personal loans
• Car loans

Some useful personal finance calculators

• EMI calculator
  
• Loan repayment calculator

Also Read:

• Private banks increase car and home loan rates
• Banks increase bulk deposit rates
• More articles

It is possible that the central bank would shortly be sending out a directive which would categorize these banks as “foreign-owned Indian banks”. This move by RBI would go against the position of the Department of Industrial Policy and Promotion (DIPP) that any company having over 51% of its shares held by foreign investors should be regarded as a foreign company.

Other banks such as ING Vysya Bank, IndusInd Bank and Yes Bank are also regarded as foreign banks. But they defend themselves saying that regardless of the equity share, most of the voting rights remain with Indians.

The subject came into focus with ICICI and HDFC Bank filing complaints against RBI and Finance Ministry about the new FDI norms and asked for clarifications.

Foreign stakes in these banks are 77 and 64% respectively.

The prime fear of these banks is that if they are included in the list of foreign firms then their investments would be impacted as various sectors have limits on the amount of FDI permitted in them, the major one being insurance.

Get the best deals on loan offers

• Home loans
• Personal loans
• Car loans

Some useful personal finance calculators

• EMI calculator
  
• Loan repayment calculator

Also Read:

• ICICI Bank and HDFC Bank downplay their ‘foreign’ status
• ICICI Bank and HDFC Bank to get ‘foreign’ tag
• More articles

30 touch points have already begun functioning in parts of Bulandshahr in Uttar Pradesh, Rohtak in Haryana and Gaya in Bihar. With this, the bank would be establishing itself in 119 villages thus reaching 1, 32, 000 people.

The mission called Project Namaskar was opened by Finance Minister, Mr. Pranab Mukherjee in the New Delhi Headquarters of the bank.

On the occasion the bank also said that it would apply 100% core banking solution (CBS) (anywhere banking facility) in 6 regional rural banks (RRBs) supported by PNB. These RRBs are located across 67 districts in 6 states.

PNB has been participating in the method of financial inclusion for a long time. This is not the first time by the bank this year in this area. Some months back the bank had launched Biometric ATMs.

The bank said, “With the implementation of CBS, the RRBs shall also be able to provide fastest remittance facilities to its customers”.

The bank has already finished the execution of CBS in its promoted RRBs 18 months prior to the end date of September 2011 fixed by RBI.

Get the best deals on loan offers

• Home loans
• Personal loans
• Car loans

Some useful personal finance calculators

• EMI calculator
  
• Loan repayment calculator

Also Read:

• PNB establishes biometric ATMs: a move towards financial inclusion
• 5 steps to freedom from financial stress!
• More articles

A statement released by the bank says, “The revised interest rates on Domestic Rupee Term Deposits of Rs 1 crore and above will be applicable for various periods on fresh deposits and on renewal of maturing deposits wef 15.04.2010, other rates remaining the same”.

For deposits of minimum Rs 1 crore for 1-2 year maturity, the bank reduced the rate to 6% from 6.75%, while for those whose maturity period is 2-3 years, the rates have been reduced from 6.75% to 6.25%, it said.

With inflation reaching the double digit level, analysts anticipate RBI to further stiffen its monetary policy in its annual policy on April 20 that can cause an increase in both lending and deposit rates.

The Reserve Bank has already hiked the cash reserve ratio in its January policy review besides increasing its short-term rates by 25 basis points.

The  government owned Union Bank of India also lately increased deposit rates by up to 0.5% for different maturities.

Get the best deals on loan offers

• Home loans
• Personal loans
• Car loans

Some useful personal finance calculators

• EMI calculator
  
• Loan repayment calculator

Also Read:

• Dhanalakshmi Bank reduces deposit rates up to 1%
• Fixed deposits as an investment, are they for you?
• More articles

The report says that about 5% of the loans disbursed by these banks have become bad in the fiscal 2009-10. This has upset the whole non performing assets (NPA) situation of the banks. The systemic slippages of about 16% from the total is contributed by foreign banks.

A senior official of a foreign bank has said that the poor asset quality of these banks will persist in FY’10 also and improvement is anticipated only in FY11.

The FY’09 saw HSBC post a gross NPA of 5.36%, CitiBank has a gross NPA of 5.1% while StanChart was better with NPA of 2.8%. Together these banks comprise 70% of the total balance sheet of the foreign banks functioning in the country. They also make up for 10% of the total gross NPA of the system.

The report said that the Indian operation of foreign banks constitute about 14% of the system’s total profit and, if listed, their market capitalisation would be $28-32 billion, about 25% of the country’s banking system.

Get the best deals on loan offers

• Home loans
• Personal loans
• Car loans

Some useful personal finance calculators

• EMI calculator
  
• Loan repayment calculator

Also Read:

• Andhra Bank has the best asset quality
• Banks increase bulk deposit rates
• More articles

A test study on the commencement of this new service was inaugurated by the company in Pune in February. The official said that the study got an “extremely encouraging” response. The study was conducted in a tie up with Yes Bank.

It now intends to have more tie ups of this type with other banks in order to commence with the service in various regions of the subcontinent.

The official said, “A decision will be taken after the six-month test period. The process involves getting approvals from Reserve Bank of India“.

Nokia sees promise in this service as it is one of the leading mobile phone suppliers in India. So those who carry a Nokia mobile can also transfer money with the same instrument. Customers using this facility can also pay their utility bills and top up SIM cards. They can also pay for goods and services.

While detailing the working method of the service the official said, “By using this facility a person living in one place can transfer the money to another person not having bank account and the latter can receive the money from Nokia dealer in his area.”

Nokia believes the worth of mobile payment transactions in India will go up to $1.28 billion by 2013.

Get the best deals on loan offers

• Home loans
• Personal loans
• Car loans

Some useful personal finance calculators

• EMI calculator
  
• Loan repayment calculator

Also Read:

• Citibank introduces mobile contactless payment program
• Innovation from Axis Bank: secure mobile payment service
• More articles