The Reserve Bank of
India governor D Subbarao’s 50 basis point cut in the repo rate came as a
pleasant surprise to economists, analysts, banks and the markets. The markets
had expected only a 25 basis point cut.
Here are the key
takeaways for banks from the policy statement:
1. A cut in the
repo rate. This, of course, is the big positive for banks. The repo rate
is the rate at which the RBI lends money to scheduled banks for the short term.
A rate cut will reduce the cost of funds for banks, who can then pass it on
their borrowers.
That, however, works mostly in
theory, not reality. Sailendra Bhandari, managing director and CEO, ING Vysya
Bank toldCNBC TV18, that in the past
year, despite repeated hikes in the repo rate, most banks did not raise their
base rates. Now, with a single repo rate cut, there is little chance of a steep
reduction in base rates. As most banks might pass on a 25 basis point cut to lending
rates to borrowers.
2. An increase in
the marginal standing facility from 1 percent to 2 percent will also help banks
with immediate liquidity.
3. While aggregate
deposits of banks are projected to grow by 16 percent, growth in non-food
credit of scheduled commercial banks is projected at 17 percent. Money
supply is also estimated to rise by by 15 percent.
4. There were
enough concrete statements on Basel III, the new capital adequacy regulation
that the banks will need to adopt to align themselves to international
standards. The central bank said the final guidelines will be released by the
end of April, while the final guidelines on liquidity risk management will be
out by the end of May. According to a Crisil estimate, banks in India
will reportedly need up to Rs 2.7 lakh crore in fresh capital if Basel III
guidelines are implemented.
5.Non-bank finance
companies that are big providers of gold loans, like Manappuram Finance and
Muthoot Finance, will be hit hard as it said that banks’ with exposure to NBFCs
that have more than half of their assets exposed to gold loans will have to
lower their exposure from 10 percent to 7.5 percent of a bank’s capital funds.
The exposure can, however, go up to 12.5 percent if the additional exposure is
on account of funds lent to NBFCs that have, in turn, been lent to the
infrastructure sector.
The RBI has also
constituted a working group to study the intricacies and present condition of
the gold loan business in details and come out with recommendations when
required.
6. The RBI also
made a significant change to the prepayment penalty clause for banks, which is
likely to affect banks with large home loan portfolios, such as ICICI Bank.
A few months ago,
an RBI ombusdman’s report recommended that no bank be permitted to levy
foreclosure charges or pre-payment penalties on home loans taken on a floating
interest rate basis. These charges are applicable when home loan borrowers get
existing loan refinanced by cheaper loans. RBI explained this charge needed to
be abolished as “foreclosure charges are seen as a restrictive practice
deterring the borrowers from switching over to cheaper available source.”
7. The RBI has also
mandated banks to take the financial inclusion process further. It has asked
the state level bankers’ committees to “prepare a road map covering all
unbanked villages of population less than 2,000 and notionally allot these
villages to banks for providing banking services in a time-bound manner.” Such
branches typically have long gestation period for banks as it takes longer time
to recover investment made and start earning profits.
8. The RBI has
observed that banks offer varied interests on retail and bulk fixed deposits
and said that it was unfair to retail depositors. Further, banks are offering
significantly different rates on deposits even when the maturity periods are
not significantly different. The RBI has asked banks to ensure that the
variation in interest rates on single-term deposits of Rs 15 lakh and
above and other term deposits stays minimal.
9. The RBI has also
mandated that banks should offer a ‘basic savings bank deposit account’ with
certain minimum common facilities and without any requirement of maintaining
minimum balance to all of their customers. The RBI will issue separate guidelines
on this.
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