Impact Of Recession On Banks

INDIAN BANKS DURING RECESSION

AnshitaGupta Katya Cordeiro Gia D’cunha JimcyDaniel

Roll no – 10 Roll no - 20 Roll no – 30 Roll no - 40

SCHEDULE BANKS • Included in the second schedule of the RBI act of 1934. • Have to fill 2 conditions: – Paid up capital and collected funds of banks should not be less than Rs. 5 lacs. – Any activity of the bank will not adversely affect the interest of depositors.  E.g. SBI, ICICI, ING Vyasa, 

• Divided into two: – Commercial banks – Co-operative banks

COMMERCIAL BANKS • Provides: – Checking accounts – Savings accounts – Safe deposit boxes – Currency exchange – Term loans – E.g. Canara bank, ICICI, HSBC etc

Co-operative Banks • Function on no loss, no profit basis. • Perform all the main function of banking. • Finance agriculture based activities, small scale industries • Sources of funds: – Central and State government. – RBI – Other co-operative institutions. – Ownership funds – Deposits or debenture issues • Intra sectoral competition is absent.

Continued… • Co-operatives banks are divided into two: – Urban Co-operatives – State Co-operatives • E.g. Ahmedabad Mercantile Co-op Bank Ltd. • Charminar Co-op. Urban Bank Ltd.

Foreign banks • Allowed to set up their subsidiaries. • Upcoming Foreign banks – Switzerland’s UBS – US based GE capital – Credit Suisse Group – Industrial and commercial bank of China 

Regional Rural banks • Established in rural areas. • SBI has 30 rural banks • Till date 14,475 rural banks in India out of which 91% are located in rural area.

Private and public sector banks • 43.83% of net profit in the last quarter, December 2008. • State Bank of India, Punjab National Bank, ICICI and HDFC reported 40 per cent plus growth in the net profits. • PSU banks recorded a combined net profit of Rs 10,810 crore in the December 2008 quarter compared to 7212 crore last year. • Private-sector banks posted a net profit of Rs 3,185 crore compared with Rs 2,519 crore. • SBI had reported a net profit of Rs 3,713.66 crore, an increase of 52 per cent.

Reasons for the growth • Prudent measures taken by RBI. • All other sources of income have dried up. • Banks are a cheaper source of credit. • Increased the credit limit.

IMPACT OF RECESSION ON BANKS

Has India been hit by he crisis??? • Excessive leverage (too much debt compared to equity) is the common culprit in all financial market crashes – be it in 1929 (leverage by investment trusts) or 1987 and 1994 (leverage through collateralised debt and mortgage obligations and junk bonds) or 1998 (excessive leverage by LTCM and other hedge funds) or 2001 (leveraged bets on dotcoms) or 2008 (worldwide leveraged bets that US housing prices would not go down; and that interest rates won’t fall). 

• While banks traditionally have higher leverage than other businesses, countries where banks either avoided, or were barred from investing in difficult-to-value derivatives, and consequently did not leverage excessively, have been left relatively unscathed. In

• ICICI Bank's overseas operations has reported market to market losses of $264.34 million (Rs 1,060 crore) on account of its exposure to credit derivatives and investments as on January 31, 2008 

• This could wipe off up to 9% of this year’s profit for ICICI 

• ICICI and its subsidiaries abroad have an aggregate exposure of $2.2 billion in credit derivatives. 

• Other banks like the Axis bank, SBI and Bank of Baroda also have such exposures 

• ICICI Bank has the maximum exposure followed by Bank of India’s $750 million and Bank of Baroda’s $311 million and Axis Bank’s $150 million.

• • But its not a crisis for Indian banks as none of the banks have direct exposure to subprime loans 

• It is just a one time profit issue which they can easily finance this through their equity

• • Only $1 billion out of India's total banking assets of more than $500 billion slipped into toxic assets or related investments. When the crisis came and financial institutions around the world found themselves writing off almost $1 trillion in assets from their books, Indian banks had at most a few

Problems faced by Indian Banks…. • Massive liquidity tightening by the Reserve Bank of India (RBI) in early and mid part of 2008, pushed up the cost of funds for business and hampered growth

• • Since mid-September, the RBI has reduced the repo rate about five times–from 9 to 5%. And it has revised the reverse repo rate at least thrice, from 6 to 3.5%

• • Domestic banking is still generally secure especially because nationalized banking remains the core of the system . • Credit expansion during the period between December 19, 2008 and February 13, `09 was Rs. 8,091 crore–as per RBI data– was sharply lower than that of Rs. 86,978 crore in the corresponding period of the previous year. 

• The total flow of resources to the commercial sector from banks and non-banks during fiscal 2008-09–up to February 13–at Rs 4,98,136 crore was lower than Rs 6,08,351 crore during the corresponding period of the last fiscal.

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• While the gross non-performing assets (NPA) went down to Rs.4.62 billion for the period under review from Rs.5.1 billion the previous year, the net NPA went up to Rs.803 million (Rs.80.3 crore) from Rs.778 million (Rs.778 crore). 

• The bank’s capital adequacy ratio has come down to 12.68 percent last quarter from 13.51 percent in the corresponding period the previous year.

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• There has been a steady decrease in the foreign exchange reserves held by RBI after June 2008. In June 2008, we had $320 bn which has now decreased to $250bn in

• Despite a steep cut in policy rates by Reserve Bank of India (RBI) since October 2008, there has not been a commensurate reduction in lending rates by banks as fears of rising bad loans have made them cautious in increasing advances/lending

• • Also commercial banks continue to refuse to fire up demand in the system

• • Due to the banks not lending, the sectors worst affected are realty, automobile and SME’s.

• • Given a situation where the FIIs are still in exit mode and trade at an all time low, only bank lending has to take the lead to rev up the economy.

• • Majority of the banks have pulled out completely from FII’s except for DeutcheBank and Citigroup. The banks who have

S&P Ratings…..!!!!! • Standard & Poor's Ratings Services said that it had revised the outlook on the counterparty credit ratings for the following Indian banks to negative from stable due to cut in Indian sovereign credit outlook  

-- Axis Bank (BBB-/A-3) -- Bank of Baroda (BBB-/A-3) -- Bank of India (BBB-/A-3) -- Canara Bank (BBB-/A-3) -- HDFC Bank Ltd. (BBB-/A-3) -- ICICI Bank Ltd. (BBB-/A-3) -- IDBI Bank Ltd. (BBB-/A-3) -- Indian Overseas Bank (BBB-/A-3) -- Indian Bank (BBB-/A-3) -- State Bank of India (BBB-/A-3) -- Syndicate Bank (BBB-/A-3) -- Union Bank of India (BBB-/A-3)

• The rating agency maintained its “BBB-” long-term and “A-3” short-term credit ratings for India. Both these ratings are at the lowest rung of the so-called investment grade.

• • This is due to the direct and indirect influence that the sovereign in distress would have on a bank's operations, including the bank's ability to service foreign currency obligations

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This belief stems from the following factors:

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(1) Banks in India are subject to policy and regulation by the government (2)They invest a significant portion of funds in government securities (3)A high proportion of their revenue streams emanate from India (4)A large number of Indian banks are majority owned by the

• “... India’s fiscal position has deteriorated to a level that is unsustainable in the medium term. We expect general government deficit, including off budget measures such as oil and fertilizer bonds, to increase to 11.4% (of gross domestic product) in the fiscal year ending March 31, 2009, from 5.7% in the previous fiscal year,” an S&P release said.

• • The revision (in S&P’s outlook) will have no major impact on corporate borrowing 

• It may raise overseas borrowings costs by 50 basis points and lead to a further depreciation of the rupee  (One basis point is one-hundredth of a

WHAT HAS BEEN DONE SO FAR…

RBI The main tool in the hands of the RBI is the  monetary policy and the 3 quantitative measures are: 1) Raising or reducing Bank Rates 2) Open Market Operations 3) Variable Reserve Ratio 

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Repo rate: 5% Reverse Repo: 3.5% CRR:5% SLR: 24%

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• Prompts other banks to cut interest rates. • RBI is to formulate separate policy for auto loan

General steps followed by banks • Softening Home loan interest rates: liquidity in realty sector. • Cut in auto loan interest rates • Initially most banks only provided benefits to new loan takers now banks are trying to restructure old loans as well. •  to attract customers banks are waiving off the processing fees. Eg: Canara Bank •

State Bank Of India • SBI has emerged as the most hostile player by announcing a special scheme under which new home loan borrowers are being offered an 8% rate.( Happy Home Offer) • Scheme is open till April 2009 • Froze interest rate on auto loans at 10% for a year

Canara Bank  Allows transfer of loans  decided to fix loan rates for 20 years by applying different rates to varying slabs. For loans
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1st year- fixed rate-8.25%

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2nd -5th year- fixed rate- 9.25%

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6th -20th year- 200bps below the then prevailing BPLR

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For loans of Rs 30 -99 lakhs, the bank will charge 50 basis points more

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• The bank has fixed a floor rate of 10% for the period from sixth to the twentieth year.  • The scheme is available till December 2009 • • The bank has also lowered auto loan rates from 12% to 11%

HDFC • HDFC has reduced home loan rates by as much as 150 basis points following a reduction in its cost of funds. 

Loan amount

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< 20 lakhs

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20- 30 lakhs

> 30 lakhs

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Interest Rates  9.75% 9.75% 10.75%

ICICI  On 5th March 2009cut interest rates for new home loan buyers by 25-50  bps.  Loan amount Interest Rate   

< 20 lakhs 20-30 lakhs > 30 lakhs

9.75% 11.5%

10%

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 not cut interest rates for existing home loan customers. 

Standard Chatered  A strong focus on Asia is a major factor behind the operating profits of $4.5 billion in 2008.  The bank said it reduced directors' bonuses for 2008 by between 10% and 25% and imposed salary freezes on senior managers across regions.  Acquired Cazenove in Asia and is looking to buy assets of other loss making peers in Asia including India.

Banking Effect on the Realty Sector

• Banks seek up to 150% collateral against Loans • Unitech, is looking at restructuring a Rs 800-crore loan from public sector banks. • The Reserve Bank of India (RBI) recently allowed banks to restructure loans taken for commercial real estate without turning them into non-performing assets (NPAs).

• Pradeep Jain, Chairman, Parsvnath Developers said, We will approach the RBI to demand a restructuring of existing debt by way of Financial Institutions (FIs) granting a minimum moratorium period of a year.

• Public sector banks have made their loans cheaper and private banks and Household Financing Corporations are expected to follow suit. •

Foreign VCs • The Reserve Bank of India recently started approving applications from foreign venture capital investors (FVCI) that were kept on hold for a considerable period of time. • 10 investible sectors.

Investible sectors Infrastructure, Biotechnology, Information technology, Nanotechnology, Research in new chemical entities in the pharmaceuticals sector, rrrrrrr • Dairy and • Poultry industry, • • • • • •

• Globally, there is a fight for capital and given the present scenario in financial markets, it is imperative that VC investors be encouraged as they bring long-term capital to portfolio companies.

FIIs • Public Sector Bank shares are losing charm • Before recession, FII paid premium prices for these shares. • Many funds have about 17% of bank shares in their portfolios •

Auto Sector • • Joint ventures between auto manufacturers and banks. • The country's largest auto maker, Tata Motors, joined hands with public sector lender Punjab National Bank (PNB) to provide financing facilities to consumers for its passenger cars.

Sunday March 1, 02:13 AM • SBI has slashed interest rates on auto loan to 10% • Union Bank of India on Saturday slashed interest rates on new car loans by up to 1.5%. • Punjab National Bank announced a cut in car loans by 50 basis points

• PSBs have been nudged by the government to speed up credit • Increase in auto demand • SBI, the top auto financer, was the first to slash rates • Followed by Andhra bank, Central Bank of India, Syndicate Bank, Union Bank and others.

Readying for a smooth ride • Many auto firms have already joined hands with PSBs in a bid to prop up demand • They want PSBs to provide cost-effective funding solutions to customers • Hyundai Motor has tied-up with PNB, Canara Bank and Syndicate Bankand • Tata Motors has approached SBI to restructure loans. It has also roped in Corporation Bank and the Central Bank

• These reform measures have had major impact on the overall efficiency and stability of the banking system in India. • In the current scenario, banks are constantly pushing the frontiers of risk management.

• Consolidation, competition and risk management are no doubt critical to the future of banking but I governance and financial inclusion would also emerge as the key issues for a country like India, at this stage of socio-economic development.

References • • • • • • • • •

http://indiarealestatemonitor.com/ www.livemint.com www.economictimes.com www.rbi.org.in www.rupeetimes.com www.telegraphindia.com www.business-standard.com