Friday, November 30, 2007

Big players of private sector banks and foreign banks skip high-risk lending

The banks have been facing widespread activism from the customers, regulatory pressures and over leveraging by customers, on the issue of loan recovery, so they have back out themselves from high-interest small- ticket personal loans(STPL). The segment of STPL is the subprime category in India. With this the good olden days are back for the money lenders who charge at least twice the rate of these institutions.

The interest charged on the loans to the STPL segment range anywhere between 30-60% and the average ticket size of these loans is in the range of around Rs 25,000. Before the arrival of private sector banks in this segment, NBFCs were the bigger players in the formal segment.

Many of the big players of private sector banks and foreign banks- ICICI Bank, HDFC Bank, Centurion Bank of Punjab, Development Credit Bank and IndusInd Bank. Foreign NBFCs, including Citi Financial and others like Prime Credit of StanChart, which had in the recent past aggressively lent in this segment, have either pulled out or changed their lending strategies.

One of the major Indian NBFCs, which had made a big-bang entry, has also stopped lending STPL to this segment.

The big players like HDFC Bank have stopped giving oans above 30%, while others like ICICI Bank are now giving loans at only sub-20%. CBoP, which was testing the market trend for launching of its product, has also stepped back from it. Earlier, others like DCB and IndusInd Bank have also quit from the market.

Citi Financial, one of the oldest players in lending has seen a slowdown of around 20%. It has tightened credit norms and started credit counseling, consolidating loans even though it has increased its ticket sizes to around Rs 40,000 in metros. Others like Prime Credit are now offering loans of above Rs 50,000 only.

The negative stances on collection agents against the loan defaulters have affected most of these players. In some cases the bank employees have been charged for such stances with the result that employees are not very comfortable in going out to deal with customers. “Employees have been charged under IPC. This has, in fact, tainted their records,” points a senior banker.

In recent months consumer activism has resulted in rise in delinquency in some of the northern and southern markets like UP, Bihar, and Andhra Pradesh. A senior banker pointed out, “In some geographies, posters have been put up asking customers to call up senior police officials in case they feel banks are harassing them.

Some of the customers on the fringes have taken advantage of this change and are refusing to pay. Delinquencies, which were at around 7%, have now moved up to as high as 15%.” After such a widespread activism by the customers in cities like Mumbai, collection agents refused to do collection work in August and September. Though the situation improving now.

Some officials from regulatory agencies believe that banks are also responsible for such situation as they have doing aggressive lending and using unapproved methods for recovery. The higher margins enjoyed by some of the players led to the entry of a host of new players aggressively in the system.

A senior banker stated that players can make profit in this segment once they build up a strong and huge base along with delinquencies under control. As most of the customers do not have proper documentation, newer players used the payment history with existing players as a surrogate.

Customers started over leveraging themselves as they started to borrow from multiple players, thus leading to defaults.

In some of the cases, collection agents went overboard to recover these loans, which resulted in the recent backlash. Most banks have started offering loans above Rs 40,000 only. In other cases, senior bankers say that they have brought down interest rates, but have tightened credit norms.

Tuesday, November 27, 2007

RBI sees sub-prime woes raising interest rates

The Reserve Bank of India (RBI) believes that any uncontrollable adjustments in the global financial markets may result in a sharp increase in interest rates.

This in turn will affect the repayment of the loans as it will result in an increase in defaults in home loan collection and mark-to-market losses on investments by banks in India.

The report released on trends and progress of banking in India during 2006-07, RBI, said, “Banks are exposed to some degree of market risk in the near term. The major source of such risk is the financial markets. Recent developments in the US sub-prime mortgage market have caused volatility and uncertainty in financial markets.”

RBI said though global financial imbalances had slide down, but they continue to be a cause of concern. Any uncontrollable changes in financial markets would lead to changes in interest rates and liquidity shifts. The market risk could shape up into credit risk in banks’ books.

RBI stated, “Sharp rise in interest rates may result in marked to market losses on the investment portfolio of banks. Sharp rise in interest rates would also have some impact on housing prices and may expose the balance sheet of households to interest rate risk. This may have adverse impact on the balance sheet of banks through increase in loan losses.”

RBI proclaimed that the interest rates in India had toughened and the spread between AAA-rated corporate bonds and government bonds had widened.

However, the investment portfolio of banks as a percentage of total assets declined sharply to 27.5 per cent at the end of March 2007 from 31.1 per cent at end-March 2006 and 36.9 per cent a year earlier.

Banks might experience higher default rate in the coming years on account of rapid growth in credit of the past three years. The slowdown in credit during 2007-08 possibly will result in banks reporting higher NPA ratios.

The high credit offtake and increased supply for bad loans had so far helped banks report lower levels of non-performing assets to advances, despite a rise in misconduct.

Though the NPAs, ratios of banks showed a decline, the fresh slippages for the year ended March 2007 were more than the recovery of NPAs.

RBI stated, “Owing to rapid credit expansion of the last few years, it is possible that banks experience high delinquency rate in the near future. This, combined with the slowdown of credit, might lead to rise in the NPA ratios of banks in the coming years. However, such rise is not expected to be significant and, on the whole, credit risk environment would continue to be benign.”

A decline in the equity market might show some default on loans given for investment in the equity market.

But the impact of a fall in equity market would not be serious for banks as they have only meek direct and indirect exposure to the equity market.

“However, sharp adjustments in the real estate prices might have some implications on the balance sheet of the banking sector,” said RBI. The banks however have flexibility to withstand any adverse development in financial markets.

Banks’ profitability has improved and their capital position continues to remain strong.

According to the reports the banking system has the ability to cope with the situation arising out of any adverse development and a strong domestic growth will continue to have a positive impact on the balance sheet of the banking sector.

Monday, November 26, 2007

New private sector banks and foreign banks have more complaints

The Reserve Bank of India (RBI) affirm though the new private sector banks and foreign banks are getting affluent customers but there are more customer complaints than old private- and public-sector banks.

The number of customer complaints per 1000, the new private sector banks and foreign banks account to be higher at 0.61 and 0.33 in comparison to the old private- and public sector banks at 0.05 and 0.07 excluding credit cards.

Usha Thorat, deputy governor, RBI stated, "New generation private sector banks and foreign banks have got a share of affluent and high net worth individuals (HNIs). These are higher negative moments of truth for them."

Thorat said that the complaints are related to delays in clearing of outstation cheques, high charges, and entries not being properly recorded. In case of home loan borrowers the majority of complaints are related to a lack of transparency of interest rates.

Thorat stated, "When you have a floating interest rate, and the customer signs a document, he does not know the benchmark rate and the spread over the benchmark rate. When it is a fixed rate loan, the customer does not know whether or not the bank has a right to refix the rate after 2-3 years."

The deputy governor stressed banks should make sure while selling their products to the customers, they are given complete and proper information about the product so that the customer knows what he is getting into.

To prevent over-leveraging of customers banks need to take on responsibility of providing good and efficient banking services and lending facilities along with credit counseling and educating customers.

"There is a consciousness among banks. We are sensitizing banks. Look at your agents that they are trained properly. There should be responsible banking and customer education. Customer is also responsible,” said Thorat.

Credit card segment have the highest number of complaints with one out of every five customer complaint is related to a credit card.

If we see the ratio of complaints regarding credit card issuing the old age private – and public sector banks respectively per 1000 credit cards issued. Where as the new private banks and foreign banks have a lower complaint ratio at 0.20 and 0.26 respectively.

Thorat stated, "These banks have issued many more credit cards so the ratio is lower. There is a lot of variation among public sector banks."

Centurion Bank of Punjab to provide Rs 1,200 crore for the agriculture sector in the north region

More and more banks are coming forward to help the farmers, major portion of the population of the country. Following this the Centurion Bank of Punjab (CBoP) has allocated about Rs 1,200 crore for the agriculture sector in the states of the north.

The bank has funded about Rs 600 crore and the rest would be disbursed by March 2008. The bank financed Rs 419 crore last year under agriculture loan. This leapfrog under the agriculture credit was the result of commercialization of agriculture in the region. This will also help in eliminating middlemen who cheat the farmers.

Managing Director and CEO of the bank Shailendra Bhandari informed the bank have a team of 250 agriculture graduates to explain the farmers about the modern techniques of farming, which could get them better returns.

He further added that the stagnation in the agricultural incomes in the past few years could be overcome if the agricultural funding was joined with technological upgrade. He told that by March 2008 the bank would be hiring 100 more agriculture graduates to meet the target of higher agriculture lending.

The small and marginal farmers who will not be able to take loan, the bank is considering to boost cooperative farming to help them.

At present the bank has funded about 20,000 farmers in north and is expected to add around 20,000-25,000 more farmers in the next year.

Bhandari said over 1,000 SMEs were financed by the bank in Punjab, Haryana and Chandigarh and Rs 430 crore was disbursed in the last one year.

According to him the direct bank lending is being introduced to eliminate the middlemen who fleece the farmers.

He informed the bank has 20 licences to open new branches. And it is open to both organic and inorganic growth. The bank registered a growth of 70 per cent from March 06 to March 07.

He said the low frill saving account is being introduced for the weaker sections of society and would be simplified further to make it more users friendly.

HDFC Standard Life country’s first life insurance company on Indian bourses

According to press reports HDFC Standard Life Insurance the country’s private sector life insurer is planning to dilute over 10% equity through an initial public offer (IPO).

HDFC Standard Life Insurance is a joint venture between HDFC and UK-based insurer-Standard Life, will utilize the proceeds of the company for capital requirements.

The public issue will make HDFC Standard Life the country’s first life insurance company to be listed on the Indian bourses.

Speaking on the sidelines of IIM-A Confluence, Deepak Satwalekar, managing director and CEO, HDFC Standard Life Insurance, confirmed that the company would be hitting the capital market very soon. Satwalekar said that the company was planning an IPO and its nitty gritty was yet to be sorted out.

Regarding the equity’s percentage to be diluted, Satwalekar said, “The Company would be diluting over 10 per cent of its holding in the insurance company.”

Standard Life has 18.1% stake in the JV. Recently Standard Life Insurance Company was listed on the London Stock Exchange. “We need to raise funds for our capital requirement for the life insurance business,” he said.

Currently, the insurance regulation allows an Indian insurance company to dilute only up to 26% to any foreign partners.

According to him, the life insurance business will need capital of around Rs 600 crore for the current year. He added that the IPO size would be above Rs 100 crore.

He informed “If the regulation allows further dilution of equity stake, we will go for dilution of equity above 10 per cent”.

Satwalekar said his company is confident that the regulation for equity dilution would be further increased to enable the insurance sector to raise more capital through equity dilution.

Friday, November 23, 2007

Syndicate Bank extends e-network to Mysore and plan to open rural branch at Yelwal

Syndicate Bank introduced CBS five years ago. It was the first public sector bank to introduce CBS and today its 93 per cent of branches are networked, enabling its customers to transact through any of the networked branches.

Adopting a ‘Consumer-friendly, IT-savvy’ face, the nationalized Syndicate Bank has extended its networking to the remaining 7 per cent of its branches too under the core banking solution (CBS) to be able to provide online facility for its customers to all its branches, across the country.

Assistant General Manager K L N Joshi said, “Ours is the first bank to implement CBS among the public sector banks. The five-year experience has put us in a superior position. This has enabled us to introduce several technology-flavoured products like online booking, internet banking, telebanking, e-gateway and ATM sharing. As a result of this technology drive, Syndicate Bank has been awarded the best core banking project for large banks award in 2006 and the Asian Banker IT Implementation Award, also in 2006.”

Chief Manager G Anatharaman added that 35 of the 42 branches in the region, covering Mysore, Mandya, Chamarajanagar, Hassan and Madikeri districts, are now under CBS networking. The rest will be covered by December.

Joshi further added “We have also become the first bank to offer online loan application filing facility. After an encouraging response for the initial two products introduced two weeks back, this facility was extended to cover four more products in Mysore region on November 16, covering education, SME, housing, traders, professionals, and self-employed.”

Chief Manager K Ramesh Pai informed further that “This covers almost all loans, except corporate financing. We want to bring in agriculture too also under online facility. Once that is done, we will be the first bank in the country to introduce the facility for farmers among the nationalized banks.”

Joshi informed that Syndicate Bank is planning to add five ATMs to the existing 21 in the region and open a rural branch at Yelwal, outskirts of Mysore.

“Our two other products, educational loans (Synd Vidya and Synd Vidyarthi) and agricultural loans (Synd Jaikisan) is becoming very popular. Students can obtain Rs 10 lakh loan without guarantee and Rs 20 lakh with guarantee for studies in India and Rs. 7.5 lakh for studies abroad, apart from OD facility up to Rs 10,000. The hassle free investment credit scheme for agriculturists enables loan up to Rs 15 lakh,” said Ananatharam.

Joshi told that as against the banks target of Rs 30 crore, the bank disbursed Rs 18.5 crore farm loans last year and Rs 14.5 crore so far this year.

Banks might adopt self-regulatory loan recovery practices

Recently there have been cases of harassment by recovery agents of the banks. An increase in the infiltration of personal loans in their collection has resulted in banks employing agents for recovering bad debts. The complaints are increasing in number and Reserve Bank of India and courts have raised questions over the practices of banks employing recovery agents after the case of a borrower being driven to suicide by these agents.

The Reserve Bank of India is making new guidelines to keep check on the methods of the banks in view of which the banks are responding by going slow on small-ticket personal loans. Before giving loans banks are checking the financial status of the people and their loan pay back ability due to which the middle class people are facing problem.

The IBA working group studied the recovery practices in the UK and the US. In US and UK, where the lender can take back the security (say a car) if the borrower has defaulted over three times. The only situation the lenders are barred from doing so is when it is in the customers’ own premises.

The Indian Banks’ Association (IBA) have been looking for the fast- track remedial approach and a legal method for the recovery of loan as the legal route takes a very long time years to settle disputes specially in the cases of small loans. The IBA is in favor of self-regulation by banks with respect to practices adopted by lenders for recovering personal loans.

In India, there is no proper law to deal with the recoveries of small-ticket loans. Even under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFESI) that gave some flexibility to recover securities, there is a provision of recovery of securities of only over Rs 1 lakh.

RBI, in its recent monetary and credit policy review, had asked the banks to urged their policies, practices and procedures used in engaging recovery agents by them because the litigations against banks for engaging recovery agents, is getting them adverse publicity which could lead to reputation risk for the banking sector as a whole.

BOB, IBA will be hosting this year’s annual bankers’ conference in Mumbai on 26th November. It will be a two-day event, in which there will be five sessions revolving around the theme, ‘Indian Banking: Towards global best practices’.

The discussions are expected to tackle various issues concerning all the stakeholders in the banking system, including employees, shareholders and bank customers with presentations also from academia, other industries as well as banks.

Thursday, November 22, 2007

Banks are advised to rely upon the Guardianship Certificate for opening and operating bank accounts of disabled persons

The National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999 was passed by Parliament to provide for appointment of legal guardians for persons with disability that is covered under the said Act. The Act was made to help the disable persons to open accounts in the bank.

The Trust also suggested that the legal guardian could open and operate the bank account as long as he remains the legal guardian.

A notification was passed by the Reserve Bank of India that the banks and banking sector have been asked to accept the Guardianship Certificate issued either by the District Court under Mental Health Act or by the Local Committees under the above Act for the purpose of opening and operating accounts for people with disabilities such as autism, cerebral palsy, mental retardation and multiple disabilities, among others. The person who is showing himself as a guardian of the disabled person has to submit the certificate as the proof in the bank for opening and operating an account on behalf of the disabled person.

The notification stated that “Banks are therefore advised to rely upon the Guardianship Certificate issued either by the District Court under Mental Health Act or by the Local Level Committees under the Act for opening and operating bank accounts.”

Wednesday, November 21, 2007

MasterCard to tap unbanked population using mobile phone to widen reach

Mastercard is planning to catch hold of the unbanked population in the country using the mobile phone customer base which has been seeing a rapid growth. The sharp domestic growth has made India a focal point for Mastercard, even as international banks like Standard Chartered, HSBC and Citi see it as a growth driver.

MasterCard Worldwide (South Asia, Middle East & Africa Region) president Sonny Sannon says the banking penetration in India is fewer than 30% while that in Malaysia is 98%. There are more people in the country with mobile phones than bank accounts. There are many options available, but the system needs to be inter-operable and not a closed loop system. It should also be secure.

India is a very important geography for MasterCard and its growth is twice that of the SAMEA region. India has witnessed a 40% annual compounded growth in credit cards for the past few years. The total credit card in the country is the region of 35 million, while the debit card market is estimated at over 70 million. The average card spend per annum is now at Rs 20,000. This is against Rs 16,000 a couple of year ago.

Recently a report was published by Boston Consulting Group according to which about 135 million households in India do not have access to basic banking services and this constitutes around 65% of the total population. In October 2007, India had a total of 213 million mobile subscribers. The number of banking customers is supposed to be much lesser.

In Africa, MasterCard had implemented a project, where customers could use a debit card which could also be used offline. The plastic had a chip in it, which would record the offline purchases. This can also be used online in main cities and also in ATMs. According to Mr Sannon, similar solutions could also be implemented in India.

The company is also looking at launching MasterCard Advisors, a wholly owned subsidiary of the company, which is engaged in consulting services. India is one of the most important markets for the company.

Mr Sannon stated, “India accounts for one-fifths of the card spends in the SAMEA region. The SAMEA region is the fastest growing geographies for MasterCard internationally and is home to the emerging markets in the world. The SAMEA region includes 16 countries which have less than 200 million plastics and a population of two billion.

What is common across the region is that people are aspiring for a better future and there are aspiration needed from governments of these countries.” He said that India is moving up because of its large population, the economy doing well and changes in lifestyle.

UCO Bank describes reports of takeover bid by SBI as baseless

There was news that the State Bank of India (SBI) had evinced interest in acquiring UCO Bank and another nationalized bank, Dena Bank, in a bid to acquire their businesses.

A statement was realized from Kolkata based public sector lender, UCO Bank describing the acquiring process as baseless.
UCO Bank Executive Director, Virendra Kumar Dhingra said, "There haven't been any talks with SBI in this regard. Everything that has come out in the media about the takeover bid is baseless. We came to know about the 'takeover' from newspapers."

Dena Bank's chairman, P L Gairola, however, was not available for comments on the issue.

UCO Bank showed a significant improvement in its bottom line, which has a total business of Rs 1,18,000 crore, as on September 30, 2007, with nearly 1,880 branches across the country and an ATM network of 235.

The bank's total advances as on September 30, stood at Rs 47,000 crore while its deposits were quoted at around Rs 71,000 crore.

UCO bank showed a year-on-growth of 17 per cent in credit and 22 per cent growth in deposits in FY07.

Dhingra informed that at present government has 75 per cent of stake in the UCO Bank which is likely to come down to 59-60 per cent after a proposed Follow-on Public Offer of the Bank, probably early next year.