RBI nod to foreign VCs, but sectors limited to 10

The restrictions may hamper the growth of VC activity and discourage foreign investment in India

Mumbai: The Reserve Bank of India, or RBI, recently started approving applications from foreign venture capital investors (FVCI) that were kept on hold for a considerable period of time. While this led to some excitement among the applicants, it was short-lived.
In what has surprised the venture capital (VC) firms, the approval letters issued by RBI to FVCIs provide for a new clause that significantly curtails the investment horizons for such entities to a narrow band of 10 investible sectors. These include infrastructure, biotechnology, information technology, nanotechnology, research in new chemical entities in the pharmaceuticals sector, dairy and poultry industry, among others.

The sectors prescribed are similar to those provided under section 10 (23FB) of the Income Tax Act, 1961, for availing tax pass-through treatment for domestic VC funds.
Illustration: Jayachandran / MintThe intention behind introducing the FVCI regime was to provide such investors a favourable investment environment in India, in comparison with foreign direct investment (FDI), as envisaged by the KB Chandrasekhar Committee Report of January 2000. The report emphasized the importance of sectoral flexibility for FVCIs and noted sectoral restrictions for investment by VC funds are not consistent with the start-up ventures that are built on innovation and technology and can emerge in any business.

Then, the sectoral restrictions prescribed are likely to create unnecessary obstacles and hamper the growth of VC activity. Further, it seems that the regulators do not wish to promote VC investment in several other sectors, including manufacturing, media, outsourcing, among others, many of which are still in a growth phase, have dearth of capital, and have high employment generation capabilities.

If FVCI investment in the real estate sector was indeed a concern to the regulators, we believe that the same is unfounded as RBI has been disallowing applicants from investing in real estate since 2006. To our understanding, it has not cleared any real-estate-focused FVCI applications.

The regulator may have intended to bring the investment opportunities open to FVCIs on the same footing as domestic VC funds, but effectually this is not the case. In fact, this has led to the creation of more disparity between offshore and local funds since domestic VC funds are allowed to invest in all sectors, except a small negative list of sectors.

Some of the offshore funds have been sector-specific and target a few industries. Had such funds known at the time of making the application that such restrictions will be prescribed, they may not have continued with the applications, assuming they do not focus on the sectors prescribed by the regulators. However, several other funds have been sector agnostic and typically spell out broad investment horizons as their investment strategy. The intent being to invest in sectors that provide growth opportunities and the VC is able to provide a value addition through management support, and to take the investee entity to the next level. It is highly unlikely that these funds alter their sectoral focus based on the regulator’s move.
Specifying sectors without any definition ascribed to them further adds to the investors’ woes. While infrastructure is recognized as a crucial input for economic development, lack of clear definition leaves it omnibus and deters investors who are unclear about what it includes and, critically, excludes.

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. The new restrictions may discourage foreign investment in India by sending negative signals in terms of consistency of the regulations and the regulators’ willingness to attract foreign investment.

Source : http://www.livemint.com/2008/12/23001331/RBI-nod-to-foreign-VCs-but-se.html

RBI’s measures can boost demand for property

The slew of measures announced by the Reserve Bank of India (RBI) last week have brought some relief for the cash-strapped real estate sector. A cut More Pictures of 100 basis points (bps) in both repo and reverse repo rates and restructuring of commercial loans have come as steps which can boost demand.

In fact, it is felt that government giving priority to housing loans up to Rs 20 lakh will bring affordable housing into focus once again. But in what way will these benefits be passed on to consumers? And how much will these measures help in reviving the realty growth?

Sachin Sandhir, MD & country head, Royal Institution of Chartered Surveyors (RICS) India, feels that the RBI’s move will help reposition the sector as a priority one and bring it on par with other sectors.

“The across-the-board rate cuts by the RBI is expected to bring in more liquidity into the system by reducing the cost of borrowing for both corporates and retail consumers. Overall, this is a positive move as it signals the easing of interest rates, thereby increasing demand. This will infuse more liquidity into the system and lead to reduction in interest rates, eventually helping the market to expand and diversify.”

What also comes as a positive measure is that housing loans below Rs 20 lakh will be categorised as a priority sector. This means that consumers can now get double benefit in terms of a reduced interest rate as well as more affordable pricing. Hence, properties in the range of Rs 25-30 lakh will become more accessible for the end-user.

“Buyers now have the advantage of getting better prices for their dream homes. Locations in Delhi NCR such as Ghaziabad, Faridabad, Manesar, Sonepat and others will be conducive. Also, developments surrounding tier II & III cities such as Mohali and Zirakpur and all outlying areas of Hyderabad, Bangalore, Kolkata and Pune will be viable locations,” says Rohit Malhotra, CEO, Realtech Group.

Targeting tier II and III towns as well as NCR are locations where you could look to avail of the loan advantage, feels Vijay Jindal, CMD, SVP Builders India. “End users were waiting for a reprieve in home loan interest rates. The measures announced by the RBI will be a big help. The benefits will clearly be passed on to the consumer as developers have already started targeting the affordable bracket for the end-user and will further step up their efforts now,” says Jindal.

Clearly, the consumer stands to gain in the wake of the recent RBI measures. So what should be the buyers’ outlook now? Experts say the disadvantage of waiting too long is that one could lose out on best properties as well as on lower rates which will not hold once the market regains equilibrium.

“The reality is that a reduction in interest rates along with a 20-25% correction in property rates is an ideal situation and the prospective home buyer should take advantage of this situation as the resulting EMI will be a lot more affordable,” adds Sandhir.

In fact, people familiar with the trends feel that the present situation is ideal for a buyer looking at a value buy. “The situation today is More Pictures buyer-friendly, especially for the end-user group. Developers are keen to sell their projects and hence are offering the best value deals.

Banks are also supportive in lending and extending various long-term schemes. The market is good for projects which are ready-for-possession. One can get attractive deals at best locations as the developers want to sell their unsold stock,” asserts Punit Beriwala, MD, Vipul.

However, even though end-users have incentives right now to buy, real estate players still have challenges to face. For most realty firms facing an acute credit crunch, the recent initiatives mean a limited impact. Rohtas Goel, CMD, Omaxe, feels that the current move will solve some of the current liquidity crisis for many real estate companies.

“Restructuring of loans will alleviate the liquidity problem for the moment. That I think is a positive development for many of the struggling real estate companies today. It is a small point but it is a significant point.”

Beriwala, too, is cautious and feels the benefit to the real estate sector is yet to be seen. “Much depends on the banks to announce a policy change to ensure that this extra money is pumped into the realty sector by making funds easily available to developers. We also look forward to banks reducing the home loan rates which will bring the customers back to the market.”

The housing sector is one of the most significant sectors in the economy. These steps, no doubt, will offer some relief to those looking at value-for-money buys. With the latest RBI initiatives, the market is in all likelihood expected to see a revival of demand in the near future.

Source : http://economictimes.indiatimes.com/Features/The_Sunday_ET/Property/RBIs_measures_can_boost_demand_for_property/articleshow/3834335.cms

PSU banks pushed to offer home loans between 7% and 8%

Following the announcement of fiscal and monetary measures by the government and RBI, banks have started cutting rates and now the government is pressing public sector banks to offer interest rates on home loans up to Rs 20 lakh at levels that prevailed before 2004.

The pre-2004 levels of rate would imply that housing loans are offered at interest rates of 7% to 8% against the current rate of 9.5% to 10%. However a banker from public sector bank said, “The price of such home loans may be capped at 10 percent.

Currently the cost of funds for banks is higher that the rate at which they will offer the loans as per the new scheme. The government is therefore planning to work out a deal that would compensate the lenders. Interest subsidy is taken as an option for the deal and also the government is looking at measures that would bridge the gap between the rate at which the loan is offered and the market rate. Refinancing from the Reserve Bank of India is considered for this purpose.

The government is also ready to bear the risk involved in interest rate movement during the course of time. An official from the finance ministry said, “We are looking at various options like interest subvention and cheaper liquidity support to banks to provide home loans at the pre-2004 rate of interest.”

In fact Finance Secretary Arun Ramanathan is expected to meet the chiefs of public sector banks to discuss on matters regarding the same. The outline of the action is likely to be set by the next week.

Under the scheme, home loans up to Rs 5 lakh will be offered at a rate of around 7% while those above Rs 5 lakh and up to Rs 20 lakh will be granted at around 8%. The interest subsidy provision by the government will make the banks earn around 10% for the loans.

In the fiscal stimulus package announced On December 7th, the government informed that PSU banks will announce a package for home loans up to Rs 20 lakh. Even RBI decided on Saturday to include home loans of up to Rs20 lakh in so-called priority sector lending.

Presently banks and housing finance firms are charging between 12% and 14% for fixed-rate home loans and offering between 9.5% and 11.75% for floating rate home loans. But the latest measures announced by RBI has started easing the cost of funds for the banks following which they are expected to decline the interest rate further.

Source :  http://www.rupeetimes.com/news/home_loans/psu_banks_pushed_to_offer_home_loans_between_7_and_8_1932.html

Private banks deny home loan gains

Even as the government and the Reserve Bank of India (RBI) are attempting to bring down the cost of home loans by giving concessions to commercial banks and housing finance companies (HFC), private banks and HFCs have not passed on the benefits of similar concessions given to them as far back as April 2008.

As a result, consumers of private banks and HFCs, who have taken home loans of upto Rs 30 lakh, have not got the benefits of lower interest rates that their public sector bank (PSB) cousins have. The differential can be as high as 1.5 percentage points (a sub-Rs 30 lakh customer of such banks and HFCs, who should have paid 11 per cent is actually paying 12.5 per cent).

“We facilitate the benefit but decision for rate cut depends on banks and HFCs,” said a senior Reserve Bank of India (RBI) official. Ideally, banks should pass on the benefit transferred by RBI to customers, but “we can’t force banks to cut rates.”

In April 2008, RBI had relaxed the risk weightage (the capital to be kept aside with the central bank for loans given) from 150 per cent to 50 per cent for loans below Rs 30 lakh. Which means, a bank that would have had to keep Rs 45 lakh with RBI for a Rs 30 lakh loan would now have to park just Rs 15 lakh. The interest earned on the difference of Rs 30 lakh was expected to be passed on to consumers.

But only PSBs have transferred this benefit. The sole exception: Punjab National Bank (PNB), which has restricted the benefit to loans below Rs 20 lakh.

“We treat priority sector (loans upto Rs 20 lakh) differently but as far as the risk weight is concerned it is an internal matter,” said RIS Sidhu, chief general manager, PNB. However when asked why benefits have not been passed even when the cost of funds has fallen, he said, “PNB in any case is charging the lowest rate and so I don’t think there is a need for us to create the differential at Rs 30 lakh.”

Private banks, however, have no segregation of rates on the basis of the risk weight benefits they get. So, the benefit they are getting are staying with them.

“We are present only in seven big cities where there are few properties at that price (below Rs 30 lakh) bracket,” said Kamlesh Rao, head retail assets, Kotak Mahindra Bank. “In big towns, the risk profile of a customer buying property below Rs 20 lakh is very high and that has to be taken into account.”

The HFC to partially pass on this benefit to consumers was ICICI Home Finance, which lowered its rate by 1.5 percentage points for such loans a week ago. But this benefit has been restricted to loans of less than Rs 20 lakh.  The concerned official was “busy in meetings” and was not available for comment.

A Citibank spokesperson also could not immediately provide a response.

According to an HDFC spokesperson, the benefit is not “so significant” that it could be translated into a rate reduction.

Source :  http://www.hindustantimes.com/StoryPage/StoryPage.aspx?sectionName=HomePage&id=58ab2966-5bba-495f-b3d1-87e21a6d9555&MatchID1=4855&TeamID1=6&TeamID2=2&MatchType1=1&SeriesID1=1223&PrimaryID=4855&Headline=Private+banks+deny+home+loan+gains

Banks follow RBI cue, HDFC & UBI cut rates

NEW DELHI: Taking a cue from the RBI’s rate cut, banks have started cutting their lending rates. On Monday, public sector bank Union Bank of India cut its prime lending rate (PLR) by 0.75 percentage points to 12.5% and the second largest private sector bank HDFC Bank by 0.50 percentage points.

On Saturday, RBI cut both the repo rate the rate at which it lends short-term fund to banks, and reverse repo rate the interest rate paid by RBI to banks for parking their short term funds with RBI, by one percentage points each to 6.5% and 5% respectively.

The RBI’s decisions led to lowering of the interest rates bench mark by around one percentage point. The interest rate on 10-year government bond has fallen by over one percentage point to 5.57%. This clearly indicated an easy liquidity condition in the market.

On Monday, banks deposited around Rs 27,000 crore with RBI under reverse repo operation at 5% interest rate. On top of this, RBI has decided to release another Rs 10,000 crore in the system by buying back the market stabilization bonds from banks, which were issued earlier. These measures will put further downward pressure on interest rate.

A senior bank official said that under the present circumstances, more and more banks will cut their lending rates.

The cut by HDFC Bank will be effective in two tranches of 25 basis points each, the first from December 15, 2008 and the second from January 1, 2009 to 16%

Commenting on the development, executive director of HDFC Bank Paresh Sukthankar said, the drop in the PLR is pursuant to the reduction in the Bank’s incremental cost of funds and the significant easing seen recently in the monetary stands and the local currency money markets.

However, the cut in the HDFC Bank’s PLR will not affect the home loan rate of the bank. In fact, HDFC Bank markets the home loan product of HDFC Ltd, which is yet to decide on the rate cut.

Union Bank in a statement said the bank has effected the cut “in order to ensure credit to productive sectors at lower rates for sustaining growth momentum.” The cut in PLR will be applicable to both the existing and new customers of the bank and also to all PLR related portfolios. That means, it will lead to lowering in the interest rate of its home loan product also. With this, Union Bank cut its lending rate by 1.5 percentage points in the last one month. In November also, the bank had cut its PLR by 0.75 percentage point.

Source : http://timesofindia.indiatimes.com/Business/India_Business/Banks_follow_RBI_cue_HDFC__UBI_cut_rates/articleshow/3810416.cms

Home loan rates may drop in medium term

After the high interest rate scenario over the last couple of years, the first signs of interest rate softening were seen in October when the Reserve Bank of India (RBI) announced sharp cuts in the repo rate and cash reserve ratio (CRR).

Some rate cuts by almost every bank in all consumer loan segments have already happened. Now, there is a buzz in the market that more interest rate cut announcements are expected in the near term.

Considering the market conditions, some rate cuts seem imminent in the near future. However, the government and RBI are playing safe. They are analysing the situation carefully rather than acting in a hurry.

Some factors influence the RBI’s decision on monetary policy. An analysis of these factors indicates borrowers can expect some softening in interest rates in the medium term.

The global economy is going through a recession phase. There is a softening of prices in the global commodities market. Prices of all major commodities have come down significantly. Crude oil prices have come down to one-third of their peak prices quoted in March this year.

Due to the global recession , foreign funds are withdrawing their investments from domestic markets to shore up resources to beat the global liquidity crunch.

Foreign institutional investors (FIIs) have remained net sellers in the domestic stock markets this year and have sold stocks worth more than USD 12 billion so far.

The effects of global slowdown have started showing up in the domestic economy as well. The RBI has already announced one round of sharp cuts in key policy parameters in October this year.

Analysts believe the RBI will announce more rate cuts shortly to shield the domestic economy from the global economic slowdown .

Inflation is showing a downward trend in the last couple of months. It has come down from around 12.5 percent to 8.8 percent last week.

This is mainly due to lower prices of essential commodities like vegetables , pulses and cereals, and some manufactured items.

Analysts expect a further dip in the inflation level due to further softening in commodity prices, as the global economy is going through slowdown and demand is quite weak.

Analysts are predicting inflation will come down to around four percent by March 2009. Given that inflation was one of the main reasons to tighten the monetary policy earlier this year, government and RBI will be more flexible to cut interest rates as inflation slows down.

The demand in the domestic market is visibly slowing down over the last couple of months. It is also visible in various data reported by the industry and analysts’ reports.

Many global research firms have revised India’s GDP growth rate downwards for this fiscal as well as the next fiscal. The main reason for this slowdown in the domestic market is the negative investor sentiments following the slowdown in the global markets .

The Government and RBI are taking many careful measures to stimulate demand in the local market. Bringing down the cost of funds is one of the ways to stimulate demand.

Abrupt rate cuts result in excess liquidity in the system. Therefore, a combination of reduction in repo rate, reverse repo rate and CRR is the way.

Source : http://economictimes.indiatimes.com/quickiearticleshow/msid-3804613.cms

Loans to get cheaper as RBI cuts repo rates again

Mumbai: The Reserve Bank of India (RBI) sent a strong signal to banks to lower interest rates on all types of borrowings by cutting the repo and reserve repo rates by 100 basis points. The cuts are part of a mega economic stimulus package to make borrowing more affordable.

With this, the repo rate—the interest charged by the RBI on borrowings by commercial banks—will be down to 6.5 per cent and reserve repo—the rate at which the central bank borrows money from commercial banks—will be down to 5 per cent.

The RBI has, however, kept the cash reserve ratio (the portion of deposits banks have to keep with the RBI) unchanged at 5.5 per cent, stating there was enough liquidity in the system. The statutory liquidity ratio (the portion of deposits banks have to invest in Government securities) has also been left untouched.

In another measure that will result in lower home loans, the RBI has decided that loans granted by banks to housing finance companies (HFCs) for on-lending to individuals may be classified under the priority sector, provided the loans granted by HFCs do not exceed Rs 20 lakh per dwelling unit per family. The priority sector status will enable banks to reduce interest rates on such loans significantly.

The RBI had cut the repo rate from 9 per cent to 7.5 per cent in October-November as a signal to commercial banks to bring down rates, but not many private banks did that. This time, RBI Governor D. Subbarao, while announcing the cut in rates in Mumbai on Saturday, said in no uncertain terms that commercial banks “need to get the signal”.

“We hope that commercial banks (will) act accordingly. It is a matter of time before banks take a decision on interest rates on home loans. Monetary transmission takes time. However, as there is adequate liquidity in the system now and the demand for money is also falling, interest rates will also move down,” Subbarao said.

On Friday, ICICI Bank reduced its interest rate for home loans of Rs 20 lakh and below by 1.50 per cent to 11.50 per cent. Bankers said that with a comfortable liquidity position and fall in inflation, interest rates would now fall across the board.

A reduction in the repo rate will make borrowing cheaper for commercial banks. The cut in reverse repo rate—the first this year—to 5 per cent will make it less lucrative for banks to park funds with the central bank.

The apex bank did not make any changes in the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). To provide easier credit to micro and small enterprises, the RBI enhanced the refinance facility for the Small Industries Development Bank of India (SIDBI) by Rs 7,000 crore. The RBI is also working on a Rs 4,000 crore refinance facility for the National Housing Bank (NHB).

Commenting on the health of the economy, the RBI governor said, “The outlook for the Indian economy is mixed. Confidence in global credit markets continues to be low, and credit lines remain clogged. There is evidence of economic activity slowing down.”

Among various measures, the RBI also allowed buyback of foreign currency convertible bonds (FCCBs) of companies out of rupee resources. With export growth turning negative, it also said overdue export bills up to 180 days will get credit not exceeding BPLR minus 2.5 percentage points.

Source : http://www.indianexpress.com/news/loans-to-get-cheaper-as-rbi-cuts-repo-rates-again/395198/2

RBI signals cheaper loans

Mumbai: Sending a clear signal to banks to reduce lending rates and advance more credit to productive sectors, the Reserve Bank of India on Saturday cut its key short term rates – the repo and reverse repo – by one percentage point each.

The rate cuts, which the market had been speculating about the past few days, form part of a package of measures – dubbed as ‘growth stimulus’ – announced by the central bank to step up demand and boost growth in the economy.

Announcing the measures at a press conference on Saturday, the RBI Governor, Dr Duvvuri Subbarao, said:

“We hope that the measures announced today encourage banks to cut lending rates. The financing cost, transaction cost, and administrative cost of passing on this money should be as small as possible.”

The other measures in the package include permission for banks to allow a second restructuring of loans to units facing cash flow problems, a funding lifeline for Small Industries Development Bank of India (SIDBI) and National Housing Bank, incentives to banks to on-lend to housing finance companies, and easing the regulatory norms for treatment of banks’ exposure to commercial real estate.

Leaving other key ratios such as the CRR (cash reserve ratio) and SLR (statutory liquidity ratio) unchanged, the RBI cut repo to 6.5 per cent from 7.5 cent and the reverse repo to 5 per cent from 6 per cent from December 8.

The revision in reverse repo comes after a gap of almost two-and-a-half years, the last being a hike by 25 basis points in July 2006.

Reduction in reverse repo is to encourage banks to lend more to the productive sector rather than parking their surplus funds with RBI.

(Repo is the rate at which RBI lends money to banks, while reverse repo is the rate at which it accepts surplus funds from banks).

Including the latest cut, the central bank has reduced the repo rate by 2.5 percentage points over the last two months.

‘Cooling off’ period

However, banks, which had reduced their lending and deposit rates last month after the first round of rate cuts by the RBI, appear unprepared for another cut immediately, some of them claiming they needed a “cooling off” period.

T.S. Narayanasami, CMD, Bank of India, said the cut in repo and reverse repo rates are related to short -term liquidity: “As for banks effecting a cut in deposit and lending rates, we’ll have to see. The regulator has been forthcoming. So, banks will align rates to make credit affordable and make a difference to borrowers.”

The RBI Governor did note that there was slackening demand from borrowers as well as risk aversion on the part of banks. “Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity…….Admittedly, there is some risk aversion and there is a tendency among banks to maintain more than adequate liquidity.”

A top SBI official said: “A general reduction in interest rates on assets and liabilities cannot be ruled out following RBI’s latest measures. We will take stock of the situation arising out of these measures. We will weigh the impact of our action in this regard on our depositors and also take into account the stimulus package that the Government is expected to announce shortly before taking rate action.”

Real estate boost

In order to help ease the tight liquidity situation the real estate sector finds itself in, RBI has decided to extend concessional treatment to banks’ commercial real estate exposures which are restructured up to June 30, 2009. This would reduce the provisioning cost of banks lending to the sector.

Recognising the fact that in the current scenario of economic downturn even viable units could face temporary cash flow problems, the RBI, as a one-time measure, has decided that the second restructuring by banks of exposures (other than exposures to commercial real estate, capital market and personal/consumer loans) up to June 30, 2009 will also be eligible for exceptional regulatory treatment.

In a bid to boost lending to the housing sector, the RBI has decided that loans granted by banks to housing finance companies (HFCs) for on-lending to individuals for purchase/construction of dwelling units will now be classified under the priority sector, provided the housing loans granted by HFCs does not exceed Rs 20 lakh per dwelling unit per family. However, the eligibility under this measure will be restricted to 5 per cent of the individual bank’s total priority sector lending. This special dispensation will apply to loans granted by banks to HFCs up to March 31, 2010.

On the FCCB front, the RBI which has already allowed premature buyback of FCCBs issued by Indian companies, will now consider their buyback out of rupee resources: provided there is a minimum discount of 25 per cent on the book value of the FCCBs; that the buyback amount is limited to $ 50 million per company; and that the resources come from the internal accruals of the Indian company. If the Indian company has its own foreign exchange resources such as through EEFCs or fresh ECBs, the buyback could be at a discount of 15 per cent.

Micro/small enterprises

In view of the need to enhance credit delivery to the employment-intensive micro and small enterprises (MSE) sector, the RBI has decided to provide refinance to the tune of Rs 7,000 crore to SIDBI. The facility will be available at the prevailing repo rate under the LAF for a period of 90 days. During this 90-day period, the amount can be flexibly drawn and repaid. At the end of the 90-day period, the drawal can also be rolled over. This refinance facility will be available up to March 31, 2010.

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The RBI is also working on a similar refinance facility for the NHB amounting to Rs 4,000 crore.

Export credit

In view of the difficulties faced by exporters on account of the weakening of external demand, the RBI said the prescribed interest rate as applicable to post-shipment rupee export credit (not exceeding BPLR minus 2.5 percentage points) would now be extended to overdue bills up to 180 days from the date of advance of the loan.

Source : http://sify.com/finance/fullstory.php?id=14813283

RBI move to boost housing loans

MUMBAI, Dec. 1: In a bid to encourage lending to housing sector, which has been witnessing some slowdown over the past few months, RBI today relaxed provisioning and risk weight norms for Urban Cooperative Banks (UCBs).
On a review, it had now been decided, as a counter-cyclical measure, to effect changes in these norms, with immediate effect, RBI said in a circular to UCBs.
The central banks has brought down the provisioning requirement for advances from existing one per cent to 0.40 per cent of the loan amount.
The move taken would free capital to the extent of reduction in provisioning requirement that could be, in turn, used for increasing lending to targeted specific sectors, “except in the case of direct advances to agricultural and SME sectors, which shall continue to attract a provisioning of 0.25 per cent”, it said.
The provisioning requirement was increased in February 2007 with a view to maintain asset quality in the light of high credit growth in the real estate sector.
It added that the revised norms would be effective prospectively but the provisions held at present should not be reversed. n PTI

Source : http://www.thestatesman.net/page.news.php?clid=12&theme=&usrsess=1&id=233773

RBI makes it easier for banks to lend

Over the past few years, banks went all out to expand their home loan portfolios. In the present scenario of increasing interest rates and squeezing  liquidity, the default rates are expected to increase. Bankers feel that home loan defaults could rise in the light of the economic slowdown. The delay in receipt of EMIs impacts the quality of loan assets of banks negatively. The Reserve Bank of India (RBI) had mandated strict guidelines for provisioning of loan assets of banks.

The RBI has extended guidelines on restructuring, that are currently available to industrial units, small and medium enterprises (SMEs) etc, to encompass home loans given by banks. This would benefit the banks.

The RBI has said banks can now avail of the special regulatory treatment relating to asset classification on restructuring of home loans. Previously, the RBI had prescribed a ceiling of 10 years on the repayment period of restructured advances, thereby making housing loans, which have a tenure ranging between 15 and 20 years, not eligible for the special treatment. Home loans can be restructured either by extending the repayment period or by giving a moratorium on interest payment for a certain period.

According to the RBI circular , the ceiling of 10 years on the repayment period of restructured loans would not be applicable, subject to compliance with all other terms and conditions prescribed by it. The board of directors of the banks should prescribe the maximum period for restructured advances keeping in view the safety and soundness of advances.

According to the RBI, the restructured housing loans should be risk-weighted with an additional risk weight of 25 percentage points to the risk weights prescribed. Previously, banks had to assign a risk weight of 50 percent on loans up to Rs 30 lakhs and 75 percent on loans of Rs 30 lakhs and above. This will prevent banks’ home loan assets from being downgraded once they are restructured, and help in improving the bottomlines of banks. Banks can book interest, but need not provision for bad or potentially non-recoverable loans.

When the amount due to a bank (present value of principal and interest receivable as per restructured loan terms) is fully covered by the value of the security, charged in its favour, the bank’s due is considered to be fully secured.

While assessing the realisable value of a security, primary as well as collateral securities would be reckoned, provided such securities are tangible securities and are not in intangible form like guarantee etc of the promoter or some others. However, for this purpose the bank guarantees, State Government guarantees and Central Government guarantees will be treated on par with tangible security .

restructured account is one where the bank, for economic or legal reasons, relating to the borrower’s financial difficulty, grants to the
borrower concessions that the bank would not otherwise consider. Restructuring would normally involve modification of terms of the advance, which would generally include alteration of repayment period, repayable amount, number of instalments , or rate of interest.

This easing of pressure on banks would enable them to go a bit easy on home loans – both in terms of disbursals and new approvals. The banks were increasingly becoming reluctant because of the stringent provisioning requirements. In case of defaults or delays, they were required to make an appropriate provision in their books. This affected the financials of banks. The new guidelines provide greater leverage to banks. They will now have greater flexibility to provide home loans for long tenures.

Source : Economictimes

RBI makes recast of realty loans tougher

MUMBAI: India’s struggling real estate sector is set to come under further pressure in the coming weeks as the Reserve Bank of India (RBI) has made
it tougher for banks to ‘restructure’ loans, forcing them to cut house prices or risk being starved of bank funding. Banks often resort to restructuring loans — a practice aimed at preventing loans from being classified as bad — when they sense their borrowers are facing difficulties in repaying loans. In a typical restructuring, banks give borrowers more time to repay the loan by extending the loan tenure, and sometimes, even at reduced interest rates.

Such an exercise enables banks to keep their non-performing assets (NPA) ratios under check and their books clean of the stigma of dud loans. But in a little-known directive issued earlier this year, the central bank has ordered that the moment a loan to a builder is restructured, banks must classify the account as an NPA.

However, for restructured loans in all other sectors, the account can continue to be treated as a so-called ‘standard asset’ , thus sparing banks from having to make large provisions in their profit and loss accounts. The inability to restructure loans easily is forcing banks to put pressure on builders to cut prices, sell properties and service loans. Builders are usually left with little choice as an NPA tag will make it difficult for them to approach other banks for funds.

“We are putting pressure on the real estate sector to reduce property prices. In such times, even if they are able to keep their head above water, it would be fine. They have all had a good innings so far. Now, they have to learn to live with thin margins,” said TS Narayanasami, chairman & managing director of state-run Bank of India, and the chief of industry body — Indian Banks’ Association.

“Just banks reducing interest rates will not help in reviving sentiments; builders will have to bring down prices for buyers,” Mr Narayanasami added.

Bankers say demand for home loans has fallen because buyers are waiting for property prices to fall. “Banks have taken the initiative by cutting home loan rates. Prices of cement and steel too have fallen, but builders have not reduced property prices,” said MV Nair, CMD of Union Bank of India.

Although the RBI relaxed some bank lending norms for the building sector last weekend, it has remained quiet on the issue of restructured loans of builders.

Analysts have expressed concerns over the financial health of the real estate sector. City-based retail broking firm, India Infoline , fears the liquidity situation of developers could worsen further if banks refuse to refinance maturing debts of real estate companies and maintain the credit freeze on their accounts.

“We reckon that debt maturing over the next 12 months for developers like Unitech, Sobha and Puravankara is higher than our estimate of these companies’ revenues over the corresponding period. The situation with Omaxe, Parsvnath and Ansals also remains precarious, owing to large land advances and high receivables” , it said in a research note.

The building sector has seen a raft of credit downgrades amid refinancing concerns and bankers say the sector has little choice but to cut prices. “If a builder does not pay, banks would either initiate a recovery proceeding or restructure the loan. A recovery proceeding often results in lower realisation. This, hopefully, should indirectly put pressure on builders to bring down price and go for negotiated sales,” said SA Bhat, CMD of Indian Overseas Bank.

Source : Economictimes.com

Realty Sector- Banks to be more ‘considerate’

Banks are expected to be more ‘considerate’ in lending to commercial real estate with the Reserve Bank of India removing the additional capital requirements for advances to this sector.

Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India and Chairman of the Indian Banks’ Association, said in keeping with the economic needs, the RBI has rightly relaxed the provisioning requirements to support the real estate and NBFC sectors. “We will be more considerate in terms of interest rates when clients from these segments come for roll-over of their credit lines.”

RBI on Saturday eased the capital requirements for bank advances to the real estate sector, NBFCs and capital market as part of a host of measurers to boost liquidity and enhance flow of credit.

Bankers said RBI’s move is a clear signal that banks must lend to real estate, which is facing a slow down in demand. While most bankers agree that there is a case for extending more credit to the real estate sector, they were not unanimous on the issue of pricing the credit.

Pricing issue

Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said RBI has given clear indication that banks must lend to the real estate sector. Pricing will depend on the funding cost. Earlier, banks were hardly lending to this sector because of the risk and the exposure limits. “Now we will lend. Pricing issue will come later. Over a period of time, it is possible that interest rates may come down.” Once prices reach more realistic levels, house-buying will pick up, he said.

Banking analysts, however, said they expect an increased flow of credit to the real estate at lower rates.

Mr M .D. Mallya, Chairman and Managing Director of Bank of Baroda, said both capital cost and provisioning cost have to be taken into account for pricing. For certain segments, where standard provisioning and risk weight were earlier increased, it has been brought down now. So appropriately, pricing would have to take this into account. This facilitates improved credit delivery to the sector and gives it greater flexibility for over all credit delivery.

Positive sign Mr Keki Mistry, Vice-Chairman and Managing Director, HDFC, said the realisation (on the part of the central bank) that the real estate sector needs assistance itself is a positive sign. The employment generation in the construction sector is huge and a slow down in this sector first leads to unemployment of large number of workers.

Banks were reluctant to finance real estate sector; even “AAA” rated companies in the sector were finding it difficult to access bank credit. The Reserve Bank of India had raised the risk weight on bank advances to the commercial real estate sector from 100 per cent to 150 per cent. This was done at a time when the real estate prices were rising rapidly. And there were concerns on the asset quality. Now the situation has changed. The sector is witnessing a slow down.

Source : www.indianrealtynews.com

RBI against breach of FDI caps by FIIs

NEW DELHI: In a move that has virtually torpedoed the controversial proposal from the department of industrial policy & promotion (Dipp) to allow FIIs to invest beyond sectoral FDI caps, the Reserve Bank has said that Fema (Foreign Exchange Management Act) does not permit such flexibility.

The central bank has also rejected the liberal formula proposed for calculation of indirect foreign equity in Indian companies by stating that all foreign investment –– including FDI, FII investment, FVCI (foreign venture capital investment) and NRI investment –– should be taken into consideration on a ‘pro rata’ basis. The Dipp had suggested that FDI in holding companies should be taken into consideration for calculating indirect foreign equity in Indian companies, only if it exceeded 50%. In holding companies where FDI is below 50%, FDI in downstream should be treated as nil, according to the proposal.

The finance ministry is also opposed to the proposal and wants to indirect FDI to be calculated on a pro rata basis, a finance ministry official, who did not wish to be identified said. However, the proposals now face the danger of being put on ice. Dipp had sent the proposals for the consideration of the Cabinet Committee on Economic Affairs (CCEA), but it is unlikely to get the green signal due to lack of support from the finance ministry and the RBI. The home ministry and the defence ministry also have reservations and the liberalisation now faces rough weather, he said.

The RBI has argued that clearing the proposal would mean allowing 100% foreign investment in sensitive sectors like telecom though the sectoral FDI ceiling is 74%. The intent of the government was to keep 26% stake in telecom companies in the hands of Indian citizens, officials of the apex bank have said. The several other sectors like civil aviation, single-brand retail, banking and information & broadcasting would also see effective foreign holding breach the FDI limits set for these sectors. “The FII cap should be included within the FDI cap in sectors having composite FDI cap,” a letter from the RBI to the finance ministry has emphasised.

The apex bank has also said that FEMA regulations do not provide any mechanism to monitor indirect foreign investment in Indian companies. This comment is in response to Dipp’s suggestion that FIIs can report their indirect stake to Indian authorities and commit that stakes beyond the FDI limit would not entail board representation and management control.

“All foreign investments (FDI, FII, FVCI, NRI, etc) in an Indian company, irrespective of the percentage, should be considered for deciding whether a company is a foreign owned company for the purpose of determining indirect foreign investment,” says the letter.

Moreover, the finance ministry opposition stems from the fact that it in favour of adopting a comprehensive view needs on the issue of allowing FII over an above the FDI cap and calculation of indirect foreign holding. “The proposal could also lead to an anomalous situation in certain sectors such as private sector banks could theoretically have foreign investment up to 100%.

The same situation could arise in respect of sensitive sectors such as media, insurance, telecommunication, etc. Therefore, foreign investments should capture the entire investment through various routes –– FDI, FII, FVCI, PIS (portfolio investment scheme), etc,” says the communication.

Source : Economictimes

RBI steps to spur growth in real estate

After pumping in around Rs 2.80 lakh crore liquidity into the banking system, the Reserve Bank on Saturday announced a slew of measures to give a boost to the real estate sector, in addition to taking steps to arrest decline in forex reserves.

In order to ensure more liquidity for the real estate sector, RBI allowed the registered housing finance companies to raise short-term funds from overseas markets.

“It has been decided to allow, as a temporary measure, housing finance companies registered with the National Housing Bank to raise short-term foreign currency borrowing under the approval route”, a release by RBI said.

The decision will also help the country shore up its declining forex reserves, which according to the latest data, has slipped to about $250 billion from a high of $314 billion in April-May.

In addition, the RBI also permitted Indian banks to offer better interest rates for foreign currency deposits by the non-residents.

Henceforth, the banks can offer rates up to 100 basis points over London Interbank Offered Rate (LIBOR) under Foreign Currency Non-Resident (Banks) scheme and 175 basis over LIBOR on Non-Resident (External) Rupee Accounts deposits.

These changes will encourage the banks to make the non-resident deposit schemes more attractive by raising interest rates.

Since October RBI has announced various measures, including cutting the mandatory deposits that banks keep with RBI by 350 basis points, unlocking nearly Rs 2.80 lakh crore bank funds.

Source : profit.ndtv.com

Provide for deals with bankrupt Lehman arms, RBI tells banks

The Reserve Bank of India (RBI) has advised all banks to provide for the deals entered into directly or indirectly with subsidiaries of Lehman Brothers that have filed for bankruptcy globally.

The provision would have to be made for the quarter ended September 2008.

Sources close to the development said the total exposure of Indian banks to structured products — fixed income derivatives such as forward contracts, overnight interest rate swaps etc. — of Lehman would not exceed Rs 800 crore.

While Indian operations of Lehman Brothers are still intact, its subsidiaries namely Lehman Brothers Securities Asia, Lehman Brothers Futures Asia, Lehman Brothers Holdings Japan and Lehman Brothers Japan have already filed for bankruptcy.

Meanwhile, banks have been asked to terminate deals with Lehman subsidiaries, which were still operational, in due course of time in the open market or through bilateral negotiations with interested parties.

In a meeting held with the Fixed Income and Money Market Dealers’ Association, various foreign and Indian banks have already served their termination notices with regard to deals in structured products.

As for the exposure to the real estate sector in India, RBI is of the view that the government’s press note-5 on foreign direct investment (FDI) provides for exemption from the lock-in period in real estate investments in special cases. As per rules, FDI in real estate has a lock-in period of three years before any foreign entity could exit investments in India.

However, it has to be seen which arm of Lehman Brothers has made real estate investments directly or indirectly. If that subsidiary has already filed for bankruptcy globally, regulators may allow an exemption from the lock-in period. However, sources said no Lehman subsidiary or related entity has applied for an exemption from the lock-in period yet.

Norms for Housing Loans by Coop Banks Relaxed: RBI

Making it easier for urban cooperative banks to extend housing loans, Reserve Bank has relaxed the risk provisioning norm for purchase of residential properties up to Rs 30 lakh.

The central bank issued notification yesterday in pursuance of the annual credit policy announcement made by the Reserve Bank Governor Y V Reddy on April 29.

Earlier on May 15, the Central Bank had relaxed the risk provisioning norms for housing advances by the commercial banks. “It has been decided to enhance the limit of Rs 20 lakh to Rs 30 lakh in respect of bank loans for housing in terms of applicability of risk weights for capital adequacy purposes. Accordingly, such loans will carry a risk weight of 50 per cent,” Reddy had said.

The move would provide the urban cooperative banks additional capital for lending more to housing sector. For banks, the amount of capital they are required to set aside for each loan is decided by minimum capital adequacy ratio prescribed by the central bank. Capital adequacy ratio is the ratio of a bank’s net worth to its risk-weighted credit.

According to the analysts, the RBI has modified the provisioning limit for housing loan to take care of the growing property rates mainly in the urban centers.

The risk provisioning earlier was 75 per cent of the loan value between Rs 20-30 lakh. For loans exceeding Rs 30 lakh for purchase of residential property, the banks would have to make a risk provision on 75 per cent of the loan amount.

Home Loans may become Costlier as RBI raises Repo Rate

Consumer, home loan, auto and other loans could become costlier with the Reserve Bank today hiking its short-term lending rate to banks by 0.25 per cent to 8 per cent in the face of surging inflation.

Announcing the increase from 7.75 per cent, the central bank said the decision was taken to contain inflationary expectations as the rate of rise in prices touched a 45-month high of 8.24 per cent.

The inflation, analysts said, is expected to climb over nine per cent once hike in petroleum prices gets reflected in the official wholesale price index.

The move to increase repo rate, at which the central bank gives short term money to banks in exchange of government securities, has been taken for first time this fiscal.

It had earlier been trying to contain inflation by raising cash reserve ratio– the mandatory deposits that banks keep with RBI.

Commenting on RBI decision Punjab National Bank Chairman K C Chakrabarty said, “All interest rates would be affected. We will take decision by month end. It (the move) will increase the cost of resources.”

Country’s largest lender SBI said it would examine lending and deposit rates on Friday.

Real estate company Unitech said home loan rates may rise after the Reserve Bank’s step.

The reverse repo rate, at which RBI borrows money from banks in exchange of the government papers, however, remained intact at six per cent.

HDFC Bank Chief Economist Abheek Barua said,” This (repo rate hike) will have an implication on the bank’s lending rates. I think the Prime Lending Rates of the banks will go up by about 50 basis points. There would also be a revision of bank’s deposit rates.”