INDIAN BANKS DURING RECESSION AnshitaGupta Katya Cordeiro Gia Dcunha 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 condition s: Paid up capital and collected funds of banks should not be less than Rs. 5 la cs. Any activity of the bank will not adversely affect the interest of depositor s. 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 exchang e 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: C entral and State government. RBI Other co-operative institutions. Ownership fund s Deposits or debenture issues Intra sectoral competition is absent.

Continued Co-operatives banks are divided into two: Urban Co-operatives State Co-operative s 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 Switzerlands 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, Pu njab National Bank, ICICI and HDFC reported 40 per cent plus growth in the net p rofits. PSU banks recorded a combined net profit of Rs 10,810 crore in the Decem ber 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 n et 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 a ll financial market crashes be it in 1929 (leverage by investment trusts) or 198 7 and 1994 (leverage through collateralised debt and mortgage obligations and ju nk bonds) or 1998 (excessive leverage by LTCM and other hedge funds) or 2001 (le veraged bets on dotcoms) or 2008 (worldwide leveraged bets that US housing price s would not go down; and that interest rates wont 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 relat ively 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 i nvestments as on January 31, 2008 This could wipe off up to 9% of this years 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 Indias $750 million and B ank of Barodas $311 million and Axis Banks $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 th eir equity Only $1 billion out of India s total banking assets of more than $500 billion sl ipped into toxic assets or related investments. When the crisis came and financi al 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 timesfrom 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 banki ng remains the core of the system . Credit expansion during the period between December 19, 2008 and February 13, `09 was Rs. 8,091 croreas per RBI data was sharply lower than that of Rs. 86,978 c rore in the corresponding period of the previous year.

 The total flow of resources to the commercial sector from banks and non-banks du ring fiscal 2008-09up to February 13at Rs 4,98,136 crore was lower than Rs 6,08,35 1 crore during the corresponding period of the last fiscal. 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 banks capital adequacy ratio has come down to 12.68 percent last quarter from 13.51 percent in the corresponding period the previous year. There has been a steady decrease in the foreign exchange reserves held by RBI af ter 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 SMEs. 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 FIIs 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 c ounterparty credit ratings for the following Indian banks to negative from stabl e 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 fo r India. Both these ratings are at the lowest rung of the so-called investment g rade. 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 forei gn currency obligations This belief stems from the following factors:

(1) Banks in India are y invest a significant rtion of their revenue nks are majority owned

subject to policy and regulation by the government (2)The portion of funds in government securities (3)A high propo streams emanate from India (4)A large number of Indian ba by the

 ... Indias fiscal position has deteriorated to a level that is unsustainable in th e medium term. We expect general government deficit, including off budget measur es such as oil and fertilizer bonds, to increase to 11.4% (of gross domestic pro duct) 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&Ps 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 quantitat ive measures are: 1) Raising or reducing Bank Rates 2) Open Market Operations 3) Variable Reserve Ratio

Repo rate: 5% Reverse Repo: 3.5% CRR:5% SLR: 24% Prompts other banks to cut interest rates. RBI is to formulate separate policy f or 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 n ow banks are trying to restructure old loans as well. to attract customers banks are waiving off the processing fees.Eg: Canara Bank

State SBI which cheme r

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

Canara Bank Allows transfer of loans decided to fix loan rates for 20 years by applying diff erent rates to varying slabs. For loans <Rs30 lakhs 1st year- fixed rate-8.25% 2nd -5th year- fixed rate- 9.25 % 6th -20th year- 200bps below the then prevailing BPLR For loans of Rs 30 -99 l akhs, the bank will charge 50 basis points more

 The bank has fixed a floor rate of 10% for the period from sixth to the twentiet h 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 redu ction in its cost offunds. Loan amount < 20 lakhs 20- 30 lakhs Interest Rates 9.75% 9.75% 10.75%

> 30 lakhs

ICICI On 5th March 2009cutinterest ratesfor new home loanbuyers by 25-50 bps. Interest Rate < 20 lakhs 20-30 lakhs > 30 lakhs 9.75% 11.5% 10%

Loan amount

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 bi llion in 2008. The bank said it reduced directors bonuses for 2008 by between 1 0% and 25% and imposed salary freezes on senior managers across regions. Acquire d Cazenove in Asia and is looking to buy assets of other loss making peers in As ia including India.

Banking Effect on the Realty Sector

 Banks seek up to 150% collateral against Loans Unitech, is looking at restructur ing 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 w ithout turning them into non-performing assets (NPAs).

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

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

Foreign VCs The Reserve Bank of India recently started approving applications from foreign v enture 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 Poultr y industry,

 Globally, there is a fight for capital and given the present scenario in financi al markets, it is imperative that VC investors be encouraged as they bring longterm capital to portfolio companies.

FIIs Public Sector Bank shares are losing charm Before recession, FII paid premium pr ices for these shares. Many funds have about 17% of bank shares in their portfol ios

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 Saturd ay slashed interest rates on new car loans by up to 1.5%. Punjab National Bank a nnounced a cut in car loans by 50 basis points

 PSBs have been nudged by the government to speed up credit Increase in auto dema nd SBI, the top auto financer, was the first to slash rates Followed by Andhra b ank, 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 T hey want PSBs to provide cost-effective funding solutions to customers Hyundai M otor has tied-up with PNB, Canara Bank and Syndicate Bankand Tata Motors has app roached 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 stabil ity of the banking system in India. In the current scenario, banks are constantl y pushing the frontiers of risk management.

 Consolidation, competition and risk management are no doubt critical to the futu re 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 w i.org.in www.rupeetimes.com www.telegraphindia.com www.business-standard.com