The Reserve Bank of India (RBI) has turned down banks’ plea for sops such as relaxation of exposure norms and priority sector status for lending to infrastructure projects.

“If you look at the concentration risk and the asset-liability mismatches, any further relaxation will be imprudent,” RBI Governor Usha Thorat said at a banking seminar organised by the Indian Banks’ Association.

In February, RBI said exposure of banks to infrastructure finance companies had been enhanced up to 20 per cent of their capital funds.

She conveyed RBI’s disapproval of the plea for giving priority sector lending (PSL) status for funding to infrastructure projects. There was a specific purpose for PSL, to provide credit to areas like farming and micro and small enterprises. Banks found it challenging to meet the condition that 40 per cent credit go to the priority sector, Thorat added.

Thorat said the headroom for government financing for infrastructure was quite limited in India and so there was a need to reach out to banks, financial institutions and capital markets. India needs $500 billion for infrastructure in the five years to 2012.

The government and the Planning Commission had earlier indicated that this could double to $1 trillion during 2012-2017. Indian lenders expect loan growth to pick up in the second half of this financial year, driven by demand from the infrastructure sector.

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According to the latest data released by the Reserve Bank of India (RBI), deposits went up by 14.44 per cent on a year-on-year basis.

After RBI asked banks to beef up deposit mobilisation in its first quarter monetary policy review, banks started raising rates. Most banks raised on short- and medium-term fixed deposit by up to 150 basis points.

RBI has projected 18 per cent deposit growth for 2010-11. So far, deposit growth has not exceeded 15 per cent in this financial year.

Bank credit fell by Rs 13,114 crore during the fortnight. It grew by 19.4 per cent on a year-on-year basis at the end of the fortnight. Outstanding bank credit stood at Rs 33,51,396, against Rs 28,06,741 crore at the end of the previous fortnight.

Bankers said they expected modest credit demand in the current quarter. The demand was robust during the first quarter of the financial year, predominantly because of the huge demand from telecom companies for 3G and broadband wireless access.

“Credit flow may not have happened from the banking system but corporate have availed of the alternate sources. They have raised funds from other routes like commercial papers (CPs) and mutual fund,” said a senior public sector executive.

Last month, yields on CPs had touched a one-year high. This was also because of the banking system shifting to base rates as corporates had no means to raise short-term capital.

“Demand for credit is not robust. We had expected a moderate credit growth in this quarter. With funds flowing from other sources to the commercial sector, demand from banking will be slow for some more time,” said a senior executive of another public sector bank.

The central bank has projected 20 per cent growth in credit for the current financial year.

A number of banks have also increased their benchmark prime lending rates (BPLR) in a bid to coax more customers to move to the base rate system, which came into effect from July 1. So far, base rates have been untouched.

As a result of high deposit mobilisation and drop in credit growth, banks’ investment in government securities went up by Rs 23,674 crore during the fortnight.

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The bank is also relying on the branches it plans to open in the northern region to push its current account-savings account (Casa) ratio in the overall deposit book.

“We are aggresively pushing Casa in our overall deposit book for the last two years. Casa ratio, which was 22 per cent two years back, has reached 24.6 per cent due to these efforts. We would like to see the ratio to be higher than the present ratio in the near future,” said Albert Tauro, chairman and managing director of Vijaya Bank.

He said the bank has introduced liberal remittances for depositors along with certain concession for current account holders to increase its Casa portfolio. The government had recently asked banks, like IDBI, UCO Bank, Oriental Bank of Commerce and Vijaya Bank, to increase their Casa to 30 per cent of the total deposits as it has a direct bearing on their profitability and net interest margin.

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The frontrunners to succeed Stephen Green, set to become a British government minister in January, are said to be former Goldman Sachs banker and HSBC non-executive director John Thornton, and current chief executive Michael Geoghegan.

Both have a wealth of experience of China, Asia more broadly, and an inside track on the complex and far-reaching financial services giant.

HSBC’s choice is complicated by it having to decide where the chairman will be based, past trouble with investors when it ignored best corporate governance, and the sheer complexity of managing the world’s third biggest bank.

HSBC said its reach across 86 countries and diverse operations explained why it needed a full-time chairman with international banking experience.

Green, who will become Britain’s trade and investment minister in January, announced his exit on Tuesday, earlier than expected and without a successor being named. The bank said it had started a search for a replacement.

Thornton spent 23 years at Goldman Sachs including spells as president and co-chief operating officer and was head of its London operations and chairman of the Asia business. He has been a non-executive director at HSBC since 2008.

Irish bookmaker Paddy Power makes Thornton the 5/4 favourite, with Geoghegan at 15/8.

Other candidates linked with the role include Simon Robertson, another non-executive; Vincent Cheng, chairman of HSBC Bank (China); Douglas Flint, finance director; Mervyn Davies, former boss of rival Standard Chartered; and Adair Turner, head of Britain’s financial watchdog.

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Indian banks would not be impacted significantly by the higher capital norms being contemplated by the Basel Committee on Banking Supervision (BCBS), Reserve Bank of India (RBI) Governor Duvvuri Subbarao said on Tuesday.

BCBS, engaged in discussions to chalk out the agenda for a fresh round of reforms in the financial sector, released a discussion paper recently.

This round, known as Basel-III, broadly asks banks to hold more and better quality capital as well as more liquid assets. It also proposes to limit banks’ leverage, besides mandating building up of capital buffers in good times for use during periods of high stress.

Subbarao said Indian banks were well capitalised and the Basel-III norms were unlikely to prescribe higher capital than what they were maintaining. “Indian banks are not likely to be significantly impacted by the new capital rules. As such, we do not expect our banking system to be significantly stretched in meeting the proposed new capital rules both in terms of the overall capital requirement and the quality of capital,” Subbarao said in his address at the Ficci-IBA banking conference.

As on June 30, the capital adequacy ratio of the banking system stood at 13.4 per cent, of which Tier-I capital accounted for 9.3 per cent, he said.

However, the proposed changes in capital rules regarding counterparty credit risk framework may have capital adequacy implications for some Indian banks with large over-the-counter bilateral derivatives positions. “This underscores the importance of enlarging the derivatives transactions coming within the scope of a multilateral settlement mechanism through central counterparties,” Subbarao said.

The Basel committee has also proposed lower financial leverage of banks, as the global financial crisis was accentuated by high leverage by some banks. According to the BCBS proposal, no asset, including cash (which obviously has the least risk) should be excluded from leverage ratio.

According to RBI, Indian banks’ leverage ratio is quite moderate, and along with adequate Tier-I capital and limited derivatives activities, leverage ratio norms will not be a constraint. Regarding the proposal for levying systemic risk capital and liquidity charge to systemically important financial institutions, Subbarao said a few Indian banks might be called upon to maintain additional capital and liquidity charges. The governor also pointed that the government’s fiscal position would not come under stress if it had to infuse more capital into banks.

“In case of public sector banks, the government, as the owner, will have to contribute to building capital buffers so as to maintain the floor of 51 per cent in ownership. This is unlikely to put undue pressure on the government’s fiscal position, as it will happen during the cyclical upturn, when banks’ profits and the government’s revenues will be buoyant,” he said.

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“I see a huge amount of growth across sectors and geographies, driven mainly by younger people,’’ Bhatt said at a three-day conference organised by the Indian Banks’ Association and the Federation of Indian Chambers of Commerce & Industry.

The head of the nation’s biggest bank said there was a huge requirement for capital. Urban infrastructure alone would require $1 trillion in five years. Home loans, the fastest growing segment in the banking sector, could top $1 trillion over the next decade, Bhatt said. India would have to build a banking structure bigger than what we have today, he told the gathering.

The number of hits in automatic teller machines remained unchanged even after SBI doubled their number, evidence of the need for more financial services. The need for bank branches could grow as much as four times, as more people used banking services, he said.

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Less than a week after its teaser home loan scheme expired, HDFC has re-launched it at slightly higher rates. And, SBI is also likely to extend its own teaser rate scheme, due to expire on September 30, a top official said yesterday.

n HDFC’s latest offer, customers who apply before September 30 and take part-disbursement before October 31 will be charged an interest of 8.5 per cent up to March 31, 2011, and 9.5 per cent for the period between April 1 and March 31, 2012. Thereafter, the prevailing floating rate will apply. The scheme is available to all customers irrespective of loan amount, said an HDFC statement.

Last week, HDFC had raised its retail prime lending rate by 50 basis points (bps) to 14.25 per cent for the first time in two years.

According to a senior HDFC official, 75 per cent of the mortgage financier’s lending is done at floating rates.

Yesterday, SBI Managing Director S K Bhattacharya said the bank might extend its teaser home loan scheme. “Our home loan scheme has been immensely successful, and why should we not continue with it?” he told reporters on the sidelines of a banking event in Kolkata.

“It is a good scheme. We have overtaken all others in home loans. Till now, we have not taken any decision on extending the scheme. The final decision will be taken at the ALM (asset-liability management) meeting in September,” he added.

SBI’s scheme was originally supposed to end by April 30, but was extended till June and then again till September. For the first year, home loans carry an eight per cent interest rate, which rises to nine per cent in the second and third years. From the fourth year on, home loans up to Rs 50 lakh will be charged 9.25 per cent, while higher loans will be charged 9.75 per cent.

While most banks have withdrawn fixed-cum-floating rate schemes, SBI and HDFC have persisted with the teaser rates.

LIC Housing Finance has a scheme which offers 8.9 per cent till March 31, 2012, and a floating rate thereafter. LICHF Director and Chief Executive R R Nair said the mortgage financier reviews its scheme at the end of every month.

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“If public sector banks are required to compete with private banks on a level playing-field, there is a good case for compensating them, too, on a competitive base,’’ said Subbarao. “There is also the risk that if the public sector bank compensation is not improved, the public sector may lose talent to the private sector.’’

The governor’s comments come at a time when the central bank is battling with the finance ministry on the issue of revising the salaries of its own employees. The central bank typically revises these salaries and then informs the ministry. The ministry now wants RBI to seek prior approval of the changes.

“Executive compensation in the public sector, as is well known, is lower than that in the private sector,’’ said Subbarao. “Notwithstanding the historical reasons for this, there is, perhaps, a good reason to revisit this.’’

The central bank in July released draft guidelines regarding compensation of whole-time directors, chief executive officers, risk takers and control staff, as the regulator wants to ensure effective governance of compensation and alignment with prudent risk taking.

The guidelines require banks’ boards to formulate and adopt a comprehensive compensation policy covering all employees (risk takers and control/compliance staff). Limit on variable pay is, however, not proposed.

Since public sector banks account for 70 per cent of the Indian market, where compensation is determined by the government, the variable component is very limited.

“The proposed reform to compensation structures is relevant in India only to the remaining 30 per cent of the non-public sector industry segment,” Subbarao said.

In its July communication, RBI said flawed incentive compensation practices in the financial sector were one of the important factors contributing to the recent global financial crisis.

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“Accounts will be opened through invitations by the bank. We are targeting around 250 upper elite customers by March 2011 for this branch,” said Shiv Kumar, chief general manager, (Hyderabad circle) SBI.

The bank expects a turnover of Rs 100 crore from the branch, named as Kohinoor Banjara Premium Banking Centre, in the coming six months. It is planning to set up such branches across the country and in other places in the state.

“As the economy has come out from the recession, we have upgraded our banking service to meet the current demand. The centre, with state-of-the-art technology-enabled facility, will provide the customers a feel-good ambience in terms of space and personalised services,” said Diwakar Gupta, deputy managing director and group executive – Rural Business, SBI, while inaugurating the branch.

SBI has invested Rs 80 lakh in the centre. “The branch is the first-of-its-kind in India where banking service would be available throughout the year with an extended timing of up to 8 pm. It will have a business centre and a conference room,” said K Venugopal, general manager (Network-1), SBI.

The locker facility, (500) would be available 24/7 with prior appointment. Among others, it would also provide cheque/draft pick up, deliver services, video conferencing, financial planning, forex services, SBI e-Tax, e-invest and online trading facilities.

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A study by Reserve Bank of India staffers has favoured updating the price statistics, particularly consumer price, to improve the effectiveness of monetary policy.

The large divergence between Consumer Price Inflation (CPI) and Wholesale Price Inflation (WPI) trends, and significant volatility in headline WPI inflation due to supply shocks limit the use of price data for monetary policy making.

The Indian inflation path has been significantly conditioned by two major supply shocks — oil and food. The common man is primarily affected by these two items. Hence, exclusion of these two items will make measurement of core inflation less representative, it said. The CPI captures the effects of a rise in oil and food prices more accurately at the customer end, some analysts say.

RBI on Thursday released a staff study ‘Measurement of Inflation in India, Issues and Associated Challenges for the Conduct of Monetary Policy’.

The authors, G V Nadhanael and Sitikantha Pattanaik, said year-on-year inflation has been much less volatile than the sequential month over month (seasonally adjusted) inflation. Hence, the former is more relevant for conduct of monetary policy.

A wide dispersion in inflation across commodity groups within WPI and the weakly representative nature of price indices also complicate matters, the study said.

In the Indian context, measures like month-over-month seasonally adjusted inflation and core inflation are significantly volatile. Hence, they can’t become the key reference indicators in monetary policy, it said.

The share of significantly volatile items like, fuel and metals in total transactions have increased over time.

The distribution of inflation across different commodities within the WPI exhibits large changes during supply shocks. Understanding the variability within the commodity basket is critical to analyse the underlying price pressures and respond with appropriate policy action.

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Launched in 2009, the sector-agnostic, equity-linked fund made its maiden investment of $27 million (Rs126 crore) in Chennai-based Star Health and Allied Insurance Company Limited in April this year.The new fund follows the $810-million India Advantage Fund-II, which was capped at $583 million. The company raised $245 million in the first round.

“We believe that India offers an opportunity in the next decade as its economy is bound to grow over 8 per cent by then. The growth will mainly continue to be driven by consumption-driven segments. And, clearly pharmaceutical, media, pharmaceutical and financial services look promising today,” she told media persons here on Thursday.

ICICI Venture, which has three practices — private equity, real estate and mezzanine, recently made its first debt investment of Rs20 crore in People Combine Group’s Oakridge International School in Hyderabad.

Stating that education was clearly an upcoming segment, Mulye said ICICI Venture’s

investments in this sector would probably start from now. “We are bullish on the education sector, particularly vocational, and we will definitely look at education very closely to invest in from the India Advantage Fund-III as well,” he added.

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According to RBI sources, the government — which appoints deputy governors — is of the view that it will do away with the practice of reappointment to important posts like chairman of the Securities and Exchange Board of India, RBI, National Bank for Agriculture and Rural Development.

However, there is no rethinking on allowing extensions of term. According to RBI rules, a deputy governor is appointed for five years or until he or she attains the age of 62, whichever is earlier. The retirement age of RBI governor is also 62.

Though there was no norm on how many deputy governors can be chosen from RBI internally, the practice usually followed is to have at least two from within the central bank. The third deputy governor is usually a public sector bank chief, while the fourth is an economist. Apart from Thorat, Shyamala Gopinath is from RBI while Subir Gokarn is an economist and K C Chakrabarty is a commercial banker.

Technically, Thorat was also eligible for re-appointment as she will still have two years before the retirement age kicks in. But for Thorat to continue, mere extension will not do and the government has to form a search committee and shortlist at least three candidates for the deputy governor’s post.

In September last year, the government had allowed the reappointment of Shyamala Gopinath, who had completed her five-year term. She was reappointed for two years up to June 2011. It was the first occasion when a deputy governor was reappointed.

Thorat oversees the department of banking operations and development, banking supervision, currency management, rural planning and credit department, among others.

Among the internal candidates that could replace Thorat are V K Sharma, the senior-most executive director, and Anand Sinha, another ED.

Gopinath’s reappointment followed observations made by the Delhi High Court in 2007 on the need for proper norms and criteria for the appointment of a deputy governor.

The court made those observations in a case filed by P K Biswas — an executive director of RBI — who challenged the appointment of Thorat as deputy governor. Biswas challenged the appointment on the grounds that despite being senior to Thorat, his case was ignored. The court had dismissed Biswas’ plea.

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A special purpose vehicle (SPV) would be set up for information technology infrastructure in GST. Called ‘GST N’ (Network), it would have the Union government, state governments and technology partner NSDL as stakeholders. Sources say the government is likely to make these appointments official to prepare ground for quicker implementation of GST.

NSDL and SBI will have to ensure the tax, especially in inter-state transactions, is collected and processed without procedural delay and distributed to states on a set schedule.

P Chidambaram, former Union finance minister, aimed to get GST rolling by April 1, but the deadline was re-set to April 1, 2011. The appointment of the two lead organisations would help them prepare and test their systems much in advance, an official said.

Introduction of GST will probably be India’s most ambitious tax reform to bring all states on a par and ensure higher and more transparent collection of taxes by the government. It is hoped that the system can check tax evasion at any level.

Central sales tax will be replaced by the consumption-based GST. In case of inter-state transactions, NSDL might be given special powers to distribute taxes to the states concerned after making a collection in any other state, said an official with knowledge of the matter. The IT network of NSDL and the vast branch network of SBI made them natural choices to ensure that all states get the taxes due to them fairly and quickly, the official said.

NSDL has the experience, as it had set up the tax information network for the income tax department, which is running well.

In 2004, the Task Force on Implementation of the FRBM Act, chaired by Vijay Kelkar, had also said that the existing systems should be used for GST implementation, both at the Centre and at the state level. As the tax information network was set up by NSDL, it seemed a natural choice for GST.

Tax experts believe this is a step in the right direction, but the challenge will be implementation. “At some stage, the system would need to have the ability to process, verify and reconcile the dealer/invoice details uploaded by inter-state suppliers. The other big challenge would be to expand the coverage to states where IT penetration is relatively low, to facilitate online registrations/filings/payments for all taxpayers,” said Pratik Jain, executive director, KPMG.

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After completing the amalgamation of state Bank of Saurashtra and State Bank of Indore with itself, State Bank of India (SBI) plans to discuss the issue of merging the remaining five associate banks with the government.

SBI Chairman O P Bhatt said the bank would discuss with the government whether it should go ahead with the consolidation of some more associates. There would be consultations with the five associate banks as well to make the process relatively faster and easier.

He was speaking to reporters on the sidelines of a seminar on funding to solar power project organised by the Confederation of Indian Industry.

The government has already given a nod for merging State Bank of Indore with SBI. Its branch would work as SBI branches from August 26. SBI had already amalgamated State Bank of Saurashtra last year.

Referring to the choice of banks for merger, he said it didn’t matter whether it was listed or unlisted. What mattered was how smoothly it could be done, as SBI had an experience in terms of modalities.

The shares of the three associate banks – State Bank of Mysore (SBM), State Bank of Travancore (SBT) and State Bank of Bikaner and Jaipur (SBBJ) – surged by over 35 per cent in last two trading sessions on buzz about further consolidation.

However, the three stocks fell today. SBM was down by 1.92 per cent to Rs 1,301.6; SBT was down by 8.9 per cent to Rs 959.45 and SBBJ was down by 5.94 per cent to Rs 773.95 on the Bombay Stock Exchange (BSE).

Meanwhile SBM today informed BSE that it was planning to raise over Rs 583 crore through rights issue. The capital raising process is expected to be completed before the end of the year.

The board of SBM has fixed Rs 540 a share price for its rights issue of 10.8 million shares. The ratio for the rights issue is set at 3:10, which means investors who apply for the issue will receive three shares for every 10 shares.

Bhatt said associates were raising extra funds, since the capital requirements for banks were rising or had already risen. SBI wants all associates to be well capitalised just as their parent, which wants to raise about Rs 20,000 crore this year. SBI may raise the funds through a rights issue but has not ruled out looking at other options like follow-on offer.

Six associates, including State Bank of Indore, together posted a 0.54 per cent drop in its net profit at Rs 682.96 crore at the end of June. Their profits dipped due to higher provisioning for non-performing assets (NPAs). Their net interest income grew by 52.22 per cent (year-on year basis ) to Rs 2,565.57 crore at the quarter ended June.

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RBI’s annual report yesterday maintained its July policy stance, that inflation remains a concern and monetary policy action would continue. Economists surveyed said RBI is likely to raise rates by about 25 basis points in mid-September to cool excessive demand. It could also narrow the corridor between the rate at which it lends to banks and borrows from them, they said.

“The RBI is not yet done with increasing its rates,’’ said Shubhada Rao, chief economist with YES Bank. “We are expecting tightening to be front-loaded, as the real economy responds with a lag.’’

Rao says RBI may raise the repo rate by up to 50 basis points by March. The central bank on July 27 raised the rate by 25 basis points, the fourth quarter-percent point increase in it since January 1, and the reverse repo rate by 50 basis points. It had then raised the inflation forecast for March to 6 per cent, from its earlier projection of 5.5 per cent made in April.

The central bank has voiced anxiety over rising asset prices and said demand has played a role in influencing these, said Rupa Rege-Nitsure, chief economist at Bank of Baroda in Mumbai. She expects RBI would raise rates by up to 75 basis points by the financial year-end in March.

Before the mid-September policy review, data from first quarter GDP numbers, wholesale price index, index of industrial production and the global trend of prices of commodities, including crude oil, the global economic uncertainty and outlook will all help the central bank decide which instrument will be most suitable, bankers say.

By then, the status of the monsoon over the country will be clearer. A widespread monsoon could help keep food prices under check. In its July policy, RBI had mentioned the monsoon as one of the key factors influencing inflation, apart from a good kharif harvest, global energy and commodity prices.

“The RBI has to do a balancing act,’’ said Krishnamurthy Harihar, treasurer at FirstRand Bank in Mumbai. “While it needs to control inflation, it also has to help keep GDP high, as any sharp increase in rates could have wider implications.”

Yield on the 7.8 per cent bonds maturing in 2020 rose about six basis points today to 8.07 per cent, the highest in about six months.

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“The key underpinnings while developing (new) products and markets will be to ensure that the process of disintermediation away from banks is genuine and the risks are clearly and transparently captured in a prudential framework in areas where both banks and NBFCs are involved,” RBI said in its annual report for 2009-10 released on Tuesday.

It added that inter-connected flows between NBFCs and other financial sector entities also needed close monitoring.

RBI has been taking efforts to tighten control over NBFCs, which are more loosely regulated than banks.

Any takeover or merger involving deposit-taking NBFCs now requires the prior approval of RBI. In addition, the management of the merged entity must comply with the ‘fit and proper’ criteria of RBI.

In its annual report, RBI also chided NBFCs involved in micro-finance for charging high rates while accessing cheaper funds from banks.

According to the banking regulator, there are 12 systematically important non-deposit NBFCs that are lenders with an asset size of at least Rs 100 crore engaged in micro-finance lending.

Many of them have agreements with private sector and foreign banks for outright buy-outs and direct assignments of loans for priority sector requirements that banks are subject to.

However, the end-borrowers do not get the benefit of low interest rates, as NBFCs are assigned the responsibility of managing the loans. Consequently, the borrower continues to pay the same rate of interest, which is as high as 23.6-30 per cent.

“The main sources of funds for these NBFCs are borrowings from banks and financial institutions. Most of them have received large amounts as foreign direct investment and many of them are now largely foreign-owned,” RBI added.

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The surplus transferable to the government dipped to Rs 18,759 crore from Rs 25,009 crore last year. The earnings from foreign currency assets and gold declined 50.58 per cent to Rs 25,102.55 crore from Rs 50,796.21 crore in 2008-09.

The dip in earnings was due to lower yield on foreign securities and interest on balances held abroad, due to a low interest rate environment. RBI Deputy Governor Shyamala Gopinath said returns had been low due to near-zero interest rates in the international market. The rate of earning on foreign sources plummeted to 2.09 per cent from 4.16 per cent in the previous year.

RBI parks foreign exchange reserves in high-rated bonds and deposits. It follows three principles — safety, liquidity and returns while deploying reserves abroad. The safety got first priority, Gopinath said.

RBI changed its accounting policy for valuation of securities. Under the revised policy, the change in value (due to appreciation or depreciation) of securities is booked as a balance-sheet item. Earlier, depreciation was booked to the profit and loss account, while appreciation was ignored.

RBI’s earnings from domestic sources also took a blow. They declined from Rs 9,935.77 crore to Rs 7,781.59 crore due to an increase in the coupon income from a larger portfolio of government securities and a decrease in the depreciation on securities.

An increase in net interest outgo under the liquidity adjustment facility, a drop in interest earnings on loans and profits from sale of securities also put pressure on the domestic income of the bank. The central bank’s expenditure, comprising establishment costs, agency charges and security printing charges (arising from performing statutory function), rose 2.25 per cent from Rs 8,217.88 crore in 2008-09 to Rs 8,403.12 crore.

Its establishment expenditure was down due to lower provision for long-term employee benefits. These benefits are calculated on the basis of actuarial valuation.

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Corporate houses issue CPs to raise funds from banks as CP rates are lower than the prevailing lending rates. This is because the instrument is tradable. CP issuances have surged since the advent of the new loan pricing regime, base rate, from July 1. Banks have been barred from lending below their base rates.

Speaking at a press conference to discuss the central bank’s annual report for 2009-10, RBI Deputy Governor Shyamala Gopinath said: “We are in the process of reviewing the guidelines in consultation with market participants.”

With the base rate system, CPs have became the flavour of the day for banks, as they found an avenue to deploy funds for returns that are lower than their base rates Most banks’ base rates are between seven per cent and 8.25 per cent. According to RBI data, companies have reported Rs 11,680 crore worth of issuances in the first two weeks of July, while between April 15 and June 30, the issuances had risen by Rs 16,627 crore.

According to Gopinath, CP issuances are going to rise in the future, mainly because of the base rate regime. The norms needed to be reviewed as the existing ones were issued at least a couple of years ago. However, she said RBI was not averse to more CP issuances.

“Our concern is not so much the existing guidelines on ratings but that these guidelines were framed a couple of years ago. In the changed situation, when the base rate has come, there is a possibility of more such issues,” said Gopinath.

On whether RBI was concerned about the end use of CP funds, Gopinath said: “This issue did come up in an earlier meeting. For all issuances of longer-term instruments, the companies have to disclose the reasons for which the funds are used. The issue which came up is that whether some form of disclosure should be there. That is yet to be discussed with the market participants.”

Bankers said the scrutiny of the background and the prospective use of funds by companies raising money through CPs was less stringent when compared to the strict checks banks did while giving loans.

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Government-owned Punjab & Sind Bank is planning to raise Rs 500-600 crore through an initial public offer (IPO) by diluting 17-18 per cent of the government stake. The bank is likely to hit the capital market by this year. The proceeds from the issue would be utilised in funding the expansion plans.

The government owns 100 per cent stake in the bank. Speaking to Business Standard, Executive Director of the Bank, P K Anand, said, “We would be filing DRHP(Draft Red Hearing Prospectus) document to Sebi by this month. We would be diluting 17-18 per cent of the government stake or in other words, the bank would offer 40 million shares to the public. If everything goes well, we would be able to hit the capital market by this financial year.”

In FY10, the bank did a business of Rs 82,000 crore and is likely to touch Rs 95,000 crore this year. The deposit was Rs 49,500 crore last year while advances stood at Rs 32, 500 crore. In FY10, the bank posted an 18 per cent jump in net profit at Rs 508.8 crore compared to Rs 431.1 crore in the previous year.

When asked about the projected growth, he added, “This year we are consolidating and expecting the same growth of 20-23 per cent as projected by the Reserve Bank of India.” The bank has a capital adequacy ratio (CAR) of 12.73 per cent, while the CD ratio stood at 67 per cent.

At present, the bank has 920 branches across India, with 450 in Punjab alone. Meanwhile, he mentioned the bank is planning to open 100 branches and 180 ATM’s across India by the end of this financial year. Out of the total branches and ATMs, 40 branches and 35 ATMs would be in Punjab.

Punjab constitutes 23-25 per cent of the bank’s total business. Besides Punjab, the bank is planning to open branches in Haryana, Uttar Pradesh, Gujarat, Tamil Nadu, among others.

The bank is also in process of hiring 2,000 clerks and officers this financial year to cater to the expansion plans. He also mentioned that the bank has hired the services of Wipro for making their branches CBS enabled. Initially Satyam was given the contract but after Satyam fiasco, the contract was terminated and handed over to Wipro.

He added, “Our pilot project is already operational with 15 branches under CBS compliance and by 2012 all the branches would be CBS enabled.”

The bank also announced attractive rate of interest of 10.5 per cent for financing rural godowns of any storage capacity according to the requirement of borrower in Punjab and Haryana.

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Banks followed the BPLR rate regime till June 30. Since July 1, the base rate regime has come into force, the rate below which banks cannot lend. Existing borrowers can continue with the old PLR-linked loan rates or shift to base rate-linked rates. Many banks are already nudging customers towards the base rate regime because they do not want to maintain two records, one for the new and another for the existing customers.

Experts say it makes sense to shift. With the Reserve Bank of India mandating that there can be no charges on shifting from existing to base rate, borrowers should take advantage of that.

“The basic advantage here is that unlike PLR, the base rate is the minimum lending rate for banks and, hence, it can be raised only to a certain extent. Otherwise, banks will lose business. Also, the base rate will be stickier, so rates will go up slowly,” says K V S Manian, head, retail banking, Kotak Mahindra Bank.

However, before shifting, take these points into consideration:

No reduction
This is simply because the bank will not treat the shift as a fresh loan. With the contract remaining the same, you will pay at the same rate. Say, you currently pay nine per cent, or 300 basis points less than BPLR. After the shift, the rate sheet would say eight per cent (base rate) plus 100 basis points.

End of tenure
It also does not make sense if you are in the last two-three years of your loan repayment because you would largely be making principal payments. For instance, you had taken a Rs 50 lakh loan at 9 per cent for 15 years. If you are in the last two years of repayment, the outstanding amount is Rs 10,67,684. In an EMI of Rs 50,713, the principal payout is Rs 42,388 and interest Rs 8,326.

Teaser loans
Shifting may not be such a good idea if you have opted for teaser loans, where the rates are around 8- 8.25 per cent. “A teaser rate customer will have to forego all the advantages he is likely to get in the initial years of a teaser loan. It will, anyway, be reset after three years and be linked to the base rate. So, it is not a great idea,” says C S Jain, head-retail banking, IDBI Bank.

Renegotiating the rate
While shifting to base rate, one could even consider renegotiating and shifting to the existing rate of interest. But renegotiation comes at a price. Since the bank treats these as fresh loans, they will charge you 1.5-2 per cent on the outstanding principal.

But it should depend on the rate of interest you are on and the remaining tenure. If you are in the first couple years of the loan tenure or the last few years, renegotiation may not be smart. In the last couple of years, the rate of interest has been falling, so you are most likely sitting on 9-10 per cent – the existing rate. In the latter case, you have already paid the interest cost. Customers stuck in the middle band may try to renegotiate, because the rate there might be very high.

(BS)