Bank Job Is Now Last Option

Challenge for banks: Get people to join up, stay-Hindu Business Line 14.01.2015

BY   A. J. Vinayak and L. N. Revathy

 

Mangalore/Coimbatore, Aug 24:  

Recently, at the graduation day ceremony in a B-school near Mangalore, some students approached a former senior banker, who is the head of academic council there, for his blessings before starting off on their career in banking. He had this piece of advice for them: “Build loyalty to the organisation you work for.”

 

When we posed the question of loyalty to another banker, who heads the regional office of a public sector bank in Mangalore, he said: “That is for later. The first challenge is to get people to join the banking sector.”

 

Citing the example of his bank, he said there were over 900 vacancies for the post of officers. After completion of the selection process, hardly 200 among the short-listed candidates confirmed their willingness to join. And, finally, only 20 per cent actually joined the bank.

 

Lest we thought the problem was unique to his bank, he hastened to add: “This is not limited to our bank alone. It is an industry problem.”

Not satisfied

Here is another instance: Four people joined a public sector bank in Mangalore city as probationary officers. No sooner had they joined the bank, than they started surfing the Net for better opportunities in other sectors. A banker in the know of this happening, said the new recruits were told about the benefits of a bank job vis-à-vis those in other sectors.

A fresher in an IT company gets a CTC (cost-to-company) compensation of Rs. 3 lakh a year. “When we calculated the CTC for a fresher in a public sector bank in a place like Mangalore, it added up to around Rs. 5 lakh a year. We considered only monetary gains and other incentives to the fresher, unlike the new-economy IT companies that take into account even the place where the fresher sits while calculating CTC,” the banker said.

Besides, banks also offer accommodation/quarters at some locations.

 

But these benefits don’t seem to impress many engineers and B-school graduates, for whom a bank job is only a stopgap arrangement. “They join a bank only because they want a job. And before long, quit to join elsewhere,” said a banker in Coimbatore. Bankers feel that management grads and engineers are overqualified for clerical jobs in a bank, yet they apply and get in because they want to be employed somewhere.

 

A public sector bank official says the trend is almost similar in the officer category too.

“Even if they join as probationary officers, they don’t stick on for long as in the past. They are invariably posted to the credit section and are set responsibilities. The present day youth is not prepared to take on the burden of responsibility. Youngsters feel their package is not commensurate with the hours they toil in the bank.”

Metro focus

There are some who want jobs only in the metros. If employed in banks, they will have to work in villages too. This is a different kind of challenge, said a banker. Often, when candidates join and quit shortly thereafter, the vacancies are never filled.

Secretary of Coimbatore Consumer Cause Kathirmathiyon is of the view that banks should ask for a bond to control this exodus. “Such candidates are denying the opportunity to other aspirants. If they had joined a private company, they would have had to settle their dues if they quit before serving the notice period,” he said.

Banks need to revisit credit exposure limits of firms: RBI

Mumbai, January 13:  

Banks may have to revisit at an opportune time the individual company credit exposure limits, as well as sector exposures, according to Reserve Bank of India Deputy Governor Urjit Patel.

This observation by the Deputy Governor comes in the wake of rise in stressed loans in the banking sector.

 

Speaking at a Best B-School Project Awards function, Patel said, “Banks may have to revisit at an opportune time the individual company credit exposure limits, as well as sector exposures, as part of their learning for the future for better risk management practices over the business cycle.”

He added that a much larger number of small business loans will be encouraged rather than an overriding emphasis on very large loans.

 

Stressed loans

Stressed advances (gross non-performing assets plus restructured standard advances) increased to 10.7 per cent of total advances from 10 per cent between March and September 2014, according to RBI’s latest Financial Stability Report. Public sector banks continued to record the highest level of stressed advances at 12.9 per cent of their total advances in September 2014 followed by private sector banks at 4.4 per cent

Currently, the exposure ceiling limits are: 15 per cent of capital funds in case of a single borrower and 40 per cent of capital funds in the case of a borrower group. The capital funds for this purpose comprise Tier I and Tier II capital as defined under capital adequacy standards.

 

Credit exposure to a single borrower may exceed the exposure norm of 15 per cent of the bank's capital funds by an additional 5 per cent (that is, up to 20 per cent) provided the additional credit exposure is on account of extension of credit to infrastructure projects. Credit exposure to borrowers belonging to a group may exceed the exposure norm of 40 per cent of the bank’s capital funds by an additional 10 per cent, provided the additional credit exposure is on account of extension of credit to infrastructure

Who says interest rates are going up?-By

Radhika Merwin

Deputy Chief of Bureau, Banking sector analyst

 

There has always been a lot of fanfare around the Reserve Bank of India’s policy action. But the sound and fury over its reluctance to cut rates is hard to understand. The truth is, a cut or hike in policy rates has not mattered much to borrowers. A study of the data put out by the RBI on banks’ lending rates since 2008 shows that banks have been tardy in passing on the RBI’s rate actions, be it hikes or cuts.

 

In all the exhortations for rate cuts in recent months, this aspect has gone unnoticed.

 

The mismatch

 

Between September 2013 and now, the RBI increased the repo rate by 75 basis points. But the lending rates of banks, that are meant to track the central bank’s policy action, have not moved up during this period. On the contrary, the weighted average lending rate actually fell by 20 basis points between September 2013 and September 2014.

Going by this data, the claim by India Inc and the government that high interest rates have led to lower growth and stalled fresh investments, hardly holds water.

 

But the recent anomaly in rates is not a singular event. Even in the past, banks have been tardy in passing on rate actions. This has been particularly true during an easy money policy.

 

Consider for instance, the period between September 2008 and September 2009. The RBI had slashed the repo rate by a tidy 425 basis points but what fell into the borrowers’ lap was a mere 120 basis points cut in lending rates. Or the period between March 2012 and June 2013, when the repo rate fell by 125 basis points. Only 40 basis points of this rate cut was passed on to borrowers. Why this discrepancy between the rate actions of the RBI and banks?

 

Banks’ dilemma

While the RBI’s primary tool for monetary signalling is the repo rate, and it helps set the direction for rates, banks decide their lending rates based on their base rates, which they are free to decide. Factors such as the cost of funds, administrative costs and profitability are taken into account. Ideally, when the RBI lowers its policy rate, it should translate into lower cost of borrowings for banks and reduced lending rates for borrowers.

 

But there are two main reasons why this doesn’t happen. One, banks source only a minuscule portion of their funds from the repo window. The amount has hovered at about 1 per cent of their total deposits. Banks’ dependence on deposits with maturities of less than one year has also been falling. Banks rely significantly on longer term deposits. With the bulk of the deposits unaffected by RBI’s rate action, banks are unable to tweak lending rates in a hurry.

 

The second reason for slow transmission is liquidity. In a tight liquidity scenario, banks may be reluctant to cut deposit rates. This was one of the main reasons for banks not cutting rates from April 2012 to May 2013. Banks had to raise deposit rates to woo depositors.

Tables turned

 

What prevented banks from cutting rates then is what triggered a fall during the last one year. Many banks started to cut rates across different term deposits, mainly due to ample liquidity. Banks flush with liquidity had enough headroom to lower deposit rates. As a result, banks’ costs of borrowings have come down by 30-40 basis points since January 2014. Banks have also not been able to deploy their funds due to slowing credit growth, and have shed high cost deposits to keep margins intact. With the cost of funds coming down, some of this benefit has been transmitted to borrowers in the form of lower lending rates.

 

An analysis of Capitaline data for CNX 500 companies reveals that, in the first half of 2014-15, while interest costs have gone up by 6 per cent (over last year), total debt has also risen by 10 per cent. This clearly indicates that companies have not paid higher interest (incrementally) on their loans, and the increase in interest payment is mainly due to higher leverage.

The good and bad

 

Banks have also been making the point that good borrowers have been able to source funds at attractive rates. This argument does have some merit after all. Having burnt their fingers with highly-leveraged companies and risky sectors, banks have turned wary, particularly over the last year or so.

Given this backdrop, it is safe to assume that the average lending rates disclosed by the RBI for fresh loans mostly reflect the rates at which corporates — the good ones — have been able to fund their additional need over the last one year. This data reveals that lending rates on fresh loans sanctioned have actually fallen by 44 basis points.

 

Top-rated companies have also been able to make hay in the secondary market. Yields on AAA-rated corporate bonds have fallen by 60-70 basis point in the last one year. More importantly, after hovering around 10 per cent (the lowest amongst banks) towards the end of 2013, rates on AAA bonds slipped to 8.6 per cent levels by the end of 2014 — way below bank borrowing rates.

AA-rated companies that rank a notch lower, still pay about 30-40 basis points more than top-rated companies to source funds from the secondary market.

Getting it right

Good or bad, all companies are now clamouring for lower rates. While some softening has already begun, it is clear that India Inc is awaiting the big move from the central bank. But aside from setting the direction, it is imperative that the RBI’s rate action is transmitted by banks to borrowers in its entirety.

In this context, the RBI’s decision to move away from the fixed repo to the term repo mechanism, in keeping with the recommendations of the Urjit Patel Committee, is welcome. Introduced in October 2013, term repos provide short-term funds at market-determined rates, with the RBI auctioning off such funds. By altering the amount it provides at each auction, the RBI can tweak short-term rates to suit its needs. Liquidity, cited as one of the reasons for not reducing lending rates in the past, can now be adjusted to ensure there is ample liquidity when the easing begins.

The RBI’s objective of bringing down banks’ SLR requirement will also ensure better transmission. This will do away with a captive market for government securities, and re-align the cost of borrowing to market determined rates. Every segment of the yield curve will move to market-determined rates.

From a longer term perspective, it is measures such as these that will ensure efficient working of the monetary policy framework. Borrowers will not feel shortchanged when the RBI slashes the policy rate.