RBI's new base rate norm leads to delay in revision of rates, say bankers-
( see my observation given below)
Say cost of funds hasn't come down as expected-Business Standard-26.02.2015
The Reserve Bank of India (RBI)’s recent directive on computation of the base rate is proving a stumbling block for lenders in reducing base rates. This is because against expectations, the cost of funds hasn’t declined, say bankers.
Base rate is the benchmark lending rate to which all loan rates are linked.
“I had said the base rate will come down, depending on the calculation for it. But according to the revised calculation, it is not coming down. Going by the old calculation, it will come as a reduction in my deposit cost; so, automatically, the base rate will change. But in the revised guidelines, a majority of your deposit has to be considered; so, my cost does not come down,” said Aditya Puri, managing director of HDFC Bank.
Base rate is the benchmark lending rate to which all loan rates are linked.
“I had said the base rate will come down, depending on the calculation for it. But according to the revised calculation, it is not coming down. Going by the old calculation, it will come as a reduction in my deposit cost; so, automatically, the base rate will change. But in the revised guidelines, a majority of your deposit has to be considered; so, my cost does not come down,” said Aditya Puri, managing director of HDFC Bank.
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Earlier, Puri had said as deposit rates had started falling, lending rates were expected to decline in the January-March quarter.
According to the new norms, banks are free to calculate the cost of funds either on the basis of the average cost of funds or on the marginal cost of funds, or any alternative method. But these should be available for scrutiny whenever required, the central bank had said.
State Bank of India (SBI) Chairman Arundhati Bhattacharya said RBI had said the mandate of choosing the maturity bucket with the highest deposits had challenges. “Say, today I have the highest amount (of deposits) in the one-year bucket; in one or two weeks, it could be the one-two year block. Does that mean I shift the base rate immediately? There are difficulties in doing these types of calculations,” she had said while announcing the bank’s earnings earlier this month.
SBI has written to RBI, fro more clarity on the issue.
Another banker said to calculate the cost of funds, lenders earlier considered the interest in the bracket where the rate was the highest; the deposit base could be small. But now, banks have to consider the interest on the tenure with the largest deposit base. “It is because of this that for some banks, the cost of funds hasn’t fallen as expected,” the banker added. In January this year, RBI had cut the repo rate, the rate at which it lends to banks, by 25 basis points. This was followed by widespread expectation that banks would embark on a rate-cut cycle. However, only three lenders — Union Bank of India, United Bank of India and Karur Vysya Bank — reduced their base rates.
“Once you choose a particular methodology, you can change it only once in three years (according to the new norms). There will be no elbow room to change that in between. Therefore, we have taken the time to assess it and we have realised the cost of funds hasn’t come down. As a result, the expected revision in the base rate hasn’t happened so far,” said the chief financial officer of a public sector bank.
Lack of demand is another reason why banks haven’t cut rates. Lenders believe if the base rate is revised, their margins will come under further pressure, as there is no demand to offset this.
MY Observation on above news is as under :
It is now reported by some of CMDs of public sector banks that they are unable to reduce Base Rate because revised policy for calculation of Base Rate prescribed by RBI does not permit them to do so.
As I used to say in the past that bank management never take into account whether the change in base rate announced by them will cause erosion in profitability of the bank or not. They used to focus on what FM wants them to do. There are many flatterer CMD who used to announce cut in base rate even during midnight without computing even cost of fund in tune with RBI directive on how to arrive at base rate.
Last month RBI Governor Mr. Rajan issued fresh guidelines for banks making computation of Base Rate for a bank more to the point and transparent. This has put hurdles in the path of Yesman type Chairman of banks. Now they are unable to bring down Base Rate because their asset -liability position do not allow them to do so without taking the risk of loss in profit. Salute to RBI who has put brake on Yesmanism .
Till a few years back, say upto 2010-11 , these Yesman type CMDs used to buy deposits at higher rate to achieve target fixed for deposits and similarly used to increase advance in the month of March by sanctioning short term loan at much lower rates to achieve targets fixed for advances. The primary concern of a CMD used to be winning the blessings of Finance Minister even if caused huge loss to the bank.
It has also been detected five years ago that CMDs of bank did not even make adequate provisions for Bad assets and for terminal benefits payable to their own staff after their retirement. When it was brought to the notice of Government of India , RBI as a special case permitted these Yesman type CMDs to amortise residual provision towards pension, bad assets and other terminal benefits for five years to avoid accumulated burden in one finance year.
This is why I always use to say that until GOI or FM or RBI are unable to end flattery and bribery culture in public sector banks, they cannot dream of inculcating credit discipline or they cannot enforce good HR Policies in banks ,they cannot stop rising trend in bad debts and they cannot improve credit quality which are backbone for survival of banks as also for earning desired true profit .
Similarly management of public sector banks opened numerous economically unviable and loss making branches in remote and critical areas merely to please Finance Ministers. They opened numerous unviable ATMs throughout the country just to increase sale of a ATM vendor who was associated with some VIP or the other . They were and still are unable to properly serve the customers residing near to of such branches in want of adequate quality manpower and are willingly or unwillingly allowing branch heads of such branches to indulge in reckless lending to achieve the target even though after two to three years all such advances will invariably turn Non Performing assets and cause considerable dent in profits of these banks.
It is good luck that now GOI has asked them to make their banks efficient in terms of return on assets and return of equity to get capital infusion . GOI has asked them to curtail operational expenses which will help in raising profits. At least now some of banks have stopped reckless expansion programme and even decided not expand in foreign countries.
There is a proverb 'sau chuhe mar kar billi haz ko chali" . I say so that public sector banks in general have opened thousands of branches and ATMs during last two to three years just to fulfil the task of Financial Inclusion even though they are all loss making branches and they have undoubtedly no bright future in coming few years or even in a decade or more.
This happens only because majority of officers in PS banks work to please ministers and RBI officials so that their career may see bright future. They are not as professional as their counterpart in private banks are.
Bank branches to be closed on 2nd, 4th Saturdays
IBA signs pact with unions, settles for 15% wage hike---BUSINESS STANDAD 26th Fab 2015
Bank employee unions have called off a planned four-day strike after agreeing to a 15 per cent wage increase and two more holidays a month – the second and fourth Saturdays, a senior union official said on Monday.
But other Saturdays in a month will be working, the union official said. A formal approval from the government and the regulator might be required for effecting changes in the working schedule.
The annual wage bill (at 15 per cent rate) works out to Rs 4,725 crore for banks. This will be a five-year wage pact running from November 1, 2012 to October 30, 2017. At base level, the wage bill burden for five years would be over Rs 23,600 crore. The actual bill would be more, “as the cost of medical, hospitalisation scheme, other items, superannuation, provident fund, gratuity and pension is being worked out separately”, said Vishwas Utagi, convener, (Maharashtra), United Forum of Bank Unions.
The process of wage negotiations started after the unions submitted their charter of demands in October 2012. They demanded broadly a 25-per cent hike before settling for a 15-per cent rise.
In the last round of wage settlements, the employees received 17.5 per cent hike that included pension and other retirement benefits also.
The bank managements offered a 5-per cent hike at start and raised gradually through negotiations to settle at 15 per cent. Unlike previous wage negotiations, banks are better prepared this time around. Banks have been making provisions in books assuming a 13-15 per cent annual hike in wages. Banks began making provisions from 2012-13.
The distribution of annual wage increase between workmen unions and officers’ association will be worked out separately based on break-up of establishment.
“As per the agreement, the second and fourth Saturdays of every month will be holidays and the remaining Saturdays will be full working days,” IBA said. The details of the bipartite settlement will be worked out in the next 90 days.
Banks would start distributing arrears soon.
But other Saturdays in a month will be working, the union official said. A formal approval from the government and the regulator might be required for effecting changes in the working schedule.
The annual wage bill (at 15 per cent rate) works out to Rs 4,725 crore for banks. This will be a five-year wage pact running from November 1, 2012 to October 30, 2017. At base level, the wage bill burden for five years would be over Rs 23,600 crore. The actual bill would be more, “as the cost of medical, hospitalisation scheme, other items, superannuation, provident fund, gratuity and pension is being worked out separately”, said Vishwas Utagi, convener, (Maharashtra), United Forum of Bank Unions.
The process of wage negotiations started after the unions submitted their charter of demands in October 2012. They demanded broadly a 25-per cent hike before settling for a 15-per cent rise.
In the last round of wage settlements, the employees received 17.5 per cent hike that included pension and other retirement benefits also.
The bank managements offered a 5-per cent hike at start and raised gradually through negotiations to settle at 15 per cent. Unlike previous wage negotiations, banks are better prepared this time around. Banks have been making provisions in books assuming a 13-15 per cent annual hike in wages. Banks began making provisions from 2012-13.
The distribution of annual wage increase between workmen unions and officers’ association will be worked out separately based on break-up of establishment.
“As per the agreement, the second and fourth Saturdays of every month will be holidays and the remaining Saturdays will be full working days,” IBA said. The details of the bipartite settlement will be worked out in the next 90 days.
Banks would start distributing arrears soon.
IBA's deal with bank staff may amount to Rs 1,600-cr windfall for general insurance companies -Economic Times
MUMBAI: State-run general insurance companies could be in line for a windfall of Rs 1,600-crore business a year, following the Indian Banks' Association's (IBA) wage deal with more than 10 lakh staffers, said two people familiar with the matter.
From now on, banks will buy health insurance cover from one of the state-run general insurance companies instead of reimbursing the medical expenses of staff in full which goes as part of their expenses, they said. This could also reduce the expenses and put a cap on the liabilities of banks in the future. "This is a path-breaking agreement," said TM Bhasin, chairman of IBA and CMD of Indi an Bank. "Besides a 15% hike and holiday on alternate Saturdays, it is mutually agreed that the bank will buy medical cover for the employee and his family."
Bank employees unions, including that of State Bank of India (SBI) and the industry body representing state-run banks, agreed on a 15% increase in their basic salaries for the period 2012 and 2017. One new factor that crept into the agreement this time, other than holidays on alternate Saturdays, is medical cover.
Although no definitive agreement or insurance underwriter is yet to happen, executives in both banking and insurance industries indicate that underwriting norms could lead to an outgo of about Rs 1,500 crore to Rs 1,700 crore. That will depend on individual bank's negotiating power.
From now on, banks will buy health insurance cover from one of the state-run general insurance companies instead of reimbursing the medical expenses of staff in full which goes as part of their expenses, they said. This could also reduce the expenses and put a cap on the liabilities of banks in the future. "This is a path-breaking agreement," said TM Bhasin, chairman of IBA and CMD of Indi an Bank. "Besides a 15% hike and holiday on alternate Saturdays, it is mutually agreed that the bank will buy medical cover for the employee and his family."
Bank employees unions, including that of State Bank of India (SBI) and the industry body representing state-run banks, agreed on a 15% increase in their basic salaries for the period 2012 and 2017. One new factor that crept into the agreement this time, other than holidays on alternate Saturdays, is medical cover.
Although no definitive agreement or insurance underwriter is yet to happen, executives in both banking and insurance industries indicate that underwriting norms could lead to an outgo of about Rs 1,500 crore to Rs 1,700 crore. That will depend on individual bank's negotiating power.
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