Banking reforms ahead PDF Print E-mail
Wednesday, 26 October 2011 00:00
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Freeing savings rate overshadows rate hike


Just when everyone had reconciled to a 25 bps rate hike, RBI went and surprised everyone with a series of reforms and policy announcements, the most important of which was the freeing up of interest rates. Along with more freedom to open bank branches, banks are expected to start hiking rates to keep their market share of savings loans. Analysis by SMC Global Securities says that, were banks to raise savings rates by one percentage point, this would clip R14,500 crore from bank profits, or around 18-20% for banks like SBI. While this would suggest banks would be wary of large changes, smaller banks will drive the change, so it has to be seen how things will play out—on Tuesday, the fall in bank stocks signalled what the market thought the impact would be on individual banks. An interesting thought: if banks are to raise interest rates on savings banks, they may be less interested in opening no-frills accounts, so perhaps the government will have to make incentive payments for this.

From the reforms point of view, this will allow market players to have a better idea of the yield curve—hopefully the government will, at some time, follow suit with PF and other small savings rates. Other measures intended by way of financial sector reforms include steps related to guidelines on interest rate futures, credit default swaps and ways to increase liquidity in the secondary market for derivatives and Gsecs. Banks have been alerted to the higher Basel III provisioning norms, and draft guidelines for implementation of Basel III will be out by mid-December. A working group will work on guidelines for dynamic provisioning—higher provisions when the going is good, which serve as a cushion during a crisis; prudential norms are to be worked out for loan restructuring—critical given the scope for discretion. Banks have been encouraged to put limits on unhedged exposures of clients—so far, no limits are being prescribed—and RBI has told the government it is not going to issue new bank licences until the laws are changed, to allow it, among others, to be able to supersede the boards of shaky/shady banks.



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