Govt looking to rejig subsidies

The government is looking to rejig its subsidy mechanism with a view to achieving a high growth rate on a sustainable basis while bringing down the fiscal deficit, Cabinet Secretary K.M. Chandrasekhar said on Tuesday at a Confederation of Indian Industry (CII) function that they are looking at subsidies, how the subsidy system can be re-jigged to ensure it reaches the poorest of the poor on one hand, and at the same time it incentivises production.

The economy is set to register a growth rate of 8.5 per cent in the current fiscal, he said, adding, a good monsoon would help in easing prices and the double-digit inflation would ease in the next few months.

With a good monsoon and good crop, inflation will certainly fall. Experts are saying that inflation will be 5-6 per cent by year end, So there is no reason to disbelieve it.

He said though the Reserve Bank of India could take further monetary steps to address the issue, no measure on the fiscal side is likely to be taken and tax and financial sector reforms would be critical in achieving a double-digit growth.

Chandrasekhar has also said that the fiscal deficit could drop below the budget estimate of 5.5 per cent because of high non-tax revenue receipts.

Bank deposit growth slackens

Apart from the developments in the Euro zone, which continue to cast a shadow over the stock market, there could be trouble from the liquidity situation, in the face of retail banking deposit growth slowing and lending picking up.

The aggregate deposit growth rate has slowed from 20.4 per cent in December 2008 to 18 per cent in December 2009. During the same period, the growth rate of gross bank credit increased significantly from 15.9 per cent to 18.3 per cent.

Deposit rates

Banks will have to take a view on hiking their deposit rates in the near-term. With inflation on the higher side, a negative yield on deposits is not something the depositor is going to take for long. This will impact credit growth in the future and with the Reserve Bank of India hiking repo and reverse repo rates by 25 basis points, liquidity is bound to become slightly tighter.

Banks are waiting for stronger signs of credit off-take before focusing on raising deposits or interest rates, said Mr Suman Chowdhury, Head, Crisil Ratings.

Other segments

Barring infrastructure, telecom and real estate, the credit appetite from other segments is sluggish. This could prove a dampener for banks to immediately raise the deposit rates as they would be saddled with liquidity. The lower growth rate in deposits is indicative of the perception about lower returns as well as the availability of alternative avenues for investment.

Bankers feel the runaway inflation has eaten into the surplus in the hands of the common man, which is reflected in banks' deposit accretion. Apart from this, high networth individuals appear to be looking for better returns and opting for investment in real estate and gold ETFs. In the last one year, gold ETFs have logged 114-per-cent growth.

Market experts say the NCDs issued by Shriram Transport and L&T received a good response from retail bankers. Monthly income plans of mutual funds too are in favour. As for institutional investors, they are pouring money into debt funds.

Trade deficit

Another worry for the economy could be the steadily rising trade deficit. The economy will be back on track only if imports are handled well. Exports need to grow at a much faster pace than the existing 35 per cent. Bank deposit growth slackens

Home loan firms may see new lending rate norms

After banks, it’s the turn of housing finance companies to have a more transparent regime for pricing of loans. The National Housing Bank (NHB), the regulator for these companies, is working on a system that is similar to the base rate regime introduced for banks recently.

The base rate, substitute for the earlier benchmark prime lending rate (BPLR) for banks, was introduced from July 1. The country’s largest lender, State Bank of India, fixed its base rate at 7.5%. The rate for most banks is in the range of 7.25-8%.

Housing Development Finance Corporation and LIC Housing Finance are two major players in the home loan market. Since they come in the non-banking financial institution category, they were excluded from the base rate system.

Analysts said introduction of a base rate was likely to put pressure on housing finance companies because of the transparency it would bring. There are expectations that market forces might put pressure on them to make rates more transparent.

Housing finance firms would be under a lot of pressure to come up with a more transparent mechanism. The floating rate of interest will have to be based on certain parameters that will move in both directions. It cannot remain sticky for too long any more.

The main problem for these companies in moving to such a system is their cost of funds. While banks depend on a more stable system, of deposits from their consumers, home loan companies have to borrow from banks and other sources. Home loan companies are more heterogeneous than banks. Their cost of funds, therefore, is quite different.

These companies are one of the largest borrowers from banks. Also, the pricing of bonds they issue are dependent on market conditions. As a result, they are more impacted by liquidity conditions.

There are also fears that any transparent rate, which is a function of cost of funds, will be highly volatile in nature. For, while their costing can vary widely, the assets they provide are for the long term. There could be a pricing mismatch.

In addition, since banks cannot lend below their base rate in the new regime, there are fears that if the rate is on the higher side, the cost of funds for housing finance firms will go up substantially. This, in turn, will impact their lending rate.

India ready for bank tax at G-20

With the G-20 leaders agreeing that any such levy should be left to individual nations, India's stand against any tax on banks for funding bailouts was vindicated. This was its latest trends in Banking.

Though the financial sector should make a fair and substantial contribution towards paying for any bailouts, policy should take into account each nation's circumstances and options.

In their Toronto declaration, the G-20 leaders, including Prime Minister Manmohan Singh, US President Barack Obama, German Chancellor Angela Merkel and French President Nicolas Sarkozy, decided that while the financial sector should make a contribution to prevent a breakdown, the policy approach should differ from country to country.

To protect tax payers: reduce risk from financial system... take into account individual countries' circumstances and options and help promote a level playing field.

While countries like Britain, which has already levied a tax, France and Germany campaigned for such a tax, India has reservations.It pointed out that its trends in banking were conservative by nature and followed healthy norms that prevented any crisis in the country in 2008. India has been in favor of strong financial regulations, rather than imposing a levy on the banks.