As deposit growth slackens, funding credit growth to remain a concern along with NPA coverage; NIMs to improve in rising interest rate scenario
The last quarter of the financial year has been a trying one for many banks. They have had to deal with a multitude of regulatory requirements while trying to maintain profitability in a rising interest rate scenario. Several banks have had to cough up more funds towards provisioning for losses as well as adhering to the revised methodology of calculation of interest rates on savings deposits. Tight liquidity conditions brought forth by the impact of sudden outflow of cash to fund telecom companies' 3G fee bids and advanced tax payments put a lot of pressure on banks. On top of this, deposit growth slackened drastically towards the end of the quarter, creating a wide deficit against credit off-take.
The quarter witnessed bank credit off-take rising by nearly 20%. But that figure also needs to be seen in context. First, it is against a low base of the previous quarter. Second, a large chunk of this credit demand was at the fag end of the quarter, driven by corporate loans to pay off 3G fees. This was a one-time credit flow, and hence it will not be easy for banks to report similar credit growth going forward. So where does it leave the banking sector heading into the second quarter?
Clyton Fernandes, banking sector analyst at Anand Rathi feels that the high credit growth is not sustainable in the future and that inflation and a weak monsoon continue to be an overhang for credit growth. "If inflation comes off, it would mean lower working capital requirements for companies and hence lower credit growth. Also, if the global situation improves, banks abroad will start lending again and lot of corporates will opt for ECBs. A good monsoon will also ensure that some of the retail demand will pick up in the next quarter."
Looking ahead, banks with higher proportion of CASA deposits will feel a slight pinch on their margins, but the base rate, which kicks in this quarter, is likely to offset the impact appropriately. BRICS Securities explains, "With banks having to adopt daily average balance methodology in calculating interest on savings rates, various banks have indicated that their NIM could be impacted in the 15-25 bps range, which should have a meaningful impact on earnings growth. However, with the base rate era in place, the expectation is that most, if not all of the decline could be short-term as the increased cost would be incorporated into base rate and priced appropriately into loans."
HDFC Bank, State Bank of India and Axis Bank have the highest proportion of CASA deposits. As such, NIMs of these larger banks will be affected more compared with smaller banks like IndusInd Bank, IDBI Bank and Yes Bank.
Deposit growth was another worrying factor for many banks as the availability of low-cost funds slackened during the last quarter. As per RBI data, deposit growth was 13.9% y-o-y as on 19 June 2010, whereas credit outflow surged by 19.6% y-o-y. BRICS Securities expects this trend to continue over the next few quarters as banks compete on pricing to attract deposits, and as bulk deposits and wholesale borrowings pick up to fund incremental credit growth. It expects a combination of these two factors to partly offset the positive impact from a gradually rising interest rate environment.
Mr Fernandes points out, "It depends on how inflation pans out. Banks have to raise deposit rates because the real interest rate is currently negative. They will do so if they are confident of credit growth. However, they will not look at raising deposit rates very aggressively if they do not have a cushion on the yield side. Also, as banks do not have much pricing power on their asset side, they would not go full throttle on the liabilities side."
He believes that the current investment-deposit ratio of 32% provides a good cushion for banks to fund credit growth. "Banks have shown good loan book growth in the last quarter. They are liquidating investments and diverting that money towards this growth. This scenario is similar to the one in 2005 when investments as a proportion to deposits came down and credit growth picked up gradually."
Several banks have yet to make ground to adhere to the mandatory 70% provisioning requirement set by the RBI. Some of the larger banks like ICICI Bank and SBI have already received extensions until September 2011 to provide the necessary capital. "While this helps the banks to somewhat smooth-line the additional provisioning," says BRICS, "it nevertheless would put pressure on earnings over the next few quarters." It believes that SBI and ICICI Bank will be under pressure the most.
Starting this quarter, banks have started pricing loans according to the new base rate system introduced by the RBI. Under this system, banks will not be allowed to provide loans below a certain floor rate. The banking fraternity has fixed the initial base rate between 7%-8.5%. However, a lot of clarity is still awaited as to the actual working of the new pricing regime.
RBI has given flexibility to banks to readjust the base rate on a quarterly basis so as to enable them to arrive at the optimal rate. But with interest rates set to move further north, it is expected that banks will probably transfer the rate hike on to customers with a similar revision in the base rate.
Trading volumes and turnover of equity exchange traded funds (ETFs) continue to be pathetic, in sharp contrast to the rash of ETFs that fund companies are launching
Exchange traded funds (ETFs) are coming by the dozens to the market. After a spate of gold ETFs and even a specialised index ETF by Motilal Oswal Mutual Fund, Benchmark Mutual Fund is ambitiously launching six ETFs over and above its bouquet of eight. These are IT BeES, FMCG BeES, SERVICES BeES, ENERGY BeES, PHARMA BeES, and REALTY BeES. The benchmark indices of these schemes would be CNX IT Index, CNX FMCG Index, CNX Services Sector Index, CNX Energy Index, CNX Pharma Index and CNX Realty Index respectively.
Currently there are 10 equity ETFs listed on the National Stock Exchange (NSE) and 12 on the BSE (Bombay Stock Exchange) while seven gold ETFs are traded on both NSE and BSE.
Half a decade after ETFs became a rage in international markets, they are becoming more and more popular in India. But the question is among whom? While fund companies are launching more and more ETFs, the investing public continues to ignore this product category. A cursory glance at the volumes of ETFs listed on the NSE is a testimony to this fact.
On Tuesday (20th July), the total traded quantity of 10 equity ETFs stood at 1,67,854 units with a total turnover of just Rs5.24 crore on the NSE. The ETFs launched by Benchmark Mutual Fund -'NIFTYBEES' and 'JUNIORBEES' - were the two schemes which together contributed Rs5.08 crore of this turnover. HDFC Mutual Fund and ICICI Prudential Mutual Fund have also launched their gold ETFs.
The low trading volumes were reflected in the bid ask spread. The difference between the bid price and the ask price of Reliance Banking Exchange Traded Fund (ETF) - 'RELBANK' was Rs14 with bid price or buy price at Rs947 and sell price at Rs961.
Similarly 'PSUBNKBEES' had a spread of Rs5 with bid price at Rs388 and sell price of Rs393 on a turnover of just Rs40,000. At 2.50pm (20th July) on the NSE, UTI Mutual Fund's 'UTISUNDER' recorded only one trade worth Rs1,000. In the event of market volatility the difference between this spread will be even more. There is a direct co-relation between the spread and volumes. The lower the volumes the higher will be the spread (difference between selling price and buying price). Just as a matter of comparison, Nifty Index Futures trades at a spread of 10-20 paise on a price of over Rs5,400. In the options market, the liquidity and trading volumes are so high that the price difference is just about 30 paise.
The huge gap in bid ask prices was also visible in gold ETFs. For instance, the 'RELIGAREGO' order book had a buy price of Rs1,816.50 and sell price of Rs1,835, a difference of Rs18.50 with turnover of just Rs2.22 lakh. The assets under management (AUM) of all gold ETFs put together were marginally higher at Rs1,939 crore as on June 2010. The seven gold ETFs recorded a turnover of Rs17.35 crore on the NSE on 20th July with a total of 97,395 contracts traded.
"Index funds and ETFs are the best way to invest for a long-term perspective but they are yet to catch up in India. That is the reason why volumes are poor. There is no retail penetration. The volumes will not be there if there's no retail participation. Institutional volume is slowly picking up. A few banks which are open to the idea of buying ETFs are already doing some transactions," said RL Narayanan, vice president - equity & institutional sales, Bonanza Portfolio Ltd.
The concept of ETFs is new among retail investors. Industry experts cite poor commission as the primary reason behind the low awareness of these products. ETFs are cheaper for investors. An ETF carries 1.50% annual recurring expense compared to 2.50% which an equity fund can charge to its scheme. ETFs also do not carry an exit load unlike other schemes. As on June 2010, the AUM of ETFs stood at just Rs1,135 crore (excluding gold ETFs).
"Benchmark Mutual Fund is usually into ETFs so people are more aware about it. The awareness about other big fund houses which have launched ETFs in the recent past is not much. Even if they are aware they like to buy traditional equity funds. Buying a traditional fund is convenient than buying an ETF at the moment," said Y Jawahar, VP - head, distribution, Mata Securities.
Major public sector insurer admits that a few local offices have been delinquent, and a few TPAs have been slack in releasing insured amounts
For a long time, hospitals and doctors have argued that when it comes to payment of the cost incurred on medical procedures, insurance companies don't pay hospitals on time. A major public sector insurance company has admitted to these charges and confirms that some of its regional offices and a few Third Party Administrators (TPAs) may have made delayed payments to hospitals.
"We are addressing these issues. There have been some regional offices that are delinquent, resulting in slackness in payments, while some TPAs have been indifferent when it comes paying doctors on time," said M Ramadoss, managing director, New India Assurance.
Delayed payments have been a major issue with hospitals, who have been complaining that they have been getting their dues after nearly six to eight months. Hospitals have been blaming TPAs for these delays, saying that the intermediaries keep the float given by insurers and delay payments. Even insurers have complained that TPAs are not using these funds to settle patients' claims.
Generally, insurance companies maintain a float with a particular TPA for a period of 15 to 30 days for settling claims. When the float is exhausted, the TPA receives additional money from the insurance companies for settling claims.
However, a few private insurers whom we spoke to said that TPAs can't be wholly blamed for the current imbroglio, as payments to hospitals depend on the insurance company. "The TPAs are being slapped from both sides, they can't do much as the payments depend on us," an insurer told Moneylife, preferring anonymity. These insurers also feel that hospitals were over-charging customers.
Insurers who have done away with TPAs say that they are not satisfied with these middlemen in the process. "TPAs have not been able to live up to the service standards that had been expected from them when these administrators were introduced. This has led to various issues, including some doctors and hospitals refusing to work with them. For us, as an insurer, it would be better if we have our own team which can interact both with customers and hospitals directly, to ensure that our clients are getting prompt service. This will help us to address customer issues much faster," KG Krishnamoorthy Rao, Future Generali India's managing director and chief operating officer, had earlier told Moneylife.
However, Mr Ramadoss says that even hospitals need to be partially blamed. Most cashless claims are preauthorised for a certain coverage amount. Hospitals call the TPAs or insurer to confirm the go-ahead for the operation for the said amount. However, if there is any increase in cost, the hospital doesn't consult the TPA or insurer. So at the time of payment, the TPA or insurer is only able to pay the hospital the said amount and not the additional cost incurred. However, the remaining payment is given out after negotiations between the doctors and TPAs or insurer.
Fee charges and payments have been a topic of intense discussion between insurance companies and hospitals. In fact, in the middle of February, policyholders who were admitted to Mumbai hospitals were trapped in the midst of a raging battle between city-based doctors and TPAs, due to various doctors being unhappy with the low consultancy fees being allowed by a few TPAs for reimbursement, under a number of medical insurance plans.