Money & Banking
Base rate could go down by 50 bps if banks follow RBI guidelines
RBI's guidelines on base rate computation, if implemented in its current form, would reduce base rates by 50 basis points. It also means a one-time profit hit of Rs20,000 crore for banks in FY2017, says CRISIL
 
The Reserve Bank of India (RBI)'s draft guidelines on computation of base rate, if implemented in its current form, will significantly impact profitability of banks and reduce the base by about 50 basis points, says ratings agency CRISIL.
 
The RBI guidelines require banks to the ‘marginal cost of funds’ method for base rate computation from 1 April 2016. CRISIL, in a report, said, its estimates show the change in methodology can lower banking system base rates by approximately 50 basis points (bps) from current levels. Crucially, it will reduce banking sector profitability because return on assets (RoA) will fall by 20 bps in fiscal 2017, it added.
 
Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings, said, “Our base-case is that profitability of banks will have one-time impact of around Rs20,000 crore in fiscal 2017, which would be equal to 15% of the total estimated profit of the banking system for that year. The actual impact will depend on whether the banks will be given a leeway to make this shift over a longer timeframe in the final guidelines.”
 
Further, for every subsequent 25 bps cut in the deposit rate, profits will be impacted by Rs5,000 crore in a year from the rate cut, CRISIL said.
 
According to the ratings agency, in an environment of falling interest rates, yields of banks that lend mostly on a floating rate basis will be significantly impacted. Banks with low levels of current and saving accounts, and/or relatively longer tenure term deposits, will also be majorly affected. Nevertheless, in an increasing interest rate scenario, banks will tend to benefit as they will be able to immediately pass on any hike in deposit rate to the base rate, the report added.
 
"Banks could look at mitigating interest-rate risks by sourcing more short-term deposits and borrowings. However, the flexibility for this would be limited given that they have to implement Basel III rules such as Liquidity Coverage Ratio and Net Stable Funding Ratio, which aim to improve liquidity and lower asset-liability mismatch risks,” says Rajat Bahl, Director for Financial Sector Ratings at CRISIL.
 
Alternatively, banks could look at offering floating rate deposit products, but this would depend on demand, he added.
 
The RBI has proposed the changes to ensure faster monetary transmission. The new calculus for base rate will increase the sensitivity of bank lending rates to changes in the RBI’s policy rate.
 
However, given the impact on profitability, banks may shy away from cutting deposit rates, especially in times of low profitability, which will defeat the objective of quick transmission of cuts in the RBI’s policy rates.
 
The guidelines will also impact the broader objective of encouraging corporates to increasingly resort to the bond market given that the arbitrage created between rates on bank loans and bonds, due to a lag in monetary transmission by banks, will now disappear, CRISIL concluded.
 

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COMMENTS

MG Warrier

2 years ago

The clamour for 'rate cut by RBI' by those who are the beneficiaries of bank credit is based on the expectation that reduction in repo rate will have an impact on banks' lending rate. As interest rates now stand deregulated, reduction in lending rates by banks will be preceded by reduction in deposit rates. This will be the position until banks are able to work with lesser margins. The calculation of loss on reduction in lending rates is an arithmetical exercise. The question is whether the possible reduction in deposit rates has been accounted while assessing the possible 'one time loss' in 2017.

Ailing HMT to be recast, 2,900 watchmakers may lose jobs
Known once as 'Timekeeper of the Nation', the state-run behemoth is set to lay off 2,900 of its staff, including 1,091 from its twin-watch units and a bearing factory to turn around its fortunes with 1,600 blue collar workforce
 
Time is ticking away for thousands employees of the ailing state-run HMT, formerly Hindustan Machine Tools, as they face uncertain future due to an imminent closure of some of its loss-making watch subsidiaries despite talks of a golden handshake.
 
Known once as "Timekeeper of the Nation", the state-run behemoth is set to lay off 2,900 of its staff, including 1,091 from its twin-watch units and a bearing factory to turn around its fortunes with 1,600 blue collar workforce.
 
"As we plan to retain about 1,600 employees in other two subsidiaries after closing the three subsidiaries, we will soon offer an attractive Voluntary Retirement Scheme (VRS) to 2,900 of the total 4,500 workforce," HMT group chairman S. Girish Kumar told IANS here.
 
"Post-restructuring, we plan to have nine verticals, including machine tools, bio-medical equipment, tractors and watches in small quantity," Kumar said.
 
With the Narendra Modi government deciding in December to shut down the three loss-making subsidiaries and merge the remaining two into a holding firm, a one-time voluntary retirement scheme, estimated at around Rs.25-55 lakh for each employee, is being worked out.
 
But P.S. Chandrasekhar, president of the HMT Head Office Employees Association, is livid.
 
"This is not new. The government has been using the lure of VRS for two years but it has not delivered on it. It is neither giving VRS nor salaries for the past 17 months," Chandrasekhar told IANS.
 
The three subsidiaries -- HMT Watches in Bengaluru, HMT Chinar Watches at Ranibagh in Uttarakhand and HMT Bearings at Hyderabad in Telangana -- are saddled with 1,091 employees, who have not been paid salaries over the last 17 months or since April 2014.
 
The watch subsidiary, with 1,004 employees, has two factories in Bengaluru, one at Tumkur, 70 km from here, and another at Ranibagh. The Chinar unit, with 31 employees, has a defunct factory at Srinagar in Kashmir and an assembly unit at Jammu, while the Bearing arm has 56 employees.
 
During the past four years, 835 employees left the 62-year-old enterprise, availing of the liberal VRS package, based on the 2007 revised wages, as against the 1992 pay-scale, on which salaries have been paid over the last two decades.
 
Though some employees have availed the offer, many desire not to leave their jobs.
 
"I do not want VRS. I want to work until I retire. I wish to complete my service with dignity and retain my respect in society and among relatives," said K.M. Lakshminarayana, employee of HMT Watches, with 18 months of service left.
 
"There are 100 employees with 7-10 years of service left, 400-500 employees with less than five years and not many with less than two years. They will lose all those years of earnings. Who will give them a job at 50 years of age after availing VRS?" queried Lakshminarayana.
 
The other two subsidiaries -- HMT Machine Tools and HMT International -- will be restructured to support the government's "Make in India" flagship programme by rolling out more products and generating more employment, officials said.
 
The machine tools subsidiary, which also makes tractors, has five factories in Bengaluru, two each at Kalamassery in Kerala and Hyderabad, and one each at Ajmer in Rajasthan, at Pinjore in Haryana and at Mohali in Punjab.
 
The only profit-making HMT International arm was set up here in 1974 to export manufactured goods and offer consultancy in engineering and technical services from concept to commissioning on a turnkey basis.
 
"The restructuring exercise will also span our business portfolio, marketing and finance to turn competitive and profitable again," Kumar said.
 
Admitting that the company had hired more employees than it required over the years, Kumar said the company could not compete with lean and mean private firms (like Titan), thriving in the liberalisation era since 1991.
 
As a result, the watch subsidiary, which was churning out a whopping two million quartz and analog watches yearly till the 1990s, had an accumulated loss of Rs.2,252-crore and total liability of Rs.2,308 crore till fiscal 2012-14.
 
"HMT did not upgrade its technology. It is still using the same 1965 technology to make watches," said Chandrasekhar, who worked for 37 years with HMT International and is also the general secretary of the National Confederation of HMT Employees Union.
 
According to a source, HMT has an inventory of 80,000 watches in its warehouses at Jalahalli in Bengaluru. The company also receives institutional orders for watches in the range of 1,000-2,000 watches sometimes. Mysore University ordered nearly 1,200 watches recently.
 
The holding company (HMT Ltd) and its international arm, however, reported a profit of Rs.87 crore and Rs.4.5 crore, while four other arms posted a combined loss of Rs.352 crore in fiscal 2013-14.
 
As the company has a whopping 1,400 acres of prime lands in states where it has plants, it is approaching the ministry to clear all long-term liabilities by monetising the surplus ones and return those it leased from state governments.
 
"The government considers HMT as a strategic sector in view of its ambitious 'Make in India' initiative to attract global investments into the country, increase the manufacturing sector's contribution to the GDP (gross domestic product) and generate thousands of jobs," Kumar added.

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COMMENTS

TIHARwale

2 years ago

80,000 watches in inventory. Jokers if watch is not used for more than 6 months machinery gets jammed. Auction it for Rs 30/-a piece if some takes it ok otherwise gift it to school children across the State without incurring further costs

TIHARwale

2 years ago

80,000 watches in inventory. Jokers if watch is not used for more than 6 months machinery gets jammed. Auction it for Rs 30/-a piece if some takes it ok otherwise gift it to school children across the State without incurring further costs

FII outflows worse than October 2008? Not really!
Though the sell-off by foreign investors in August 2015 is significant, it is not as high as it is made out to be for two simple reasons
 
In August 2015, foreign institutional investors (FIIs) sold Rs17,248 crore worth of Indian equities. This was the highest since January 2008 when FIIs sold as much as Rs17,326 crore. In October 2008, at the height of global financial crisis, they recorded an outflow of Rs14,248 crore, the third-highest in the last seven years. Clearly, the net selling that took place in August 2015 seems huge. However, there is a problem in drawing alarmist conclusions. While in absolute terms the outflow may look massive, in reality, an outflow of Rs17,000 crore today is not the same as an outflow of Rs17,000 crore seven years back. The value of money depreciates and the market level changes. If the time value of money is considered, the latest outflow would be much lower. So where are we placed currently compared to the historic outflows of the past? We use two methods. In the first, we adjust the inflows and outflows of the previous months with inflation and in the second method, we calculate the percentage of the monthly FII flows to the total market capitalisation of the BSE. 
 
In the first method, the net inflows and outflows of FIIs in the past years are adjusted to today’s prices, assuming an inflation rate of 7%. We had used this data for an earlier article on whether you should buy, when FIIs are selling. (Read: FIIs are selling aggressively. Should you buy?)
 
We reckon that post such adjustment, the January 2008 outflow would be roughly Rs28,942 crore and the October 2008 outflow would be Rs22,624 crore. On an adjusted basis, the FIIs outflow in August 2015 is still the third highest outflow in the past 15 years but far lower than the big outflows on the two earlier occasions. Take a look (below) at the top 10 months which have the highest FII outflows on an inflation adjusted basis.
 
 
While FII outflows in August 2015 were high, it is still a long way off from the peak. In August 2015, the outflow is nearly 50% lower than the FII outflows seen at the peak in January 2008. Even compared to the outflows in October 2008, the recent outflows in nearly 30% lower.
 
On analysing the FII flows as a percentage of the total BSE market capitalisation, we find that this is the eighth highest FII outflow using this metric. The highest percentage outflows to the total BSE market cap was in October 2008. In the month, FIIs sold as much as Rs14,249 crore and the total BSE market-cap was Rs29.97 lakh crore. In May 2004, the ratio works out to -0.32%, as FIIs sold Rs3,251 crore when the total BSE market-cap was around Rs10.23 lakh crore. The FII outflow in January 2008, which was the highest in absolute terms, ranks third. The FII outflow of Rs17,326 crore in January 2008 was at a time when the total BSE market-cap was around Rs57.96 lakh crore.
 
As on 31 August 2015, the total BSE market-cap was as high as Rs98.28 lakh crore. The outflow of Rs17,248 crore as a percentage of the market-cap works out to just 0.18%. This brings it to a level that is almost on terms with the FII outflow of Rs3,806 crore seen in October 2005, when the BSE market-cap was Rs20.66 lakh crore.
 
Take a look at the highest FII outflows in percentage terms to the total BSE market capitalisation-
 
 
Therefore, the FII outflow in August 2015, though large, is not among the most significant.
 

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COMMENTS

Avinash Gupta

2 years ago

Stats can always be twisted to prove a point. Point is not whether they are the highest ( adjusted ) but they are very large. And there appears to be reasonable chance that they may continue. What is going to hurt the small investors as always is the fact that they probably entered the market at the peak and are now down 25-30% in most of the shares. Indices do not give the correct picture. Economy not moving forward could lead to further problems. There was one silver lining through which economy could benefit - low crude prices but that has also been darkened earlier by increases in taxes and now by a failed monsoon. Indian investors are in for tough time and shall be really beware of shenigans of overhyped ace stock pickers.

REPLY

Vinayak Bhimrao Mudholkar

In Reply to Avinash Gupta 2 years ago

Sir, I don't think he is twisting the statistics. If small investors plunge into stockmarkets without proper study; who should they blame to?....Savy investors have been investing in smallcaps & even after this correction they are enjoying decent profits....when economy recovers it is this segment that benefits disproportionately....Choice is yours....The glass is half full....Don't look at just Sensex or Nifty !

Vinayak Bhimrao Mudholkar

In Reply to Avinash Gupta 2 years ago

Sir, I don't think he is twisting the statistics. If small investors plunge into stockmarkets without proper study; who should they blame to?....Savy investors have been investing in smallcaps & even after this correction they are enjoying decent profits....when economy recovers it is this segment that benefits disproportionately....Choice is yours....The glass is half full....Don't look at just Sensex or Nifty !

R S Murthy

In Reply to Vinayak Bhimrao Mudholkar 2 years ago

90% of the trade is in derivatives. So long as the derivative trade exists small investor will continue to suffer. Only delivery based trade is a solution for all these evils.

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