Corporates may find it difficult to repay loans: RBI

“The outlook of the firms show signs of weakness which can be attributed to rise in input prices, interest rates, slackening demand and some infrastructural constraints. Servicing of loans by them, therefore, may come under stress,” said the RBI’s Financial Stability Report

Mumbai: The Reserve Bank of India (RBI) on Thursday said Indian companies may find it difficult to repay loans as rising input cost is putting pressure on their profit margins.

“The outlook of the firms show signs of weakness which can be attributed to rise in input prices, interest rates, slackening demand and some infrastructural constraints.

Servicing of loans by them, therefore, may come under stress,” said the RBI’s Financial Stability Report (FSR).

It said the profit margin of the corporate sector has dipped, which indicates its reduced pricing power in the wake of rising raw material and input costs.

“The rising share of interest cost in sales as well as gross profits so far, implies that the impact of monetary tightening on the margins of corporates are now becoming visible,” the RBI said.

The RBI has hiked rates 13 times since March 2010 and industry believes the rising borrowing cost is putting pressure on margins as production is getting impacted.

It said restructured and impaired assets increased in telecom and power sectors. “The fact that incremental credit to these sectors was also high—higher than the aggregate growth in banking sector credit—called for careful monitoring of asset quality in these segments,” RBI said.

The report further said that banks’ asset quality has come under pressure due to the adverse impact of inflation on growth and various other factors.

It said that higher interest expenses and higher provisioning requirements put some pressure on banks’ profitability even as efficiency ratios continued to improve.

“Going forward, earnings may be further stressed due to the impact of high deposit rates, potential slowdown in credit growth and deterioration in asset quality,” it said.

Further, India’s external sector faces risks due to decreasing growth in world trade volumes and weakening global demand.

“Going forward, exports may moderate further if the slowdown in advanced economies persists,” the RBI said.

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RBI may lower GDP projection for FY11-12: RBI governor

RBI governor D Subbarao said that the targeted growth may not be achieved on account of several factors such as high inflation and the depreciating rupee

Vijayawada: The Reserve Bank of India (RBI) on Thursday said the Indian economy is likely to grow below its projection of 7.6% this fiscal, and is likely to revise downward the forecast in its policy review next month, reports PTI.

RBI governor D Subbarao said while addressing an event here that the targeted growth may not be achieved on account of several factors such as high inflation and the depreciating rupee.

The central bank is likely to revise downwards its gross domestic product (GDP) projection in its 3rd quarter review of monetary policy on 24th January, during which it will come out with revised forecast for year-end inflation.

In October, it had cut the GDP growth forecast for 2011-12 to 7.6%, from 8%.

Earlier this month, the government lowered its full-year growth forecast to between 7.25% and 7.75%, down from 9% projected in February.

Mr Subbarao said the macro-economic situation is a cause of concern, as growth is declining, inflation is stubbornly high and rupee is weakening.

After 13 interest rates hikes since March 2010, the RBI had paused the rate hike cycle in its policy review on 16th December. The overall inflation was still at an elevated level of 9.11% in November.

There are risks to inflation, Mr Subbarao said, adding that high oil prices and the sudden depreciation in rupee pose challenges for the economy.

The rupee has depreciated 18% against the US dollar so far this year. It is hovering at 52.65%.

Mr Subbarao said market forces would continue to determine the rupee level and RBI will intervene only if there is a sharp volatility. He said the course of exchange rate movement could change if the European markets improve.

The RBI chief said administrative measures taken by RBI would curb undue speculation and ensure that interest of the genuine customers in forex markets are not affected.

RBI had last week taken measures to support the rupee, including putting curbs on forward trading to check speculation.

India’s economy grew at a slowest pace in over two years at 6.9% in the July-September quarter. Further, factory output contracted 5.1% in October.

Mr Subbarao said he expects inflation to be below 7% by the March end, but did not specify as to when the benchmark interest rates would be reduced.

“I cannot say when and how the interest rates will come down. Challenges before the RBI is to balance growth and inflation,” he said.

Mr Subbarao said that in addition to the constraints in food supply and rising prices, the international oil rates also flared up the inflation levels.

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Banks increase interest rate on NRE deposits

The rates on NRE deposits have gone up in the wake of the RBI freeing the interest rates on non-resident deposit schemes on 16th December to stem the fall of the rupee by luring more funds from NRIs

Mumbai: Private sector lenders like HDFC Bank, Yes Bank, Dhanlaxmi Bank and the state-run Allahabad Bank on Thursday steeply increased the interest rates on select maturities of NRE deposits, reports PTI.

HDFC Bank increased the interest rates on NRE deposits of Rs1 crore and above with a maturity of one to two years to 9% against 3.82% earlier. It has, however, left the NRO deposit rates unchanged.

Yes Bank too increased the rate on NRE accounts by 2 percentage points to 6% for up to Rs1 lakh and by 3 percentage points to 7% for over Rs 1 lakh.

The state-run Allahabad Bank, too, yesterday announced a spike in its NRE deposits up to 7.5%. The Kolkata-based bank will now offer 7.5% for one to two years tenor (against 3.82% earlier), 7% on deposits of two to three years (from 3.51%), and 6.75% for those above three years (from 3.64%).

HDFC Bank NRE Services head Abhay Aima told PTI that the bank has increased the interest on deposits above Rs25 lakh to 8.5% for tenor under two years. The bank has an NRE deposit base of Rs7,100 crore.

He also said there has been a considerable spike in the inflows since the rupee fall and opined that such high rates will not last long.

The Thrissur-based Dhanlaxmi Bank too hiked interest rates on NRE deposits to 8% for a maturity of one to three years effective 26th December while the rate for deposits for three years and up to 10 years will be 7.75%, the bank said in a release.

Earlier this week, the Kochi-based Federal Bank and Laxmivilas Bank had also increased their rates on these deposits.

On 16th December, Federal Bank hiked the interest rates on NRE deposits for one year to 6.5% from 3.82% and left the rates on other deposits unchanged. It also said the new rates will be applicable for a limited period from 19th to 31st December.

Similarly, another Kerala based lender Laxmivilas Bank had revised the interest rates on NRE deposits of various slabs on Wednesday. For one year and under two years, it is offering 10%, 8% for deposits of two to three years and 7% for deposits above three years.

The Kerala-based banks have huge NRI clientele as a good portion of the state population work outside the country.

The rates on NRE deposits have gone up in the wake of the RBI freeing the interest rates on non-resident deposit schemes on 16th December to stem the fall of the rupee by luring more funds from NRIs.

The RBI had already freed the saving and deposit rates for resident customers.

The move gave banks the freedom to fix rates on non-resident external rupee deposits and ordinary non-resident (NRO) accounts with immediate effect.

“With a view to providing greater flexibility to banks in mobilising non-resident deposits and also in view of the prevailing market conditions, it has been decided to deregulate interest rates on such accounts,” RBI had said in a circular adding that the “interest rates offered by banks on NRE and NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits.”

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