Industry bodies have also urged RBI to revisit its guidelines on securitisation and priority sector lending as industry players, especially NBFCs, are facing fund crunch, apart from raising the cap on NBFCs' exposure to mutual funds
Mumbai: Non-banking finance companies (NBFCs) and asset infra finance companies have asked the Reserve Bank of India (RBI) to further liberalise foreign borrowing norms for them to tide over fund crunch, reports PTI.
Financial market players like NBFCs, the Finance Industry Development Council (FIDC), the Fixed Income Money Market and Derivatives Association (Fimmda), Foreign Exchange Dealers' Association (FEDAI), the Primary Dealers Association, among others, met the RBI top brass, including Governor D Subbarao, this evening at the customary pre-policy meeting.
"We requested the Governor to look at relaxing the external commercial borrowings (ECB) norms for NBFCs and asset financing companies," FIDC Director General Mahesh Thakkar told reporters after the meeting.
He said that the industry bodies have also urged RBI to revisit the guidelines on securitisation and priority sector lending as industry players, especially NBFCs, are facing fund crunch, apart from raising the cap on NBFCs' exposure to mutual funds.
Leading NBFC L&T Finance president N Shivraman said while conveying the industry's concerns about fund crunch, as banks have not passed on the benefit of the rate cuts by RBI in April to borrowers, they urged the central bank to relax the ECB norms for them.
"The RBI needs to help us to diversify our funding sources," Shivraman said.
The draft report of the Usha Thorat committee on NBFCs, submitted in August 2011, had called for tighter rules for NBFCs in terms of provisioning, lending and capital adequacy ratios, to help avert possible risks to the financial system.
The RBI set up the committee because unlike banks, whose exposure to realty and stock markets are tightly regulated, NBFCs don't have stringent rules on sectoral lending and group-wise exposure, enabling them to lend more liberally against shares and also for realty.
The industry, however, argued today that it was facing considerable fund crunch and sought liberalised borrowing norms to raise funds from overseas.
When home loan interest rate is reduced, the benefits are passed on to new customers while an increase is applicable to all old customers. Why banks, lenders are allowed to indulge in this jugglery in the name of floating rate of interests?
Here comes the good news. But before you hear the good news, let me tell you there is an irony attached to this good news. The same news which is good for some prospective customers is bad for large number of existing customers. Three home loan players have reduced the rate of interest on their home loans but the reduced rates are applicable only for the new customers. These three institutions are ICICI, HDFC and Vijaya Bank. On 12 October 2012 these institutions announced a reduction in the rate of interest on home loans upto 1%. The reduced rate of interest is obviously meant to attract new customers on the occasion of forthcoming festival of Diwali when many customers decide to book home and go for home loans.
This move has once again raised the most perplexing question related to lending practices of banks, “Why is that when rate of interest is reduced on home loan, benefits are passed on to new customers only, while an increase in rate of interest is applicable to old customers?” Why are banks allowed to indulge in this jugglery in the name of floating rate of interests? Let us investigate this question in detail. Banks and financial institutions generally do not touch their BPLRs (Base Prime Lending Rates) and Bank Rate. These institutions only adjust the spread that they charge on home loans below PLRs and above Bank rates. So for example if the BPLR of a bank is 16% and it was providing a spread of PLR minus 5% for an existing customer, for new customers the rate is changed by keeping PLR at 16% but changing spread to 6% which automatically changes the rate for new customers. Similarly in case of Base Rate, the rate is kept unchanged and the spread charged over the base rate is adjusted.
Now let us look at reasons that banks often point out for doing this and not adjusting rate of interest for all customers. Though banks do not have a very tangible answer for this they try to provide some answer which sounds logically flawed but hardly draws the attention of the regulator i.e. Reserve Bank of India (RBI) .The most unacceptable logic given is that since the cost of borrowing for banks for existing customers is high, they cannot pass on the benefit of reduced rate to existing customers. Hence they make the benefit available to new customers. This logic seems totally flawed.
Let us analyse two different scenarios for understanding the logic extended by banks. Let us look at the practice being currently followed by HDFC, one of the leading players in home loan market. If you have a home loan from HDFC, the financial institution allows you the benefit of the new rate on interest by charging an amount which they call as “conversion fee”. So if you want the benefit of reduced rate of interest pay the conversion fee and get the benefit of reduced rate of interest, even as an existing customer. This amount depends on the home loan availed by you. The surprising thing here is that HDFC allows one to go for new rates multiple times as an existing customer by a paying conversion fee every time you want rate of interest to be changed on your loan. This shows that cost of borrowing has very little significance in policy-making and HDFC wants their existing customers to pay a fee post which they are ready to pass on the benefit of reduced rate of interest. The fee charged is not good enough to compensate the so called cost of borrowing. This shows that the practice followed is unethical and needs attention of the regulators.
But much more than this, what is unfair is the other practice followed by banks and financial institutions. If you have an existing loan from one bank and want to shift it to another bank which is offering lower rate of interest, you are entitled to get the benefit of a reduced rate of interest. So as a customer you again end up paying a processing fee and some costs attached to the paper work. This again shows that cost of borrowing has very little role to play in this. The processing fee is a nominal amount generally compared to the home loan amount.
These two practices followed by banks and financial institutions shows the unfair practices being followed by them which they do in the guise of pricing of products which seems to be the natural right of these institutions in absence of clear cut regulatory guidelines. While rate of interest on fixed rates, whether deposits or lending may remain same, it does not make sense to do the same on floating rates? But is the regulator listening?
Immediately after becoming the FM once again, P Chidambaram exhorted banks to dole out more educational loans. In 2004-05 he had done exactly the same thing, leading to large losses for government-controlled banks
After P Chidambaram became the finance minister in August this year, one of the first things he did was to rail at banks (read public sector banks) to ensure that they dole out more educational loans. The finance minister even went as far to say that bank officers will be penalised for rejecting education loans without sufficient reasons. “Bank loan is the right of every student who meets the parameter. No bank can turn away an applicant. Every application for a bank loan must be received and acknowledged and every deserving candidate must be given the loan if the student meets the parameter,” Chidambaram had said. While he has laced his admonishment with words like “who meets the parameter”, bank chairmen know better. It was a directive from the FM.
Will the banks feel pressured to lend more for education? Of course they will. If so, is the finance minister pushing the government-owned banks into a hole? Exactly what he did in 2004-05?
Yes, directing banks to dole out more education loans was exactly what P Chidambaram had done in 2004-05—with alarming results.
As the FM, P Chidambaram, had announced several ‘incentives’ to boost education loans during his budget in 2004-05. In the budget speech he said:
* The requirement of collateral was dispensed with for loans up to Rs4 lakh.
* I am happy to say that commercial banks have now agreed to waive the need for collateral for loans up to Rs7.5 lakh, if a satisfactory guarantee is provided on behalf of the student.
* Thus, no student admitted to any professional course, including courses in IITs, IIMs and medical colleges, will be deprived of the opportunity to study because of lack of funds.
What was the impact? In order to please the master, PSBs went into an overdrive—bloating their portfolio of education loans. Education loans multiplied by a stupendous 10 times since FY04 and have grown at a compounded rate of 35% in the same period versus industry credit growth of 23%, according to Espirito Santo Securities, which has compiled a very perceptive report on this.
In the four years post the announcement of the incentives in the FY04 budget, education loans rocketed by 48%+ year-on-year. The proportion of education loans has steadily increased from 0.5% of total non-food credit to about 1.17% of total nonfood credit as of FY12. Similarly, the proportion of education loans increased from 1.46% of priority sector credit to 3.59% of priority sector credit as of FY12.
When the FM orders, bank chairmen comply and then retire quietly. The bank is left with a portfolio of assets it would not want in the normal course of business. No wonder, education loans are going bad at an alarming rate. The gross non-performing assets of educational loans has swelled to 6% from 2%, in a couple of years, with a couple of banks having even reported that over 10% of their education loan portfolio is now at risk of being written off.
Amazingly, the FM is doing it again. Either he has a bad memory of his actions, or he does not know or—as is most likely—simply does not care. As long there are public sector banks which can be milked for political ends, the taxpayers and shareholders are there to pick up the tab.
The finance ministry, in the recent budget, had announced the formation of the education loan credit guarantee fund, which will be worth Rs5,000 crore, and where banks will be guaranteed 75% of the loan amount in case a student defaults. However, this is for loans up to Rs7.5 lakh where there is no third-party guarantee or collateral security. Evidently, Rs5,000 crore is still there is to be picked. With Pranab Mukherjee as the FM, the banks may have found ways not to lend. With Chidambaram as the FM now, they know better. As long a he is the FM, we may see a surge of education loans—a lot of which will duly go bad.
Tomorrow: Bad loans are especially concentrated in the southern states, mainly Tamil Nadu from where the FM hails.