Money & Banking
NBFCs, infra finance companies ask RBI to relax ECB norms

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.

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Home loan interest rates: Games banks and financial institutions play

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?

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COMMENTS

Dayananda Kamath k

5 years ago

floating rate regime is one of the most abused system to loot the borrowers as applied in india with active connivance of the regulator Reserve Bank of india. in floating rate and at every change of interest announced by banks they do not inform what aspect of the floating rate is being changed by the bank. ie whether they have changed base rate or mark up. this is basic need for transperancy in administration of floating rate. further in every sanction they have to clearly mention what is interval for resetting the rate ie once in quarter or halfyearly or yearly. and the rate should be reset only on these intervals if there is any change in base rate. but none of the banks follow this. it is violation of the contract act also. this matter has been brought to the notice of governor reserve bank of india and also followed up but no action so far.

Sachin M Regundwar

5 years ago

It is true even with public sector banks like LIC Housing finance. I was offered the loan with a spread of 3.5% Later on, I found that this spread is changed to 2.5% only. When, I spoke to the concerned officer, I was told that the offer was only for 1 year and later on it depends on bank to decide the spread. Still, I am not satisfied with their answers. I want to take up the matter to higher ups, but I don't know how to go ahead.

Amit

5 years ago

A very informative article and what you have stated above wrt HDFC is very true. And charging of conversion fees is very unfair and even if home loan is shifted to some other bank then also amount of proceesings is more or less same as compared to conversion fees. But appropriate authorities should come forward and look into these matter in the interest of the public.

Inflicting bad education loans on banks: The FM wants to repeat his 2004-05 act

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.

 

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COMMENTS

A BANERJEE

5 years ago

I am afraid, you seem to be rather biased against the principle of educational loans. I think, it is necessary even to more broadbase the policy so as to ensure that all academically eligible but economically handicapped students get the benefits, though tightening of the recovery policies must be well publicised and adopted. It would be better to examine each case on merits though the schools/colleges so as to rule out any scope for favouritism, bribery (to a great extent) and partiality. On the whole, it is a necessary evil.

Narain Jagirdar

5 years ago

Politicians build schools and colleges, give fancy names to them, and claim high standards of teaching, charge high fees not commensurate with the standard of teaching they provide to hapless students. As a government wedded to American ideology of commercializing everything, they want to privatize education as well, so they can wash their hands of even this basic responsibility of skilling the next generation of working people.
These very politicians have perhaps appointed PC to advocate easy loans to students from banks. Banks can go to hell!

Dayananda Kamath k

5 years ago

tragedy fo india is every good intentioned schemes are missused by the persons who matter. education loans are taken by wealthy people only. banks will also release these loans faster so that they can show the statistics. when pmry was intorduced with Rs.one lakh subsidy there was a case where it was released to a wealthy persons daughter and after claiming subsidy it was closed immedietly. 366 subsidised cylinders were given to jindals. no action even afterthe matter came in public domain. education loans will be the next problems for nationalised banks.

Sachin

5 years ago

So do you want to say that education loan should not be given ? If FM did not give directive then no bank (NO BANK) will give loans without collateral guarantee. And their are many many deserving students who cannot provide collateral and will be deprived of the education. You are pointing gun are wrong end. Problem is not with FM's directive, but students who do not repay even though they are supported by banks in need.

Also you talk about increase in loan amount, Can you also be kind enough to post the percentage increase in cost of eduction ?

Also can you give stat of farmer loan that are in NPA along with percentage increase from 2004 till date ?

Only to clarify even i do not like CHIDAMBARAM as India's FM and Congress in ruling, but request you to not make sensational stories only for sake of it.

I WOULD LOVE TO SEE EVERY INDIAN CHILD TO HAVE GOOD EDUCATION EVEN IF IT COST FEW % MORE 'NPA' TO BANK.

REPLY

Narain Jagirdar

In Reply to Sachin 5 years ago

Sachin, your spirited letter needs a dose of reality. NPAs are not banks', it is our money that banks will be playing with and a bank laden with NPAs doling out loans to students who do not repay or have no intention to repay will ultimately affect us.
Do not get carried away with exhortations of shrewd and manipulative politicians, for their vital interest is not in students but in protecting the income streams of educational institutions floated and run by their fraternal politicians who view education as a money making racket.

Sachin

In Reply to Narain Jagirdar 5 years ago

Yes Narian,
I agree with your point. Even I am not a socialist person. My point was only to show the real culprit. FM directives were to give loan to students. Now its upto each and every student who took loan to repay it timely. So real culprit for high NPA in eduction loan are students not paying back and not FM.

Regarding the education institution exhorting more money is totally different issue and that is also wrong. Everyone know that all private eduction institutions are run by politicians and these directives are to get easy money for such private institutions. We should fight against high cost of eduction but DEFINITELY WE SHOULD NOT STOP EDUCATION LOAN FOR ANY DESERVING CANDIDATE.
I have personally seen very closely how bank managers treat poor peoples when they ask for loan. For wealthy peoples bank manager themself go home to get signatures.

MOHAN

In Reply to Sachin 5 years ago

I agree with your statement "there are many many deserving students who cannot provide collateral and will be deprived of the education".

Most of the nursing students who took ed-loans could not repay it because nursing profession are underpaid in India. Hospitals and doctors are fleecing patients but nurses are paid peanuts.

PRABAL BISWAS

5 years ago

if the people who take the laons do not refund the loans they are the cheats.it does not matter who is the FM. Its very easy to point fingers

Babubhai Vaghela

5 years ago

Only about 3 Per Cent Middle Income Students are beneficiary of Education Loan in India unlike more than 70 Per Cent in US & EU Countries. Not poor but deserving. Need to Prosecute Chidambaram for Corrupt Practice.

MOHAN

5 years ago

Could you please publish the state wide percentage/details of bad educational loans?

Most of the bad ed-loans of Kerala are likely to be loans taken for pursuing nursing education.

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