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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks may raise lending rates by 25-50bps in response to policy rate hike, impact of regulatory
changes and likely increase in short end deposit rates. Loan growth is likely to moderate. We
remain cautiously optimistic on the sector and continue to prefer banks with superior liability
franchise. Buy SBI, HDFC Bank.
50bps hike in key policy rates
�� RBI has increased repo rate by 50bps to 7.25%. The repo rate, henceforth, will be the only
independently varying policy rate
�� The reverse repo rate, as per the new operating procedure, will no longer be an independent
variable rate and will be pegged at fixed 100bps below the repo rate. Thus the reverse repo
rate is 6.25%
�� A new facility called Marginal Standing Facility (MSF) will be instituted. Banks can borrow
overnight from the MSF up to 1% of their respective net demand and time liabilities (NDTL).
The rate of interest on amounts accessed from this facility will be 100 basis points above the
repo rate i.e. 8.25%
�� This in effect implies that the rate at which banks borrow from RBI (repo window) has gone up
from 6.75% to 8.25%.
Savings bank deposit interest rate increased from 3.5% to 4.0%
�� At the system level, savings bank (SB) deposits constitute about 23% of total deposits. The
50 bps increase in interest payable on SB deposits thereby implies about 11-12bps increase
in cost of deposits.
�� Given the expectation that term deposit rates will rise in response to the repo rate hikes, we
believe on a blended cost basis, high CASA banks like State Bank of India (48% CASA)
HDFC Bank (51%) will still be relatively better off compared to whole sale funded banks in
general.
Enhancement of rates of provisioning for non-performing assets
�� RBI has increased the slab rates at which banks make provision for NPAs by 5-10%
depending on the classification of NPAs (substandard/ doubtful)
�� As per RBI data, at the system level, gross NPAs were about 2.4% of loans as of March
2010. Of this, NPAs under the substandard category constitute 50% of total NPAs, about 40%
falls under the doubtful category and balance 10% are loss assets.
�� Assuming, GNPLs are in the range of 2.7-3% of loans currently, the increased provision
requirement (on retrospective basis) implies a one time charge of about 15bps on loans.
�� However, on a prospective basis, the impact due to the increase in the rates of provision will
not be material.
Provision on restructured loans
�� 2% provision on standard restructured accounts (vs. 25-100bps earlier) in the first 2 years
from the date of restructuring, or in cases of moratorium on payment of interest/principal after
restructuring, for the period covering moratorium and 2 years thereafter
�� Restructured accounts classified as NPAs, when upgraded to standard category will attract a
provision of 2% in the first year from the date of up gradation (vs. 25-100bps earlier)
�� In our view, restructured loans are about 3-3.5% of loans at the system level. Assuming, that
banks will have to provide on the existing restructured loan book, the one time impact will be
about 5bps of loans.
�� However, on a prospective basis, the impact due to this will not be material
Cap on bank's investment in debt oriented mutual funds
�� To avoid the systemic risk involved in the circular flow of funds between banks and debt
oriented mutual funds (DoMFs) in times of stress/liquidity crunch, RBI has stated that that the
investment in liquid schemes of DoMFs by banks will be subject to a prudential cap of 10% of
their net worth as on 31 March of the previous year.
�� According to bank's management, in general, the quantum of funds deployed in liquid funds is
a function of loan growth and banks may have to find alternative investment options to deploy
surplus liquidity (if any).
�� Prima facie, this appears to be a marginally negative development for the mutual fund
industry in general.
Branch authorization policy
�� Domestic scheduled commercial banks (SCBs) are being mandated to allocate at least 25%
of the total number of branches to be opened during a year to unbanked rural (Tier 5 and Tier
6) centres (with population up to 49,999)
�� RBI states that, it was observed that on average SCBs opened about 20% of the total number
of new branches in rural centres (Tier 5 and Tier 6) in the last two years.
Other highlights
�� RBI has accepted the broad framework of regulations recommended by the Malegam
committee for the micro finance (MFI) sector. Accordingly, bank loans to all MFIs, including
NBFCs working as MFIs on or after 1 April 2011, will be eligible for classification as priority
sector loans under respective category of indirect finance only if the prescribed percentage of
their total assets are in the nature of "qualifying assets" and they adhere to the "pricing of
interest" guidelines to be issued in this regard.
�� As regards licensing of new banks in the private sector, RBI stated that the
comments/feedback have been examined and the draft guidelines on the entry of new banks
are being finalised in consultation with the Government of India.
�� A new committee will be appointed to re-examine the existing classification and suggest
revised guidelines with regard to priority sector lending classification.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks may raise lending rates by 25-50bps in response to policy rate hike, impact of regulatory
changes and likely increase in short end deposit rates. Loan growth is likely to moderate. We
remain cautiously optimistic on the sector and continue to prefer banks with superior liability
franchise. Buy SBI, HDFC Bank.
50bps hike in key policy rates
�� RBI has increased repo rate by 50bps to 7.25%. The repo rate, henceforth, will be the only
independently varying policy rate
�� The reverse repo rate, as per the new operating procedure, will no longer be an independent
variable rate and will be pegged at fixed 100bps below the repo rate. Thus the reverse repo
rate is 6.25%
�� A new facility called Marginal Standing Facility (MSF) will be instituted. Banks can borrow
overnight from the MSF up to 1% of their respective net demand and time liabilities (NDTL).
The rate of interest on amounts accessed from this facility will be 100 basis points above the
repo rate i.e. 8.25%
�� This in effect implies that the rate at which banks borrow from RBI (repo window) has gone up
from 6.75% to 8.25%.
Savings bank deposit interest rate increased from 3.5% to 4.0%
�� At the system level, savings bank (SB) deposits constitute about 23% of total deposits. The
50 bps increase in interest payable on SB deposits thereby implies about 11-12bps increase
in cost of deposits.
�� Given the expectation that term deposit rates will rise in response to the repo rate hikes, we
believe on a blended cost basis, high CASA banks like State Bank of India (48% CASA)
HDFC Bank (51%) will still be relatively better off compared to whole sale funded banks in
general.
Enhancement of rates of provisioning for non-performing assets
�� RBI has increased the slab rates at which banks make provision for NPAs by 5-10%
depending on the classification of NPAs (substandard/ doubtful)
�� As per RBI data, at the system level, gross NPAs were about 2.4% of loans as of March
2010. Of this, NPAs under the substandard category constitute 50% of total NPAs, about 40%
falls under the doubtful category and balance 10% are loss assets.
�� Assuming, GNPLs are in the range of 2.7-3% of loans currently, the increased provision
requirement (on retrospective basis) implies a one time charge of about 15bps on loans.
�� However, on a prospective basis, the impact due to the increase in the rates of provision will
not be material.
Provision on restructured loans
�� 2% provision on standard restructured accounts (vs. 25-100bps earlier) in the first 2 years
from the date of restructuring, or in cases of moratorium on payment of interest/principal after
restructuring, for the period covering moratorium and 2 years thereafter
�� Restructured accounts classified as NPAs, when upgraded to standard category will attract a
provision of 2% in the first year from the date of up gradation (vs. 25-100bps earlier)
�� In our view, restructured loans are about 3-3.5% of loans at the system level. Assuming, that
banks will have to provide on the existing restructured loan book, the one time impact will be
about 5bps of loans.
�� However, on a prospective basis, the impact due to this will not be material
Cap on bank's investment in debt oriented mutual funds
�� To avoid the systemic risk involved in the circular flow of funds between banks and debt
oriented mutual funds (DoMFs) in times of stress/liquidity crunch, RBI has stated that that the
investment in liquid schemes of DoMFs by banks will be subject to a prudential cap of 10% of
their net worth as on 31 March of the previous year.
�� According to bank's management, in general, the quantum of funds deployed in liquid funds is
a function of loan growth and banks may have to find alternative investment options to deploy
surplus liquidity (if any).
�� Prima facie, this appears to be a marginally negative development for the mutual fund
industry in general.
Branch authorization policy
�� Domestic scheduled commercial banks (SCBs) are being mandated to allocate at least 25%
of the total number of branches to be opened during a year to unbanked rural (Tier 5 and Tier
6) centres (with population up to 49,999)
�� RBI states that, it was observed that on average SCBs opened about 20% of the total number
of new branches in rural centres (Tier 5 and Tier 6) in the last two years.
Other highlights
�� RBI has accepted the broad framework of regulations recommended by the Malegam
committee for the micro finance (MFI) sector. Accordingly, bank loans to all MFIs, including
NBFCs working as MFIs on or after 1 April 2011, will be eligible for classification as priority
sector loans under respective category of indirect finance only if the prescribed percentage of
their total assets are in the nature of "qualifying assets" and they adhere to the "pricing of
interest" guidelines to be issued in this regard.
�� As regards licensing of new banks in the private sector, RBI stated that the
comments/feedback have been examined and the draft guidelines on the entry of new banks
are being finalised in consultation with the Government of India.
�� A new committee will be appointed to re-examine the existing classification and suggest
revised guidelines with regard to priority sector lending classification.
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