I may say in brief that lowering of interest rate cannot help in credit growth and cannot help in improving health of bank's assets without keeping manpower happy.
Selling of insurance product by banks will further jeopardise health and wealth of banks.
Unfortunately banks as well as government consider root cause of sickness as the only medicine to cure the sickness.
Reckless expansion of bans can give temporary growth in volume of business but lastly it will prove dangerous and affect badly survival of banks. -Danendra Jain
HDFC Bank, SBI now among top 50 most-valued global banks-Business Standard
Sharp rally in their stocks propel rankings; 4 Chinese banks figure among top 10
Two Indian banks, HDFC Bank and State Bank of India (SBI), now figure in a list of the top 50 global banks in terms of market capitalisation. HDFC Bank, India’s second-largest private lender in terms of asset size, ranks 45th, with a market capitalisation of $39 billion, Bloomberg data show. With a market capitalisation of $38 billion, SBI is ranked 46th.
ICICI Bank, ranked 53rd, is the only other Indian entity to figure in the list of the 100 most valued global banks.
The market capitalisation, or value, of an entity is calculated by multiplying the total number of its shares outstanding by its stock price.
The huge leap in the rankings of Indian lenders is due to a sharp rally in their stocks in the past year. During this period, shares of HDFC Bank gained 50 per cent, while those of SBI nearly doubled. ICICI Bank added about 70 per cent.
A year ago, no Indian bank featured among the 60 most valued global banks. At 65, HDFC Bank had the best ranking among Indian lenders.
The BSE Bankex, a barometer of the performance of banking stocks, has been one of the best-performing sectoral indices in the past year. It gained 75 per cent, against a 33 per cent rise in the benchmark Sensex. The rise in bank stocks was in anticipation of a revival in domestic economic growth, led by a reform push by the new government.
“Expectation that the domestic economy will revive has contributed to gains in the Indian stock market. Monetary policy action and hopes of government reforms have led to an improvement in investor sentiment,” said Vaibhav Agrawal, vice-president (research), Angel Broking.
Industrial and Commercial Bank of China (ICBC) tops the list of global banks, with a market capitalisation of $285 billion, over seven times that of HDFC Bank. Chinese banks dominate the list of the top 10 global banks, with Bank of China ($212 billion), China Construction Bank ($208.1 billion) and Agricultural Bank of China ($202 billion) also figuring in the list.
Wells Fargo ($263 billion) and JP Morgan Chase ($205 billion) are other major global banks, ranked second and fifth, respectively.
Experts say no Indian bank figures in the top 10 list because the country’s banking sector is quite fragmented, with a large number of players. “Compared to India, many Asian economies have fewer banks. China, for instance, has only four major banks. This gives an opportunity to these banks to grow in size. Also, the size of the economy is a factor. The economies of China or the US are much bigger in size than India’s,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services.
While the gross domestic product (GDP) of the US, the world’s largest economy, is about $17 trillion and China’s $9.2 trillion, India’s is $1.9 trillion. Analysts say typically, bank assets grow at about two times the economic growth rate.
In terms of asset size, Indian banks have a lot of catching up to do. HDFC Bank, for instance, has assets of $84 billion, only a fraction of ICBC’s $3 trillion. At $400 billion, SBI has the highest assets among Indian lenders, though it is still a far cry from $2.4 trillion, the average asset size of the top five global banks.
RBI allows banks to sell multiple insurance products as brokers
Final guidelines issued after two years of discussion
Customers could soon get an option to buy any insurance company's policy from one bank.
In its final guidelines on the subject, the Reserve Bank of India (RBI) has said banks may become insurance brokers and sell multiple products, though this is not mandatory.
To facilitate an open architecture of bancassurance, where a bank is enabled to sell products of all insurance companies, RBI had earlier issued draft norms on this.
Bancassurance, which refers to banks selling insurance products, now follows a corporate agent structure. This means banks sell insurance as a corporate agent, the regulations allowing each to sell insurance products of only one life, one general and one health insurance company each.
In the final norms, a bank can enter insurance broking only if the capital to risk (weighted) assets ratio is 10 per cent or above and the level of net non-performing assets is three per cent or below. RBI said the bank’s net worth should not be less than Rs 1,000 crore, double the Rs 500 crore proposed earlier.
There was a call to have an open architecture of bancassurance in the insurance sector, as there were several late entrants in the market which did not have a bank to tie-up with. Former finance minister P Chidambaram had said banks could become insurance brokers to boost the latter sector’s penetration, now less than five per cent of gross domestic product.
Issues
Insurance sector experts said while the new guidelines are an enabling provision, banks would not become brokers for these products unless mandated to do so. Almost all private and public sector banks either have joint venture (JV) agreements or are corporate agents of insurance companies.
The chief executive officer of a non-bank promoted life insurance company said, “Banks are unlikely to become brokers unless forced. They do not see this as an advantage and would be held responsible for the policies sold. There are huge financial risks involved if they face a large claim during any financial year.”
Amitabh Chaudhry, managing director of HDFC Life, said: “Having a corporate agency model is easier for a bank. It will become a broker if it helps earn more revenue, if it enables them to give more choice or if it is forced.”
Chaudhry added a customer could buy a product from any insurance company and a mid-way path between the current corporate agency model and the insurance broker model can help open the sector. “A bank could be enabled to sell two policies of life, non-life or standalone health companies to begin with. This would be less complex than the broking model. We have to wait and see if any bank chooses the insurance broker model,” he said.
On December 20, 2013, a letter from the finance ministry, addressing public sector bank chief executives, said all these lenders should become insurance brokers and leverage their branch network for insurance penetration. Then finance minister P Chidambaram had in his budget speech said he was permitting banks to become insurance brokers.
The Insurance Regulatory and Development Authority of India (Irdai) had also earlier proposed the concept of an open architecture of bancassurance. However, those in the sector were divided. This was followed by both Irdai and RBI bringing out draft norms. Banks that had a JV agreement with insurance companies had expressed discontent. It would have meant they had to sell products of all insurance companies. As a broker, they would be liable for an insurance policy, unlike the case with a corporate agent. The liability is high, especially if the bank was to sell products of multiple insurers.
Following this, an experts’ committee was set up to review the proposal.
More detail
The central bank has clearly said only one entity in a banking group can undertake insurance distribution by either one of the two modes mentioned. The bank should have made a net profit for the past three continuous years and the record of the performance of subsidiaries, if any, should be satisfactory.
Banks which satisfy the eligibility criteria (as on March 31 of the previous year) can approach RBI to set up a subsidiary/JV company for undertaking an insurance business with risk participation.
RBI said a subsidiary of a bank and another bank will not normally be allowed to contribute to the equity of the insurance company on a risk participation basis. Further, it should ensure the risks involved in insurance do not get transferred to the bank. There should be an ‘arms length’ relationship between the bank and the insurance outfit.
The Insurance Laws (Amendment) Ordinance has also paved the way for an open architecture for bancassurance and all intermediaries, including agents and brokers, have been clubbed under one category.
RBI has said there should be a system of assessment of the suitability of products for customers. Pure risk term products with no investment or growth components that are simple and easy for the customer to understand will be deemed universally suitable products. More complex products with investment components will require the bank to necessarily undertake a customer need assessment, prior to sale.
The regulator has prohibited banks from any restrictive practices of forcing a customer to either opt for products of a specific insurance company or link the sale of such products to any banking product. It should be prominently stated in all publicity material distributed by the bank that the purchase by a bank’s customer of any insurance product is purely voluntary and not linked to availment of any other facility from the bank.
The share of corporate agents in the new business premium procured by private life insurers was significant at 47.6 per cent in 2013-14 (49.1 per cent in 2012-13), says Irdai’s annual report. For bank-promoted insurance companies, sectoral estimates suggest it is as high as 65-70 per cent.
Lower rates unlikely to translate into higher demand for bank credit
Borrowers may continue to wait hoping for rates to fall further
A 25-basis-point repo rate cut might not lead to an immediate improvement in demand, as corporate houses are unlikely to rush to borrow money from banks or non-banking sources. Financing options from non-banking sources have become even more inexpensive.
According to Bloomberg data, the interest rate on commercial paper in the secondary market for tenure of one month to 12 months range between 8.39 and 8.85 per cent, over 100 basis points lower than what banks have been lending at.
As a result, even if banks cut their lending rates by 25 bps in accordance with the repo rate cut, lending via the money market route will still be cheaper for companies.
“Even if banks cut their base rates, the rates in the money market might also come down, as the money market is not a constant thing and yields have already started coming down. Therefore, a rate cut will not mean that credit offtake will increase in the short term,” said P Sitaram, CFO, IDBI Bank.
Credit demand has been decelerating and loans grew at its slowest pace in a decade in September 2014. According to the Reserve Bank of India’s latest data, the year-on-year growth in bank credit was 10.5 per cent as on December 26.
“… Transmission of Thursday’s rate cut beyond the near term – after a proportionate reduction in lending rates by most banks -- would hinge upon the risk aversion among banks because liquidity is expected to remain comfortable. As to whether this will trigger credit growth immediately, the jury is out because interest rates in the money market are already 100-150 bps lower than bank lending rates,” said a CRISIL report. It is not only the corporate borrower. Even the retail borrowers are likely to stay away, in anticipation of a further rate cut.
“Now that the rate cut cycle has begun, borrowers, especially individual ones, will wait in anticipation of a further rate cut. Retail borrowers are typically choosy and if they know that can get a lower rate of interest after a few months, they will normally postpone purchases. Therefore, it is unlikely credit demand will improve immediately,” P Srinivas, managing director and chief executive officer of United Bank of India (UBI), told Business Standard.
UBI was the first bank to lower its base rate after RBI cut the repo rate on Thursday. This was the first repo rate cut since May 2013. India Inc has been demanding a rate cut, claiming it was essential to propel investment demand. UBI, Union Bank of India has also announced a reduction in base rate. Many other banks are expected to mirror the move in the coming days.
"RBI's stance signifies that if other conditions do not become adverse then the rate cut journey will continue. But it has to be established at what rate the investors' confidence in building capacities and expand capital expenditure will actually happen," said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services.
Moreover, bankers and industry experts also stress on the fact that credit offtake will not improve until green shoots in the economy become more visible.
"Credit demand is a function of a multitude of factors apart from just the cost of capital. First, while some banks have cut their base rate, a cut in the repo rate by RBI would not necessarily translate into rate cuts by other banks as they would individually assess their asset and liability situation. Second, lower rates would take time to filter through the supply chain, which further depends on the efficiency of the transmission mechanism. Overall, we see this cut in rate by RBI coming in at an opportune time, but we believe that it would take some time for it to have a perceptible impact on credit offtake," said Anis Chakravarty, senior director at Deloitte in India.
Bankers also felt that a 25-basis-point rate cut might not be adequate to rebuild investors' confidence and revive capital investments.
"Lower interest rate is just one ingredient in the credit demand cycle. A lower rate will help in boosting sentiment but credit offtake will depend on investment appetite of large corporate borrowers and incremental investment opportunities. So, for credit demand to improve the economy has to pick-up and a 25-basis-point rate cut is probably not enough for that," said Shyam Srinivasan, managing director and chief executive officer of Federal Bank.