PNB raises Rs 1000 cr through sale of bonds

As a step to raise capital to meet the global capital adequacy ratio (CAR) requirement, public sector Punjab National Bank on Tuesday said it has raised Rs. 1000 crore in domestic market via private placement of bonds. 

PNB garnered Rs. 1,000 crore through long-term bonds which have a coupon rate of 8.23 % on February 9, the bank said in a statement.

As per the Basel III norms on CAR, all public-sector banks will need capital infusion of Rs 2,40,000 crores by 2018, the Finance Ministry has said. The Government plans to infuse capital to these banks in stages and has allocated Rs 11,200 crore for this in the current fiscal. Of this, PNB was allocated Rs 870 crore.

Finance Minister Arun Jaitley has stressed the need for capital infusion in his budget speech and said while public ownership will be retained, there will be an expansion of shareholding in a phased manner. Shares of these banks will be sold in a phased manner, he had noted.

What is Basel III?

Basel III (or the Third Basel Accord) is an international, voluntary regulatory standard on banking. Primarily, the accord focuses on regulations related to capital adequacy, market liquidity risk and stress testing. The basic principles were agreed upon by the members of the Basel Committee on Banking Supervision in 2010–11.

After the global financial crisis of 2007-08, banks decided to make the capital adequacy ratio stricter and promote better financial compliance as a means to check such crises. Basel III evolved as a mechanism to tighten bank capital requirements by increasing bank liquidity and decreasing bank leverage.

About Punjab National Bank

Punjab National Bank (PNB), one of the largest nationalized banks, was established 120 years ago. The bank has 6081 branches including 5 foreign branches, 6940 ATMs with a customer base 8.9 crore. PNB, has strong fundamentals, good brand image and enjoys trust among customers. The Bank offers wide range of products and services to cater to every kind of need.

The Bank has won many laurels and accolades in recognition of its overall performance. Recently, PNB was awarded the Golden Peacock Innovative Product/Service Award 2014 by Institute of Directors, It also bagged the ‘Global CSR Excellence and Leadership Award’ for ‘Organisations with Best CSR Practices’ and ‘Bank with leading Financial Inclusion Initiatives Award’ by ABP News and “Vigilance Excellence Award” by Institute of Public Enterprises, New Delhi.

Asymmetry in monetary policy transmission in India

Transmission troubles

Consider this: An annual review of the Indian economy by the IMF (International Monetary Fund) released last month reported how a repo cut announced by the Reserve Bank of India in January this year is likely to pave way for lower bank lending rates only in September 2017.

What’s more, certain studies have indicated that monetary policy in India impacts output with a lag of about 2 to 3 quarters and WPI headline inflation with a lag of about 3 to 4 quarters.

 

Caught in transmission

The long, variable and uncertain time lags in the process of money policy transmission begs the question: Does India’s monetary policy transmission mechanism leaves a lot to be desired owing to several loopholes including, but not limited to, the inordinate amount of time a repo cut leads to a lending rate cut?

Critics further argue that the studies highlight a larger issue which warrants greater scrutiny- the effectiveness of the monetary policy arrangement between the government and the RBI.

The objectives

Monetary policy transmission in India is aimed at achieving several parameters, some of which are listed below:

●      Ensure price stability

●      Expansion of bank credit 

●      Boost economic output (exports)

●      Facilitate commerce

●      Rein in inflation

Below is a list of channels of monetary policy transmission in India

Market prices	Market quantities
Interest rates	Money supply
Exchange rates	Credit aggregates
Yields	Government bonds

The ‘interest’ factor

Given that India, by and large, is a bank-dominated economy (notwithstanding the growth of equity and debt markets), several studies have indicated that interest rates are one of the strongest channels of policy transmission.

Asymmetry in policy transmission 

The aforementioned IMF report examined how pass-through to deposit and lending rates is slower in India. The report also stated that the deposit rate adjusts more quickly to monetary policy changes than the lending rate.

Banks find it tricky to cut lending rates following policy rate cuts because the cost of deposits does not adjust quickly by virtue of the fixed nature of deposit contracts. On the contrary, banks can raise lending rates, since loans can be re-priced quickly.

There is a view that small banks are more receptive to contractionary monetary policy shocks compared to big banks. Given that big banks have a large resource base including income from stock and foreign exchange markets, they are, to some extent, better equipped to deal with liquidity crunch.

Intriguingly, monetary transmission mechanism in India, is often referred to many as a ‘black box’ since many channels (interest rates, bank lending and asset prices among others) can influence the final objectives.

The complex network of financial markets and transmission lags lead to uncertainty with policy makers faced with the daunting challenge of assessing the actual impact of policy decisions on macroeconomic aggregates and economic output.

Policy decisions of the RBI to transmit through the money market to bond and asset markets (which in turn, influence savings and investment patterns) and from financial markets to labour markets (as reflected in aggregate output.)

Given that monetary policy works via financial markets (by means of interest rates or liquidity), transmission, by and large, depends on the sophistication of domestic financial markets in addition to financial integration with the real economy. Also, exchange rate regimes may influence the pass-through of external shocks on the domestic market. It has also been observed that the speed of pass-through to asset prices depends on volatility in money markets and balance sheets of banks among other factors.

End to end transmission

There is a view that monetary transmission in India is more effective in times of less liquidity i.e, the pass-through of policy rates is higher during tight monetary policy cycle owing to transmission lags. It is, therefore, argued that there is asymmetry in the transmission of policy rate changes between the surplus and deficit liquidity conditions.  While changes in policy rates are quickly reflected in money market rates and government bond yields, there is a certain degree of inflexibility exhibited by banks when it comes to lending and deposits rates.

The introduction of the Liquidity Adjustment Facility (LAF) as an operating procedure for monetary policy in the post-reform period (2000) is generally considered an important milestone. Experts believe there have been significant changes in the post-LAF period such as a marked importance of interest rate, asset prices and exchange rate channels in influencing monetary policy transmission. 

What's the Best Way to Use the Repo Rate Cut to Your Advantage?

RBI reduced Repo rate by 25 basis points

RBI announced a repo rate cut and all jaws dropped with confusion. I, for one, wasn’t sure if this was a good thing for my money or whether I should be really worried.

Turns out, I had nothing to worry about. The repo rate cut announced by RBI is one of the best that could have happened to all investors and depositors across the country.

 

Commercial Banks will reduce rate of interest on loans

The gist of this piece of news is simple. Commercial banks will have to reduce their lending rate, that is, the rate of interest charged on loans they give out. This reduction should see the light of day somewhere around April, as per current speculation. There is no evidence to support this prognosis.

What is the good news in the above deduction? Well, the demand for loans will eventually have to increase when the banks reduce their lending rates. In the event that the demand for loans increases, banks will need to have enough funds to supply for the increased demand.

Best time to invest in a fixed deposit

And that’s the good news, the rates of interest offered on fixed deposits will decrease in the future, but right now they are at an all-time high. They will continue to be as long as banks need to gather funds for the predicted drop in lending rates.

Repo rate won’t affect commercial banks at least for a few months

That’s more interesting is the fact that commercial banks don’t borrow all of their money from RBI, instead they pick up funds from the market. This means that RBI reducing its repo rate won’t affect the banks for a few months and hence they will use these months to collect money as deposits for future lending purposes.

It is a good time for depositors and investors to lock in their money and opportune interest rates.

How much to deposit into a fixed deposit account?

Depositors can consider dividing a sum of say Rs.5 lakhs into 5 separate deposits of Rs.1 lakh each in order to enjoy maximum returns on their investments.

What about debt investors?

Debt investors, especially, should invest in medium to long term funds for maximum benefit.

Dual opportunity in debt

In fact debt offers a dual opportunity with the reduced repo rate coming into play.

On one hand, capital appreciates from easing yields and other the other hand, credit opportunity from improved corporate fortunes.

Word of caution though, a minimum 2 years have to be set aside for both to come to pass.

What happens to rate sensitive markets with the reduced repo rate?

Another question that is interesting is, how does the repo rate cut affect the rate sensitive sectors?

The year that is coming up is good for rate sensitive sectors like, capital goods, auto and banking. They will do well with the reduced repo rates in the next 12-15 months.

What about loans taken that can be invested into fixed deposit accounts?

For those who are looking to pick up loans in order to use this opportune time for investments, a word of advice.

It is best to take loans on floating rates of interest right now. The EMI on such loans will come down substantially when commercial banks employ the reduced rates of lending.

Effect of RBI Rate Cut on Indian Banks in the Short Term

After the recent rate cut of 25 basis points (bps) by the Reserve Bank of India (RBI), banks may find it difficult to cut their lending rates over the short term, according to Pradeep Kumar, Managing Director of the State Bank of India (SBI).

The rate cuts from RBI were initiated after a prolonged period of inflation control by the apex bank. Going ahead in the same direction, Mr Raghuram Rajan, the present Governor of RBI, may cut rates by a further 50 basis points in the current calendar year.

 According to Mr Kumar, SBI and other major banks had already anticipated such rate cuts, and accordingly reduced their deposit rates long before the rate cut was officially announced by the RBI. Also anticipating future falls in rates, customers have been shifting to fixed deposits from their savings deposits so as to ensure steady flow of interests.

In such a scenario, banks like SBI have found it difficult to get their cost of funds to decrease in spite of the lowering of deposit rates. In fact, during the last financial quarter, SBI reported a rise of 1 basis point in their cost of funds. As such, initiating rate cuts in the short term may prove difficult for banks. However, if the inflationary and rate cut trends continue, then all banking institutions will have to relook their rates.

As of now, only United Bank and Union Bank have decreased the base rates since RBI’s repo rate cut in January. The State Bank of India, however, had reduced deposit rates in July last year by around 25 to 50 bps in selected categories. There being a tilt in credit demand as well as availability of excess funds, have inspired some banks to cut deposit rates over the last two financial quarters.

The credit demand, according to Mr Kumar, hasn’t seen change in the ground level. And in absence of new policies that create new assets and large projects, there cannot be improvements in credit demand. Weak demand has also caused large banks to post flat growth figures in the corporate credit sector. ICICI bank, for instance, posted flat figures of 4% year-on-year growth in December.

Mr Kumar has also commended SBI for its system of stress recognition, which helps in identifying Non Performing Assets (NPAs) when a related event happens. SBI currently has one of the lowest restructured assets and NPAs among public sector banks in India. This indicates a high level of identification of NPAs very early in their tenures.

Conclusion

●     The falling rates of interest are instigating customers to move to fixed deposits from their savings deposits, thereby keeping the cost of funds constant for banking institutions. This has kept banks from reducing rates further.

●     If there are more rate cuts by RBI in future, then banks are likely to reduce their rates also.