Open letter to Shri O P Bhatt, Chairman, State Bank of India

Dear Mr. O P Bhatt, Chairman, SBI

I admire you as the great democratic runner of India’s oldest banking group, the State Bank of India which takes pride in serving its citizens during many disasters, wars and good times too for long 200 years. The bank has positioned itself as the real bank of India reaching to every nook and corner of India, shown by its massive network of more than 14,000 branches.

Your bank always have the first mover advantage and it also takes pride in being adjudged largest/biggest/longest/worthiest for common people like us. Even today, the common people reliability lies on you and your services which benefit us in building assets including easing our lives in financial complications.

But my thinking stops at one point and forces me to think whether your bank is really interested in helping common man, especially living in rural areas and want to build financial assets. You have come up with a public issue of Lower Tier II Bonds to garner Rs. 1,000 crore along with a green-shoe option of Rs. 1,000 crore, totaling Rs. 2,000 crore which you intend to deploy the issue proceeds to augment your capital base in line with your future growth story. The returns offered are good, in fact so good that it may provide trading opportunities on listing. The reservation for retail applicants is no doubt very good i.e. 50% of total issue. Bravo!

However, I fail to understand why you have limited the number of application collection branches to meager 126 out of 14,000 SBI branches. Very judiciously, you have covered 24 states and 80 cities and you have also given greater jurisdiction in major commercial centers. Just to add, you have given One branch each in Patna and Guwahati to cover the population of 8.3 crore and 4.8 crore respectively (as per Census 2001, India) covering 8 states. Even in Siliguri allocated branch, there have been incidences of not accepting the forms without their home branch cheque. It is very heartening to know that Indian banks have become so proficient that 2 branches can handle 13.1 crore residents as per your predictions. But did you figure out what the common people lost out of it?

By doing this, you have thwarted the majority class of retail investors who wanted to invest in these bonds. They are the genuine investors who wanted to take a pie of the high interest rates offered (still they don’t understand how to link it with the current macroeconomic scenario in the country). Thanks to your “First Come, First Serve” policy, the responses have been substantial. However, the bond issue has given trading opportunities which have increased the grey market actions. Brokers have been dolling out as high as Rs. 15,000 on each retail application. My grandfather including all senior citizens is also not happy with you as they could not avail the issue because of non-availability of collection centres in their cities. Also they won’t get these rates on other investment products for 10-15 years. I don’t know whether we should rejoice or groan over your step behavior towards India’s common residents. I believe the bank has forgotten its tag of “The Banker to Every Indian”.

Sincerely Yours,

An unbanked Proud Indian

From financial crisis to financial reforms? Implementation of the Dodd-Frank Act

From financial crisis to financial reforms? Perhaps the Federal Reserve of United States completed its cycle with the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

Chairman Ben S. Bernanke released its testimony on the Implementation of the Dodd-Frank Act.

The Bernank’s testimony says that

One of the Federal Reserve's most important Dodd-Frank implementation projects is to develop more-stringent prudential standards for all large banking organizations and nonbank firms designated by the council. Besides capital, liquidity, and resolution plans, these standards will include Federal Reserve- and firm-conducted stress tests, new counterparty credit limits, and risk-management requirements. We are working to produce a well-integrated set of rules that will significantly strengthen the prudential framework for large, complex financial firms and the financial system.

Good! This will put checks on their market participants’ risk taking measures and lending practices.

The testimony also says that

Complementing these efforts under Dodd-Frank, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for internationally active banking firms. These efforts resulted in the adoption in the summer of 2009 of more-stringent regulatory capital standards for trading activities and securitization exposures. And, of course, it also includes the agreements reached in the past couple of months on the major elements of the new Basel III prudential framework for globally active banks. Basel III should make the financial system more stable and reduce the likelihood of future financial crises by requiring these banks to hold more and better-quality capital and more-robust liquidity buffers. We are committed to adopting the Basel III framework in a timely manner.

It is good to know that the Federal Reserve has been serious in implementing Basel III framework for their banks. The good quality assets and high liquidity buffers by these banks will help in preventing the financial crisis further.

What the act says?

The nice brief summary of the Dodd-Frank Act compiled by United States Senate Committee on Banking, Housing and Urban Affairs is mentioned here. It aims to create a sound economic foundation to grow jobs, protect consumers, rein in wall street and big bonuses, end bailouts and too big to fail and most important, prevent another Financial Crisis.

In testimony words,

The act also requires supervisors to take a macro-prudential approach; that is, the Federal Reserve and other financial regulatory agencies are expected to supervise financial institutions and critical infrastructures with an eye toward not only the safety and soundness of each individual firm, but also taking into account risks to overall financial stability.

To conclude, the Dodd-Frank Act is a major step forward for financial regulation in the United States which may provide a starting step for others to follow.

Happy Reading!

-       Amar Ranu

Has Interest Rate peaked out?

We are in a very peculiar situation; equity market is down but gold prices are picking up. Inflation has not been budging down; the liquidity deficit along with the RBI’s ‘calibrated’ turned ‘aggressive’ monetary policies has been driving short term rates. While the Industrial production as measured by IIP nosedived drastically to 1.6 per cent for Dec 2010 from 18 per cent in Dec 2009 mainly due of high base effect and slowdown in industrial activity, the headline inflation cooled marginally to 8.23 per cent, higher than the street expectation of 8.1 per cent. This extreme slowdown in industrial growth may not prevent the central bank RBI to hike the policy rates for another time as the inflation remains stubbornly high.

What other indicators say?

·         10-year G-Sec Bond movement

The G-Sec 10-year yield, an indicator of long-term interest rate scenario in India has been trading below its July 2008 peak when the world markets had been reeling under the immense economic upheavals.  In July 2008, the yield on 10-year note went as high as 9.4 per cent. Due to various accommodative measures announced by RBI, the 10-year note touched to its low of 5.2-5.3 per cent. However, with improved market scenario and increased government borrowing which led to wide gap in fiscal deficit, the bond yield inched upwards to the level 8.23 per cent, but still below the July 2008 level.

·         Short Term rates at its 26-month peak

The interest rates on 3 Months and 12 Months Certificate of Deposits (CDs) – these are short term deposits raised by banks from fellow participants; unlike normal term deposits, these are traded in secondary market – have reached to its 26-month peak on tight liquidity in the system. The liquidity deficit since 3G and WIMAX auctions which led to outflows of over Rs. 1 lakh crore coupled with the government’s high cash balances with RBI and sluggish deposit-credit ratio have led banks tap this market. Short-term rates have continued their upward movement after the RBI started hiking policy rates. The 3M and 12M CD rates have crossed 10 per cent albeit below the level of 2008 economic crisis as given in the graph.

Which is bigger risk for India – Interest rate or inflation?

Many think-tanks say that inflation is a bigger risk in India because the economy becomes haywire because of it. However, this can be dealt with tighter monetary policies albeit in India, the structural and frictional issues are dominant factors in building up the inflation. To a large extent, the RBI has taken protective measures but few more hikes are imminent. The global commodity prices have also been roaring for which the US’s QE II should be blamed. This has affected the local domestic prices too to a large extent.

Moreover, the high fiscal deficit has been worsening. Though in the current financial year, the government has been successful in narrowing down the deficit, thanks to one-time big inflows from spectrum auctions. They might not be successful in future too.

What is expected in future?

The market participants expect massive government borrowing in the next fiscal year to be announced in the upcoming budget in last Feb to meet the increased expenditures which will lead to more bond supply. This will put upward pressure on yields. Also the liquidity deficit which will worsen further on account of advance tax outflows in the current quarter will take the short term rates high further. Moreover, banks have been issuing CDs aggressively to build their large balance sheet size, another reason to boost up the interest rates. Hence, an expected gradual rise in interest rates, given sticky inflation would add to hardening of bond yields.

- Happy Investing!

- Amar Ranu