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

Home Loan war is on!

The home loan war just seems to be getting intensive with major domestic lenders such as SBI, ICICI Bank, HDFC Bank and others jumping into the bandwagon. The situation reminds a similar event seen in 2003 when foreign banks lined up to provide home loan at 6 per cent for first 2 to 3 years followed by floating rates unlike 7 to 8 per cent provided by their private and PSU counterparts. ICICI Bank and Kotak Mahindra Bank took the fight further with the announcement of new rates so called ‘teaser rates’. Kotak Mahindra Bank has announced the special offer of 8.49 per cent for 30 months for all loan categories followed by the interest rate linked to retail prime linked rate in subsequent years. Similarly, ICICI Bank offers home loan at 8.25per cent for first two years followed by rates linked to in house built Floating Reference Rate (FRR) in subsequent years. Earlier this year, State Bank of India (SBI), the largest lender in India has launched ‘SBI Easy Loan’ offering home loans at 8 per cent for first year, 8.5 per cent for next two years followed by interest rates linked to State Bank Advance Rate (SBAR). HDFC, an another big lender in home loan segment which once described these moves as ‘teaser rates’ also announced a fixed cum floating scheme where it offers home loans at 8.25 per cent for first three years followed by interest rate linked to retail prime lending rates in subsequent years. However, this time they have given out different reasons such as ample liquidity, improved operational efficiency and good quality portfolios among few. So, the question arises what have made these lenders to jump into lucrative home loan segment and which rates are cheapest at the current conditions?

Lucrative home loan portfolio: is it attractive?

In the current economic scenario, the credit growth has almost dried, currently growing at little over 10 per cent down from 20-22 per cent a year earlier. The banks’ credit portfolio which comprised mainly of commercial loans witnessed slow commercial lending due to subdued market conditions and this led to a fall in net interest income, a difference between interest income over interest expenditure. This forced banks to concentrate to home loan borrowers to cover up the losses. Moreover, the real estate boom after a long two year lull added another spark among prospective buyers, thanks to combined home loan sops from lenders and discount offers from builders. Sops to Customers Banks have been offering sops in terms of low interest rates to new customers, just bypassing the existing customers. Initially some banks offered nil or reduced processing and documentation charges but they had scrapped it too. But the question arises, would the teaser rates jeopardize the cash flows of borrowers if the rates arise in future? The answer lies in the effectiveness of borrowers’ planning.

So effectively, the interest rates vary across all the banks at the current BPLR of respective banks which may vary in future as per the interest rate scenario in future.

Are these loans easily available to borrowers?

Simply no! Rupeetalk has interacted with some of the prospective home loan borrowers and many have complained that banks have put stringent norms before sanctioning these teaser loans to them. Some of the norms put are compulsory new home (no 2^nd home buying), compulsory guarantor, no refinancing, listed developers and increased processing time.

Sanjay Bhange, a prospective home loan borrower applied for a home loan with PNB in last Aug 2009 and got sanctioned his home loan in Nov 2009, that too, after repeated reminders along with a warning for complaint in consumer forum.

The logic is simple: have patience, check the listed developers with them, arrange the guarantor in advance and get all your documents ready before applying for these new home loan schemes.

What can the regulator do?

To some extent, the Reserve Bank of India (RBI) has been successful in creating a positive competition among banks to offer low interest rates to borrowers as banks were initially reluctant to pass the monetary policy benefits given by RBI to them. Currently, the RBI in consultation with a special committee has been working to float a new benchmark rate applicable for all home loan borrowers (old and new). So, in near future, the home loan borrowers will have the ease to select the bank on the basis of services provided.