Mumbai, March 18 Non-resident Indians (NRIs) appear to be making the most of the rupee’s depreciating trend against the dollar. By liquidating their foreign currency non-resident (banks) deposits denominated in dollars and parking the proceeds in non-resident ordinary rupee (NRO) and non-resident (external) rupee (NRE) accounts, they are laughing all the way to the bank.
The upshot of this arbitrage is that even as there was an outflow of funds aggregating $1.194 billion from FCNR(B) deposits in the April 2008-January 2009 period (as against an outflow of $670 million in the corresponding period last year), the NRO and NRE deposits saw a robust accretion of $2.201 billion ($637 million inflow) and $1.138 billion ($373 outflow) respectively.
Given that sub-one per cent interest rate regime is prevailing in most advanced economies, NRIs are deploying their hard earned money with Indian banks. By not getting adventurous with their investments and sticking to the knitting, they are not only assured of protection of their principal but also earn a decent return from banks in India. Net of tax, NRIs stand to earn as high as 6.8 per cent yield (or pre-tax return of 8 per cent) in the case of one-year NRO deposits. Indians settled overseas are reportedly taking loans to take advantage of the high interest rates on NRO and NR(E)RA deposits. In the case of NRE and FCNR(B) deposits, the one-year returns are 3.87 per cent and 3.12 per cent respectively.
“NRIs pulled out money from FCNR deposits, which are denominated in six foreign currencies including the US dollar, euro, pound, etc, when the rupee started depreciating beyond the 45 levels and deposited the proceeds into NR(E)RA deposits, which are denominated in rupees. NRIs are not only taking advantage of the interest rate differential between India and overseas but also between the three deposit schemes aimed at them,” said a Bank of India official.
In view of the robust inflows on account of NRIs, bankers are of the opinion that the Reserve Bank of India could effectively counteract the country’s declining foreign exchange reserves by increasing the interest rate ceiling on NRE and FCNR(B) deposits further. Since March-end 2008, India’s forex reserves have come down by $62.431 billion to stand at $247.292 billion as of March 6, 2009.
Indian holdings in US treasuries soar to $32.5 b
Bangalore, March 18 India’s holdings of the US Government securities rose by $17.9 billion on a year-on-year basis despite a sharp contraction in foreign exchange reserves.
The US Treasury Department data released on March 17 showed India’s holding of US Treasury securities at a record $32.5 billion, as against the $14.6 billion a year earlier. The institutions that invest in US Treasuries, besides the Reserve Bank of India, include the General Insurance Corporation of India, foreign branches/subsidiaries of domestic banks and domestic mutual funds that are permitted to invest in foreign securities.
Investments in US dollar securities rose by $3.3 billion between December and January alone. Foreign exchange reserves though contracted by slightly over $6 billion during the same period and by over $44 billion between January 2008 and January 2009. During the same period, the Reserve Bank of India intervened in the foreign exchange markets to calibrate the depreciation of the rupee against the dollar.
The intervention was partly to support the foreign exchange requirements of the oil refineries through special market operations (SMOs) and direct sale of foreign currency to importers. The SMOs implied purchase of special oil bonds by the RBI and simultaneous release of foreign exchange to the refineries. Since the beginning of the SMOs in June this financial year, the RBI has purchased Rs 31,680 crore of oil bonds releasing the equivalent of about $6 billion in foreign currency to the refineries.
Oil bondsTraders said that the increase in the US treasuries holdings was largely on account of the preference for safe haven investments. With American banks facing a meltdown, many domestic banks have already reduced their holdings of deposits in US banks and shifted them to the US treasuries. Some of the public sector banks also reduced their corresponding balances in US banks, shifting them to US treasuries. This was largely because the corresponding accounts were not covered by the Federal Deposit Insurance Corporation’s safety net. At present, only US residents are covered by the FDIC. Besides, bankers said that many institutions also reduced their holdings in UK and Euro-denominated securities to the US Treasuries to derisk investment portfolios.
However, bulk of the holdings in US Treasuries was in short-term Treasury Bills. The preference for short-term Treasury Bills was largely due to high liquidity. Longer term securities tend to be less liquid. However, the yields on these securities were also low. For instance, the 90-day US dollar T-bill currently generates yields of barely 0.25 per cent, equivalent to the current Federal funds rate. One year securities generate higher yields of about 0.46 per cent.
Traders said the low yields not withstanding, there were still possibilities to make profits from Treasury operations. Banks are expecting one more round of the interventions when the Federal Open Market Committee meets for a further revision in the Federal funds target.
New Delhi, March 18 With India’s exports losing traction and sliding on a negative zone since October 2008 in the face of a global economic slowdown and contraction of overseas demand, there is nothing to cheer up on the trade finance side too.
Available trade financing across the world have stumbled, following international financial strains that were a major factor in pushing up the trade financing cost.
The persistent plea by Indian exporters for higher trade financing at an affordable cost and even dollar credit from lending bodies, particularly from banks, have not been met in any satisfactory way.
This general apathy to exporters’ plea and the escalating cost and declining availability of finance for imports and exports are taking a toll, especially in emerging markets, says a senior official of the International Monetary Fund (IMF), Mr Thomas Dorsey.
Fund-Bank SurveyWriting in the latest quarterly journal of Finance & Development, a joint publication of the Fund and the World Bank, Mr Dorsey, Division Chief in the IMF’s Strategy, Policy and Review Department, said the Fund has worked with the Bankers’ Association for Finance and Trade (BAFT) for a survey. The survey focused on bank-intermediated forms of global trade finance such as letters of credit and trade lending.
In a questionnaire to a long list of banks, of which 40 responded — roughly evenly split between advanced countries and emerging markets — the survey found that the price of trade finance has increased sharply.
About 90 per cent of the banks reported increased prices of both short and medium-term lending facilities in which the goods being traded serve as collateral.
Higher fund costsStating that roughly 80 per cent of the banks contended that a higher cost of funds played a key role in increasing the price of trade finance, Mr Dorsey said the pressure of heightened cost of funds to banks has outweighed the dampening price effect of sharply less restrictive monetary policies in several countries. The higher capital requirements imposed by regulators and by banks on their own lending have also pushed the spreads between the banks’ costs of funds and the price of trade finance to their clientele.
Lending criteriaIn the survey, more than 90 per cent of the banks in advanced economies and 70 per cent in emerging markets said they had changed their lending criteria with respect to the specific counterparty bank to the trade transactions.
The survey suggests that emerging markets and commodities trade are likely to be the hardest hit. While the higher costs of trade finance are global, the decline in availability has supervened more in the emerging markets in Asia, with emerging market banks reporting on average a 6 per cent decline in trade finance transactions. While developed country banks expect no significant change in transactions, emerging market banks expect on average a 10 per cent decrease this year, he said.
Mr Dorsey states that growth prospects also matter but the dismal near-term outlook for the world economy would place upward pressure on the cost of trade finance as banks set rates that account for the higher probabilities of defaults by importers and exporters. For manufactured goods with low profit margins, which are most important in East Asian trade, the higher price of financing could reduce volume because importers may not be able to afford more expensive letters of credit.
For countries like India in the emerging markets, where much of the intraregional trade is in low-profit margin items that are part of the manufacturing supply chain for exports to advanced economies, the portents on the trade financing front are none too promising, trade policy analysts worryingly say.
Axis Bank to curtail personal loan portfolio
Kolkata, March 18 The eastern zone of Axis Bank, comprising West Bengal, entire North-East, Bihar, Jharkhand and parts of Chhattisgarh, would curtail its personal loan portfolio following an increase in delinquencies.
The bank would lend personal loans only to its existing customers, according to Mr S.K. Mitra, President, Eastern Zonal Office, Axis Bank.
The bank plans to restructure its existing personal loan book on a case-to-case basis in order to curb the rise of non-performing assets. The personal loan portfolio of the bank in the region was at Rs 184 crore and the NPAs were ‘significantly high’, Mr Mitra told Business Line.
Talking about restructuring of the personal loan portfolio, Mr Anindya Sen, Vice-President, Zonal Head-Retail Assets, said, “There are some genuine customers who have approached us for restructuring of their loans. These are customers with a good track record but have defaulted due to market conditions. Restructuring such loans will prevent it from becoming an NPA.” Extending the tenure of loan, thereby bringing down the equated monthly instalments, could be one way to help these customers, Mr Sen observed.
Retail portfolio, at Rs 1,250 crore, accounts for almost 25 per cent of the bank’s total advances in the region at Rs 5,000 crore. The East, according to Mr Mitra, was a retail intensive region and the bank would leverage the strength of the zone.
Home loanThe home loan segment has not been largely impacted by the recession and has rather been witnessing a good growth, Mr Mitra pointed out. “The real estate prices in the eastern region did not require too much of a correction as in other regions. There has been a good growth in the home loan segment,” he said.
The home loan portfolio stands at Rs 777 crore. The NPA in the segment is at about 2.5 per cent. The region has also witnessed a steady growth in its auto loan portfolio. “The auto loan portfolio was launched just two years ago and we have done a business of Rs 275 crore and the NPA is as low as 0.4 per cent,” Mr Sen said.
The total business of the bank stands at Rs 20,000 crore (advances at Rs 5,000 crore and deposits at Rs 15,000 crore). The eastern zone expects business growth of 35 per cent in 2009-2010.
Low-cost current account and savings account (CASA) deposits account for 50 per cent of the bank’s total deposits, Mr Mitra said. The bank hopes to register a good growth in fee-based income from the sale of third party products. “Private banking and wealth management are areas we will be looking at in a big way,” he said.
The bank plans to add 40 more branches in the region during the next financial year thereby taking the branch strength to more than 200.
