28 april 2000

new credit policy, same old wine in new bottle - however fis can turn to banks and banks can enter insurance
mumbai: come april end and it is time for the governor of the reserve bank of india (rbi) to make the half yearly announcement called "credit policy" that will affect the ways banks and corporates function. this year was no different than the previous years.

obviously, the rbi governor seems gung-ho about the state of the economy. at least, on the surface: inflation is down, industrial production is picking up, gdp growth is expected to be around 6.5-7 per cent, and he has made it very clear that the central bank will do what it can to keep things this way.

however, there is an inherent fear that inflation rate has begun to rise. the drought in gujarat and rajasthan and the state of the fiscal deficit is still cause for concern. in keeping with these concerns, the new monetary and credit policy for ’00-01 continues to have the usual measures relaxing rules for markets, tightening prudential norms further — in line with global requirements — and laying down the roadmap for future reforms. with specific reference to prudential norms, rbi is moving towards international benchmarks, in a serious attempt to make the indian banks more globally competitive. it is asking banks to consolidate their subsidiary balance sheets with their own accounts.

predictably, the foreign exchange market, the government securities market and the money markets didn’t react at all to the policy statements. but remember one thing: liquidity taps will remain fully open for some more time. translation: easy money conditions will continue and interest rates signals are only southwards.

but to his credit, his experiments with monetary policy have paid off some dividends: despite easy liquidity during ’99-00, inflation stayed low and there was a distinct softening of interest rates. even the monetised deficit — net rbi credit to the government — showed a negative growth this year. but despite this, the governor is not taking any chances and he has warned banks to maintain continuous vigilance and caution on the inflation front. banks and other financial institutions should make adequate allowances for unforeseen contingencies in their business plans, and take into account the implications of changes in the monetary and external environment on their operations.

freedom is the recurrent theme in the policy. banks have been allowed some flexibility in how they maintain their fortnightly cash balances with the central bank in the form of crr — an elbow-room of around rs 13,000 crore a day! there’s more. financial institutions have been freed from rate restrictions on term deposits — so far they had to kow-tow to sbi rates. not any longer.

jalan has introduced another major change in the financial sector landscape. the rbi has agreed to allow financial institutions to turn into commercial banks. institutions have been demanding that they be allowed to turn into banks. in short, they also need access to short term funds. they have now been allowed to move into the space occupied exclusively by commercial banks, provided they conform to all the relevant prudential norms.

in another path-breaking decision, strong banks have also been allowed to hold majority control in insurance joint ventures. so far, banks’ stakes in insurance jvs was restricted to only 50 per cent.

standard chartered leapfrogs into big league with grindlays acquisition
mumbai / melbourne : it has finally happened. after weeks of denying the move, the australia and new zealand banking group said on thursday it would sell its grindlays unit to standard chartered (stanchart) for us$1.3 billion in cash, in an attempt to further cut its exposure to emerging markets. in addition to the cash payment, stanchart will also pay the anz group us$ 500 m as dividends on retained earnings at grindlays' operations in south asia and middle east. it is said that the indian operations of the anz banking group have alone been valued at a$900m.

with this transaction, the anz group will still get a net profit of a$400m, even if it had to pay out more than a$460m in possible claims in a dispute between grindlays and national housing bank in india.

despite the big price it has had to pay, standard chartered believes that the acquisition would be earnings positive after amortisation of goodwill in the first full fiscal after the deal. stanchart expects annual cost savings of us$110m after three years.

this acquisition will ensure that stanchart in india will catapult to the number one position among foreign banks in the country, leaving its closest competitor, citibank, at a distant second. apart from giving stanchart a huge network of 39 branches spread across 15 cities in india, the acquisition will also bring it a retail customer base of 700,000 and a corporate customer base of 900. this will only add to the 19 branches that stanchart has and the retail customer base of 650,000.

in india, however, the takeover of anz grindlays bank does not make stanchart liable for the rs 1,500-crore securities related scam case anz is fighting with the national housing bank. the case is pending in the supreme court of india and is expected to come up for hearing in october this year.

the acquisition is likely to see some amount of rationalisation of the branch network and other operations of the two banks in india.

new policy to allow icici and idbi to transform to banks
mumbai : following the reserve bank of india's watershed announcement that development financial institutions can convert themselves into banks, the two giants of the financial sector — icici and idbi — have decided to set the ball rolling to convert themselves into banks.

icici, which has always wanted to become a bank, will thrash out the route it wants to adopt to achieve this goal. on the other hand, idbi will be appointing a consultant to look into the modalities of how to go about the conversion. a lot will, however, depend on the final guidelines of the central bank.

the options for icici are many. icici could merge icici bank into it post-conversion or icici could go for a reverse merger into icici bank or both entities could co-exist as banks. but whatever the route, it will fit into icici’s strategy to become a one-stop, one-click outfit.

while the strategies of these two institutions are likely to take some time to formulate, icici already has a lead as it has been working towards the goal of universal banking for some time now. icici sources said that conversion of icici into a bank fits perfectly into its strategy of combining the retail and corporate functions of the group with its overall e-commerce strategy. on the other hand, idbi is getting its act together only now.

whatever be the conversion strategy, both the giants know that conversion is not going to be any easy task. there are huge regulatory issues involved in the form of what type of prudential norms should be in place once the conversion takes place. for one, reserve requirements is an issue. while banks have to maintain cash reserve ratio (crr) and special liquidity ratio (slr) on liabilities, development financial institutions (dfis) do not.

secondly, the priority sector would also need to be addressed. banks have to lend 40 per cent of their advances to this sector. a converted dfi could do that on an incremental basis or its infrastructure lending could be treated as priority sector.

arthur andersen report states that infrastructure gap in telecom unbridged
new delhi: according to a recent report by the accounting major, arthur andersen, india's telecom sector is going through an identity crisis and needs to cover some ground before it can move towards dynamic competition.

the crisis revolves around the fact that telecom-spend in india is amongst the lowest worldwide. to illustrate: indian telecom revenues are one-tenth the revenues of at&t, and revenues from telecom, as a percentage of gdp, are just 1.2 per cent as compared with over 3 per cent in the developed world, the report says. coupled with this, investment in telecommunications is low with low penetration levels and the government focus to increase infrastructure, hasn’t helped. this is definitely a gap that needs to be bridged, the report says.

the report also comments that the entry fee for the existing cellular and basic service providers at $1.2bn till july 31, 1999 — which was the licence fee arrears which operators had to pay for a shift to revenue sharing — is probably amongst the highest licence fee pay-outs in the world. the report suggests that the government should look at the licence fee only to recover only the administrative costs involved in the issue and administration of a licence. this suggestion is similar to that put forward by the trai recently.

the report recommends that in the indian context of a smaller market size ($5bn), lower purchasing power, vast geography and a skewed market, competition should be introduced in a gradual manner if infrastructure development has to take place.

the report also advises that the government should move faster towards converting the department of telecom services into a corporate entity to ensure a level playing field for the private operator to expand the market and build world class infrastructure.

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