After RBI push, DCB Bank lowers lending rates

Private lender DCB Bank today reduced both base rate or the minimum lending rate and the marginal cost of funds-based lending rate (MCLR), a move which will lower EMIs for its borrowers.

While MCLR has been reduced by up to 0.5 per cent, the base rate has been cut by 0.06 per cent.

MCLR for overnight lending has been slashed by 0.5 per cent to 9.32 per cent while it has been lowered by 0.2 per cent to 9.72 per cent effective May 4, DCB Bank said in a statement.

MCLR rate for other maturities has been left unchanged, it said.

DCB Bank revised its base rate to 10.64 per cent per annum from the earlier base rate of 10.70 per cent, effective May 4.

RBI had asked banks to price fixed rate loans of up to three years based on marginal cost of funds from April 1.

The lending rate based on marginal cost of funds is lower than base rate in some cases, resulting in lower EMIs for borrowers. Most banks earlier decided lending rates based on their average cost of funds.

Sun Capital

Banks with strong networks will find takers

Mumbai The government, which recently stepped up focus on consolidating weaker public sector banks (PSBs), plans to reduce the number from 27 now to six or seven larger banks.While market capitalisation is a reflection of how the Street (investors, analysts, etc) views the bank's core fundamentals, the current state as well as the future prospects, a detailed look at the nine months' data of these banks provides some insight on their financial and business condition.In terms of asset quality, for instance, Indian Overseas Bank (IOB) and UCO Bank are the worst placed as they had the highest gross non-performing assets (NPA) at 12.6 per cent and 11 per cent, respectively, as on December 31, 2015.Dena Bank was the third on this list with gross NPA ratio of 9.9 per cent. 

However, if one adds the restructured assets, it would reflect the real asset quality picture of a bank. While the latest figures of total stressed assets for many banks are not available, the situation is not alarming, say analysts.Many PSBs also have low levels of capital to fund growth as well as any fresh losses that they may witness on account of bad loans. For example, while Dena Bank reported a net loss for the nine months ending December 31, 2015; its Tier-1 capital of 7.1 per cent is the lowest amongst its peers. United Bank's Tier-1 capital ratio, too, stood at 7.1 per cent in this period. Again, not all banks have declared their Tier-1 capital ratios as at the end of the December 2015 quarter.Notably, while PSBs consolidation will be largely driven by regulations, larger banks would not want to buy banks having low capital adequacy as well as poor asset quality, unless they prove to be of strategic importance. A key factor that will aid consolidation will be a bank's branch network. Historically, banks having larger presence in one region have bought smaller banks having stronger presence in another region. This ensures there is minimal overlap and the businesses are complementary in nature. The key hurdle and integration challenge, though, will be the employee unions in some of the PSBs that might resist such mergers and acquisitions. Nevertheless, with the advent of digital banking, the attraction of a branch network might not be enough.Analysts, however, believe most smaller and relatively weaker PSU banks could be potential takeover targets.Vaibhav Agrawal of Angel Broking says, "United Bank, IOB, OBC, Dena Bank, Vijaya Bank, Bank of Maharashtra, Andhra Bank, Indian Bank, Corporation Bank, among others, could be key takeover targets. The prime criteria will be complementary network, capital adequacy, asset quality, unions and actual integration of this merger."

Sun Capital

Banks will have to lower lending rates in April

Mumbai Irrespective of whether the Reserve Bank of India (RBI) cuts its policy rate on or before the April 5 policy review, banks will have to cut their lending rates by at least 25-30 basis points (bps) in April, to catch up with the lag in transmission.

The central bank has, so far, cut its repo rate by 125 bps and banks have passed on between 60-70 bps of the cut. If the central bank cuts some more, as is expected by the market, banks' lending rate cuts should be steeper, too. One basis point is 0.01 per cent.

But, the lending rate cuts might not happen immediately in March, as banks would ideally want to shore up their treasury profits by taking advantage of the recent dip in bond yields, and also enjoy an improvement in spreads in the last month of the financial year, when credit demand generally picks up.

The resultant profit will also mend their bottom line to some extent, as they have been severely hit by RBI's asset quality review programme, which will continue to exert pressure in the March quarter as well. "Transmission will happen, irrespective of the rate cut quantum (by RBI)," said Soumya Kanti Ghosh, chief economist, State Bank of India.

However, that will likely not be in March, said A Prasanna, chief economist at ICICI Securities Primary Dealership Ltd.

"There is pressure on bank balance sheets now. Transmission will improve with liquidity in April," Prasanna said.

From April 1, RBI's marginal cost-based lending rate (MCLR) would kick in, which will prod banks to use their incremental cost of funds, rather than average cost of deposits to arrive at the lending rate. Since money market rates move faster than deposit rates and banks tap into these money markets, the incremental cost will add dynamism in lending rate calculations. And, 10-year bond yields have fallen 15-20 bps since the Budget. If this trend continues till March-end, banks would have to factor in this drop.

Finally, with RBI infusing longer-term liquidity in the system through secondary bond market purchases, banks should have less reason to complain that system liquidity tightness is not letting them pass on rate cuts. Under the new liquidity framework, RBI ensures call money rates are anchored at around the repo rate, no matter how much liquidity infusion is needed. However, bankers have complained that the liquidity infused is short-term, and more permanent liquidity needs to be infused through secondary market bond purchase. The central bank does so through its open market operations, or OMO. Including a scheduled Rs 15,000-crore OMO purchase on Thursday, RBI's liquidity infusion is close to Rs 50,000 crore in recent months.

The OMOs, and with government spending picking up, have ensured that from an acute shortage of Rs 1.6 lakh crore at the end of January, banking system liquidity has improved to less than Rs 1 lakh crore now.

But there would be stress on the liquidity front again, starting March 15, when advanced tax outflow starts, pointed out Gaurav Kapur, India economist at Royal Bank of Scotland.

The tight liquidity condition would be needed to be evened out first before banks can move with rate cuts and that would be by the next financial year, Kapur said.

However, whether the rate cut would be of any meaning to revive growth is a different question altogether, articulated IDFC Bank's Chief Economist Indranil Pan.

"With MCLR pricing the incremental cost, pass-through of the cumulative 125-basis point rate cut is expected to be at 25-30 bps. So, even after a transmission of 85-90 bps if credit growth doesn't take place, one needs to ask if the problem lies with the RBI rate cuts and transmission mechanism or the credit channel itself," Pan said.

Investment Banking 

DCB Bank buys 5.81% stake in Annapurna Microfinance

Deal values the micro lender at Rs 172 crore. 

DCB Bank Ltd has acquired a 5.81 per cent stake in Odisha­based Annapurna Microfinance Pvt Ltd for Rs 9.99 crore (about $1.5 million). 

The move strengthens the business partnership between the two companies, Murli M Natrajan, managing director and CEO at DCB Bank, said in a statement filed to stock exchanges. DCB’s microfinance initiatives help it achieve its financial inclusion goals, he added. 

DCB, formally known as Development Credit Bank, was founded in 1995. It has 176 branches in 17 states and two union territories in India. 

Gobinda Pattnaik, managing director at Annapurna Microfinance, said the transaction will help it strive forward to achieve its goal of serving the financially underserved. “This capital infusion is a mandate for growth,” he said. 

Annapurna focuses on rural locations of Odisha, Chhattisgarh and Madhya Pradesh. It has 14 branches each in Odisha and Madhya Pradesh and six in Chhattisgarh. It has half a million members and assets under management of Rs 720 crore

The latest transaction values Annapurna at Rs 172 crore. The firm had earlier also raised funding. In April last year, it secured Rs 25 crore in a Series C round of funding from Samridhi Fund, which is managed by SIDBI Venture Capital Ltd, a wholly owned subsidiary of state-run SIDBI and an existing investor in the firm. 

In 2014, the microlender raised Rs 30 crore in a Series B round of funding led by Belgian Investment Company for Developing Countries, with participation from the existing investor Incofin Investment Management's Rural Impulse Fund II.

The firm posted total income of Rs 61.61 crore for the six-month period ended September 20, 2015, up from Rs 22.69 crore a year earlier, according to its half-yearly audit report. Net profit jumped to Rs 6.85 crore from Rs 58 lakh.

Sun Capital Services