[sbinews] Finance Minister Fears trouble for banks if rate hardens

  • From: sbistcbangalore@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Sat, 13 Dec 2003 07:01:35 +0500

Finmin fears trouble for banks if rates harden

MUMBAI: Banks will have problems if interest rates harden, according to Vinod 
Rai, additional secretary (banking), ministry of finance. Mr Rai did not 
elaborate on the issue at Becon, but it is well known that the government is 
concerned over a possible hit that many state-run banks will have to take if 
rates start moving up. 

Last year, the finance ministry had prepared a report on the risk that banks 
would face if the interest rate rose. 

The central bank has also been pushing local banks to build adequate cushion 
against interest rate risk by asking them to build investment fluctuation 
reserves (IFR)up to 5% of their treasury portfolio. 

Against the 25% stipulation by RBI, banks have invested 40% of their net demand 
and time liabilities in government securities in the absence of credit offtake. 

Banks have made huge profits on their treasury portfolio over the last three 
years following a steep decline in interest rates. But fears are that this gain 
may be wiped off once rates increase. 

R V Shastri, CMD of Canara Bank said that high exposure in the government 
securities is an issue of concern as he does not see interest rate falling 
further. “We need to find out if the liquidity overhang is a culprit or a 
driver,” he said. 

Mr Rai also voiced concern over the high intermediation cost in the Indian 
banking. The intermediation cost is as high as 200-300 basis points in India 
that is actually the cost of funds for banks abroad. 

Aditya Puri, managing director of HDFC Bank said that it will be imperative for 
banks to price their products based on the risk. 

“You will have to match the customer profitability to the cost. I recommend 
that every bank should ask customers to maintain a minimum balance of Rs 
2,500,” he said.  “Bank should even charge for the real time gross settlement 
(RTGS) facility which would be provided to the customers. We should charge for 
the cost that we have incurred to put in place the technology and 
infrastructure behind it,” said Mr Puri. RTGS will give customers access to 
real time online clearing and settlement of payment transaction which may 
result in banks losing the free float. “It will kill the profitability of the 
banks if we give it free,” he added. 

Banks will have to be prepared for RTGS by January on a stand-alone basis and 
it would be implemented on a full-fledged basis by June, according to RBI. At 
present, it is not very clear if banks would be charging customers for using 
the RTGS facility. 

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