Ten bank stocks fell by 0.09% to 2.52% at 13:01 after a committee set up by the Reserve Bank of India on credit pricing framework submitted a draft report on Thursday, 10 April 2014.
The S&P BSE Bankex was down 56.34 points or 0.38% at 14,749.63. It outperformed the S&P BSE Sensex which was down 106 points or 0.47% at 22,609.33.
Among private bank stocks, IndusInd Bank (down 2.52%), Kotak Mahindra Bank (down 0.36%), Axis Bank (down 0.49%), Federal bank (down 1%), Yes Bank (down 0.09%), and ICICI Bank (down 1.21%) declined. HDFC Bank rose 0.44%.
Among PSU bank stocks, Andhra Bank (down 0.93%), State Bank of India (SBI) (down 0.69%), Bank of Baroda (down 0.36%) and Bank of India (down 0.93%) dropped. Union Bank of India (up 1.75%) and Punjab National Bank (up 0.26%) gained.
The Bankex had outperformed the market over the past one month till 10 April 2014, gaining 7.08% compared with the Sensex's 3.56% rise. The index also outperformed the market in past one quarter, gaining 20% as against Sensex's 9.43% gain.
A committee set up by the Reserve Bank of India (RBI) on credit pricing framework on Thursday, 10 April 2014, suggested that commercial banks, particularly those whose weighted average maturity of deposits is on the lower side, move towards computing the Base Rate on the basis of marginal cost of funds. This may result in more transparency in pricing, reduced customer complaints, better transmission of changes in the policy rate and improved asset liability management at banks, a draft report of the committee on 'Working Group on Pricing of Credit', said. If banks use weighted average cost of funds because of their deposits profile or any other methodology that may result in differentiation between old and new customers, the boards of banks should ensure that this differentiation does not lead to any discrimination amongst borrowers, the draft report said.
Apart from factors like specific operating cost, credit risk premium and tenor premium, broad factors, such as, competition, business strategy and customer relationship are also used to determine the spread. The RBI committee suggested that bank should have a board approved policy delineating these components. The board of a bank should ensure that any price differentiation is consistent with the bank's credit pricing policy factoring Risk Adjusted Return on Capital (RAROC). Banks should be able to demonstrate to the Reserve Bank of India the rationale of the pricing policy, the draft report of the committee stated. Banks' internal policy must spell out the rationale for, and range of, the spread in the case of a given borrower, as also, the delegation of powers in respect of loan pricing, the draft report said.
The spread charged to an existing customer cannot be increased except on account of deterioration in the credit risk profile of the customer, the committee said. The customer should be informed of this at the time of contract. Further, this information should be adequately displayed by banks through notices/website, the committee said in its draft report.
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The floating rate loan covenant may have interest rate reset periodicity and the resets may be done on those dates only, irrespective of changes made to the Base Rate within the reset period, the committee said. There may be a sunset clause for Benchmark Prime Lending Rate (BPLR) contracts so that all the contracts thereafter are linked to the Base Rate. Banks may ensure that these customers who shift from BPLR linked loans to Base Rate loans are not charged any additional interest rate or any processing fee for such switch-over, the draft report stated.
The IBA may develop a new benchmark for floating interest rate products, namely, the Indian Banks Base Rate (IBBR), which may be collated and published by IBA on a periodic basis. Banks may consider offering floating rate products linked to the Base Rate, IBBR or any other floating rate benchmark ensuring that at the time of sanction, the lending rates should be equal to or above the Base Rate of bank. To begin with, IBBR may be used for home loans. By design, the IBBR should meet the standards for benchmarks set by the Committee on Financial Benchmarks. The Working Group has also made several recommendations to bring in greater transparency enabling comparability across banks and informed decision making by customers.
The benefit of interest reduction on the principal on account of pre-payments should be given on the day the money is received by the bank without waiting for the next EMI cycle date to effect the credit, the draft report said. For retail loans, the customers should have a choice of "with exit" and "sans exit" options at the time of entering the contract. The exit option can be priced differentially but reasonably. The exit option should be easily exercisable by the customer with minimum notice period and without impediments. This would address issues of borrowers being locked into contracts, serve as a consumer protection measure and also help enhance competition. Further, IBA should evolve a set of guidelines for easier and quicker transfer of loans, particularly mortgage/housing loans. There could also be penalties for banks which do not cooperate with borrowers in this regard.
Despite the policy efforts to usher in transparency and fairness to the credit pricing framework, there have been certain concerns from the customer service perspective, the RBI said. These mainly relate to the downward stickiness of the interest rates, discriminatory treatment of old borrowers vis-vis new borrowers, and arbitrary changes in spreads, etc. The mandate of the RBI's 'Working Group on Pricing of Credit' is to examine the issues related to discrimination in pricing of credit and recommend measures for transparent and appropriate pricing of credit under a floating rate regime.
IndusInd Bank dropped after the Reserve Bank of India on Thursday, 10 April 2014, notified that the foreign share holding through foreign institutional investors (FIIs)/non-resident Indians (NRIs)/persons of Indian origin (PIOs)/foreign direct investment (FDI)/American depository receipts (ADRs)/global depository receipts (GDRs) in IndusInd Bank has reached the trigger limit. Hence, further purchases of equity shares of IndusInd Bank would be allowed only after obtaining prior approval of the Reserve Bank of India.
Total foreign holding in IndusInd Bank stood at 54.51% of which 41.13% was held by FIIs (as per the shareholding pattern as on 31 December 2013).
The ceiling on total foreign holding in IndusInd Bank is 49%.
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