Confusion compounded

RBI's draft guidelines on ownership & governance of pvt banks have sent wrong signals to market

The Reserve Bank of India's (RBI) draft guidelines on ownership and governance of private banks bludgeoned bank stocks on Monday, with the BSE Bankex falling 3 per cent, and several private sector banks losing much more.

The reasons are obvious""the draft guidelines require that, during the transition period, all stakes in excess of the limit be brought down to 5 per cent "within a time-bound plan", and that promoters bring down their holdings to 10 per cent.

The net effect of this will be selling pressure on all those bank scrips where promoters or investors will have to divest their holdings. At the same time, many banks will have to increase their capital again, adding to the overhang of bank stocks in the market.

The major dampener has been the realisation that, if implemented, the guidelines will severely impact mergers and acquisitions. Many private banks were perceived to be takeover targets and their stocks had gained sharply as a result. These trades will now be unwound.

However, RBI sources point to two clauses in the guidelines which offer hope. One of them says that acquisitions above 10 per cent can always be made with prior RBI approval.

The other says that, when a financial entity is the owner, the objective is to ensure that "it is a widely held entity, publicly listed and a well established regulated financial entity in good standing in the financial community".

This could mean that there's no limit for ownership if these conditions are satisfied. This interpretation, however, clashes with the blanket 5 per cent limit for acquisition of one private bank by another.

In other words, the draft guidelines are far from clear. But there's no disputing that it sends wrong signals to the market a few days before the Union Budget.

Dabhol Power Company

The Dabhol Power Company has slapped a legal notice claiming Rs 26,000 crore from the Maharashtra State Electricity Board (MSEB). Dabhol Power's contention is that this represents not only the value of the equity in the company but also the huge lost opportunity cost.

The argument is that since the power purchase agreement was rescinded by MSEB in May 2001 and not continued for 20 years as originally envisaged, the company has lost a huge amount of money.

On the other hand, what is the opportunity cost incurred by India as a whole owing to the failed project? One way of looking at it is to consider the alternate use to which the huge loan exposure of Rs 5,000 crore that the Indian financial system has to the power project could be put.

It is the banking system that has the maximum exposure to the $ 3billion project. Had this been parked in government securities, at a conservative estimate the institutions and banks would have earned an average yield of around 6 per cent.

This means that the original Rs 5,000 crore would have appreciated to nearly Rs 7,000 crore with the interest component coming to Rs 2,000 crore.

Now this interest portion alone could have funded a 500 mw power plant going by the conventional power industry norm of Rs 4 crore per mw. Further, the original Rs 5,000 crore would have been intact. The entire Rs 7,000 crore could have funded a 1,750 mw power project minus the controversy.

'Other expenses' hit LIC Housing Finance

LIC Housing Finance Ltd's (LICHF) March quarterly profit before tax has dropped 49 per cent to Rs 48.80 crore. Income from operations also declined 13 per cent to Rs 246.9 crore, but this trend is consistent with the falling interest rates on home loans.

Interest expenses have also dropped 14.8 per cent to Rs 128.91 crore. Analysts point out that the housing finance company has recently been able to reprice LIC's Rs 3,100 crore loan by 204 basis points and has brought down the interest rate to approximately 6.7 per cent.

One reason why profits were down has been the jump in "other expenses"""senior management officials explained the rise could be attributed to the approximately Rs 28 crore premium paid by the company to Citibank, while purchasing a pool of assets.

It is commendable that the company has been aggressively trying to bring down its non-performing assets (NPAs) and net NPAs to total loans have dropped to 2.37 per cent in FY04 compared with 3.22 per cent in the previous financial year.

Going forward, analysts expect the RBI to raise rates possibly in its busy season policy. LICHF is expected to keep a better control on its interest cost base given the planned $50 million GDR issue, which is also expected to result in foreign institutional investors further raising their stake in the company.

As far as the company's ability to raise home financing rates is concerned, that will depend on the strategy adopted by its larger competitors in the private sector.

With contributions from Amriteshwar Mathur and S Ravindran