Pay more EMIs as RBI ups rates to tame inflation

 

The Reserve Bank of India (RBI) on 26^th july 2011 hiked benchmark rates again by a stiff 50 basis points. This has raised fears that household budgets would be severely tested by the combined impact of 11 consecutive hikes in interest rates since March last year.

The increase will also push up Equated Monthly Installments (EMI) for home and auto loans and make it more difficult for consumers to go in for fresh purchases. However, it is good news for savers who invest in fixed deposits as their returns will go up. Analysts say on an average, EMIs have risen by almost 20% over March last year.

RBI raised the short-term lending (repo) rate by 50 basis points to 8 per cent which caught markets by surprise as the expectation was a hike of 25 basis points (100 basis points equals 1 per cent) hike.

RBI Governor D Subbarao said in his monetary policy statement that hike was directed at fighting inflation which continued to be high and moderating inflation was important for sustaining growth. Finance Minister Pranab Mukherjee said the RBI had given a strong signal to moderate inflation.

With inflation already hurting household budgets, increase in interest rates for loans taken by consumers to buy cars, homes and consumer durables was a double whammy. These sectors have already been seeing a slowdown due to interest rate hikes.

“The cumulative increase over the past year will test the budgets of those repaying their loans,” said Anil Kothuri, executive vice president, Edelweiss Housing Finance. Home loan rates will move up again and it will also constrain the reduce the eligible loan amount for new home loan applicants.

Banks are likely to pass on the hike to consumers making loans even more expensive.

Yes Bank raised lending rates, while ICICI Bank MD & CEO, Chanda Kochhar said that banks would review the movement in funding costs and effect further increases in lending rates based on the review.

The hike will also result in increase of property prices, said Pradeep Jain, chairman, Confederation of Real Estate Developers’ Association of India (CREDAI) said real estate developers were left with no choice but to pass on the same to the buyers resulting in a increase in property prices.

Estimates suggest that the cumulative effect of rate hikes means that now the EMI is around Rs 980 on a loan of Rs 1 lakh. Home loan eligibility for home buyers has also gone down.

The rate hike is worrying for the industry, which sees dim growth prospects. With the growth momentum already under pressure, the move will hurt the future prospects. “Even the projected growth rate of 8 per cent for the year now looks difficult to achieve,” says Rajiv Kumar, secretary general, FICCI.

Chandrajit Banerjee, director general, CII said there might be a tipping point beyond which arresting the downward growth spiral may be difficult.

 

Chinese banks may face capital stress after Basel III accord

 

Chinese banks may face substantial stress in capital after the implementation of Basel III accord, the norm stipulated by G-20, a former deputy governor at the People’s Bank of China has said.

Banks of systematic importance will face a financing gap of 400 billion to 500 billion yuan (USD 77.51 billion) in the next five years, Wu said while delivering an opening speech at the fifth Annual China Bankers Forum.

Chinese banks are currently able to meet the new standard of the Basel III framework, the new global banking requirements agreed by G-20 leaders at the end of last year, with core capital adequacy ratio of most banks reaching 9 per cent, Wu said.

But a capital gap will grow as China’s banks lending scales expand at a relatively rapid pace, Xinhua quoted her as saying.

Nearly 20 trillion yuan in new loans were extended over the past two years as part of the government’s crisis-combating stimulus package.

In July, China’s new lending stood at 492.6 billion yuan. To fill the new capital gap, Chinese banks would need more market financing, or they would seek government financial support that ensures government holding in the banks, Wu said.

China’s banking regulator announced earlier this week that it is drafting tougher capital rules for Chinese lenders to meet the Basel III standard.

The new rules will keep the minimum capital adequacy ratio for banks of systematic importance at 11.5 per cent, while raising the ratio for banks of non-systematic importance to 10.5 per cent.

US rating downgrade: Jharkhand boy shakes the world

 

About four months after MS Dhoni’s boys won the Cricket World Cup for India, another man from Jharkhand has now shook up the world. On August 5, Standard & Poor’s, led by Jharkhand-born Deven Sharma, struck off the ‘AAA’ rating of the US, considered the Gold standard in the world of finance, for the first time since 1914.

On that Friday afternoon, S&P officials told Barak Obama’s treasury department that the ratings major’s analysts have come to a decision that the US no longer deserves to be among the best rated countries in the world. After six hours and a flurry of emails, phone calls and conferences between top officials in the Obama administration and Sharma’s team of number-crunchers, the world got to know of the unprecedented move – something that was in the air for a few months but which appeared more like a distant possibility: The US’ country rating was downgraded one notch to ‘AA-plus’. And suddenly the 57-year old Sharma was in the spotlight, hailed by a select few, but criticized by several in the financial world.

Born in 1955, Sharma was educated in Jamshedpur and Ranchi, and then moved to the US for his masters degree at Wisconsin and his doctoral degree in management from Ohio in 1987. During his initial years, he was in the manufacturing sector, working with Dresser Industries and Anderson Strathclyde. In 1988, he joined Booz, Allen & Hamilton, a global management consulting firm, where he spent 14 years. In 2002, he joined The McGraw-Hill Cos, the parent of S&P.

Sharma took over as the president of S&P in August 2007, just when the sub-prime crisis in the US housing sector was getting out of hand, and credit rating agencies were picked as one of the perpetrators of the meltdown for their flawed ratings models of housing loans. Over the last four years as the head of one of the foremost rating agencies in the world, Sharma has faced several US Congressional grillings, but has negotiated most of those with much elan, people who have followed him closely say. In a recent interview, Sharma admitted that over the last four years, comments made by US lawmakers have changed to appreciation from strong criticism.

No wonder the veteran of several testimonies in the US congress has been able to stand up to the global criticism from all quarters for their critical decision. Since Friday evening, Sharma, along with David Beers, his top lieutenant on the ratings side, have stood firm alongside S&P’s analysts and defended the controversial and unprecedented decision saying that such a step was necessary and it was done for the benefit of investors.

People who followed Sharma’s recent messages to the world said that there was enough evidence that a rating downgrade was more of a probability than not. Late last month, in a Congressional hearing during the height of uncertainty about raising US debt limit, Sharma was non-committal about what ratings decision his company would take. A Bloomberg report said that he told US lawmakers that S&P was waiting to see what the final proposal would be before deciding whether to keep US debt at the firm’s highest ratings level.

While the world criticized S&P for their historic decision, some even questioning the data the analysts used but back home there are some who think Sharma and his men have done a great job. The controversial head of a top brokerage house with strong presence in the US told TOI, that the ratings downgrade had to happen as it was due for years.

DEVAN SHARMA: Analysing Global Risk

EDUCATION

Born in 1955, Deven Sharma did his schooling from Jamshedpur and graduation from BIT, Ranchi; masters degree from University of Wisconsin and doctoral degree in management from Ohio State University in 1987

CAREER

1988-present: After working with Dresser Industries and Anderson Strathclyde, he joined Booz, Allen & Hamilton, in 1988; moved to The McGraw-Hill Cos in 2002, the parent of S&P ; was executive VP at S&P from 2006-07 and became president in 2007; is also Crisil chairman