Short-term measures have negligible impact from an earnings perspective: The RBI has allowed two measures to boost dollar flows—(i) FCNR (foreign currency non-resident account) deposits can be swapped with the RBI at 3.5%, which would enable banks to raise dollar deposits at attractive rates (Libor + 400 bps + 3.5%) for lending in the domestic currency; (ii) banks can raise foreign currency borrowings up to 100% of tier-1 against 50% currently and swap with the RBI at a rate of 100 bps less than the ongoing swap rate. These two measures would have limited impact on banks’ earnings as (i) the landed cost of these deposits would be almost similar to term deposits and (ii) the ability to raise borrowings, at least, has been impacted in the current environment.
FCNR deposits have languished at $15 bn in recent years and CDS (credit default swap) spreads of large banks increased by about 200 bps in recent months, making it challenging to raise these funds. We note that large PSU banks like State Bank of India (SBI), Bank of Baroda, Bank of India and ICICI Bank would be direct beneficiaries as they have a large international presence.
Medium-term measures positive especially on branch licences: The two key medium-term measures—(i) RBI indicated that new bank licences would be announced by January 2014 and that it would constitute a panel headed by former RBI governor Bimal Jalan to assist in the screening process; (ii) “well-run banks” would have the flexibility to open branches of their choice, a key positive in our view, as India remains an urban-centric market. Delays in the approval process and time-bound implementation, frequent issues raised by banks, have been addressed. However, banks would still need to fulfill certain inclusion criteria in under-served areas as a proportion of their expansion in urban areas.
Long-term measures are many, but there are no defined time lines for implementation:
SLR and priority sector.
The RBI will look to reduce the SLR (statutory liquidity ratio) for banks over the long term but in a calibrated manner, noting the role played by banks currently as well as the current state of government finances. The long-term objective would be to shift the ownership of these instruments to long-term asset players like pension funds and insurance companies. A panel, headed by Nachiket Mor will relook at banks’ priority sector lending requirements. While the financial inclusion objective would continue, the panel would suggest requisite changes, if any. The RBI’s final guidelines on PSL (priority sector lending) saw very limited acceptance of recommendations in the draft guidelines issued in February 2012.
Licensing policy. (i) The RBI would look at the possibility of continuous licensing for new banks after due consultation with various stakeholders. (ii) Also, differentiated licensing (small banks/local banks/wholesale banks) or converting large urban co-operative banks into commercial banks would be explored. (iii) Foreign-owned banks would be allowed to convert to wholly owned subsidiaries after addressing a few regulatory bottlenecks. This would allow these banks to operate like any other domestic bank.
Other key long-term measures
Loan impairment. Reduction in bottlenecks in the efficient functioning of Debt Recovery Tribunals and Asset Reconstruction Companies. Creation of infrastructure to share large common exposure across banks. Aadhaar would be used to build individual histories of clients. To address cash-flow requirements of SME borrowers, the RBI would look at establishing an Electronic Bill Factoring Exchange, which would allow borrowers to discount their bills quickly and fairly.
Payments. Introduction of a new bill payment system that facilitates easier payment of day-to-day bills for consumers. Introduce new mobile-payment systems, especially through SMS. Facilitate setting up of “White Label” ATMs. Introduction of inflation-indexed savings certificates to hedge savers against negative real interest rates.
—Kotak Institutional Equities