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Move aimed at faster transmission of monetary policy rates; new norms to come into effect from October 1

Stonewall syndrome: Banks have been reluctant to cut rates despite RBI lowering the repo rate by 110 bps. Paul Noronha

The Reserve Bank of India (RBI) on Wednesday made it mandatory for all banks to link floating rate loans — to retail customers and loans to micro, small and medium enterprises (MSME) — to an external benchmark. Some banks have already started to link home and auto loan rates to the repo rate, which is an external benchmark.

The move is aimed at faster transmission of monetary policy rates. Banks have been reluctant to cut interest rates despite the RBI lowering the repo rate by 110 basis points (bps) between February and August.

“It has been observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory,” the banking regulator said while announcing the new norms.

“The RBI, therefore, has issued a circular making it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark effective October 1, 2019.”

The norms for external benchmark linking of interest rates was scheduled to be operational from April 1, but was deferred. At present, interest rates on loans are linked to a bank’s marginal cost of fund-based interest rate (MCLR). Banks can choose from one of the four external benchmarks — repo rate, three-month treasury bill yield, six-month treasury bill yield or any other benchmark interest rate published by Financial Benchmarks India Private Ltd.

“Adoption of multiple benchmarks by the same bank is not allowed within a loan category,” the RBI said.

While banks are free to decide on the spread over the external benchmark, credit risk premium can change only when borrower’s credit assessment undergoes a substantial change, the RBI said, adding other components of spread, including operating cost, could be altered once in three years. “The interest rate under external benchmark shall be reset at least once in three months,” RBI said. Existing loans and credit limits linked to the MCLR, base rate or BPLR, would continue till repayment or renewal, RBI said.

Regarding transition to external benchmark from MCLR for existing customers, RBI said floating rate term loans sanctioned to borrowers eligible to prepay the loan without pre-payment charges, will be eligible for switch-over to the external benchmark without any charges, except for reasonable administrative/ legal costs. “The final rate charged to this category of borrowers, post switchover to external benchmark, shall be the same as the rate charged for a new loan of the same category, type, tenor and amount, at the time of origination of the loan,” RBI said.

‘Good move’

“It is a good move from the RBI… they were hinting at this for sometime. Banks are well-prepared to launch the products,” Union Bank of India MD & CEO Rajkiran Rai. G told The Hindu. Union Bank has already linked some of the floating rate products to repo rate. Mr. Rai indicated that deposit rates could also be linked to an external benchmark at a later stage.

“First, we will try to link the savings bank interest rate and then gradually we will try to introduce some term deposit products so that the transmission of the rates are equal on both sides,” he said.

Demand slowdown forces stoppage in PV manufacturing

Low gear: Assembled cars seen at the Maruti Suzuki plant at Manesar on Wednesday. V.V. Krishnan

Amid a severe slowdown in demand in the auto sector, the country’s largest carmaker Maruti Suzuki India on Wednesday announced suspension of production at two of its plants in Haryana for two days. The company said it had decided to shut down the passenger vehicle manufacturing operations of the Gurugram Plant and the Manesar Plant in Haryana on September 7 and 9, 2019.

Maruti Suzuki added that both days would be observed as ‘no production’ days. With vehicle sales declining every month, the carmaker has been cutting down production since February this year. In February, it cut production by 8.3%, in March by almost 21%, in April by nearly 9.6%, in May by 18%, in June by 16%, in July by 25.5% and in August by almost 34%.

In August, the company saw domestic sales of passenger vehicles nosedive 36% to 93,173 units as against nearly 1.46 lakh units in the year-ago period.

U.S. leads the pack with 8,134 tonnes followed by Germany with 3,367 tonnes

India’s gold reserves have grown from 357.8 tonnes in the first quarter of 2000 to 618.2 tonnes in 2019. Reuters

India has pipped the Netherlands to move into the list of top ten countries in terms of total gold reserves.

According to the World Gold Council, India has gold reserves totalling 618.2 tonnes, which is marginally higher than the Netherlands’ reserves of 612.5 tonnes.

Interestingly, in terms of individual countries, India actually ranks ninth since the International Monetary Fund (IMF) occupies the third position after the U.S. and Germany.

According to the latest release by the World Gold Council, U.S. leads the country list with total gold reserves of 8,133.5 tonnes followed by Germany with 3,366.8 tonnes.

While the IMF is ranked third with a holding of 2,451.8 tonnes, it is followed by Italy (2,451.8 tonnes), France (2,436.1 tonnes), Russia (2,219.2 tonnes), China (1,936.5 tonnes), Switzerland (1,040 tonnes) and Japan (765.2 tonnes) before India at the 10th spot.

India’s entry into the list of top ten countries comes at a time when the quantum of monthly purchases is the lowest in over three years.

“Net purchases [of a tonne or more] in July amounted to a relatively modest 13.1 tonnes. This is 90% less than June and the lowest level of monthly net purchases since August 2017,” said Alistair Hewitt, director — Market Intelligence, World Gold Council.

Incidentally, the holding data for most countries is as of July 2019 as the compilation is typically reported with a lag of two months.

Previously, when the WGC reported the country-wise reserves in March, India’s gold holding was pegged at 607 tonnes.

India’s gold reserves have grown substantially in the past couple of decades from 357.8 tonnes in the first quarter of 2000 to the current 618.2 tonnes.

India’s neighbour Pakistan has seen its standing unchanged at the 45th position with total gold reserves of 64.6 tonnes.

‘Slowdown deeper and more broad based than suspected’

Rating agency Crisil has revised the growth forecast for India for the current financial year sharply to 6.3% from 6.9% projected earlier, after the first-quarter growth rate plummeted to a 25-quarter low of 5%.

Observing that India’s economic slowdown was deeper and more broad-based than suspected, the rating agency said, “A plunge in domestic private consumption demand, slump in manufacturing, halving of merchandise exports growth, and a high-base effect from last year have gnawed away at first-quarter growth.”

Crisil said given the twin trouble of slack private consumption and manufacturing in the quarter, it believed the remaining quarters were unlikely to over reach to take the full-year number to its earlier forecast of 6.9%.

“Therefore, we revise down our growth forecast for fiscal 2020 to 6.3%, from 6.9% estimated earlier. That is under the assumption that the second quarter will see some mild pick-up in growth, which continues through the year,” Crisil said.

Crisil expects growth to get some lift from the low base effect that will now set in. Besides, an easing monetary policy, improved transmission of rate cuts, and the government’s minimum income support scheme to farmers would also feed into consumption.

Sluggish consumption

Crisil said sluggishness in private consumption could be explained by a number of factors, including a possible income slowdown and cost increases, amid other challenges in the automobile sector, slowing activity in real estate, and an overall dent to consumer sentiment.

“In fact, much of this cyclical slowdown has affected sectors that are large employment generators, suggesting that incomes and/or employment growth in these might have suffered,” it said.

Coal offtake between April and August 2019 also fell 2.5 million tonnes

Little cheer: In August, four out of CIL’s seven coal-producing subsidiaries lost production.G.N. RAO

Coal India Ltd. (CIL) ended the first five months of this fiscal with a 2.8% production decline, mining 210.2 million tonnes against 216.2 million tonnes in the year-earlier period. In August its output dropped by 10.3%.

Two of its high-yielding subsidiaries, South Eastern Coalfields Ltd. (SECL) and Mahanadi Coalfields Ltd. (MCL), ended the period with a lower production compared with the year-earlier period.

Coal offtake between April and August 2019 dropped by 2.5 million tonnes. In August, four out of CIL’s seven coal-producing subsidiaries lost production, showing negative growth rates over those clocked a year ago. This was due to various factors.

Law and order issues

CIL sources said that law and order problems at some of the subsidiaries and heavy rains in western India had led to this production loss. There were also two mine accidents that led to production loss

Edelweiss Securities said in an update that CIL’s August 2019 production and offtake volume decline was the worst in the past three years. It said that the delay in finalisation of subcontracts and mining fatalities at MCL and SECL impacted production. Higher-than expected rainfall, too, hit mining. On the offtake front, it said that lower rake availability led to loading of 178 rakes daily in August 2019 against 250 rakes of daily loading in July.

However, the brokerage firm was optimistic that CIL will get over its current production woes by resolving the issues at hand and register a growth rate of around 4.5%. It felt that achieving the year’s target of 660 million tonnes, requiring a 15% growth rate may be a daunting task for the behemoth.

Revision follows capital infusion by govt., merger gains

Rating agency Moody’s revised the outlook for Punjab National Bank’s (PNB) outlook to positive from stable following capital infusion by the government and possible gains from the proposed merger with the Oriental Bank of Commerce (OBC)and United Bank of India (UBI).

While affirming PNB’s ratings, the rating agency said bank’s baseline credit assessments will likely to improve after the capital infusion from the government, and that its financial metrics will also gradually improve.

The government would infuse ₹16,000 crore in the lender. Moody’s said post-merger, PNB would become the second largest public sector bank in India with a deposit market share of 8% compared with its standalone market share of 5.2% as of March 2019.

Taking into account the reported financials of PNB, OBC and United Bank, Moody’s expects the merged entity’s consolidated CET1 ratio will exceed 10%, compared with a standalone ratio of 6.3% as of June 2019.

Asset quality

Moody’s expects the bank’s asset quality and profitability will remain broadly unchanged following the merger.

The outlook on Canara Bank, OBC, Syndicate Bank and Union Bank are maintained at stable by the rating agency.

Moody’s has also affirmed the baseline credit assessment of these five banks.

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