If you are the kind who likes to visit his or her bank branch regularly to withdraw or deposit cash, the message from the big three new generation private sector banks (ICICI Bank, HDFC Bank and Axis Bank) is very clear. They do not want you to come visiting their branches. Or at least not very regularly.
Starting March 1, 2017, HDFC Bank, will charge you a minimum of Rs 150 in case you carry out more than four cash transactions (withdrawals as well as deposits) a month in your home branch. In case of Axis Bank and ICICI Bank, the charge has been in effect from early January 2017, when it was re-introduced. While ICICI Bank allows the first four transactions to be free, in case of Axis Bank the limit is set at five transactions.
The move is likely to impact senior citizens and others who are still not used to the idea of withdrawing money from an ATM or carrying out digital transactions using their debit cards, the most.
Also, the banks will charge Rs 5 per Rs 1,000 as a fee in order to allow you to withdraw or deposit cash, once the number of free transactions has been exhausted. This essentially means a charge of 0.5 per cent. This is subject to a minimum charge of Rs 150 for every transaction. Hence, the 0.5 per cent charge actually comes into effect only if you withdraw or deposit more than Rs 30,000 (Rs 150 divided by 0.5 per cent) at one go.
Now what is the logic of having a minimum charge of Rs 150, which is not low by any stretch of imagination? The idea is basically to tell the bank customers to come to the branch only if a substantial amount of cash needs to be withdrawn or deposited, even after the free transactions have been exhausted.
Let’s say you want to withdraw Rs 5,000 from the bank. This would mean paying the bank a charge of Rs 150 or 3 per cent of the withdrawn amount. Hence, it would just make sense to go to the ATM and withdraw the money, free of cost, and not drop-in at the branch.
From the point of view of the bank, this move makes immense sense, given that the cost of servicing a customer at the branch is the highest. A November 2015 report in The Hindu points out: “On an average, a branch banking transaction costs a bank about Rs 40-50 per customer, while an internet or mobile transaction brings down the costs to Rs 15-30 per customer.”
Also, the move suggests that the new generation private sector banks are only looking for a certain kind of customer, the one who does not want to come to the branch.
As R Gandhi, one of the deputy governors of the Reserve Bank of India had said in an August 2016 speech: “There is a new generation of young people (known as millennials). They have different expectations and their ways of interacting with banks are also different. They prefer not to come to banks for banking services. Rather they would prefer to avail the services through online and social media based platforms.” This is the kind of customer that the new generation private sector banks want.
If you are the kind who likes to visit his bank branch regularly, then you are clearly not welcome at new generation private sector banks. Public sector banks are the place for you.
Post script: Kotak Mahindra Bank, the fourth largest new generation private sector banks, will do the same as the Big three when it comes to cash transactions, from April 1, 2017, onwards. The details can be checked out here.
The other important point that I made in the column (and have made in the past) and will make again today is that there is no reason the Modi government (or for that matter any other) should be running 27 public sector banks.
Let me first explain why I am making this point again today. Yesterday’s edition of The Times of India had a news-report headlined “Govt looks at 3 options to reduce stake in IDBI Bank“. This news-report talks about the three options the government is looking at in order bring down its stake in IDBI Bank.
While a decision on how the shares of IDBI Bank will be disinvested hasn’t been made, the three ways the government is looking at are: a) to sell the shares in small lots to the public through the stock exchanges. The trouble with this option is that the government may not be able to sell the shares at the best possible price.
b)The second option being considered is to sell the IDBI Bank shares to the likes of Life Insurance Corporation (LIC) of India, other government owned insurance companies and pension and provident funds, at a premium to the current market price. This option, as has often been the case in the past, is taking the easy way out.
c) The third option (which is very similar to the second option) being considered is to sell shares to public sector banks and financial institutions. This was tried in the case of Maruti Suzuki in 2005-2006. A PTI news-report published on January 12, 2006 points out: “The government today sold 8% shares in MarutiUdyog for Rs 1,567.60 crore with Life Insurance Corporation (LIC) picking up more than 50% of the 2,31,12,804 shares sold by the government. LIC successfully bid for 1,68,00,000 shares at Rs 682 per share. Eight public financial institutions have picked up Maruti shares. SBI would be getting 39,27,074 shares at Rs 660 per share.”
None of these methods will lead to genuine privatisation. If the government sells shares to the general public through the stock exchanges, it will continue to remain the majority owner of shares in the bank. And that is the basic problem. As I had pointed out in yesterday’s column, the private sector banks are much better run and more profitable than their public sector counterparts.
Currently, the government owns 76.5% of the IDBI Bank. Even if it were to reduce its shareholding to 49%, it will still continue to be the biggest shareholder in the bank. With government ownership comes political corruption, crony capitalism and bad lending, which leads to bad loans. This story has played out over the last few years.
In fact, the net non-performing assets of public sector banks, for the financial year ending on March 31, 2015, stood at 2.92% of their total advances (i.e. loans). It was at 2.01% for the financial year ended March 31, 2013. In comparison, the private sector banks are extremely well placed with their net non-performing assets being at 0.89% of their total advances. For financial year ending on March 31, 2013, the net non-performing assets of these banks stood at 0.52%.
What this clearly tells us is that the private sector banks are better at lending money given that they don’t have to deal with political corruption and crony capitalism. In a poor country like India it is important that any money that is being lent is utilized properly as far as possible and is not siphoned off by greedy businessmen. It has become clear over the last few years that businessmen find it easy to siphon off money they have borrowed from public sector banks in comparison to private sector banks.
The second option being considered by the government is to sell shares to LIC. The interesting thing is that LIC already owns 8.59% of the bank. Does it make sense to allow LIC’s investment in any stock to go beyond 10%? The Securities and Exchange Board of India does not allow mutual funds to own more than 10% of a company. This is to prevent concentration of risk on the overall investment portfolio. But this does not apply to LIC, given that it is an insurance company.
The question is why is the government allowing this concentration of risk in LIC’s investment portfolio to happen? Ultimately like mutual funds, LIC is also basically managing money.
Further, it is also important to state here that the money that LIC has is not government’s money. LIC manages the hard earned savings of the people of India and given that these savings need to be treated with a little more respect.
Also, selling shares to LIC or the State Bank of India, for that matter, means that the ownership stays with the government. And that as I have stated earlier, is the basic problem. For IDBI Bank to do well, it needs genuine privatisation with a private owner, with the government being a minority shareholder at best.
As I had mentioned in yesterday’s column, IDBI Bank is saddled with a huge amount of bad loans. And given this it is not surprising that the government owned financial institutions are not keen on picking up any stake in the bank.
The Times of India news-report cited at the beginning points out: “State-run entities are, however, not very keen on buying the government stake. “Given the distress in the banking sector, IDBI Bank may not be the best bet since its retail as set base is weak and it has legacy issues,” said a top official.”
IDBI Bank was a major lender to Kingfisher. It also lent to Deccan Chronicle Holdings, Bhushan Steel and Jaypee Associaties, companies which are in a financial mess.
Also, if the government follows any of these three methods to sell shares in IDBI Bank, as the majority shareholder it will have to continue to keep pumping money into the bank. In fact, the government holding in the bank has gone up “from 65.14% in July 2010 to 76.5% in December 2013 by total equity infusion amounting to Rs 5,300 crore”.
Any increase in holding will bring us back to square one.
In May 2014, theCommittee to Review Governance of Boards of Banks in India (better known as the PJ Nayak Committee) had submitted a detailed report on reforming the public sector banks in India.
The Nayak committee estimated that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.” The committee further said that: “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.”
The government on the other hand estimates that “the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore.” Of this amount it proposes to invest Rs 70,000 crore. It has not explained from where will it get the remaining Rs 1,10,000 crore.
These are not small amounts that we are talking about. The tendency is to look at the government ownership in many public sector enterprises as family silver and hence, be careful while selling it. But in case of many public sector banks that cannot be really said. If the government continues to own public sector banks in the years to come it will have to keep pumping money into them in order to keep them going.
Take a look at the accompanying table. I have picked up five banks which are of a similar size. There are two private sector banks (HDFC Bank and ICICI Bank) and three public sector banks (Bank of India, Punjab National Bank and Canara Bank) in the table. The profit of the private sector banks is many times the profit made by the public sector banks. Their bad loans are also significantly lower. In fact, HDFC Bank makes more money than Bank of India, Punjab National Bank and Canara Bank put together. So does ICICI Bank.
Source: Indian Banks’ Association. As on March 31, 2015 To conclude, people keep reminding me that comparing the performance of public sectors banks with private sector banks is like comparing apples and oranges. The public sector banks have social obligations which private sector banks don’t. This is true. Nevertheless, the question is does the government need to own 27 banks in order to fulfil its social obligations?
I think, the government can easily go about fulfilling social-sector obligations by owning the State Bank of India and 4-5 other banks which are strong in different regions of the country.
Finally, a government should not be running so many banks. There are so many other things that it should be concentrating on, but it doesn’t.
Regular readers of The Daily Reckoning would know that I am not a great believer in the repo rate cuts leading to an increase in home buying and as well as consumption, with people borrowing and spending more, at lower interest rates. Repo rate is the rate at which the Reserve Bank of India (RBI) lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.
A basic reason is that the difference in EMIs after the rate cut is not significant enough to prod people to borrow and buy things. Further, they should be able to afford paying the EMI in the first place, which many of them can’t these days, at least when it comes to home loan EMIs.
These reasons apart there is another problem, which the mainstream media doesn’t talk about enough. All they seem to come up with are fancy tables on how interest rates and EMIs are going to fall and how this is going to revive the economy. And how acche din are almost here. Now only if it was as simple as that.
A cut in the repo rate is not translated into exact cuts in bank lending rates. After any repo rate cut, banks quickly cut their deposit rates. They cut their lending rates as well, but not by the same quantum.
As a recent study carried out by India Ratings and Research points out: “In the recent policy cycle, RBI has cut policy rates since January 2015 by a cumulative 125 basis points, banks have cut one year deposit rates by an average 130 basis points and lending by 50 basis points, which includes the base rate cuts in the last one week. Base rate is the rate below which a bank cannot lend. In the last 18 months three-month commercial paper and certificate of deposit rates have fallen by 150 basis points. Thus transmission of policy rates has been more through market rates and banks deposit rates in the last one year.” One basis point is one hundredth of a percentage.
In an ideal world, a 125 basis points cut in the repo rate by the RBI should have led to a 125 basis points cut in the lending as well as deposit rates. But that doesn’t seem to have happened. While the one-year deposit rates have been cut by 130 basis points, the lending rates have gone down by just 50 basis points.
And this is a trend which is not just limited to the current spate of rate cuts by the RBI. This is how things have played out in the past as well. As Crisil Research had pointed out in a report released in February 2015: “Lending rates show upward flexibility during monetary tightening but downward rigidity during easing. Between 2002 and 2004, while the policy rate declined by 200 basis points, lending rates dropped by just 90-100 basis points. Conversely, in 2011-12, when the policy rate rose by 170 basis points, lending rates surged 150 basis points.”
So, the point being that when the RBI starts to raise the repo rate, banks are quick to pass on the rate increase to their borrowers, but the vice-versa is not true.
As India Ratings and Research points out: “The policy cycle is being used by banks to their advantage. A study of the last 10 years shows, that in most cases when policy rates have reduced, deposit rates have comedown faster and the quantum has also been higher compared to lending rates. The same was also true when policy rates were hiked, where lending rates went up and the quantum was also higher compared to deposit rates.”
Also, this time around banks have been quick to cut their base rates, the minimum interest rate a bank charges its customers, after the RBI cut the repo rate by 50 basis points to 6.75%, in September. Having cut their base rates, banks have increased their spreads, and negated the cut in base rate to some extent. Take the case of the State bank of India. The country’s largest bank cut its base rate by 40 basis points to 9.3%, in response to RBI cutting the repo rate by 40 basis points.
This meant that the interest rate on home loans should have fallen by 40 basis points as well. Nevertheless, the interest rate on an SBI home loan will fall by only 20 basis points. Why is that? Earlier, the bank gave out home loans to men at five basis points above its base rate (or what is known as the spread). To women, the bank gave out home loans at the base rate. Now it has decided to give out home loans to men at 25 basis points above the base rate. In case of women it is 20 basis points.
Hence, interest rate on a SBI home loan taken by a man will be now be 9.55% (9.3% base rate plus 25 basis points). Earlier, the interest rate was 9.75%. This means a fall in interest rate of 20 basis points only and not 40 basis points, as should have been the case. ICICI Bank has done something along similar lines as well. And this step has essentially negated the cut in the base rate to some extent.
Further, the public sector banks have a problem of huge bad loans, which are piling on. Given this, they are using this opportunity to ensure that they are able to increase the spread between the interest they charge on their loans and the interest they pay on their deposits. This extra spread will translate into extra profit which can hopefully take care of the bad loans that are piling up.
The bad loans will also limit the ability of banks to cut their lending rates. As Crisil Research points out: “High non-performing assets [NPAs] curb the pace at which benefits of lower policy rate are passed on to borrowers. Data shows periods of high NPAs – such as between 2002 and 2004 (when NPAs were at 8.8% of gross advances) – are accompanied by weaker transmission of policy rate cuts. This time around, NPA levels are not as high as witnessed back then, but still remain in the zone of discomfort.”
Another reason banks often give for not cutting interest rates is the presence of small savings scheme which continue to give high interest when banks are expected to cut interest rates. As India Research and Ratings points out: “In the last decade small saving deposit schemes have offered rates between 8-9.3% unrelated to the up-cycle or down-cycle in policy rates. These rates are also politically sensitive since a bulk of this saving is made by elders, farmers and low income groups. In fact in 2009 when repo rates were at a low of 4.75%, PPF and NSC both continued to offer 8% return and in 2012 when the repo rate moved up to 8.5%, PPF offered 8.8% and NSC offered 8.6% return.”
Nevertheless, this time around banks have cut interest rates on their one year deposits by 130 basis points. This is more than the 125 basis points repo rate cut carried out by the RBI during the course of this year.
A more informed conclusion could have been drawn here if there was data available on the kind of interest rate cuts that banks have carried out on their fixed deposits of five years or more. This would have allowed us to carry out a comparison with small savings scheme which typically tend to attract long term savings.
Long story short—EMIs and interest rates fall more on the front pages of business newspapers than they do in real life.
In the press conference that followed yesterday’s monetary policy, Raghuram Rajan, the governor of the Reserve Bank of India(RBI), said: “Banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn’t fallen is nonsense, it has fallen.” What Rajan meant here was that banks are able to raise deposits at a much lower interest rate than they had in the past. Given this, banks should be cutting the interest rates they charge on their loans. Banks have been saying for a while that they can’t cut their lending rates because interest rates they pay on their deposits and other forms of borrowing continue to remain high. Rajan essentially said that this argument was basically “nonsense”. Banks got the message immediately and by the end of the day three big banks, State Bank of India (SBI), HDFC Bank, and ICICI Bank, cut their base rates or the minimum rate of interest they charge to their customers. Both SBI and HDFC Bank cut their base rate by 15 basis points (one basis point is one hundredth of a percentage) to 9.85%. ICICI Bank was a little more aggressive and cut its base rate by 25 basis points to 9.75%. These base rate cuts have got the media very excited. Here are some of the headlines. The Times of India says: “Top 3 Banks cut lending rates after Rajan push”. The Economic Times reports: “RBI doesn’t cut rates but forces others to do so”. The normally sedate Business Standard says: “Banks bow to RBI pressure”. The question is will these base rate cuts really make any difference? Theoretically people are supposed to borrow more at lower interest rates. But is that really the case? Let’s run some numbers here. For males, SBI offers a car loan at 45 basis points above its base rate. Hence, when the base rate is 10%, the car loan is available at 10.45%. When the base rate is at 9.85%, the car loan will be available at 10.30%. (For females the car loan is available at 40 basis points above the base rate). Let’s consider a male who takes a car loan of Rs 3 lakh repayable over a period of 5 years. The EMI at 10.45% would work out to Rs 6,440.74. The EMI at 10.3% works out to Rs 6,418.49 or Rs 22.25 lower. So, is someone going to buy a car just because his EMI is lower by Rs 22? None of the newspapers which have run extremely detailed stories around the base rate cuts, have bothered to ask this basic question. What about home loans? Home loans have a much larger ticket size than car loans, so shouldn’t the difference in EMIs there be huge? Let’s see. Data from the National Housing Bank shows that the average home loan size in India in 2013-2014 stood at Rs 18-19 lakh. Let’s round it off to Rs 20 lakh, given that we are now in 2015-2016. For males, SBI offers a home loan at 15 basis points above its base rate (for females the home loan is available at 10 basis points above the base rate). When the base rate was at 10%, the interest charged on a home loan to a male would be 10.15%. At a base rate of 9.85%, the interest rate charged on a home loan to a male would be 10%. Let’s consider a male who takes a home loan of Rs 20 lakh, repayable over a period of 20 years. At 10.15% his EMI works out to Rs 19,499.62. At 10%, it is Rs 19,300.43 or Rs 199.18, lower. So is an individual going to buy a home because his EMI is will now be lower by Rs 199? What if the loan size were bigger. Let’s say around Rs 60 lakh. How do things look then? In this case the EMI difference comes to around Rs 597.55. So, someone who can afford a home loan of Rs 60 lakh is definitely not going to be impacted by such a low amount. As I have often said in the past, in case of real estate, interest rates and EMIs are really not the problem. The problem is simply the price of homes. They have gone way beyond what most people can afford. And unless there is a correction there, no amount of rate cuts by banks is going to revive buying. This is a simple fact that everyone who makes a living through the real estate industry needs to realize. What these calculations also tell us is that the impact interest rates have on consumption is terribly overrated. The media spends too much time analysing will the RBI cut the repo rate(I am guilty of the same). Then it spends even more time analysing whether banks will pass on the cut to their consumers. If banks do not pass on the cut it spends time on analysing why banks are not passing on the cut. It would do a whole lot of us more good if the ‘good’ journalists who cover banking start using the PMT function on MS Excel. (This function essentially helps calculate the EMI on a loan). The issue is whether a minuscule base rate cut really makes a difference? And the answer as I have shown from the calculations above is, it does not. What makes a difference is basically how confident is the consumer feeling about the future. In India, we really do not measure this properly. The Consumer Confidence Survey carried out by the RBI “provides an assessment of the perception of respondents spread across six metropolitan cities viz., Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi.” Given that it has limited use. To conclude, it is best to quote something that the economist John Kenneth Galbraith wrote in The Affluent Society: “There is no magic in the monetary policy… It survives in esteem partly because so few understand it.” And that indeed will be the way how thing shall continue.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
Late yesterday evening, the trade unions representing Coal India workers called off their five day strike. “Consequent to the intervention by Mr Piyush Goyal, Union Miinister for Coal, strike by Coal India workers called off,” Coal secretary Anil Swarup said on Twitter. The meeting of the trade unions with the coal minister Piyush Goyal lasted for over six hours. “The strike has been called off,” Lakhan Lal Mahato, leader of All India Trade Union Congress (AITUC), one of the five trade unions supporting the strike told the Press Trust of India (PTI) after the strike was called off. “Mahato, however, did not share the details of the terms and conditions of the agreement reached between the government and the unions,” PTI reported. The real damage of this agreement (if any) will be revealed only once the details of the compromise agreed upon come out. The strike lasted two days and led to a dramatic fall in coal production. A Reuters report quotes a Coal India official as saying that “Coal India produced 645,000 tonnes on Tuesday (January 6,2015), less than half of its usual daily output at this time of year.” The unions were protesting the government’s decision to disinvest its shares in Coal India and at the same time they don’t want any private participation in the coal sector in the country. The government wants to sell 10% of its stake in Coal India, which will help the government bring down the fiscal deficit. The fiscal deficit for the period April to November 2014 was at 99% of the annual target. Fiscal deficit is the difference between what a country earns and what it spends. The government currently owns 89.65% of Coal India and even after selling a 10% stake it will continue to own almost 80% of the company, which is good enough to continue to have managerial control over the company. Hence, the government is not selling out of the company lock, stock and barrel. Coal India was and will continue to be a government owned company. So what is it that the trade unions really feared? For that one needs to take a look at the following table.
Total employee benefits expenses (in Rs crore)
Number of employees
Average employee compensation
Rs 5.09 lakh
Rs 6.99 lakh
Rs 7.49 lakh
Rs 7.88 lakh
Source: Coal India Annual Report 2013-2014
As is clear from the above table the average employee compensation for Coal India has gone up from Rs 5.09 lakh in 2010-2011 to Rs 7.88 lakh in 2013-2014, an increase of 55%. What needs to be kept in mind is the fact that 85% of the employees of Coal India are workmen. Their jobs fall largely in the semi-skilled category. In yesterday’s column I had said that the well performing subsidiaries of Coal India, like Mahanadi Coalfields and Northern Coalfields have been doing well primarily because they have been outsourcing the excavation of coal. Interestingly, coal experts point out that the firms to which the excavation of coal is outsourced hire workers at around one fourth the cost of what Coal India employees get paid. And that makes the entire exercise of excavating coal through outsourcing more productive. What this tells us clearly is that Coal India employees are paid extremely well. Now look at the following table which has the average employee compensation of ICICI Bank over the years.
Total employee benefits expenses (in Rs crore)
Number of employees
Average employee compensation
Rs 4.94 lakh
Rs 6.03 lakh
Rs 6.27 lakh
Rs 5.84 lakh
Source: ICICI Bank annual reports
ICICI Bank is the largest private sector bank in the country (in terms of total assets). It has more or less a 100% skilled workforce. Nevertheless, the average employee compensation of the bank in 2013-2014 was only at Rs 5.84 lakh. Hence, an average Coal India employee makes 35% more than an average ICICI Bank employee. This is surprising given that Coal India has a largely a semi-skilled workforce. As on December 1, 2014, out of a total workforce of around 3.38 lakh, the total number of workmen were at 2.86 lakh. And these Coal India employees get paid significantly more than they should be, given the skill-set that they have. The trade unions are essentially trying to protect this. Their big fear is that if private companies are allowed to commercially mine coal (as the recently re-promulgated Coal Mines (Special Provisions) Ordinance allows for), salaries in the organised coal sector will go down. Private companies will have no reason to pay the kind of compensation that Coal India pays its workers. As mentioned above outsourced workers get paid one fourth of what Coal India workers make. Hence, trade unions are basically trying to protect this interest of the organised coal labour. In the process they are hurting the interests of the country. Coal India produced 323.58 million tonnes of coal in 2004-2005. In 2013-2014, it produced 462.42 million tonnes of coal. The rate of production has increased at an average annual rate of 4.05%. The production of coal hasn’t kept pace with demand. During the same period, the total amount of coal imports has increased from 28.95 million tonnes to 171 million tonnes, at an average annual rate of 21.8%. The per employee productivity of Coal India is very low in comparison to its global peers. A Reuters news-report points out that: “Coal India digs out about 1,100 tonnes of coal per employee a year, compared with 36,700 tonnes per employee at U.S.-based Peabody Energy and 12,700 tonnes per employee at China’s Shenhua Energy.” What Coal India needs is some competition and that is exactly what allowing private companies to commercially mine coal will do. As Partha Bhattacharya, a former Chairman of Coal India put it in a September 2014 column in The Indian Express: “With multiple players that have both bandwidth and competence, a competitive scenario is expected to emerge sooner than later. Besides turning the current situation of acute coal shortage into one of abundance, competitive pressures are expected to bring prices well below the imported coal price, since the wage cost is likely to remain far lower in India than elsewhere, whereas productivity is expected to converge to international levels.” To conclude, India clearly needs more coal. And that is only going to be possible if more companies are allowed to produce coal. But the labour unions representing the workers of Coal India do not want that. In the process the country needs to import coal at a price which is higher than the price of the coal produced domestically. Also, the country ends up using precious foreign exchange. In fact, if India does not produce more coal in the years to come, the coal imports will only go up. What does that really mean? It means that increasing Indian coal imports will help create jobs in foreign countries. Ultimately, the unions representing the workers of Coal India will be responsible for this. And this is clearly not a happy thought.