Discrimination faced by Mumbaikars...
If the housing societies in Mumbai (Bombay) are only meant for families (married couples), then the government of Maharashtra should make marriage compulsory in the state/city.
Or else the government should tell its citizens where will Unmarried, Divorcees, Bachelors, Spinsters live in the city of skyscrapers or is Bombay only for those who have families.
This is one of the greatest mental blocks of Mumbaikars, who otherwise want to bask in the FALSE HALO of Cosmopolitanism.
This disease (of not giving apartments to Bachelors, Muslims, etc on rent) is specially prevalent in housing societies where the Gujaratis, Marathis and North Indians (to some extent) abound; while the rest of the population is more or less okay with the concept.
The government of Maharashtra should take this matter seriously and devise laws to eradicate this malice ASAP, so that BOMBAY (and its suburbs) becomes free of discrimination based on Marital Status, Religion, etc. Or else the Honourable Supreme Court of India should step in, and give directions to the state or central governments -- so that the fundamental rights of its citizens enshrined in the constitution of India is not violated.
Wednesday, January 14, 2015
Who says interest rates are going up?
January 13, 2015: There has always been a lot of fanfare around the Reserve Bank of India’s policy action. But the sound and fury over its reluctance to cut rates is hard to understand. The truth is, a cut or hike in policy rates has not mattered much to borrowers. A study of the data put out by the RBI on banks’ lending rates since 2008 shows that banks have been tardy in passing on the RBI’s rate actions, be it hikes or cuts.
In all the exhortations for rate cuts in recent months, this aspect has gone unnoticed.
Between September 2013 and now, the RBI increased the repo rate by 75 basis points. But the lending rates of banks, that are meant to track the central bank’s policy action, have not moved up during this period. On the contrary, the weighted average lending rate actually fell by 20 basis points between September 2013 and September 2014.
Going by this data, the claim by India Inc and the government that high interest rates have led to lower growth and stalled fresh investments, hardly holds water.
But the recent anomaly in rates is not a singular event. Even in the past, banks have been tardy in passing on rate actions. This has been particularly true during an easy money policy.
Consider for instance, the period between September 2008 and September 2009. The RBI had slashed the repo rate by a tidy 425 basis points but what fell into the borrowers’ lap was a mere 120 basis points cut in lending rates. Or the period between March 2012 and June 2013, when the repo rate fell by 125 basis points. Only 40 basis points of this rate cut was passed on to borrowers. Why this discrepancy between the rate actions of the RBI and banks?
While the RBI’s primary tool for monetary signalling is the repo rate, and it helps set the direction for rates, banks decide their lending rates based on their base rates, which they are free to decide. Factors such as the cost of funds, administrative costs and profitability are taken into account. Ideally, when the RBI lowers its policy rate, it should translate into lower cost of borrowings for banks and reduced lending rates for borrowers.
But there are two main reasons why this doesn’t happen. One, banks source only a minuscule portion of their funds from the repo window. The amount has hovered at about 1 per cent of their total deposits. Banks’ dependence on deposits with maturities of less than one year has also been falling. Banks rely significantly on longer term deposits. With the bulk of the deposits unaffected by RBI’s rate action, banks are unable to tweak lending rates in a hurry.
The second reason for slow transmission is liquidity. In a tight liquidity scenario, banks may be reluctant to cut deposit rates. This was one of the main reasons for banks not cutting rates from April 2012 to May 2013. Banks had to raise deposit rates to woo depositors.
What prevented banks from cutting rates then is what triggered a fall during the last one year. Many banks started to cut rates across different term deposits, mainly due to ample liquidity. Banks flush with liquidity had enough headroom to lower deposit rates. As a result, banks’ costs of borrowings have come down by 30-40 basis points since January 2014. Banks have also not been able to deploy their funds due to slowing credit growth, and have shed high cost deposits to keep margins intact. With the cost of funds coming down, some of this benefit has been transmitted to borrowers in the form of lower lending rates.
An analysis of Capitaline data for CNX 500 companies reveals that, in the first half of 2014-15, while interest costs have gone up by 6 per cent (over last year), total debt has also risen by 10 per cent. This clearly indicates that companies have not paid higher interest (incrementally) on their loans, and the increase in interest payment is mainly due to higher leverage.
The good and bad
Banks have also been making the point that good borrowers have been able to source funds at attractive rates. This argument does have some merit after all. Having burnt their fingers with highly-leveraged companies and risky sectors, banks have turned wary, particularly over the last year or so.
Given this backdrop, it is safe to assume that the average lending rates disclosed by the RBI for fresh loans mostly reflect the rates at which corporates — the good ones — have been able to fund their additional need over the last one year. This data reveals that lending rates on fresh loans sanctioned have actually fallen by 44 basis points.
Top-rated companies have also been able to make hay in the secondary market. Yields on AAA-rated corporate bonds have fallen by 60-70 basis point in the last one year. More importantly, after hovering around 10 per cent (the lowest amongst banks) towards the end of 2013, rates on AAA bonds slipped to 8.6 per cent levels by the end of 2014 — way below bank borrowing rates.
AA-rated companies that rank a notch lower, still pay about 30-40 basis points more than top-rated companies to source funds from the secondary market.
Getting it right
Good or bad, all companies are now clamouring for lower rates. While some softening has already begun, it is clear that India Inc is awaiting the big move from the central bank. But aside from setting the direction, it is imperative that the RBI’s rate action is transmitted by banks to borrowers in its entirety.
In this context, the RBI’s decision to move away from the fixed repo to the term repo mechanism, in keeping with the recommendations of the Urjit Patel Committee, is welcome. Introduced in October 2013, term repos provide short-term funds at market-determined rates, with the RBI auctioning off such funds. By altering the amount it provides at each auction, the RBI can tweak short-term rates to suit its needs. Liquidity, cited as one of the reasons for not reducing lending rates in the past, can now be adjusted to ensure there is ample liquidity when the easing begins.
The RBI’s objective of bringing down banks’ SLR requirement will also ensure better transmission. This will do away with a captive market for government securities, and re-align the cost of borrowing to market determined rates. Every segment of the yield curve will move to market-determined rates.
From a longer term perspective, it is measures such as these that will ensure efficient working of the monetary policy framework. Borrowers will not feel shortchanged when the RBI slashes the policy rate.