NEW DELHI: The Finance Ministry has asked Reserve Bank of India (RBI) Governor Raghuram Rajan to provide greater flexibility to banks funding stalled infrastructure projects, after concerns were raised by senior bankers that some lending requirements were too ‘stringent’.
A department of financial services communication to Rajan sought to de-link the extent of cost overruns as a condition for classifying any project as a restructured asset.
It also sought to allow lenders to decide the extent of funding, as well as the debt-equity ratio of the project, and the upfront contribution from promoters, finance ministry officials said.
In a circular dated August 14, the central bank had stipulated that banks could fund cost overruns for projects where the date of commencement of commercial operations (DCCO) had been extended by two years, without treating the loans as a ‘restructured asset’, provided that funding any cost overrun, excluding interest during construction, be capped at 10 per cent of the original project cost.
The circular also stipulated that debt-equity ratios agreed upon at the time of initial financial closure should remain unchanged subsequent to funding cost overruns or should improve in favour of the lenders.
The department is believed to have communicated that since the endeavour of the government was to ensure completion of stalled projects by creating an enabling environment, the RBI directive was counter-productive and should be relaxed, the officials added.
In the letter, the department also asked that the benefits of long-term loans based on the economic life of the projects be extended to existing projects where the DCCO had not been achieved.
According to another RBI guideline, effective from July this year, the tenor of the loan should not be more than 80 per cent of the initial economic life envisaged at the time of project appraisal.
This demand is similar to the one raised by State Bank of India (SBI) Chairperson Arundhati Bhattacharya in a communication to the RBI last week. Bhattacharya had asked that the 5/25 scheme be allowed for existing projects to relieve the stress on companies.
In the 5/25 structure, the bank could fix longer amortisation period (about 25 years) for loans to projects in infrastructure and core industry sectors, with periodic refinancing, say, every five years.
Such restructuring would enable loan repayment to be co-terminus with cash flows from the projects. It would also improve debt-servicing capacity and viability of the operational projects.
The department, meanwhile, is also believed to have asked the RBI to ensure a level playing field for Indian and foreign banks on the issue of raising funds through ECB (external commercial borrowing) to finance existing ECB and revolving term loans (RTL). Certain directives by the central bank have restricted Indian banks’ ability to offer foreign funding to their clients in some cases.
As a result of such directives, Indian banks are required to have incremental capital and provision requirement for the unhedged forex positions of their borrowers for financing extended by overseas branches, whereas foreign banks are not subject to this.
The department asked that the RBI consider allowing foreign branches of Indian banks to provide foreign currency funds in case of additional ECBs being used to refinance existing ECBs and RTL.
(Source: Business Standard, November 4, 2014)
PMO WILL DISCUSS RBI’S PROPOSAL TO HEDGE CRUDE IMPORT RISKS
NEW DELHI: The government is actively considering a Reserve Bank of India’s (RBI) proposal to hedge crude oil import risks at a time when international crude prices have slumped close to the lowest in nearly four years, which could significantly reduce country’s over $155 billion petroleum import bill.
The Prime Minister’s Office has called a meeting on this matter this week, which will be attended by top government officials, official sources said. Globally, energy firms resort to hedging to shield themselves from highly volatile international crude oil market.
Crude oil prices have dropped by over 20 per cent since June this year. Brent crude, which fell to $82.60 per barrel on Oct 16 has risen to around $85. But, state refiners are skeptical. Global oil markets are highly volatile and no one can predict that rates have bottomed out. They are concerned about big losses if prices fall again after they lock supplies at the current rate. India imports about 80 per cent of crude oil it processes.”
How can you take any definitive position in highly volatile commodity like crude? Similar situation took place about five years ago when its price dropped to below $40 per barrel by in January 2009 from a peak of about $140 in June 2008,” an IOC executive said requesting anonymity.
Earlier, the parliamentary standing committee on petroleum and natural gas had rebuked state oil refiners for not hedging. It said questioned Indian Oil Corp (IOC), Hindustan Petroleum Corp (HPCL) and Bharat Petroleum Corp (BPCL) for shying away from hedging volatility risks when they purchase over 20 per cent of their requirements from the spot market.
“We usually hedge for refining margins, which is difference between crude price and product price. Hedging crude prices in large quantity is not often prudent. Delivery of crude to our refineries takes about 40 days, which makes hedging more risky.
At best, we can take options with floor and ceiling. But, that will attract huge premium. I believe, government and companies are in best position to take a view on this matter,” former IOC Chairman RS Butola said.
Chief executive officer of a private-sector refiner said “hedging is dynamic and it is a function of perception and timeframe.
It may or may not give desired results. Public sector companies will opt for hedging only if the government will give definitive instructions as they are subject to tough audits.”
India’s current refining capacity is 215 million tonnes, including 89 MT private refining capacity.
State oil firms undergo stringent audit by CAG.
“If a private refiner hedge and lose heavily, nobody would blame its management, but if we make losses, we will be hounded even post-retirement,” a director in a state oil firm said.
RBI permits oil companies to hedge price risks on crude and petroleum products on overseas exchanges and markets.
But, Indian firms prefer long-term contracts while purchasing crude oil.
They, however, meet about 20 per cent their crude oil requirements through spot markets.
(Source: The Economic Times, November 4, 2014)
GS SANDHU SHUNTED OUT OF FINANCE MINISTRY; HASMUKH ADHIA MOVES IN
GANDHINAGAR/NEW DELHI: In yet another top level bureaucratic reshuffle, financial services secretary GS Sandhu has been shifted out from the finance ministry, marking removal of yet another UPA appointee to the North Block.
Hasmukh Adhia, a 1981 batch IAS officer currently posted as additional Chief Secretary Finance in the Gujarat government will replace Sandhu, a 1980 Rajasthan cadre IAS officer who has been made Chairman of National Authority for Chemical Weapons Convention. “The Appointments Committee of the Cabinet has approved the appointment of Shri Hasmukh Adhia, IAS , at present in the cadre, as Secretary, Department of Financial Services,” the government said in a statement.
Nearly 50 officers have been transferred or promoted by the Modi Government on Monday night.
Last month the government had shifted economic affairs secretary Arvind Mayaram to secretary in the minority affairs ministry, bringing in his batchmate Rajiv Mehrishi to this crucial position.
The team of secretaries at finance ministry’s now has a completely new look with only the one UPA appointee Ratan P Watta, secretary, department of expenditure, remaining in North Block.
Adhia has a post graduate degree in accounting and a gold medallist from IIM apart from a doctoral degree in Yoga from Swami Vivekanada Yoga University, Bengaluru. Adhia had been Principal Secretary Education before present posting as the ACS Finance in state government and had been Principal Secretary to the Chief Minister Gujarat from May 2004 to May 2006.
The development comes after his batchmate DJ Pandian was appointed as the Chief Secretary of Gujarat last week. He is also credited with the success of Narendra Modi’s pet Karmayogi Abhiyan, which was targeted towards enhancing the efficiency of the bureaucrats.
Anjuly Chib Duggal, 1981 batch IAS office, has been appointed as special secretary in the expenditure department of the Finance ministry. She was additional secretary in the same department. Many other secretaries in the 1981 batch of IAS have been elevated to secretary level and await appointments. In all these cases the posts currently held by the 1981 IAS officials have been temporarily elevated to secretary level.
Vijay Shankar Madan, the DG and Mission Director of UIDAI will now get the rank and pay of a Secretary to the Government of India. There have been 20 more Joint Secretary level appointments announced on Monday night as well by the Government. In all 26 1981 batch officials have been given secretary rank.
(Source: The Economic Times, November 4, 2014)
PMO MEETS COMMERCE MINISTRY, PLANS A WTO ‘PEACE CLAUSE’ PROPOSAL
NEW DELHI: The Prime Minister’s Office on Monday held a meeting with the commerce ministry on World Trade Organisation (WTO) negotiations in the wake of the readiness shown by the US to discuss India’s concerns on food security.
Although India is unlikely to retract from its stance on the issue, sources said, it is evaluating a proposal for “a perpetual peace clause” till a “permanent solution” is found on the issue of public stock holding for food security. A peace clause like this would ensure developing countries are not taken to world body’s dispute settlement panel even if their domestic support to farmers crosses the limits prescribed.
The WTO members had failed to meet the July 31 deadline for signing the protocol of Trade Facilitation Agreement (TFA), mainly due to India’s stance that an agreement on a permanent solution to the food security issue should be arrived at by December-end this year so that it can be implemented with the TFA and a package for least developed countries.
TFA was meant to ease global customs rules and add $1 trillion to the global economy in addition to creating 21 million jobs. India has since said it is not opposed to TFA, but added that while members engaged with commitment on TFA to quickly resolve issues, the same urgency was not shown on the issue of food security.
The Bali package had an ‘peace clause’ preventing WTO members from taking any developing country to the dispute settlement panel for violating the norms that the trade distorting domestic support should not be over 10 per cent of the total production.
Once the Bali package is amended to include such a clause, India will not then come in the way of signing the TFA, the sources said.
(Source: The Financial Express, November 4, 2014)
PSB DEPOSIT RATES CUT BY UP TO 100 BASIS POINTS
MUMBAI: Leading public sector banks have lowered some of their term deposit rates by up to 100 basis points as credit growth remains sluggish and liquidity in money markets has improved (100 basis points = 1 percentage point). The lenders who reduced deposit rates recently include the Bank of Baroda, Bank of India and Andhra Bank. The State Bank of India, ICICI Bank and Central Bank of India had revised rates earlier last month.
“We have been able to bring down interest rates on deposits because we hold surplus investments in government securities. The expectations of a reduction in interest rates have resulted in an improvement in the prices of bonds and we can liquidate our investments at a profit,” said C V R Rajendran, chairman, Andhra Bank. He said there was an expectation that the Reserve Bank of India will signal lower interest rates in its forthcoming monetary policy in December.
Data released by the RBI shows that bank credit growth has improved to 11% as on October 17 but continues to underperform growth in deposits which have risen by 12.6%. A fortnight earlier, bank credit growth was struggling at 9.7% even as deposit growth was in excess of 13.4%. Sectoral data shows that advances to businesses are growing in single digits and it is largely the personal segment that is driving credit growth for most banks. Bank credit to industry grew 6% by Rs 1,42,700 crore year-on-year up to September 19. As against this, bank credit to personal loan segment grew 13% (Rs 1,254 crore) during the same period.
According to Rupa Rege Nitsure, chief economist & general manager, Bank of Baroda, although deposit rates have moved down marginally this may not translate into a drop in lending rates. “Banks are conscious of their capital constraints; their interest margins have been under pressure and risk premium on advances continues to remain elevated. Although inflation has moderated, it is too early to say whether the trend can be sustained.” She added that she did not expect a rate cut in December and the RBI too has been sending cautious signals by selling bonds whenever yields have fallen in recent days.
One of the reasons why liquidity is expected to remain easy in India is continued monetary easing by the European and Japanese central banks.
“This implies that global investors will continue to hunt for attractive carry among the fundamentally strong emerging markets. We reckon that India will be in a strong position to attract foreign flows if it continues to pursue structural policy adjustments,” said Kotak Economic Research in a report here on Monday.
(Source: The Times of India, November 4, 2014)
