#12 Change is the only constant!

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Happy Independence Day to all of you! 🇮🇳

I was actually taking a much-needed break today, hence the late post. Hope you were able to make it feel like a normal holiday!

In other news, my work (an extract from my last post) was published on GoMedici. It’s the leading FinTech publication in the world. Check it out here.

Some personal thoughts from writing for another publication are captured at the end of the post, if you’re interested. In the meantime, let’s dive in! 🤓

Last week’s post on RBI MPC Announcements was pretty theoretical. Theory is good to a certain extent, to understand the concept, background or even the context. But that’s only glass half full.

Let us understand how banks ACTUALLY implement it. DCB Bank was the only one which had a conference call with analysts post the August 6th announcements. So we’ll take that example first.

On Restructuring

DCB Bank focuses mostly on MSME and business clients. So the CEO, Murali Natrajan, did not talk much about personal restructuring. But how do customers ask for it? Here’s an extract, verbatim:

Customer X: “I am paying ₹28,000 instalment. Can you reduce it to ₹24,000 or ₹22,000 and I am happy to work on the new schedule?”

Now if DCB agrees to this, the loan automatically doesn’t become classified as restructured. The borrower has to PAY the first instalment in the NEW schedule first. So if the agreement was ₹22,000, X has to pay that amount and THEN the loan account is restructured.

How are big banks taking it?

SBI Chairman Rajnish Kumar has clearly said that retail loan restructuring would mostly be for housing loans. Other banks are being vague. Axis Bank MD, Amitabh Chaudhry has said “If the right borrowers come along and asks for restructuring, we will of course step up and provide the restructuring” – now only he can define who the right borrower is!

On Gold Loan

DCB’s Bank’s secondary focus is on gold loans. (their first one is on home loans). In fact, our country’s largest lender, SBI, is eyeing a 3X growth in it’s retail/SME gold portfolio to reach almost ₹20,000Cr (it is around ₹6,000Cr now). Agriculture loan portfolio (depicted in pic below) is already around ₹57,000Cr.

Because of the huge deposits that SBI receives, it can offer competitive gold lending rates of around 7.5%, compared to other gold loan companies (non-banks) which start from 12%. Now although banks will be cautious about the LTV ratio being increased to 90% (explained in last post), they ARE using it.

Consider Jana Small Finance Bank for example. Sandeep Arora, Head of Marketing at the bank has already announced that they’re offering gold loans at 90% LTV. The screenshot below is from their website.

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So why are banks doing this?

  • Gold loans are less riskier than other loans because it is backed by collateral (gold ornaments) and the ticket size is small (less exposure to a single borrower): if you offer the right terms and focus a little bit on distribution/marketing, it can pay off well!

  • Advantage over other players: Borrowers generally avoided banks because of stricter documentation, so much, that they were willing to pay higher rates. Now the documentation is still there, but with increased LTV ratio, banks can offer better terms.

I’ll be looking for other practical examples to show you if ground realities are reflecting the fine print.

Yesterday, the Board of RBI (yes, they’re answerable to someone too!) met for the 584th time to discuss certain internal affairs, some of which I’ll highlight below. (Did you know that the details of this discussion are being released to the public only since the 579th meeting!)

  • Discussed the proposal of setting up an Innovation Hub. If you don’t know what that is, I covered it in detail in my last post.

  • Approved the Annual Report. This is due to be released at the end of August. RBI, unlike other companies, until now, had a financial calendar from June-July. From next year, it will be move over to a April-March calendar. This decision, was in fact, taken just two meetings prior to this one.

  • The Board approved the transfer of ₹57128 crore to the Government. Here is where it gets interesting. So every year, RBI transfers some of it’s profits to the Government. Why? Well, it is owned by the Government after all. So these transfers are also called “dividends” sometimes; just like a company pays to its shareholders. These dividends have averaged around ₹50k Cr each year, as you can see below:

As you can see, last year was an anomaly. And as expected, it caused a lot of drama. Hundreds of news articles went into overdrive mode to explain it. This is the one I had liked the best. I highly recommend; but here’s the TLDR version:

Government always thinks it should get more. RBI (and certain economists) think they should shell out less. It’s really a never-ending debate.

This year, the Government had expected ₹60,000Cr (as estimated in the Budget). But many think that RBI should have transferred more considering Budget was released before the true extent of coronavirus was realised. As soon as RBI releases their Annual Report, I’ll make sure to tell you if it could have done that!

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This week we talk about LIBOR.

No, it’s not a country. It’s called the London InterBank Offered Rate. Ignore the long name, it’s simply an interest rate. For about 50 years, LIBOR has helped determine the cost of borrowing around the world, from student loans and mortgages to interest-rate swaps and collateralized loan obligations (CLOs)

What is it used for? How is it calculated?

If the graphic above isn’t clear, it’s basically a rate which a couple of banks use to borrow and lend cash from/to each other.

How important is LIBOR?

The picture below is from 2018. As of today, the LIBOR market i.e. all the transactions that happen using LIBOR as the benchmark rate is well over $240T. To give you a comparison, the size of the global economy is $142T. More than that, almost all countries use some version of LIBOR. In India, we have MIBOR.

Why are we talking about it now?

From next year, banks will no longer use LIBOR. Why? Because since 2012, banks have been found manipulating this rate to make illegal profits! Barclays (and other banks) were fined billions of dollars!

What will banks use now? How is it different?

SOFR (Secured Overnight Financing Rate). It is different from LIBOR because:

  • It uses market rates (LIBOR was a rate decided by banks)

  • It only provides ONE overnight rate (LIBOR had different rates for different maturities from 1 day to 1 year)

  • It is a secured rate (backed by collateral; LIBOR was unsecured)

So no disadvantages?

There is. The overnight rate which is based on has been known to be volatile. Many people suggested fixing LIBOR rather than moving to a different rate altogether.

Also, as the theme of our article, banks are resistant to change. The transition has been happening for more than two years now (last date is 31st Dec, 2021). Let us hope that to remove one uncertainty (LIBOR), we don’t invite more!

International

  • Coronavirus beat up almost all bank stocks. This particular Euro digital bank prospered. Why? Because of it’s investment advice division. Also shows how much costs you save when you don’t operate a traditional branch network.

  • It seems legendary investor Warren Buffett is dumping bank stocks and hoarding gold. Apart from his love for Coke and sweets (yes, he’s turning 90 after 15 days but is still a child at heart), he also has a penchant for banks. His JP Morgan stake is down 62% and Wells Fargo down 26%. But fret not, he has also bought Bank of America shares recently, which mostly indicates that it’s more about the company than the sector!

  • Does Google want to be a bank?

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National

  • ICICI Bank has successfully raised ₹15,000 Cr from big shot investors like the Morgan Stanley, SocGen and the central bank of Singapore. Money, as usual, would be used to strengthen the capital of the bank and remain super competitive!

  • Fino Payments Bank posts a profit of ₹11Cr in Q1. Don’t laugh at this number. Most payments banks run in losses, as I had explained in my special piece. The company has been doing quite well, despite Covid. I had covered short thoughts on their strategy on Twitter. If you want to watch the full interview of CEO Rishi Gupta, click here. (hat tip: Rahul)

  • Arti Singh has penned an excellent piece highlighting the ground realities of how FinTechs are not really receiving the promised funding from RBI. (paywall)

Hope you did not directly scroll here without reading the article 🙈

So essentially, I realised two things:

  1. Importance of independence: GoMedici is a FinTech platform. I had to edit and draft my original article to suit it’s theme. I don’t have that restriction on Bank on Basak; I can write on whatever I feel like and sometimes, even incorporate subscriber feedback!

  2. Importance of support: GoMedici has an entire content team which edits, proofreads, adds graphics on articles – all within a matter of a few hours! My publication is a one-man job. Although I don’t want monetary support, I would still need your help in reaching out to more people! So do me a favour and share it with ONE person who you think should read my blog? Thanks!

    Share Bank on Basak

P.S. I also realised that graphics go a long way in helping readers understand a topic. As workload builds, I will have fewer time to create them myself. So I’m looking for a freelance designer to help me with some basic illustrations each week; that way, I have more time to focus on the content. If you’re interested, do reach out to me at anirudha@bankonbasak.com

P.S. You can also connect with me on LinkedINTwitter (these are two places where I post whatever that interests me) or on Quora (where I try to help people with their queries related to the banking sector).

*Boring, yet an important disclaimer: Views/opinions expressed in this entire article are solely my own and not of my employer.





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Anirudha Basak
Anirudha is immensely passionate about finance, economy, businesses, personal finance, and of course, banking. He has an MBA in Finance from XIMB.
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