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| After HDFC, State Bank of India (SBI) has now raised fixed rates on home loans. |
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| SBI has increased the rates by 25 -50 basis points depending on the tenor, raising the band to 8-9 per cent from 7.75 to 8.5 per cent. Earlier, HDFC had raised its fixed rate by 25 basis points to 7.75 -8.5 per cent. |
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| What has prompted SBI to hike its fixed rates, when most housing loans are at floating rates? If rising cost of funds is a problem, raising interest rates only on the fixed-rate housing loans would not make much of a difference, since they account for a small portion of its assets. The answer lies in the fact that incrementally, fixed rate housing loans have gone up to around 20 per cent of all housing loans, compared to around 5 per cent last fiscal. |
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| For example, HDFC's ratio of fixed to floating loans in the first quarter of the current fiscal was 82:18, compared with 92:8 in Q1 last year. What's more, in value terms the ratio was 75: 25 in Q1 this year, which means that the proportion of high value loans at fixed rates was higher. |
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| Floating rate loans are good for banks, since they pass on the interest rate risk to borrowers. Hence the move to discourage fixed rate borrowing, a move buttressed by the steep fee levied for switching from floating to fixed. |
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| Over the past four years, rates on housing loans have dropped by 675 basis points compared with a fall of 580 basis points in the 10-year bond. An upward correction in home loan rates is starting to happen. |
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| Rising rates"" impact on banks, PFs |
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| Banks are being hit irrespective of whether they go long or short in the bond market. Most of the discussion has so far been on the hit that they may have to take by marking to market their investment portfolios. And since long-term bonds are the worst-hit, banks are scrambling to reduce the duration of their investments. |
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| For instance, IndusInd Bank's current portfolio duration stands at 1.3 years, against 7.5 years as on March 31, 2004. Centurion Bank reduced the duration of the "available for sale" portion of its SLR portfolio down to 0.6 years in the quarter ended June 2004. |
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| However, this reduction in duration has resulted in lower yields. "Seventy to 80 per cent of our SLR portfolio is invested in treasury bills, which gives us an average yield of 5.1-5.2 per cent," said Moses Harding, executive vice president treasury, international operations and investment banking, IndusInd Bank. |
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| Shortening the duration of the portfolio, therefore, will also affect the interest income of the banks. Of course, this has to be viewed against the loss on depreciation "" in essence choosing the lesser evil. |
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| Provident funds on the other hand, are forced to invest as long as possible in order to ensure higher return on their investment portfolio. This is because they have to meet the administered 8.5 per cent rate of return. |
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| Even if they wish to invest short in expectations of a rise in interest rates, they are unable to do so as this would affect the average return at the end of the year, says Amit Gopal, senior vice president, India Life. |
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| Reserve Bank of India's bottomline |
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| RBI's annual accounts for the year ending June 30, 2004 show that even the country's central bank has taken a hit because of the fall in prices of its holdings of securities. That's one reason why RBI's profits were much lower in 2003-04 compared to the earlier year. |
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| For instance, profits booked on sale of securities were only Rs 2,322 crore in 2003-04, compared to Rs 4798 crore in 2002-03. The more important reason for the reduction in profit, however, is the big fall in interest on domestic securities. |
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| Now consider what's happened to RBI's balance sheet. From domestic assets being 58.1 per cent of total assets as on June 30, 1997, these declined substantially (see chart) as on June 30, 2004. |
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| In contrast, foreign currency assets and gold which stood at 41.9 per cent of total assets as on June 30, 1997, now stand at 89.1 per cent of total assets. |
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| This shift has occurred because of rising dollar inflows, dollar purchases by the RBI to prevent the rupee from appreciating, and the mopping up of the consequent rupee liquidity by selling government bonds""the process known as sterilisation. That's the reason why the RBI's holding of government bonds has declined while its forex assets have gone up. |
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| What has been the effect on the RBI's income? Average earnings as a percentage of average foreign currency assets was a mere 2.8 per cent in 2004, while earnings on average domestic assets was 5.9 per cent. |
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| So the RBI has been giving up higher-yielding assets for lower-yielding ones. That is the cost of forex reserves and the cost of sterilisation. Hence also the drop in RBI's profits. |
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| With contributions by Shobhana Subramanian, Freny Patel and Anita Bhoir |
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