The RBI knows now that raising interest rates isn’t likely to help. But that’s all they can do really – the solution needs to be political. A number of things I’ve heard suggest the situation won’t get better very soon
NREGA is exacerbating it. Most harvest season hires are temporary workers, who now have permanent paying jobs with NREGA and therefore don’t want to bother harvesting. Farmers have reacted by reducing crop acreage; supply shortfalls will increase when the pattern applies country-wide.
Sharad Pawar talks his shop – people loyal to him take cues from what he says and raise prices when he suggests any commodity is under supply stress.
The middlemen in the food supply chain, politically very strong, have been hoarding; and the politicians are helping by not flooding the market with the FCI stored resources (of which 40% are wasted!)
There was a drought last year, which constrained supply. Not much of a drought, but it doesn’t take much to fuel a panic.
Food is a very small portion of our monthly expenses considering you dont own an apartment are living on a rental basis, about half of the rent we would normally pay if we dont own a house, so even a 30% increase isn’t going to kill you. But it hurts the poorest of the poor; while as a nation we don’t care about our poor, it is simply inhuman to let them starve while we consider stupid things like raising interest rates. Even if they don’t starve, the high prices of certain items makes them undernourished as they can’t afford what’s nutritious. It’s not yet too bad but it’s progressively getting worse. With oil prices set to increase this WPI looks like it’s only headed one way: UP
Winston Dsouza
Tuesday, February 16, 2010
Thursday, February 11, 2010
RBI Mandates Single Base Rate for Banks
RBI has decided to curb the current practice of banks using different benchmark rates for different customers. From April 1, 2010 all banks will have to use a single base rate that will be the reference rate for all customers:
The Base Rate system will replace the BPLR system with effect from April 1, 2010. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance;and (iv) profit margin. An illustration for computing the Base Rate is set out in the Annex
The actual lending rates charged to borrowers would be the Base Rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium.
All categories of loans should henceforth be priced only with reference to the Base Rate. The Base Rate could also serve as the reference benchmark rate for floating rate loan products, apart from the other external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the Base Rate at the time of sanction or renewal.
Since the Base Rate will be the minimum rate for all commercial loans, banks are not permitted to resort to any lending below the Base Rate.
The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal. However, if the existing borrowers want to switch to the new system before the expiry of the existing contracts, in such cases the new/revised rate structure should be mutually agreed upon by the bank and the borrower.
This is significant – many banks have had this kind of funda:
• Lure a customer using a fundoofied low interest rate like 7.25% floating
• Make the paperwork such that the loan adjusts with respect to a benchmark rate called “Home Loan Benchmark”, say 200 basis points below it. Set this benchmark rate at 9.25%.
• When the customer’s signed up and paid for a few months, INCREASE this Home Loan Benchmark rate slowly – to 10%, then 11% etc.. The customer now has to pay 200bps lower.
• Most customers won’t care because you will increase the tenure of the loan rather than the EMI. They are too busy or ignorant to realize that they are paying 10% more interest to the bank over the term of the loan if the loan tenure is extended, for each 0.25% increase!
• Example: 30 lakh loan for 20 years at 7.25% is 23,711 a month, and you pay Rs. 27 lakhs in interest over 20 years. If they bump up the rate to 7.5%, and keep the EMI the same, you’ll pay it for 20 years 11 months; the amount of interest you pay, though, goes up to 29.4 lakhs, or 9.36% more. Screw that – you pay 3% interest in the first year.
• But this means you can’t snare the new suckers – who want low interest loans. So instead of losing that juicy extra income from the already trapped customer, you create a different benchmark called “NEW Home Loan Benchmark” and offer loans at 7.25% only to new customers. That way you can milk the older customers who have no choice but to pay, and get new customers at lower rates.
• Your older customers can’t run off easily; you set up a pre-payment penalty.
This is at the retail end. At the corporate end banks were killing each other by offering rates way below the BPLR benchmarks (one of the many numbers) and since there is no “bottom” banks could simply lowball each other to whatever end.
A fixed base rate will solve some of these problems – all loans, corporate or retail, must benchmark themselves to the base rate. (Note: Floating rate products can take on external benchmarks also – but that’s good enough if the bank doesn’t control the external benchmark. )
What this will do though, is show you the huge spread between what is offered to corporates and what you and I get. Where corporates can get loans at 7%, we can only get them at 10% or more; once they put in the base rate at 7% we get some negotiating room to eke out a better rate. But honestly most borrowers will be too ignorant to even check a bank website for it’s current base rate, so who am I kidding. All it will do right now is create a more competitive environment for certain banks.
Public sector banks are most certainly going to benefit – they didn’t indulge in these kinds of practices. Private banks are going to see margin erosion. I hope they make pre-payment penalties illegal too – then private banks are hosed. But there are ways to make money – not as much as before but still, good money – for banks, and I hope they come around and offer better products instead of trying to squeeze the last naya paisa from customers.
Winston Dsouza
The Base Rate system will replace the BPLR system with effect from April 1, 2010. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance;and (iv) profit margin. An illustration for computing the Base Rate is set out in the Annex
The actual lending rates charged to borrowers would be the Base Rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium.
All categories of loans should henceforth be priced only with reference to the Base Rate. The Base Rate could also serve as the reference benchmark rate for floating rate loan products, apart from the other external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the Base Rate at the time of sanction or renewal.
Since the Base Rate will be the minimum rate for all commercial loans, banks are not permitted to resort to any lending below the Base Rate.
The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal. However, if the existing borrowers want to switch to the new system before the expiry of the existing contracts, in such cases the new/revised rate structure should be mutually agreed upon by the bank and the borrower.
This is significant – many banks have had this kind of funda:
• Lure a customer using a fundoofied low interest rate like 7.25% floating
• Make the paperwork such that the loan adjusts with respect to a benchmark rate called “Home Loan Benchmark”, say 200 basis points below it. Set this benchmark rate at 9.25%.
• When the customer’s signed up and paid for a few months, INCREASE this Home Loan Benchmark rate slowly – to 10%, then 11% etc.. The customer now has to pay 200bps lower.
• Most customers won’t care because you will increase the tenure of the loan rather than the EMI. They are too busy or ignorant to realize that they are paying 10% more interest to the bank over the term of the loan if the loan tenure is extended, for each 0.25% increase!
• Example: 30 lakh loan for 20 years at 7.25% is 23,711 a month, and you pay Rs. 27 lakhs in interest over 20 years. If they bump up the rate to 7.5%, and keep the EMI the same, you’ll pay it for 20 years 11 months; the amount of interest you pay, though, goes up to 29.4 lakhs, or 9.36% more. Screw that – you pay 3% interest in the first year.
• But this means you can’t snare the new suckers – who want low interest loans. So instead of losing that juicy extra income from the already trapped customer, you create a different benchmark called “NEW Home Loan Benchmark” and offer loans at 7.25% only to new customers. That way you can milk the older customers who have no choice but to pay, and get new customers at lower rates.
• Your older customers can’t run off easily; you set up a pre-payment penalty.
This is at the retail end. At the corporate end banks were killing each other by offering rates way below the BPLR benchmarks (one of the many numbers) and since there is no “bottom” banks could simply lowball each other to whatever end.
A fixed base rate will solve some of these problems – all loans, corporate or retail, must benchmark themselves to the base rate. (Note: Floating rate products can take on external benchmarks also – but that’s good enough if the bank doesn’t control the external benchmark. )
What this will do though, is show you the huge spread between what is offered to corporates and what you and I get. Where corporates can get loans at 7%, we can only get them at 10% or more; once they put in the base rate at 7% we get some negotiating room to eke out a better rate. But honestly most borrowers will be too ignorant to even check a bank website for it’s current base rate, so who am I kidding. All it will do right now is create a more competitive environment for certain banks.
Public sector banks are most certainly going to benefit – they didn’t indulge in these kinds of practices. Private banks are going to see margin erosion. I hope they make pre-payment penalties illegal too – then private banks are hosed. But there are ways to make money – not as much as before but still, good money – for banks, and I hope they come around and offer better products instead of trying to squeeze the last naya paisa from customers.
Winston Dsouza
US Trade Deficit increases to $40.2 Billion
A Brief Look at the US Trade Deficit
Total December exports of $142.7 billion and imports of $182.9 billion resulted in a goods and services deficit of $40.2 billion, up from $36.4 billion in November, revised. December exports were $4.6 billion more than November exports of $138.1 billion. December imports were $8.4 billion more than November imports of $174.5 billion.
The first graph shows the monthly U.S. exports and imports in dollars through December 2009. Both imports and exports increased in December. On a year-over-year basis, exports are up 7.4% and imports are up 4.6%. This is an easy comparison because of the collapse in trade at the end of 2008.
The second graph shows the U.S. trade deficit, with and without petroleum, through December. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.
Import oil prices increased to $73.20 in December - up 87% from the low in February (at $39.22). Oil import volumes were up sharply in December. Overall trade continues to increase, although both imports and exports are still below the pre-financial crisis levels.
Winston Dsouza
The 34 Million
“Scary,34 million joined the ranks of the poor in India because of the recession that everyone was in denial of.UNDESA figurs"
I usually find these figures very global-warming type – meaning, highly suspect and jugaad methodology - so I thought I’d investigate. In the “World Economic Situation and Prospects, 2010” report, Page 35, they say:
The reduction in employment and income opportunities [due to the slowdown] has led to a considerable slowdown in the progress towards poverty reduction and the fight against hunger. Estimates by the Department of Economic and Social Affairs of the United Nations (UN/ DESA) suggest that, in 2009, between 47 and 84 million more people have remained poor or will have fallen into poverty in developing countries and economies in transition than would have been the case had pre-crisis growth continued its course (table I.3). This setback was felt predominantly in East and South Asia, where between 29 and 63 million people were likely affected, of whom about two thirds were in India.
So the figures for Asia are between 29 and 63 million people – that is a huge enough range, and 2/3rd are in India, so for us it’s between 20 and 42 million people. 34m is somewhat in the middle if you are slightly mathematically challenged, but let’s not bicker about a few million here and there.
The important thing is how they arrived at it. They said – okay, India’s growing at 9%. If it continued to grow at 9%, then X number of people would be poor. But because of this slowdown, we have Y poor people, and Y is larger than X. Therefore, this figure Y-X is the number of people that have been reduced to poverty by the slowdown.
Let’s not talk X and Ys. Let’s talk real numbers.
Assume we had a 100 poor people. Let’s say that for every 1% growth, we reduced poverty by 1 person. So with 9% growth, we are left with 91 poor.
But we grew only 6%. So, post the recession, we have 94 poor people. 94 is less than 100. That might sound like a good thing. But no.
The UN-DESA way of looking at this – and their glasses must forever be half empty – is: recession did not take 3 people out of poverty, so 3 people got poorer.
Another way of looking at it is: 6 people got out of poverty. 6 is good. Even 1 is good, come to think of it, but 6 is definitely good. And it is wrong to focus on the 3 number.
For one, 9% growth was not sustainable; it was extraordinary. It was likely to be 6-7% averaged over years, so one year we’d do more, another we’d do less. Extrapolating a pre-crisis growth figure is silly; in that way, I could extrapolate the “Hindu Rate of Growth” of 3% pre-1992 and say damn, 600 million people are out of poverty today since 1992 because we grew more than expected.
Second, the focus on the smaller figure throws real achievement out the window. There are no real figures in that sheet – but I can imagine that if this calculation yields 34 million “poorer”, then the absolute number of people we got out of poverty must then exceed 60 million. That means, we got 6 crore people out of poverty, post recession – less than the 9 crore we expected. That statement paints an entirely different picture.
Finally, I must say the statistics are screwed up because it uses per-capita income to determine poverty levels – yet, if money was earlier more concentrated in a few rich people, and post recession got better distributed among the entire population, the poverty figures UN-DESA quotes will be overstated. They acknowledge this, though:
It should be noted that the estimates presented here take into consideration the impact of the downturn only on growth in income per capita compared with continued pre-crisis trends. Hence, these should be interpreted in the first instance as a slowdown in poverty reduction owing to a drop in the mean per capita income of developing countries. For lack of additional information, the estimates do not take into account likely changes in income distribution.
That statistic is simply gleaned from macro-figures. We aren’t told how many people are really poor (buying power wise), how many of these are urban/rural, how many are in organized/unorganized sectors, what’s the birth/death impact and how the numbers are moving. Those stats may tell us where we need to focus, where achievements are good and where we can improve. What we can’t afford is to have global statements like “the recession made 34 million people poorer” – because it is a hollow statement with conveniently extrapolated matter, and yields nothing. It truly makes us poorer.
Winston Dsouza
I usually find these figures very global-warming type – meaning, highly suspect and jugaad methodology - so I thought I’d investigate. In the “World Economic Situation and Prospects, 2010” report, Page 35, they say:
The reduction in employment and income opportunities [due to the slowdown] has led to a considerable slowdown in the progress towards poverty reduction and the fight against hunger. Estimates by the Department of Economic and Social Affairs of the United Nations (UN/ DESA) suggest that, in 2009, between 47 and 84 million more people have remained poor or will have fallen into poverty in developing countries and economies in transition than would have been the case had pre-crisis growth continued its course (table I.3). This setback was felt predominantly in East and South Asia, where between 29 and 63 million people were likely affected, of whom about two thirds were in India.
So the figures for Asia are between 29 and 63 million people – that is a huge enough range, and 2/3rd are in India, so for us it’s between 20 and 42 million people. 34m is somewhat in the middle if you are slightly mathematically challenged, but let’s not bicker about a few million here and there.
The important thing is how they arrived at it. They said – okay, India’s growing at 9%. If it continued to grow at 9%, then X number of people would be poor. But because of this slowdown, we have Y poor people, and Y is larger than X. Therefore, this figure Y-X is the number of people that have been reduced to poverty by the slowdown.
Let’s not talk X and Ys. Let’s talk real numbers.
Assume we had a 100 poor people. Let’s say that for every 1% growth, we reduced poverty by 1 person. So with 9% growth, we are left with 91 poor.
But we grew only 6%. So, post the recession, we have 94 poor people. 94 is less than 100. That might sound like a good thing. But no.
The UN-DESA way of looking at this – and their glasses must forever be half empty – is: recession did not take 3 people out of poverty, so 3 people got poorer.
Another way of looking at it is: 6 people got out of poverty. 6 is good. Even 1 is good, come to think of it, but 6 is definitely good. And it is wrong to focus on the 3 number.
For one, 9% growth was not sustainable; it was extraordinary. It was likely to be 6-7% averaged over years, so one year we’d do more, another we’d do less. Extrapolating a pre-crisis growth figure is silly; in that way, I could extrapolate the “Hindu Rate of Growth” of 3% pre-1992 and say damn, 600 million people are out of poverty today since 1992 because we grew more than expected.
Second, the focus on the smaller figure throws real achievement out the window. There are no real figures in that sheet – but I can imagine that if this calculation yields 34 million “poorer”, then the absolute number of people we got out of poverty must then exceed 60 million. That means, we got 6 crore people out of poverty, post recession – less than the 9 crore we expected. That statement paints an entirely different picture.
Finally, I must say the statistics are screwed up because it uses per-capita income to determine poverty levels – yet, if money was earlier more concentrated in a few rich people, and post recession got better distributed among the entire population, the poverty figures UN-DESA quotes will be overstated. They acknowledge this, though:
It should be noted that the estimates presented here take into consideration the impact of the downturn only on growth in income per capita compared with continued pre-crisis trends. Hence, these should be interpreted in the first instance as a slowdown in poverty reduction owing to a drop in the mean per capita income of developing countries. For lack of additional information, the estimates do not take into account likely changes in income distribution.
That statistic is simply gleaned from macro-figures. We aren’t told how many people are really poor (buying power wise), how many of these are urban/rural, how many are in organized/unorganized sectors, what’s the birth/death impact and how the numbers are moving. Those stats may tell us where we need to focus, where achievements are good and where we can improve. What we can’t afford is to have global statements like “the recession made 34 million people poorer” – because it is a hollow statement with conveniently extrapolated matter, and yields nothing. It truly makes us poorer.
Winston Dsouza
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