BS Reporter / Mumbai Dec 19, 2012, 00:58 ISTThe Reserve Bank of India ( RBI) has indicated a coming change in its monetary policy to a more growth-oriented one in the fourth quarter, fuelling expectations of a rate cut cycle from January. However, bankers said the cost of funds needed to come down for the effective lending rate to reduce.
In Tuesday’s mid-quarter review, the central bank refrained from cutting the repo rate, at which it lends to banks. It also left the cash reserve ratio ( CRR), the proportion of deposits that banks need to keep with RBI as cash, unchanged at 4.25 per cent. Reduced by 50 basis points (bps) in April, it was kept unchanged in the following five policy meetings due to inflationary pressures.
“We have our asset liability committee meeting on Tuesday and will take a view on the rate cut. Whenever the CRR was cut adequately, we passed on the benefit to our customers through a rate cut. Since there is no CRR cut this time, there is nothing to pass on,” said Pratip Chaudhuri, chairman, State Bank of India ( SBI).
According to bankers, though the cost of funds on wholesale deposits has come down by 150 bps over the past nine months, there is very little reduction of retail liabilities. As a result, the impact on overall cost of funds is only 50 bps over the past few months. Following the reduction in CRR by 175 bps since January, banks have reduced their base rate – the reference lending rate to which all loans are linked – by 15-25 bps since April.
In addition, some public sector banks such as SBI and Union Bank of India have reduced their spreads on different loan segments, including housing and automobile loans, which brought down effective interest rates.
Looking ahead
“The movement in lending rates happens with the movements in cost of funds. It’s too early to say what will happen in January. Having said that, starting from the next quarter, interest rates should be on a downward trend. How fast, how sharp, how early, it’s all very difficult to say,” said Chanda Kochhar, managing director, ICICI Bank.
Bankers said the cost of funds will only come down if the tight liquidity conditions ease. While attributing the tightness to slow government spending, RBI Deputy Governor Subir Gokarn said the central bank will infuse liquidity, if needed, by buying bonds via open market operations.
“As of now, the liquidity is tight. Money supply hasn’t grown in line with what RBI has said. If there is substantial liquidity, it should mean something like LAF (Liquidity Adjustment Facility) borrowing (daily) of Rs 20,000-30,000 crore. Then, the cost of funds could change. There is a very clear mechanism that if the cost of funds change, we change the base rate. We are very conscious about the consumer responsibility,” said Aditya Puri, managing director, HDFC Bank.
Banks’ lack of interest in reducing the deposit rate is also due to the slow pace of deposit mobilisation, the growth of which was lower than credit growth. In the current financial year, while credit expanded about 17 per cent on a year-on-year basis till November 30, deposit growth was 12.8 per cent during the period.
According to Debabrata Sarkar, chairman and managing director, Union Bank of India, apart from high inflation, alternative investment options such as gold and real estate have contributed to the slower pace of deposit accretion.
Going ahead, bankers hope RBI will start cut lending rates from January as inflation exhibits a declining trend. “In the first quarter of 2013, inflation will start to head down and RBI would be more accommodative on the policy rate cut. What RBI has done on Tuesday was within the expectations of the Street,” said Gunit Chadha, Co-CEO, Asia Pacific, Deutsche Bank.
Wholesale Price Index inflation fell to 7.2 per cent in November, mainly owing to softening of prices of vegetables, minerals and fuel, though those of cereals and protein-based items such as eggs, fish and meat firmed up further, the central bank said.
“Significantly, core (non-food manufactured products) inflation eased, aided by a decline in prices of metals, cement and chemicals. The seasonally adjusted three-month moving average annualised momentum indicator also points to ebbing of inflationary pressure,” RBI said. Lower inflation, it said, would provide space for a growth-focused policy stance.
http://www.business-standard.com/india/news/for-rates-to-fall-costfunds-needs-to-come-down-first-say-bankers/496086/
Riding on its recent success with the PSU banks, FIS is looking to capitalise on channel integration and ATM management. By Mehak Chawla
About a decade back, technology in banking was mostly about putting a stable core banking system (CBS) at the backend. Today, with an array of supporting and complimentary systems coming in, it is all about integration. This widespread integration that almost every bank is struggling with, is what is driving the bread and wine of the banking tech vendors.
Keeping in line with the trends, FIS, the global banking solutions company is also investing a lot of its energy in developing systems to support the alternate channels of banking. "CBS was moving banks from a manual processing era to a digital processing era. It was mostly focused on running the Loans Deposits and basically the back end of the bank. What's happening now is that business are transitioning beyond core. The next step beyond core is around channels," explained Raja Gopal Krishnan, Group Managing Director Asia, FIS Global.
About 10 years back there was only one channel and that was the branch. Today, that number has multiplied to ATMs, POS, Mobile, Internet, call centres, peer to peer, and other emerging channels. The next wave in banking has to be in channels, across the globe. Electronic payments is a big element of this transition happening in the banking arena. According to Krishnan, any economy that is growing rapidly, has to move towards electronic payments- both through channels as well as enablement through cards.
 “It is the integration of these multiple channels that we make a living on," commented Krishnan. In a typical bank's IT infrastructure, all channels feed into the core banking. "What we do is make these CBS and we also make middleware which is the Xpress Integration Solution Suite. Each of these channels talk to the CBS, but each of these channels are also a different solution. We have our flagship multi channel integration programme called Touchpoint. Integration across channels is a key things banks are looking at today," elaborated Krishnan.
Point solutions
India has a density of about 78 ATMS per million, which is paltry when compared to 1300 ATMs per million in the US. Though financial inclusion is set to change that figure, and densification is set to increase, the ATM tech in India is fairly mature. However, the story for mobile and Internet is different. There are about 900 million mobile handphones in the country, only about 75% of them active but there are only 70-75 million subscribers who actually access the Internet on their mobiles.
As a result, banks are struggling with two things how to ensure that the mobile offering that they have is geared not towards only those 70 million, but also for those 700 million that do not have smartphones yet. And secondly, how to lower the costs per transaction while serving the larger base with less sophisticated apps.
Given the macro economic scenario, the banks in India are spending more on point solutions and mostly on non-discretionary expenses. banks are more focussed on point solutions. Our value proposition is to move them to integrated solutions. It is eventually about the TCO and being future proof on top of a versatile technology.
PCI-DSS is one element that is calling for investments in the BFSI sector, primarily because it is about compliance. Banks however, are doing more targeted compliance rather than buying the whole range of products and thus point solutions are gathering momentum.
FIS, who spent some $300 million on R&D on its products last year, is looking to tap these multi banking channels. Krishnan explained that though the buying patterns of banks may be affected as of now, the technology spending is happening nevertheless. ?anks are very big users but not creators of technology. So, for serious software there is never an in-house versus buy debate. Yes, there is the challenge of legacy systems and their up gradation versus the rip and replace approach. In the specialised software space, no one is doing in-house.”
According to Krishnan, the big debate in the Indian banking industry right now is around buy versus outsource. India is still a largely on own the software in-house models. We are beginning to gravitate towards outsourced model in payment switching and of course the whole ATM outsourcing model which was pioneered in India.”
He added that a mid-sized bank would be looking at Rs 1-5 Crore for the middleware and the software to plug it in. As far as the integration layer goes, a mid sized bank could spend as much as 10 Crore on it and it can go all the way up to Rs 100 Crore for a large bank.
The RoI, according to Krishnan, lies in two things- that the cost of contact through electronic channels is way lower than cost of contact or servicing through the branch, and the migration of transaction from a higher cost channel to a lower cost channel.
Krishnan opined that technology trends like mobile wallets etc could pick up in India but they will be a function of mobile payment gateway security, of the risk that customers will perceive and eventually it will also be a question of transaction cost.
Thanks to this growing mobile and Internet population, banks, sooner than later, may feel the need to upgrade to more sophisticated systems because today they are catering to a largely non smart phone population. That is set to change and when a bank needs to provide full service solutions on the mobile, up gradation is natural. "Apps are out but eventually there will be a segregation of customers based on system of more bells and whistles for advanced customers versus basic system for the other set. Banks will continue to run these two different streams," said Krishnan.
Krishnan was also of the opinion that banks in India are increasingly evaluating the Cloud, and that in turn is making the vendors take Cloud into account while building their solutions.
India pipeline
FIS has just signed contracts worth over half a billion dollars with the Indian government for ATM outsourcing. Under the agreement, FIS is set to deploy and manage more than 5,500 ATMs in India. This deployment is part of a pan-India ATM rollout that will be undertaken by a consortium of public-sector banks over the next two years. By end of 2014 the company expects to have over 10,000 ATMs under management,said Krishnan. India is one of the fastest growing markets for us, we have had a CAGR of over 30% in the last 5 years. We have invested heavily in India, in terms of own offices as well as for the ATM business,he added.
FIS is currently the top company on FinTech 100, an annual international listing of the top technology providers to the financial services industry, and has over 33000 employees globally out of which 7000 are in India. A lot of development work is also happening out of India.
The company's biggest markets in Asia are India, Australia and Thailand followed closely by China and Singapore. Going ahead, FIS is aiming to make deeper inroads into the Indian banks. "Over 50% of top 30 banks are our customers. We certainly want to go after the others," remarked Krishnan.
According to him the biggest challenge in India is analysing how the market is going to evolve. " You have to make sure your tech is timed right rather than coming ahead of the curve. The key lies in developing tech that is going to be relevant five years from now," summed up Krishnan.
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