Policy rate cuts transmission higher for depositors than borrowers

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Interest rates for borrowers and depositors have been on a downward march since February 2019, when the current easing cycle first began. But data from the RBI suggest that while the reduction in policy rates has not been entirely passed on to borrowers, depositors have seen deeper cuts on their returns, with the transmission being faster for them.

With the rate cycle expected to turn sooner than later, further transmission to borrowers seem unlikely, while depositors may begin to see higher returns when policy rates move up.

Further drop unlikely

While repo rate was cumulatively cut by 250 basis points (bps) since February 2019, the weighted average lending rates (WALR) on all outstanding bank loans fell by just 118 bps, until August 2021.

However, RBI’s sector-wise data on WALR (outstanding loans) reveal faster transmission of rate cuts in the lending rates for large industries, infrastructure, trade, and professional services — in the range of 181 to 226 bps, over March 2019 to August 2021. On the other hand, the WALR on retail loans such as housing, vehicle and education loans dropped only by 98 to 185 bps. MSMEs also saw a fall of just 182 bps in their WALR (outstanding loans).

In the past, the transmission of policy rate cuts to lending rates have been more sluggish, thanks to the banks’ reliance on internal benchmarks, that is, their own cost of funds. However, the RBI, in 2019-20, mandated banks to move to an external benchmark for select loan categories. These include all new floating rate personal or retail loans and floating rate loans to micro, medium and small enterprises (MSMEs).

Following this, the share of external benchmark-linked loans in total outstanding floating rate bank loans increased from 2.4 per cent in September 2019 to 32 per cent in June 2021. Owing to this, the WALR on fresh rupee loans offered by banks, dropped by 190 bps (vs 118 bps on an overall level) during February 2019 to August 2021. However, with Marginal Cost of Funds Based Lending Rate (MCLR) based loans still accounting for a lion’s share of 60 per cent of overall floating rate loans, the transmission of rate cuts is slower on an outstanding loans level (118bps as discussed above).

Much of the funds that banks lend to borrowers comes from depositors – including low cost Current Accounts and Saving Accounts (CASA). On the other hand, banks’ reliance on RBI’s repo operations is as low as 10 per cent. The current share of MCLR-based loans – 60 per cent of outstanding floating rate loans – makes it more difficult for banks to pass on the repo rate cuts to borrowers.

Hence, industry experts feel much of the drop in interest rates has already been given effect to and a further drop is highly unlikely.

 

Upturn to help depositors

With inflation data in the US for October coming in at a 31-year high of 6.2 per cent, markets in the US are now pricing in two rate hikes next year as against zero expectations of a hike a few months back.

In India, too, core inflation continues to remain sticky. Domestic inflation apart, the RBI may also have to consider interest rate hikes to defend the domestic currency. Given these factors, a turn in the interest rate cycle in India is expected sooner than later. This may be good news for depositors as, compared with lending rates, deposit rates move faster with change in policy rates. In the ongoing down cycle, weighted average domestic term deposit rates were slashed by 180 bps from February 2019 to August 2021, which is higher than the fall in lending rates during the same period.

Basis the data compiled by Bankbazaar.com on interest rates offered on bank deposits, the rate reduction of deposits of private banks was in the range of 75 to 285 bps on deposits with a tenure of less than two years compared with just 110 to 160 bps decline in rates offered by public sector banks, for similar tenures, during the same period.

Deposit rates of small finance banks too fell sharply — in the range of 175 to 275 bps — for deposits with tenure of less than two years.

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Fino Payments Bank Q2 net profit up 74.5%

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Fino Payments Bank reported a 74.5 per cent increase in its net profit for the second quarter of the fiscal at Rs 7.89 crore. In the same period last fiscal its net profit was Rs 4.52 crore .

Its total income increased by 35.1 per cent to Rs 242.15 crore in the July to September 2021 quarter as against Rs 179.2 crore a year ago.

Net interest income increased by 29.9 per cent to Rs 3.61 crore in the quarter ended September 30, 2021 from Rs 2.78 crore in the same period last fiscal.

Other income also increased by 34.8 per cent on a year-on-year basis to Rs 235.11 crore in the second quarter of the fiscal.

“Revenue grew by 35 per cent year-on-year on the back of a growth of 32 per cent in transaction revenue, 43 per cent in subscription income and 35 per cent in open banking,” Fino Payments Bank said in a statement on Saturday.

Rishi Gupta, Managing Director and CEO, Fino Payments Bank said, “Our growth momentum in transaction volumes and throughput continues to be strong. Consumer behaviour towards convenience banking is gaining impetus.”

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PM-chaired meeting expresses concern over crypto ads

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The government on Saturday indicated steps against aggressive advertisement on cryptocurrency. The issue was discussed in a meeting chaired by Prime Minister Narendra Modi.

“It was strongly felt that attempts to mislead the youth through over-promising & non-transparent advertising should be stopped,” a government source said. It was also felt that unregulated crypto markets cannot be left to become avenues for money laundering and terror financing.

This stance has come at a time when the Centre is preparing a legislation to be introduced during the Winter Session of Parliament.

A joint advertisement by Indian Crypto exchanges and industry bodies said that investment by Indians in Indian assets have crossed ₹6-lakh crore. There are reports, quoting research firm CREBACO, suggesting that the user base has number of crypto investors have crossed 10 crores. Keeping these numbers in mind, meeting chaired by the Prime Minister has become important.

Sources said that Saturday meeting on the way forward for cryptocurrency and related issues was a very comprehensive one. “It was also an outcome of a consultative process as RBI, Finance Ministry, Home Ministry had done an elaborate exercise on it as well as consulted experts from across the country and the world. Global examples and best practices were also looked at,” source said.

According to him, the Government is cognizant of the fact that this is an evolving technology hence the government will keep a close watch and take proactive steps. There was consensus also that the steps taken in this field by the Government will be progressive & forward looking. “Government will continue to pro-actively engage with the experts and other stakeholders. Since the issue cuts across individual countries’ borders, it was felt that it will also require global partnerships and collective strategies,” source said.

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How a single woman can achieve retirement goals with ease

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Meenakshi, aged 48, is single and wanted to ensure she retires when she turned 60. Her goals were limited. She had enough resources and cash flow from her point of view.

But she was a bit apprehensive on her financial condition towards satisfying her needs and wants. Her assets and cash-flow statement are listed below (see table).

At her age of 48, at first look this seems to be a reasonably sound net worth. The value of land parcels will only be known when she sells. Being single, she felt uncomfortable holding such land parcels. She felt that her relatives were expecting some ‘goodwill’ out of every sale of land. This increased the uncertainty factor in the net worth calculation. To please her relatives she felt she had an emotional binding to do what they expected.

Her expenses, at the time of planning, were ₹60,000 per month. On a relative scale, for a middle-class woman this definitely is above average. But she was not willing to compromise on her lifestyle. In addition to this, being an avid traveller, she would incur ₹2 lakh every year when her travel plans resume.

We analysed her risk profile, and the results showed her appetite in “balanced” category. She was able to appreciate long-term investing and the risks associated with that.

Review & recommendations

1. Emergency fund should to be maintained as fixed deposits for ₹7.2 lakh

2. Medical emergency fund to be maintained as liquid funds would be for ₹10 lakh. Being taxed only at redemption, these funds would help her in tax efficiency.

3. Her high priority goal was retirement at her age of 60. At current cost, her expenses in the first month of retirement would be ₹1,35,131 at 7 per cent inflation. She wanted to plan for her retirement corpus with a life expectancy of 90, post retirement inflation of 7 per cent, and expected return of 8 per cent.

4. To ensure adequate financial assets are in place to aid retirement life, salary income, provident fund accumulations (PPF and EPF) and previously held mutual fund investments were stringed together. This should provide her a corpus of ₹2,71,36,851. But her retirement corpus requirement would be ₹4,26,46,779. She was advised to invest ₹57,000 per month through systematic investments in equity mutual funds till her retirement age of 60.

5. She was advised to invest ₹10 lakh from cash in hand towards her “post retirement hobbies fund” in equity mutual funds.

6. If she continues her employment, she would be able to comfortably reach her goals of retirement, health and vacation needs by way of financial assets assuming she adopts the above-mentioned suggestions.

7. She was also advised to exit her real estate assets in a phased manner and accumulate in financial assets.

8. She will be using these sale proceeds partially to fund education needs of her relatives’ children and to other needy group over the next 10-12 years. This will help her manage her time post retirement. She was advised to establish a charitable or private trust to manage the activities if she plans it as a continuous activity.

9. She also wanted to contribute to the society in building social infrastructure at her hometown with her income in future. Ensuring adequate liquidity by way of optimum exposure to financial assets would help her to stabilise her post retirement life. She would be devoid of liquidity issues and emotional issues mentioned earlier. By consolidating her immovable assets, she would be in a position to provide for her nobler goals. This would in turn help her to spend time on such activities without having to carry the burden of liquidating immovable assets at short notices.

The writer, Founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI

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Tax Query: How to save real estate capital gain?

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I have a house and a flat, and the same are declared in my IT returns every year. Last financial year, I have sold a plot (purchased during 2004-05) at a profit. I have opened a capital gains account and invested the entire proceeds in the capital gains account. Out of the sale proceeds, I have used about 85 per cent for booking a flat in Bangalore. The new flat is not yet registered. The balance amount in capital gains account is equal to my plot’s original cost. I need guidance on the following:

(A) Can I claim exemption from tax on capital gains, since I have used the proceeds from sale for purchase of property (booking advance)? Is capital gains tax applicable for my sale transaction since I have used the proceeds from sale for purchase of property (booking advance)? (B) I understand that I have to pay capital gains tax since I have two properties in my name, as per prevailing IT rules. But it is to be noted that the third property (new flat) is not yet registered. If capital gains tax is applicable, can I gift the property to my wife by making settlement deed before filing IT return for FY 2020-21, so that I remain a owner of only two properties (including new one)? (C) Also, please suggest whether I can remit back the amount withdrawn from the capital gain accounts and avoid capital gains tax?

Satyanarayana KS

A) Capital gain (CG) tax provisions shall apply on sale of plot under Income tax Act, 1961 (the Act). You are eligible to claim the tax deduction under section 54F of the Act from the capital gains earned, by investing the net sale consideration in buying the residential house property, provided you don’t own more than one residential house property (excluding the new property) on the date of transfer of the plot. As you own more than one residential house property (house and flat) on the date of sale of plot of land, you may not be eligible to claim this exemption. We would also like to add that you may still claim the deduction under section 54EC of the Act upon investing making investment in specified bonds (including National Highway Authority of India (NHAI) or Rural Electrification Corporation Limited bonds) up to ₹50 lakh. Such investment should be made within six months from the date of transfer of such capital asset and the lock-in period is five years. The option of depositing the capital gains in CGAS is not available for exemption in this category.

B) There are two transactions here. One is sale of plot and the other is gifting of property. Gifting of immovable property to your spouse is exempt under section 56 (1) (x) of the Act. Your spouse is not required to pay tax on such gifts. In order to claim exemption under Sec. 54F, as mentioned earlier, the crucial point is the date of sale. If on the date of transfer of the plot you own more than one house property then, you will not be eligible to claim exemption.

C) LTCG could be deposited in Capital Gain Account Scheme (CGAS) for the purpose of utilising the money in making the requisite investments. However, such deposits should be made on or before the due date of filing the tax return. There are specific conditions for transferring / withdrawing the amount from CGAS account or closure of such account whereby you are required to complete certain formalities with your banker. Further, if the amount remains unutilised after expiry of prescribed period of time, then the amount not so utilised shall be charged as capital gains of the year in which the prescribed period expires.

The writer is Partner, Deloitte India

Send your queries to taxtalk@thehindu.co.in

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3 important things to note about NPS annuity

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The National Pension System (NPS) is one of the preferred retirement options, thanks to its low cost structure and tax advantage. But one thing that concerns investors is the mandatory requirement to lock into an annuity product on exit. The requirement to purchase an annuity is for providing a monthly pension after retirement. If you are planning to enter the NPS or are an existing subscriber reaching your retirement age, here are some of the important factors to know about the annuity product.

Under all citizens model, for subscribers on turning 60, it is mandatory to buy an annuity plan with at least 40 percent of the NPS corpus (unless subscriber decides to defer the exit). The balance 60 per cent is paid as lump sum to the subscriber. If the subscriber chooses to prematurely exit from the NPS before the retirement age, at least 80 per cent of the accumulated corpus has to be utilised for the purchase of annuity.

The four main variants of annuities include — Annuity for life (annuity for life time and on death of the subscriber, annuity ceases); Annuity for life with return of purchase price (on death, annuity ceases & 100 per cent of the purchase price is returned to the nominee); Joint life, last survivor without return of purchase price (annuity for life time and on death of the subscriber, annuity will be payable to the spouse for life time. On death of the spouse, annuity ceases); and Joint life, last survivor with return of purchase price (same as earlier, but purchase price will be returned to the nominees on death of the spouse). There’s one more option – ‘NPS – Family Income’, a dedicated annuity option offered only to government employees.

Currently, there are 13 life insurance companies empanelled with the Pension Fund Regulatory & Development Authority (PFRDA), from whom you can select the annuity product. One can use the link – https://cra-nsdl.com/CRAOnline/aspQuote.html – to compare the annuity rates for different annuity variants provided by the all service providers.

Return on investment

When you purchase an annuity, you get a fixed income at the annuity rate throughout life irrespective of interest rate movements. Since the annuity pays you for life-time, it also reduces the risk of re-investment of capital. These benefits come at a cost, though, which get accounted for in the annuity rate.

Currently, the annuity rates for products with the return of purchase price (ROP) are in the range of 5.5-6.6 per cent for an individual of 60 years for an annuity purchase of ₹40 lakh. Though not a perfect comparison, we can look at the return on the ROP annuity products versus that on non-cumulative bank deposits and the Pradhan Mantri Vaya Vandana Yojana (PMVVY). Today, banks are offering 6-6.5 per cent on their ten-year FDs. The PMVVY – with a limit of ₹15 lakh for a single account and a lock-in of ten years – is offering an assured pension of 7.40 per cent per annum payable monthly for all the policies purchased till 31st March, 2022.

There are no investment products that can be compared with the annuity products with no ROP, which pays higher annuity than those with the ROP option. The internal rate of return (IRR), which is an effective way of calculating the return on investment in this case, increases as the subscriber goes on to live longer. For instance, a 60-year old purchases an annuity with annual fixed income of ₹80,000 for ₹10 lakh today. If she lives to 80, her IRR would be just five per cent. But if she lives till 100, then her return jumps to 7.6 per cent.

Annuity products with no ROP can be opted by those with no dependents or liabilities. Note that the income you receive from your annuity plan is taxable at your income tax slab rate.

To overcome the low rates on annuities, PFRDA appears to be working on an option in which the corpus would continue to be managed by pension fund managers but subscriber gets to have periodic payouts, similar to systematic withdrawal plans of mutual funds.

Deferment of annuity

While annuity providers reset the annuity rates periodically, the rate prevalent at the time when you purchase the annuity is applicable to all future annuity pay-outs. Since we are in the low interest rate environment, rates are expected to inch up. Thus, if you are an existing NPS subscriber who is close to retirement and does not need a periodical annuity income, you can defer buying annuity. Also, the longer you defer the purchase of annuity, higher the pension you will get as the number of years over which the insurance company has to pay the annuity comes down. As per NPS rules, one can defer the annuity purchase by 3 years from the time the subscriber exercises the option to withdraw the non-annuity portion (60 per cent, or 80 per cent of the corpus in case of pre-mature withdrawal).

Less scope to alter annuities

Subscribers under all citizen and private sectors can choose from monthly, quarterly, half yearly or yearly payment frequencies (only monthly for government employees). Once an annuity is purchased, the option of cancellation or reinvestment with another annuity service provider or in another annuity scheme is not allowed after the free look period. Surrendering the policy, too, is restricted only to special circumstances such as a critical illness. This would be available only for the annuity option with ROP, however, at high charges.

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IDFC First Bank leases Citibank’s erstwhile HQ tower in Mumbai’s BKC from Mindspace REIT, BFSI News, ET BFSI

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Mindspace Business Parks REIT has leased out an entire commercial building–Citibank India’s erstwhile headquarters in Mumbai’s business district Bandra-Kurla Complex (BKC)–to IDFC First Bank for a nine-year term, people aware of the development said.

K Raheja Corp and Blackstone Group-backed listed Mindspace REIT had acquired the building, The Square BKC, a marquee structure, from Citibank in 2019 for around Rs 400 crore.

IDFC First Bank has leased the 10-storey property spread over nearly 1.30 lakh sq ft at a monthly rental of Rs 280 per sq ft, taking the annual payout to Rs 44 crore. The agreement includes a rental rest clause with 15% escalation every three years, taking the total lease value to over Rs 450 crore over the nine-year term.

“The Square BKC (the erstwhile Citibank building) now stands fully leased,” Mindspace REIT said in its July-September earnings statement on Friday.

The deal is another sign of the recovery in office leasing, not only in peripheral but also in prime business districts following the aggressive vaccinations and the gradual return of employees to offices.

“We continue to witness strong leasing activity across our portfolio with over 2.1 million sq ft leased in the first half of this financial year,” said Vinod Rohira, CEO of Mindspace Business Parks REIT. “We remain increasingly confident of the commercial market outlook, buoyed by record tech hiring and growth trends, improved GCC prospects, vaccination coverage in our gateway cities as employees return to office. We are excited about the robust demand cycle re-emerging.”

However, he declined to elaborate on the BKC lease transaction.

ET’s email query to IDFC First Bank remained unanswered.

The REIT has recorded a robust gross leasing of 9 lakh sq ft, with an average rent of Rs 88 per sq ft a month across 11 deals concluded during the quarter. It has also concluded another build-to-suit lease of 5 lakh sq ft at Mindspace Juinagar in Mumbai Region. Over the last two quarters, it has leased 2.1 million sq ft in total.

Mindspace REIT has continued to collect over 99% of its gross contracted rentals and has reported net operating income of Rs 359.2 crore, up by 6.7% from a year ago.

The REIT has declared distribution of Rs 272.8 crore or Rs 4.60 per unit for the quarter, taking its annualised distribution yield to 6.7% on the issue price of Rs 275 per unit.

The record date for the distribution is November 18, payment of the distribution will be processed on or before November 27.

The REIT has raised around Rs 400 crore through issue of debentures at project level at 6.1%, helping the reduction in average cost of debt further by 15 basis points to 6.9% as on September-end.

The July-September quarter has already witnessed a sharp uptick in absorption of office spaces, led by leasing activity in the information technology and IT-enabled services sectors.

Lease transactions for large office spaces are being registered across key property markets, led by steady economic recovery, an aggressive vaccination drive across the country, and increasing number of corporates planning return of their workforce to office.

The IT, ITeS sectors are among the prime drivers of overall leasing activity in the top cities, and bulk hiring by these firms is expected to influence the demand for large quality office spaces.



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Restrictions put on Laxmi Coop Bank, Solapur; Rs 1,000 cap on withdrawals, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) on Firday imposed several restrictions on Laxmi Cooperative Bank Ltd, Solapur, including Rs 1,000 cap on withdrawals for customers, due to deteroriation in its financial position.

The restrictions imposed under the Banking Regulation Act, 1949, shall remain in force for six months from the close of business on November 12, 2021, and are subject to review, the RBI said in a statement.

As per the directions, the bank shall not, without the prior approval of the RBI, grant or renew any loans and advances, make any investment, incur any liability, and disburse or agree to disburse any payment.

“In particular, a sum not exceeding Rs 1,000 of the total balance across all savings bank or current accounts or any other account of a depositor, may be allowed to be withdrawn,” the RBI said.

It further said the issue of the directions by the RBI should not per se be construed as cancellation of the banking licence.

“The bank will continue to undertake banking business with restrictions till its financial position improves,” the Reserve Bank of India said.

On Monday also, the RBI had imposed similar restrictions on Babaji Date Mahila Sahakari Bank, Yavatmal, Maharashtra.



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ONGC reports highest ever net profit by any corporate at Rs 18,347 cr in Q2, BFSI News, ET BFSI

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New Delhi, Nov 12 (PTI) State-owned Oil and Natural Gas Corporation (ONGC) on Friday reported the highest ever quarterly net profit by any Indian firm of over Rs 18,347 crore as it made a one-time tax gain on opting for a lower rate regime. Net profit in July-September period at Rs 18,347.73 crore is compared with Rs 2,757.77 crore net profit in the same period a year back, according to the company’s filing to the stock exchanges.

The profit in the quarter is compared with Rs 11,246.44 crore net profit ONGC had earned in full 2020-21 fiscal year (April 2020 to March 2021).

This is the highest ever quarterly net profit by any company in the country.

Prior to this, Indian Oil Corporation (IOC) held the distinction of posting the highest ever quarterly profit when it reported a net earning of Rs 14,512.81 crore in January-March 2013.

IOC’s net profit in the fourth quarter of 2012-13 fiscal was abnormally high because of receipt of fuel subsidy for the full year in one quarter. Its annual profit that fiscal was Rs 5,005.17 crore as it had posted losses in the previous quarter on failing to get fuel subsidy support.

ONGC, in the first half (April-September) of the current fiscal earned Rs 22,682.48 crore net profit as against Rs 3,254.35 crore a year back.

The profit in the second quarter (July-September) was aided by higher oil prices and the one-time tax gain of Rs 8,541 crore.

ONGC said the company has an option to pay corporate income tax at the rate of 22 per cent plus applicable surcharge and cess (lower rate) as against the earlier rate of 30 per cent plus applicable surcharge and cess, subject to certain conditions.

“Considering all the provisions under said section 115BAA of the Income Tax Act, 1961, during the quarter the company has decided to avail the option of lower rate with effect from the financial year 2020-21.

“Accordingly, the company has recognized provision for tax expenses in the financial results for the quarter and half year ended September 30, 2021, and re-measured its net Deferred Tax liabilities on the basis of the provision prescribed in the said section,” it said.

The net impact due to availing of the option has resulted in a decrease in deferred tax by Rs 8,541 crore and a decrease in current tax by Rs 1,304 crore (including relating to earlier years).

Also aiding the profit was a surge in oil prices, it added.

ONGC got USD 69.36 for every barrel of crude oil it produced from fields under its operation as against USD 41.38 per barrel realisation in July-September 2020.

Revenue soared 44 per cent to Rs 24,353 crore.

The higher price offset lower production.

ONGC produced almost 4 per cent less crude oil at 5.471 million tonne while gas output fell 7 per cent to 5.467 billion cubic meters.

“The production of crude oil and gas has declined during current year mainly due to restrictive conditions created by cyclone Tauktae and due to Covid impact,” the firm later said in a press statement.

Also, delay in mobilization of mobile processing unit to WO-16 Cluster project in the western offshore also impacted production from this field. The board approved interim dividend of 110 per cent (Rs 5.50 on each equity share of Rs 5). Total payout on this account will be Rs 6,919 crore.



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