Here're the key takeaways for banks in RBI's policy doc

The Reserve Bank of India governor D Subbarao’s 50 basis point cut in the repo rate came as a pleasant surprise to economists, analysts, banks and the markets. The markets had expected only a 25 basis point cut.

Here are the key takeaways for banks from the policy statement:

1. A cut in the repo rate. This, of course, is the big positive for banks. The repo rate is the rate at which the RBI lends money to scheduled banks for the short term. A rate cut will reduce the cost of funds for banks, who can then pass it on their borrowers.

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That, however, works mostly in theory, not reality.Sailendra Bhandari, managing director and CEO, ING Vysya Bank told CNBC TV18, that in the past year, despite repeated hikes in the repo rate, most banks did not raise their base rates. Now, with a single repo rate cut, there is little chance of a steep reduction in base rates. As most banks might pass on a 25 basis point cut to lending rates to borrowers.

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2. An increase in the marginal standing facility from 1 percent to 2 percent will also help banks with immediate liquidity.

3. While aggregate deposits of banks are projected to grow by 16 percent, growth in non-food credit of scheduled commercial banks is projected at 17 percent.Money supply is also estimated to rise by by 15 percent.

4. There were enough concrete statements on Basel III, the new capital adequacy regulation that the banks will need to adopt to align themselves to international standards. The central bank said the final guidelines will be released by the end of April, while the final guidelines on liquidity risk management will be out by the end of May. According to a Crisil estimate, banks in India will reportedly need up to Rs 2.7 lakh crore in fresh capital if Basel III guidelines are implemented.

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5.Non-bank finance companies that are big providers of gold loans, like Manappuram Finance and Muthoot Finance, will be hit hard as it said that banks’ with exposure to NBFCs that have more than half of their assets exposed to gold loans will have to lower their exposure from 10 percent to 7.5 percent of a bank’s capital funds. The exposure can, however, go up to 12.5 percent if the additional exposure is on account of funds lent to NBFCs that have, in turn, been lent to the infrastructure sector.

The RBI has also constituted a working group to study the intricacies and present condition of the gold loan business in details and come out with recommendations when required.

6. The RBI also made a significant change to the prepayment penalty clause for banks, which is likely to affect banks with large home loan portfolios, such as ICICI Bank.

A few months ago, an RBI ombusdman’s report recommended that no bank be permitted to levy foreclosure charges or pre-payment penalties on home loans taken on a floating interest rate basis. These charges are applicable when home loan borrowers get existing loan refinanced by cheaper loans. RBI explained this charge needed to be abolished as “foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.”

7. The RBI has also mandated banks to take the financial inclusion process further. It has asked the state level bankers’ committees to “prepare a road map covering all unbanked villages of population less than 2,000 and notionally allot these villages to banks for providing banking services in a time-bound manner.” Such branches typically have long gestation period for banks as it takes longer time to recover investment made and start earning profits.

8. The RBI has observed that banks offer varied interests on retail and bulk fixed deposits and said that it was unfair to retail depositors. Further, banks are offering significantly different rates on deposits even when the maturity periods are not significantly different. The RBI has asked banks to ensure that the variation in interest rates on single-term deposits of Rs 15 lakh and above and other term deposits stays minimal.

9. The RBI has also mandated that banks should offer a ‘basic savings bank deposit account’ with certain minimum common facilities and without any requirement of maintaining minimum balance to all of their customers. The RBI will issue separate guidelines on this.