Asset quality of retail loans extended by commercial banks in the country is set to deteriorate, according to a recent report by credit rating major Crisil. The report says bad loans, or non-performing assets (NPAs), in retail loans will rise to 4% of total loans over the next two years, from 2.7% as of March 2007. According to Crisil, subprime assets in India are still relatively low at 7% of the total outstanding retail loans. A reasonable definition of subprime in the Indian context could include small-ticket personal loans and a portion of credit card receivables; these loans are typically given to low-income customers. Going by this definition, Crisil estimates the loss levels in this segment to be currently at 7-9%, and expects them to increase to 10-13% over the medium term. Delinquencies across all retail categories have gone up and are likely to further increase in 2008-09. Housing loans constitute over half of the total retail loans in India. Bad loans in home loan portfolio increased to 2.2% of total loans in March 2007, from 1.8% in 2005. These are expected to increase to 2.7% in the financial year 2008-09. Car and commercial vehicle asset segments comprise one-third of total retail loans. Crisil estimates that gross NPAs in these segments have increased to 2.3% and 4%, respectively, as of March 2007, from 0.9% and 3.2%, respectively, in 2005. In 2008-09, these numbers are seen at 3% for car loans and 5.5% for commercial vehicles.

The Reserve Bank of India has decided to discontinue the interest subsidy on rupee export credit from September 30, 2008. Earlier, following the government advice, the RBI had extended the subsidy scheme up to March 2009. Under the scheme, exporters of specified items were eligible for four per cent interest subsidy on rupee export credit. In a circular issued today, RBI said now the Government has decided to bring this Scheme to a close with effect from September 30, 2008.

RBI is paving the way for a separate entity to carry out payment and settlement activities within the country which will bring down transaction costs, including credit card transactions. The new entity - National Payments Corporation of India (NPCI) - will be set up by the Indian Banks' Association (IBA) and will be owned jointly by banks. However, no bank or group of banks will be allowed to hold more than 10% of the ownership while 51% of the equity will be held by public sector banks, according to Reserve Bank of India deputy governor V Leeladhar.

Higher inflation and increasing interest rates have forced middle class consumers to cut back their spending on shopping, amusement and eating out by nearly 55 percent in the last one year, according to a survey by an industry lobby. The survey, done by the Associated Chambers of Commerce and Industry (Assocham), said middle class consumers slashed their entertainment and luxury spending by 55 percent, which has come down from Rs.5,000-Rs.6,000 per month to less than Rs.2,800.

Masses in under-banked regions may now be able to perform banking transactions using their mobile. Obopay, a payment services provider and Grameen Solutions, a Grameen Bank subsidiary, have entered into a tie-up to provide mobile-banking services to the poor in India and Bangladesh. However, these services will have to wait for the Reserve Bank of India's (RBI) guidelines which are expected anytime now. This may include services such as cross-border fund transfers, payments, savings and credit accounts. However, it can be operationalised only after the central bank releases final guidelines on mobile banking. By December 2008, the two entities are planning to launch fund transfers between India and the US.

Even as the Government is gearing up to disburse the first tranche of farm loan reimbursement by September 30, banks are facing a new problem, which could delay the entire process. Under the current guidelines, banks are not allowed to get any reimbursement until the final claims list is audited by a central statutory auditor. But the fees for the statutory auditors are huge and banks will have to pay before they get the money from the Government. And the audit may also take time, said a banker. The Indian Banks' Association has taken up the issue with the Government as well as the Reserve Bank of India after it was discussed at its management committee said an official from IBA. According to the RBI guidelines, banks have to get 20 per cent of the accounts audited by the central statutory auditors, in order to get the reimbursement. However, the RBI guidelines do not make any mention of auditors' fees. According to an official from a leading public sector bank, some auditors are asking for fees as high as Rs 15-20 per account, which could run into large amounts for some banks.

Higher risk weight attached to home loans under Basel II norms could discourage banks from pursuing aggressive lending policies, according to a recent report released by Fitch Ratings. Risk weight on housing loans is based on the loan/value ratio (LTV) and could increase from 50-75 per cent to 100 per cent for LTVs above 75 per cent as per the Basel II norms. LTV is the percentage of the loan against the value of the house. The Basel II guidelines do not specify whether the LTV calculations should be done on an ongoing basis or at the point of disbursing the loan. The report suggests that the LTV calculations should be done on an ongoing basis, especially during periods of falling prices. According to the report, the differential risk weighting on different asset classes under Basel II could help guide the proportion and direction of bank lending, such as lending to higher rated corporates or hedging exposures to small-scale industries with permitted collaterals and guarantees.

RBI would undertake a "wholesome review regarding the road map" of foreign banks in the country, its Deputy Governor V Leeladhar said recently. He said the first phase of the roadmap of foreign banks was coming to an end in March next year. Under the first phase of liberalisation in the banking sector, allowed by the RBI, foreign banks can establish presence by way of setting up a wholly-owned subsidiary (WOS) or conversion of existing branches into a WOS. The first phase of liberalisation, initiated in 2005, was aimed at giving a chance to the domestic banks to strengthen their presence and financial positions through consolidation and reform process.

Apex industry chamber CII on Tuesday warned that rising interest rates may hurt new investments even though resources to the tune of 700 billion dollars are in the pipeline over the next three years. "While the existing investments in the pipelines were being adhered to... May be, newer projects which were at concept stage, which were at the backburner may not come to the front burner," CII President K V Kamath said after a meeting of industry leaders with Finance Minister P Chidambaram.

The Reserve Bank is phasing out old currency notes in the denomination of Rs 1,000 and Rs 500 of 1996 series and replacing them with new ones with added security features.
RBI spokesperson Alpana Killawala from Mumbai said that the public will not be put to inconvenience by the phasing out of these notes, which merely means that these currency notes would not be reissued after they are deposited with banks.