India becoming a haven for money laundering

By Vipin Agnihotri

No one will argue with the fact that too much of a good thing can sometimes boomerang. The same is happening with India. The booming Indian economy and the rapid expansion of the financial services industry have exposed India to a very high risk of becoming a haven for money laundering.

No doubt the Indian banks are doing absolutely nothing to make their businesses foolproof. KPMG Forensic recently conducted a survey on 224 banks in 55 countries, including India, to find out how they are facing up to the twin challenges. In my opinion, vulnerability of the Indian banking system stems from a wide array of factors most prominent one being the presence of a large number of international banks.

In addition, growth of alternative asset classes like hedge funds, private equity and commodities being fuelled by a low interest regime is also the main reason behind vulnerability of the Indian banking system. Abysmal monitoring of illegal routines is also the factor.

According to experts, while banks in India and other emerging economies are generally aware of the risks, and have also been spending large sums to counter these still the problem has not been accorded the seriousness it warrants. It has come into the notice of The India Street that expenditure on anti-money laundering systems and processes has increase appreciably in the last two or three years.

I have talked with a number of top-notch bank officials on this issue and most of them were of the view that although it is common for Indian banks to provide training that meets the minimum regulatory requirements, the quality of training needs to improve to bring it up to international standards.

“Banks will need to work extremely hard from here if they are to maintain any advantage in the war against money laundering and terrorist financing,” pointed out one bank official on the condition of anonymity.

According to one estimate, black economy in India account for more than half of the Gross National Product (GDP). Indian government periodically offers legal but ethically reprehensible laundering schemes such as the Voluntary Disclosure of Income Scheme (VDIS) 1997.

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Top 5 India Banks ranked by Online Traffic

In conjunction with www.compete.com, The India Street has compiled the online statistics for India’s top Banks. In terms of Online usage in visits, ICICI Bank clearly leads the pack while Citibank is close behind. Noticeably, State Bank of India’s traffic has decreased 21% year over year while ICICI Bank has risen an astounding 76.9% year over year.

It’s interesting to note that banks like Canara Bank, Bank of Boroda, and Punjab National Bank that have some of the highest deposits, don’t even come close to making the list.

Timeframe: 07/2006 to 07/2007 (Click image to enlarge)

Date: 07/2007	People	Month Δ	Year Δ	What is this?
statebankofindia.com	5,368	26.1%	-21.2%	The number of people visiting a site.*
hdfcbank.com	16,385	20.1%	34.8%
citibank.co.in	44,463	-4.7%	22.2%
standardchartered.com	8,672	70.8%	54.4%
icicibank.com	64,890	62.6%	76.9%
*People Counts are also known as unique visitors - they only count a person once no matter how many times they visit a site in a given month. People Counts are typically used to determine how popular a site is.

In terms of daily growth Standard Chartered is really make a move, while the remainder are gaining users at slower pace. A small mention, it appears that over the last month, Citibank’s online growth is actual negative.

Date: 08/14/2007	What is this?
hdfcbank.com	Velocity reports the relative change in daily Attention. Velocity is used to determine the relative growth of a domain over a particular timeframe or compared to other sites. Velocity is an effective way to measure the impact of planned (or unplanned) events, such as new advertising campaigns, product/service launches or general site growth. Simply choose an event date as the starting point to see how it has affected a site's attention over time. See Full Description
citibank.co.in
standardchartered.com
icicibank.com

Some other key findings of the study of India banks, pertaining to the period FY06, are as follows:

• Total assets for the 82 Scheduled Commercial Banks (SCB)s stood at Rs 27,785,739 mn in FY06, of which PSBs had the largest share of 72.5%, followed by Private Sector Banks with 20.2% and Foreign Banks at 7.3%.

• The total income for the 82 banks stood at Rs 2,215,280 mn in FY06, of which the Public Sector Banks held the highest share of 72.7%, Private Sector Banks at 19.5% followed by 7.8% for the Foreign Banks.

• In terms of break-up of total income, non-interest income was the highest for Foreign Banks at 31%, followed by Private Sector Banks at 19.8%, thus highlighting the contribution of valueadded services these banks offer. For Public Sector Banks, non-interest income was 15.3%.

• The net profit for the 82 banks together stood at Rs 248,281.5 mn for FY06. The top ten banks (6 PSBs, 2 Private Sector and 2 Foreign Banks), based on the net profit classification, accounted for nearly 58.5% of the total net profit of all the 82 banks.

• The overall deposit growth was at 18.2% y-o-y for FY06, with Private Sector Banks posting the strongest growth at 39.2%, followed by Foreign Banks at 31.7%. For Public Sector Banks, total deposits grew at about 13%.

• Total Advances of all 82 banks grew by 32% year-on-year; Private Sector banks again witnessed the strongest growth at 44%, followed by a growth of 30.7% for PSBs and 30% for Foreign Banks.

• The ratio of operating expense to total expense for the PSBs was 26.5%, for Private Sector Banks was 28.4%, while for Foreign Banks the ratio was nearly one-third of their total expenses in FY06.

The Indian banking sector is poised for healthy growth in the forthcoming years. D&B India is confident that India’s Top Banks 2007 will provide the right platform to enable the banks to prepare for the upcoming opportunities. We will continue to track the growth of this sector and enhance this publication as an authoritative reference guide.

• Source for key findings Dunn and Bradstreet India

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Indian Banks Not Playing Fair with Home Loans?

By Dr Suvrokamal Dutta

Amidst hardening interest rates and rising defaults, it has come into the notice of the India Street that Indian banks are inserting new clauses in their home loan agreements to protect balance sheets.

If experts are to be believed, while few have stopped giving fixed rate loans beyond a few years, a number of them have set an early reset clause while others are putting in a lock-in period within which fixed to floating and floating to fixed switch cannot take place. In my opinion, all these changes will make life difficult for borrowers, who are already coughing up higher EMIs.

“Borrowers who have taken home loans on floating rates of interest have seen them increase by three to four percentage points in the last 18 months to around 10-12 percent,” pointed out Saddia Abid, home loan expert. There is no doubt that with rising rates, new borrowers are looking at taking fixed-rate loans while existing borrowers are thinking of a switch from floating to fixed rate loans despite the higher rate. Though, point to be noted here is that banks are designing the loan documents to discourage this.

It is worth mentioning in this regard that a fixed rate loan is aimed at protecting the borrower against the risk of rising interest rates. But a reset clause will enable banks to charge a higher rate at the time of the reset in the event interest rates move up.

Theoretically speaking, state owned IDBI Bank and Union Bank of India do not offer fixed rate loans above five years. Some of the bank officials feel that the fixed and floating rate concept is slowly losing its relevance. “In the last two occasions, we have not raised interest rates for existing floating rate customers, which means their loans have been at a fixed rate of interest even as interest rates have moved up in the system,” pointed out MV Nair, Chairman of Union Bank of India.

Plenty of other banks are giving a long-term fixed rate option with a reset clause. Not so long ago, Bank of India minimized its reset option on fixed-rate home loans from ten years to five years.

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