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Effect of changes inCredit and Monetary Policy of RBI

TREASARY MANAGEMENT

Effect of changes in Credit and

Monetary Policy of RBI

BANK OF BAROD A

Submitted to: Submitted By:

Dr. Monica Chopra Akanksha Agrawal (10 BSP

0283)

Date: Richa Maheshwari (10 BSP

0468)

5th August, 2011 Sharad

Sharma (10 BSP 0499)

Romani

Goyal (10 BSP 0482)

Rohit Arora (10 BSP

0477)

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Udit

Goyal (10 BSP 0545)

Section: A

BANK OF BARODA (BoB)

Introduction:

The Maharajah of Baroda, Sir Sayajirao Gaekwad III, founded the bank on 20

July 1908 in the princely state ofBaroda, in Gujarat. The bank, along with 13

other major commercial banks of India, was nationalized on 19 July 1969, by

the government of India.

Bank of Baroda is the third largest bank in India, after the State Bank of

India and the Punjab National Bank and ahead ofICICI Bank. BoB is ranked

763 in Forbes Global 2000 list. BoB has total assets in excess of Rs.

3.58 lakhcrores, or Rs. 3,583 billion, a network of over 3,409 branches and

offices, and about 1,657 ATMs. It plans to open 400 new branches in the

coming year. It offers a wide range of banking products and financial

services to corporate and retail customers through a variety of deliverychannels and through its specialized subsidiaries and affiliates in the areas

of investment banking, credit cards and asset management. Its total

business was Rs. 5,452 billion as of June 30.

As of August 2010, the bank has 78 branches abroad and by the end of FY11

this number should climb to 90. In 2010, BOB opened a branch in Auckland,

New Zealand, and its tenth branch in the United Kingdom. The bank also

plans to open five branches in Africa. Besides branches, BoB plans to open

three outlets in the Persian Gulf region that will consist of ATMs with a coupleof people.

In its international expansion, the Bank of Baroda followed the Indian

diaspora, especially that of the Gujaratis. It has significant international

presence with a network of 72 offices in 25 countries, six subsidiaries, and

four representative offices.

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http://en.wikipedia.org/wiki/Sayajirao_Gaekwad_IIIhttp://en.wikipedia.org/wiki/Princely_statehttp://en.wikipedia.org/wiki/Baroda_Statehttp://en.wikipedia.org/wiki/Gujarathttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/Punjab_National_Bankhttp://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/Forbes_Global_2000http://en.wikipedia.org/wiki/Lakhhttp://en.wikipedia.org/wiki/Croreshttp://en.wikipedia.org/wiki/Gujarathttp://en.wikipedia.org/wiki/Sayajirao_Gaekwad_IIIhttp://en.wikipedia.org/wiki/Princely_statehttp://en.wikipedia.org/wiki/Baroda_Statehttp://en.wikipedia.org/wiki/Gujarathttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/Punjab_National_Bankhttp://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/Forbes_Global_2000http://en.wikipedia.org/wiki/Lakhhttp://en.wikipedia.org/wiki/Croreshttp://en.wikipedia.org/wiki/Gujarat

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Mission Statement:

To be a top ranking National Bank of International Standards committed to

augmenting stake holders' value through concern, care and competence.

Economy Overview In The Last Quarter (APRIL TO JUNE)

INFLATION

The inflation situation in the economy continues to be a cause forconcern. Despite large scale tightening of the monetary policy by theRBI and other steps taken by the government, inflation continues toremain close to the double digit mark.

In May 2011, WPI based headline inflation stood at 9.1 percent. This ishigher than 8.7 percent inflation recorded in April 2011. Core inflationtoo has moved up from 8 percent in April 2011 to 8.6 percent in May2011.

Near term outlook for inflation is not too encouraging and there arechances that we may see inflation jump to the double digit territory ona few occasions.

High international oil prices, likely decontrol of diesel prices, highglobal food prices and hike in Minimum Support Prices for theupcoming agriculture season are some of the factors that constitutethe upside risks to inflation.

Monetary Policy Changes

Reserve Bank of India made following interest rate changes in its monetarypolicy:

Base Rate

It is the minimum rate of interest that a bank is allowed to charge from itscustomers. Unless mandated by the government, RBI rule stipulates that nobank can offer loans at a rate lower than Base Rate to any of its customers.

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The Reserve Bank of India introduced the Base Rate System from July2010, which replaced the benchmark prime lending rate (BPLR) system.Banks were given time till end-December 2010 to select the appropriatebenchmark and other cost parameters for computing the Base Rate.Subsequently, some banks requested for extension of time. Accordingly,

banks were permitted to change the benchmark and methodology used inthe computation of their Base Rates for a further period of six months, i.e.,up to June 30, 2011. RBI has currently the revised BPLR stands at 14.25%from 13.75% and base rate at 10% from 9.50%.

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NEWS

BoB lifts BPLR, base rate by 50 bpsSource: IRIS (05-MAY-11)

Bank of Baroda has decided to increase its benchmark prime lendingrate (BPLR) and base rate by 50 basis points (bps) with effect from May 6,2011.

The revised BPLR stands at 14.25% from 13.75% and base rate at 10% from9.50%.

Recently, the bank posted a net profit of Rs 12,943.50 million for thequarter ended Mar. 31, 2011 as compared to Rs 9,062.80 million for thequarter ended Mar. 31, 2010, reflecting a rise of 43%. Total income

increased from Rs 51,207.30 million for the quarter ended Mar. 31, 2010 toRs 71,686.50 million for the year ended Mar. 31, 2011, representing anincrease of 40%.

Shares of the company declined Rs 1.3, or 0.15%, to settle at Rs 847.70. Thetotal volume of shares traded was 104,435 at the BSE (Thursday).

Our Review:

From the above news we can see that BOB is still providing BPLR along with

the Base rate. BoB has also decided to increase its benchmark prime lendingrate (BPLR) and base rate by 50 basis points (bps) with effect from May 6,2011 after the change made by RBI.

BoB has currently revised the rates and BPLR stands at 14.50% from 14.25%and base rate at 10.25% from 10%.

NEWS

BoB hikes BPLR, base rate by 25 bps

Source: IRIS (12-JUL-11)Bank of Baroda has announced that the bank has decided to increase itsBenchmark Prime Lending Rate (BPLR) by 25 basis points from 14.25% to14.50% and base rate by 25 basis points from 10.00% to 10.25% with effectfrom July 12, 2011.

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The stock had underperformed the market over the past one month till July11, 2011, rising 0.78% compared with the Sensex`s 2.48% rise. Itunderperformed the market in past one quarter, declining 8.82% as against2.81% fall in the Sensex.

Shares of the company declined Rs 9.8, or 1.12%, to trade at Rs 867.50. Thetotal volume of shares traded was 10,050 at the BSE (12.53 p.m., Tuesday)

Repo Rate

Repo rate is the rate at which our banks borrow rupees from RBI. A reductionin the repo rate will help banks to get money at a cheaper rate. When therepo rate increases borrowing from RBI becomes more expensive.

The Reserve Bank of India in the last quarter (April 2011 to June 2011)there is an increase in the repo rate under the liquidity adjustment facility(LAF) by 50 basis points from 6.75 per cent to 7.25 per cent with immediateeffect.

Currently the revised Repo Rate under the liquidity adjustment facility (LAF)has increased by 50 basis points from 7.5 per cent to 8.0 per cent.

Reverse Repo Rate

Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows

money from banks. Banks are always happy to lend money to RBI since their

money is in safe hands with a good interest. An increase in Reverse repo

rate can cause the banks to transfer more funds to RBI due to these

attractive interest rates. It can cause the money to be drawn out of the

banking system.

The reverse repo rate under the LAF, determined with a spread of 100 basis

point below the repo rate and automatically adjusts to 6.25 per cent.

Currently the revised Reverse Repo Rate under the LAF, determined with a

spread of 100 basis points below the repo rate, automatically adjusts to 7.0per cent.

Marginal S tanding Facility (M S F) Rate

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Under this scheme, Banks will be able to borrow up to 1% of their respective

Net Demand and Time Liabilities. The rate of interest on the amount

accessed from this facility will be 100 basis points (i.e. 1%) above the repo

rate. This scheme is likely to reduce volatility in the overnight rates and

improve monetary transmission.

The Marginal Standing Facility (MSF) rate, determined with a spread of 100

basis points above the repo rate, stands calibrated at 8.25 per cent. This

rate will come into effect on operationalization of the MSF.

Currently the revised Marginal Standing Facility (MSF) rate is determined

with a spread of 100 basis points above the repo rate, stands recalibrated at

9.0 per cent with immediate effect.

Savings Bank Deposit Interest Rate

Savings Account is an account used to deposit money at a bank or credit

union and earn interest on the account over time. Money can be added or

removed from the account by visiting the bank. Usually you can add or

withdraw funds at any time; there is no cost to do so. Banks may require a

minimum to open or maintain the account.

In the recent period, the spread between the savings deposit and term

deposit rates has widened significantly. RBI has increased the savings bank

deposit interest rate from 3.5 per cent to 4.0 per cent.

Following rates which remained unchanged after the new monetary

policy of RBI:

Bank Rate: The Bank Rate has been retained at 6.0 per cent.

Cash Reserve Ratio:The cash reserve ratio has been retained at 6.0per cent.

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Variation in Profitability:

Bank of Baroda Q1 profit climbs 20.26%

Source: IRIS (27-JUL-11)

Bank of Baroda (BOB) has posted a net profitof Rs 10.33 billion for thequarter ended June 30, 2011 as compared to Rs 8.59 billion for thequarter ended June 30, 2010 representing rise of 20.26%.

Total income has increased from Rs 53.44 billion for the quarter ended

June 30, 2010 to Rs 72.73 billion for the quarter ended June 30, 2011,

representing increase of 36.10%.

Shares of the company declined Rs 35.9, or 3.99%, to trade at Rs 863.70.

The total volume of shares traded was 68,605 at the BSE (11.52 a.m.,Wednesday).

Bank of Baroda Q4 profit surges 43%Source: IRIS (28-APR-11)

Bank of Baroda (BOB), one of the leading public sector banks, has posteda net profitof Rs 12,943.50 million for the quarter ended Mar. 31, 2011 ascompared to Rs 9,062.80 million for the quarter ended Mar. 31, 2010,reflecting a rise of 43%.

Total income has increased from Rs 51,207.30 million for thequarter ended Mar. 31, 2010 to Rs 71,686.50 million for the year ended Mar.31, 2011, representing an increase of 40%.

The board of directors of the bank at its meeting today has recommendeda dividend Rs 16.50 a share or 165% for the financial year 2011-11, subjectto necessary approvals and declaration at the ensuing annual generalmeeting of the shareholders of the bank, which will be paid / dispatched byJuly 14, 2011.

Shares of the company gained Rs 4.75, or 0.48%, to trade at Rs 994.90. Thetotal volume of shares traded was 162,857 at the BSE (12.25 p.m.,Thursday).

Our Analysis:

With advent to the above two news, it can be clearly seen that the net profithas fallen down from Rs. 12.94 billion (end of quarter ended Mar. 31, 2011)

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to Rs. 10.33 billion (end of quarter ended June 30, 2011) i.e. the net profithas reduced approximately by 21%.

Though the total income of the bank has risen from Rs. 71.69 billion (end of

quarter ended Mar. 31, 2011) to Rs. 72.73 billion (end of quarter ended June

31, 2011).

It can also be seen that the shares of the company declined to Rs. 35.9 or

3.99% to trade at Rs. 863.70 in June 30, 2011 in respect of the gain in March

31, 2011 of Rs. 4.75 or 0.48% to trade at 994.90 thus the volume of the

share traded on June 30, 2011 was 68,605, whereas on March 31, 2011 was

162,857 at the BSE.

Non performing loan provisioning coverage ratio, including technical write

off, was 82.52% as on 30 June 2011 from 85% as on 31 March 2011.

Variation in Share Price:

Bank of Baroda plunges post Q1 resultsSource: IRIS (27-JUL-11)

Shares ofBank of Baroda are trading at Rs 871.75, down Rs 27.85, or3.10% at the Bombay Stock Exchange (BSE) on Wednesday at 11:57 a.m.

The bank has posted a net profit of Rs 10.33 billion for the quarter endedJune 30, 2011 as compared to Rs 8.59 billion for the quarter ended June 30,2010 representing rise of 20.26%.

Total income has increased from Rs 53.44 billion for the quarter ended June

30, 2010 to Rs 72.73 billion for the quarter ended June 30, 2011,

representing increase of 36.10%.

The scrip has touched an intra-day high of Rs 900 and low of Rs 861.00. The

total volume of shares traded at the BSE is 105,248.

In the earlier session, the shares lost 1.45%, or Rs 13.25, at Rs 899.60.Currently, the stock is trading down 16.98% from its 52-week high of Rs

1,050.00 and above 22.45% over the 52-week low of Rs 711.90.

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Below is the comparison of the share price of Bank of Baroda with that of the

Sensex for the last 6 months i.e from Feb till July

Informed investor has always focused on the macros, but this time,rise in interest rates hit hardest for us.

In a discussion with CNBC-TV18, M D Mallya, CMD ofBank of Baroda shareshis view on where the interest rates head and how that would impacts, bothour daily costs and economy.

Q: Deposit rates are important for banks and even for investors.What kind of flow through does one see in a rising interest ratescenario for deposit rates?

Mallya: As far as the investor is concerned, the primary concern would be toensure that one has a real interest income in terms of the deposits. Wheninflation numbers are quite high, one would expect the rates of interest onthe deposits to be reasonably above that.Therefore, the interest rates get aligned on account of a larger inflationespecially guided by the cues given by the central bank as per the various

rate scenario is concerned.If we look at it, a one year deposit would give a yield of around 9.5-9.75%,which is marginally higher than the inflation. The overall interest ratescenario is determined on account of number of factors like the inflationnumbers. Therefore, the investor would always like to get a positive return.

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Q: The first impact is on lending rates which affects every consumerin the system. What happens when the interest rate cycle moves upas directed by the RBI? How much of a trickle down happens intolending rates? Do they start inching increasingly in tandem with theinterest rate cycles set by the RBI or is there some dispersion in

movement?

Mallya: As far as the interest rate direction is concerned, one goes by theguidance given by the RBI. The changes take place as per the signal rates.Therefore, the transmission takes place.Coming to the lending rates, one would have to price the borrowings onaccount of factors like the liquidity and credit demand available in thesystem. In case the liquidity is comfortable and the credit demand of pickupis not in pace with the accretion of resources or liquidity, there might notbeen any increase in the interest rates per se immediately.There are other host of factors that determine the lending rate, both thebase rate as well as margins above the base rate, which takes into accountthe operational and credit cost.

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References:

http://rbidocs.rbi.org.in/rdocs/notification/PDFs/APS030511F.pdf

http://www.bankofbaroda.com/interest.asp

http://indiaearnings.moneycontrol.com/sub_india/compnews.php?

autono=558350

http://www.topstockresearch.com/INDIAN_STOCKS/BANKS/Bank_of_Baroda.ht

ml

http://banking.contify.com/story/bank-baroda-apr-jun-net-profit-202-year-rs-

1033-bln-nii-improves

http://myiris.com/shares/company/writeDet.php?icode=banofbar#rec

http://myiris.com/shares/news/corporateNews.php?

cSelect=5&icode=BANOFBAR

http://www.bankofbaroda.com/fin/fin_directorreport.asp

http://www.bankofbaroda.com/interest.asphttp://www.bankofbaroda.com/int_adv.asp

http://www.indiainfoline.com/Markets/News/Bank-of-Baroda/3840811436

http://www.moneycontrol.com/financials/bankofbaroda/results/quarterly-

results/BOB

http://money.livemint.com/IID66/F132134/Quarterly/Results/Company.aspx

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6631&Mode=0

http://www.moneycontrol.com/annual-report/bankofbaroda/directors-

report/BOB

http://www.moneycontrol.com/financials/bankofbaroda/results/quarterly-results/BOB

http://www.bankofbaroda.com/fin/fin_qtyJune11.asp

http://www.bankofbaroda.com/fin/fin_qtyJune11.asp

http://www.livemint.com/2011/07/27224455/Bank-of-Baroda8217s-June-

qu.html

http://www.indiainfoline.com/Markets/Company/Fundamentals/Quarterly-

Results/Bank-of-Baroda/532134

http://www.hdfcsec.com/company/Bank-of-Baroda.html

http://www.moneycontrol.com/news/bank%20of%20baroda/brokerage-reports-BOB-3months-5.html

~~~~~

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