Thursday, 30 June 2016

Bank NPA crisis: Here’s what is crucially missing

RBI Governor Raghuram Rajan will be remembered for his relentless pursuit of India’s monetary policy reforms, controlling inflation and advocating a stable policy framework. His precise diagnosis and direction for “deep surgery” for the chronic NPA problems of the banking sector, especially in public sector banks, is also noteworthy. He minced no words when he said that routine “band-aid” would not clean up the balance-sheet mess and put them back on a healthy trajectory.
RBI has been issuing master circulars from time to time, encompassing entire aspects of ensuring true and fair financial statements of banks. RBI has insisted that the new restructured loans, where the borrower has renegotiated the terms of repayment, must be classified as non-performing assets (NPA) from April 1, 2015, with provisioning of 15% of the outstanding instead of 5% for restructured loans, so that banks can take early recovery action or sell NPAs to asset restructuring companies (a loan turns into an NPA when interest repayments remain due on the 91st day).
Financial audit of banks are done by statutory central auditors (SCAs) and statutory branch auditors (SBAs). On the basis of prescribed eligibility criteria determined by RBI, the CAG prepares graded panel for empanelment and selection of eligible SCAs and the The Institute of Chartered Accountants of India (ICAI) prepares a panel for eligible SBAs in PSBs and send the panels for RBI’s scrutiny before finalisation of the lists. RBI has prescribed the number of SCAs and SCBs to be appointed to audit large, medium and small PSBs, and for audit of their branches.

Also Read: Banking crisis: Why promoters must be removed quickly

The government had delegated selection and appointment of SCAs and SCBs to individual PSBs from 2014-15 from the eligible list of firms, giving enough freedom to choose the auditors of their liking. Banks are free to select statutory auditors from the list with the approval of the Audit Committee of Board (ACB). The selection of audit firms as SCAs and SBAs is subject to RBI approval. The independence of auditors/audit firms is ensured by appointments of SCAs for a continuous period of three years, subject to satisfying the eligibility norms by the firms each year; PSBs cannot remove audit firms during the above period without the prior approval of RBI.
The option to consider whether concurrent audit should be done by bank’s own staff or external auditors is left to the discretion of individual banks. A critical issue is that auditors should be experienced, well-trained and, most importantly, adhere to applicable accounting and auditing standards, mandatory guidelines and the ethical code of conduct. Auditors must be able to function independently with professional autonomy and judgement. Adequate facilities and the requisite records must be made available to auditors with initial and periodical familiarisation of the process. Relevant internal guidelines or circulars or important references including the circulars issued by RBI and/or Sebi and other regulating bodies must be made available to the concurrent auditors.
Remuneration of auditors may be fixed by banks following the broad guidelines framed by the ACB, taking into account coverage of areas, quality of work expected, number of people required for the job, number of hours to be spent on the job, etc. Banks may devise a proper reporting system and periodicity of various check-list items as per risk assessment. Serious irregularities pointed out by the audit should be straight away reported to the controlling offices or head offices for immediate action. The findings of the concurrent audit must be placed before the ACB. An annual appraisal or report of the audit system should also be placed before the ACB.
Whenever fraudulent transactions are detected, they should immediately be reported to the inspection and audit department, and the chief vigilance officer and controlling officers. Follow-up action on the concurrent audit reports must be done promptly by the controlling office and inspection and audit department. When RBI has been insisting on true and fair financial statements by banks through various notifications, master circulars, guidelines and directions time and again, why has the banking sector, especially PSBs, been pursuing window dressing so consistently for years till the position reached the current imbroglio? Statutory auditors finally certify the accounts true and fair. Whenever any falsification of accounts on the part of the borrowers is observed by the banks or financial institutions, the auditors are responsible to bring it to the notice of the management. Auditors must have to follow auditing standards, applicable accounting standards, rules and the professional code of ethics. Being the regulator of chartered accountants, ICAI is duty bound to fix accountability of auditors if they are found lacking in professionalism and ethics.
There should be disciplinary action by ICAI. In fact, ICAI, RBI, the Department of Banking Supervision and Indian Banks’ Association are mandated to circulate the names of guilty chartered accountant firms. RBI is required to share such information with other financial sector regulators, ministry of corporate affairs and CAG. The lenders can obtain a specific certification from the borrowers’ auditors regarding diversion/siphoning of funds by the borrower. The rules also specify that banks and financial institutions may ensure incorporation of appropriate covenants in the loan agreements to facilitate such certification by auditors. RBI stipulates that lenders may engage their own auditors for such specific certification purpose without relying on certification given by borrowers’ auditors for ensuring proper end-use of funds and preventing diversion/siphoning of funds by the borrowers. Bank must invariably exercise basic minimum own diligence in the matter.
Master directions issued by RBI in January 2016 consolidate all regulatory matters under various Acts and are put on the RBI website. Proper medicine is prescribed for chronic NPA infection, but what is missing is strict implementation. Creating more rules, regulators and watchdogs may lead to overlaps, confusion and would prove to be counterproductive. If prompt administration of extant rules is taken care of and due diligence is exercised by regulators, bank management, auditors, audit committee and the board of directors, the NPA crisis can be resolved.

Wednesday, 29 June 2016

Edelweiss PE eyes growing tech start-up space

Edelweiss Private Equity, the venture capital and private equity arm of diversified financial services firm Edelweiss Financial Services Ltd, is looking to close at least 8-12 deals in the Indian start-up ecosystem this year itself.
The venture arm, which was set up mid last year on back of the growth in the start-up space, will invest in both early- and growth-stage companies.
While the fund is sector agnostic, the inclination is more towards fintech, artificial intelligence, and other tech-enabled start-ups.
A major focus is also towards the rising consumer space and categories that can drive demand for the next 10-15 years.
Pranav Parikh, head of Edelweiss PE, told BusinessLine that the fund is looking at doubling the investments in growth stage this year. While, he did not disclose the size of the fund, Parikh said a typical early-stage deal would be $1-3 million, while growth-stage investments will be $10-15 million.
The Edelweiss private equity and venture capital fund has already invested in five companies, including fitness wearable start-up GOQii, data analytics company BRIDGEi2i and consumer firm Freshee.
Indian landscape

“We are quite optimistic about the investing landscape in India and are looking at companies that can solve actual problems in healthcare, finance, transport spaces, to name a few. We play across the spectrum and will invest in tech-enabled emerging businesses, such as data analytics, Internet of Things, smart devices, tech products, as well as consumer companies with strong online and offline brands. We look forward to working with entrepreneurs and strive towards making a few of them leading brands or category leaders in their respective fields,” Parikh said.
Parikh, who has over one-and-a-half decades of investment experience in the US and Indian markets, joined Edelweiss last year to drive PE and VC investments. Parikh used to work with multi-asset private investment firm Q Investments, and was leading its Indian arm till 2013. Edelweiss PE fund is an internal fund at present, but may raise more funds from institutional investors in the next 1-2 years.
The company plans to stay invested in all its portfolio companies for at least 5-10 years, Parikh said, adding that the current market is very volatile and that a lot of investors are expected to exit their portfolios.
“The last PE rush was around 2007-08. Investments made during that time are expected to mature by now.”
He said the start-up space will see the next round of funding boom around next March.

Edelweiss is among a few other financial service firms and diversified conglomerates to have set their eyes on the growing start-up space in India. IIFL has created a corpus of ₹1,000 crore; JSW has set aside about 100 crore to invest in tech-enabled start-ups over the next three years.
Meanwhile, several private-sector and public-sector banks have also turned investors with Kochi-based Federal Bank looking to invest around 90 crore in early-stage start-ups. State Bank of India also recently announced that it has created a corpus of 300 crore for the same.

Tuesday, 28 June 2016

India Weekly Market of Economy, Corporates, Global Events & Politics

      India Market Weekly


·         Brexit drags rupee lower, RBI tries to arrest steep fall. The rupee took a sharp plunge of 96 paise against the US dollar to crash below the 68-level today as Britain's vote for leaving the EU played havoc in global markets.

·         India ranks 10th in FDI inflows: UNCTAD report: India’s FDI inflows have increased to $44 billion in 2015 as compared to $35 billion in 2014, and the growth has been across the board, the report said.

·         LIC Chairman S K Roy, appointed by previous UPA government, has resigned nearly two years ahead of completion of his five-year term.
·         NITI Aayog member Bibek Debroy said on June 22 reiterating the suggestion made by a panel headed by him last year for scrapping separate railway budget

·         Govt said it is revising its drugs law to make it easier for companies to do business while ensuring the safety and efficacy of medicines. Ministers decided the current law cannot effectively regulate areas such as biological drugs, stem cells and regenerative medicines, medical devices, and clinical trials

·         Cabinet has given approval for a special package for employment generation and promotion of exports in Textile and Apparel sector. It will have 3years sunset clause.

·         The pharma sector is expected to grow by 20% on account of relaxed FDI norms and a separate ministry to focus on the sunrise sector is on the anvil, Chemical and Fertiliser Minister said.
·         The Union Cabinet has approved the establishment of "Fund of Funds for Startups" (FFS) at SIDBI for contribution to various Alternative Investment Funds (AIF), registered with SEBI which would extend funding support to Startups. (PIB)
·         Cabinet gave a go-ahead to auctions across seven bands. The sale will see the government put around 2,300 MHz of spectrum on sale — the highest-ever in a single auction — which is likely to fetch the exchequer at least Rs 5.5 lakh crore if all the mobile airwaves are sold at the reserve price.
·         Execution of works in 20 smart cities will kick-start from June 25 with PM launching 14 projects in Pune, while 69 others will commence in other parts of the country (PIB)
·         The railways was also asked to increase its share in freight transport from the current 33% to 37% in the next three years in a NITI Aayog report to the PM. Among other targets are doubling the average speed of freight trains from 24 kmph to 48 kmph in three years, and raising that of mail and express trains to 80 kmph in three years, and 110 kmph in 15 years. The targets take into consideration the fact that the railway’s dedicated freight tracks in the western and eastern corridors are expected to be completed by 2019 and 2021, which will divert many freight trains to these corridors. (PTI)


·         As Britain voted to exit the EU, Tata Motors-owned Jaguar Land Rover today said it is "business as usual" and will manage the long-term impact and implications of the decision, insisting "nothing will change" overnight for it and the automotive industry.

·         CARE, CRISIL may face SEBI action in Amtek Auto case: The crisis drew attention to the conduct of the rating agencies in assigning a credit rating to the Amtek Auto bonds and the JP Morgan schemes. CARE Ratings chose to suspend its rating on Amtek Auto on 7 August 2015. The agency had given Amtek Auto an AA- rating. Crisil Ltd had assigned a rating of AAAmfs (signifying the highest portfolio credit quality) to the JP Morgan India Treasury Scheme in May 2015.

·         Indiabulls Alternative Investments Ltd (AIF) to raise Rs1,000 cr from NRIs for realty fund having a tenure of four years, extendable by a year. Indiabulls Asset Management Co. Ltd, a unit of Indiabulls Housing Finance Ltd, is currently raising its second fund— Indiabulls High Yield Fund— that aims to raise up to Rs1,000 cr from domestic investors to invest in residential projects in key property markets.

·         The Motherson Sumi Group is mulling a mega restructuring plan that will allow to it raise more funds and expand its business

Global events

·         Prime Minister David Cameron on Friday announced his resignation in the wake of defeat in the crucial referendum after Britain voted to leave EU in a deadly blow to the 28-nation bloc that triggered a panic reaction in world markets and raised questions over immigration and other issues in the UK after the divorce.

·         The pound has fallen to levels not seen since about 1985

·         Making the first moves to calm the markets following Britain's vote to leave the European Union (EU), Bank of England Governor Mark Carney on Friday announced that it was ready to provide additional liquidity worth £250 billion and take any other steps needed to ensure market functioning.

·         Bank stocks were pummeled at the open of European trade Friday in the aftermath of a landmark vote by the U.K. to leave the European Union, which has roiled global markets.

·         Gold prices zoomed to 26-month high of Rs 30,885 per ten gram today in the biggest single-day gain of Rs 1,215 since August 2013 as Britain voted to exit the European Union leading to bloodbath in global equity and currency markets.

·         As Britain voted to leave the European Union in a landmark referendum, India on Friday said it values its ties with both the UK and EU and will strive hard to strengthen these relationships in the years ahead.

·         Meghalaya seeks exemption from coal mining law

·         US reiterates support for India's NSG bid

·         Govt may review provisions of Geospatial Bill that proposes jail term of seven years and a fine up to Rs 100 crore if anyone wrongly depicts India's map

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