Amid crisis in banking, fresh risk for the RBI

The banks, especially nationalised ones, in India have been in a perpetual state of crisis.

In any economy, the banking system is the steel frame that holds it all together. Banks can go bust when depositors withdraw money in panic, or when the companies or people to whom they give loans are unable to return them. The system is in crisis when the bad loans equal or exceed the capital of the banks. It is saved only when governments bail out the banks by putting in more money to “recapitsalise” them. The banks, especially nationalised ones, in India have been in a perpetual state of crisis. The bankers on instructions (a phone call) from powerful politicians extend loans to dodgy promoters. The rot starts with top appointments that are made in deals in which both top managers and their political bosses share the cut. The practice has been going on for so long that, it became part of business lore, until RBI Guv Raghuram Rajan clamped down, The crucial factors are the percentage of loans that are “non-performing”, the infusion of public money needed to save the banks, the pressure that can be put on promoters to return the money, and the effect of all this on the economy. The June 2016 Financial Stability Report (FSR) brought out by the RBI quantifies the crisis.

This was because the gross non-performing advances (GNPAs) of banks “sharply increased to 7.6 per cent of gross advances from 5.1 per cent between September 2015 and March 2016.” Besides this, the banking sector’s GNPAs showed a sharp increase year-on-year of 80 per cent despite the low growth of credit. The growth of bad loans was not evenly distributed. It is the large borrowers who do not pay back. The ratio of bad loans of large borrowers increased sharply from 7.0 per cent to 10.6 per cent during September 2015 to March 2016. Moreover, “there was a sharp increase in the share of GNPAs of top 100 large borrowers from 3.4 per cent in September 2015 to 22.3 per cent in March 2016.” The crisis in the banking system is thus largely a result of the big borrowers’ inability or unwillingness to pay. One recalls the ever-flamboyant Vijay Mallya, who did not settle his dues to the banks and took refuge in the UK.

The debt owed by some of the biggest companies in the power, transport and steel sectors made for compelling reading in a report “The House of Debt” by merchant banker Credit Suisse. The report mentioned 10 top debtors. The total debt of these 10 groups was Rs 7.32 lakh crore (or trillion). The debt of these groups has risen seven times over the past eight years and some of these groups are carrying an interest burden that exceeds their earnings before interest and taxes. Not all these loans are bad, and many of these business groups are selling part of their assets to reduce their debt. Still, around Rs 4 trillion will be needed by the government if it is to recapitalise the banks. The pumping of money into banks comes from the government’s budget expenditure.

NPAs: Need For A Holistic Approach To Resolution

The banks have been given time till March 31, 2017 by RBI to clean up their books while the gross non performing assets have reportedly ballooned to over Rs 5.5 lakh crore by end of March 2016

Banking system faces enormous challenges as the spectre of gargantuan non-performing assets (NPAs) is haunting them even as the regulator is coming out with new schemes to address the NPA menace head-on.

The banks have been given time till March 31, 2017 by RBI to clean up their books while the gross non performing assets have reportedly ballooned to over Rs 5.5 lakh crore by end of March 2016. This Herculean task needs to be addressed in a holistic manner, keeping the Indian ecosystem in mind, so as to minimise future slippages in the accounts. To begin with, it would be pertinent to recognise that all borrowers are not ‘chors’ and that all lenders cannot be accused of not having done the due diligence and then try to find a resolution before the problem starts eating into the very growth of economy.

Aggravating Factors
The list of factors that caused a jump of more than 475 per cent in NPAs in a matter of 5 years are many. However, factors like commodity cycle downturn, delays in approval from government be it environmental clearance, land acquisition process, obtaining right of way, forest clearance and lack of dispute redressal mechanism in a business-like manner, besides, policychanges like cancellation of telecom licences, withdrawal of coal and iron ore mines, dumping by some countries which made local products unviable, were other contributory factors which were further compounded by the indecisiveness of the decision makers who simply did not take any timely decisions fearing political backlash.

Just to elaborate this point further, let me draw on the steel sector. According to RBI’s Financial Stability Report, June 2015, five out of the top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors. And then the operational units in the steel sector lost their cost competitiveness. As is well-known, some of the critical factors affecting the competitiveness of this industry, particularly in economic downturn, include government’s support (tax incentives), tariff protection, raw material security at competitive prices and availability of infrastructure and logistics. Who would have seen this coming when the projects were set up.

Five Sectors-Demand Upside Holds The Key
It is interesting to note here that five sectors-iron and steel, infrastructure, EPC, mining and textile account for bulk of the reported NPAs which had their share of external factors responsible for accumulation of NPAs in the last 4-5 years. While wilful defaulters need to be dealt with strictly, it is also a fact that all these sectors play key role in the growth of the economy-both at the domestic level and in international trade. A robust revival of demand would enable the companies in these sectors to generate enough cash flows to not only service the debt but return to growth path in a short time.

RBI’s S4A Scheme-May Not Meet With Enough Success
During the last few years, the corporates have piled on an unmanageable mountain of debt without commensurate increase in the earning capacity. In this backdrop, the caveats attached relating to limiting the lenders from changing any of the terms of repayment and interest rate in respect of the sustainable debt portion as also the high level of equity dilution that could be expected with the implementation of the scheme, may lead to limited success and may not meet with the desired results.

Financial Health-palliative Care
As RBI Governor rightly put it, ‘band aid’ approach would not work over a long term. What is needed is a major surgery. While it is a good sign that banks are finally willing to acknowledge the problem, it does not mean that the issue is resolved. The real task begins only now. It is not DRT or CDR or SDR or S4A or Bankruptcy laws alone which can cure this malady. What we need is a macro view taken on the entire economy and then arrive at a resolution strategy which could unlock fair value from the distressed assets for the benefit of all stakeholders. 

The success of the above will to a great extent depend on pro-active measures taken in a co-ordinated manner by Govt. and the Regulator to quickly respond to the challenges being faced by the industry and ensure long term stability in policies which are critical to their well-being. To address the existing NPA problem and protect the economic value of their loan, it is imperative that banks go for a holistic resolution. It is the right time that pain is acknowledged, loan book is corrected, and assets are rightly priced and nurtured further by infusing new money for revival and operations by inviting a new promoter or special situation fund who can bring in their portion of equity or risk capital.

We all understand that without removing the extra flab of debt, the brides may not find any suitors. Further, the investors willing to take over stressed assets are well informed and fully aware of the inherent risks and challenges associated with reviving a distressed company without the support of the old promoters. The new promoter/investor will not be able to bring in the entire equity since Indian businesses cannot sustain superlative returns as they are not very competitive. Thus, it essentially means that the project/company would need to be supported mostly by the existing lenders who have access to cheaper funds in the form of low cost deposits and can manage risk of recovery in the hands of new management/special situation fund who have proven track record of success with higher credibility. When this happens as also with the bankruptcy laws coming in place, the business of investment in distressed assets will become more mature and there will be good interest among serious investors and business assets will be put back to use.

Unlike in other parts of the world, where business successes and failures are taken with equanimity and promoters do not mind shutting the business and moving on, Indians hate ‘failure’ and see failure as a stigma and leave no corner to project success. This die hard belief in making the venture successful and running might turn out to be a blessing in disguise in turning around the stressed assets and resolving the NPAs.

Bankers to conduct marathon meetings to deal with stressed cases

Bankers also intend to evaluate the feasibility of a new financial structuring scheme introduced by the Reserve Bank of India in June

In March, lenders had held similar meetings over two days, where almost all large stressed cases were taken up and tough measures to counter stress were discussed

Lenders, led by State Bank of India (SBI) and ICICI Bank, will conduct extensive joint lender forum (JLF) meetings with the managements of at least 10 stressed firms this month, two people in the know said. Apart from taking stock of progress of these accounts, bankers also intend to evaluate the feasibility of a new financial structuring scheme introduced by the Reserve Bank of India in June.

According to one of the two persons quoted above, an official at a large state-owned lender, this is a quarterly process where banks talk to large stressed companies to monitor the progress of previously approved resolution plans and to decide on new recovery strategies. The banker spoke on conditions of anonymity as he is not allowed to be quoted in the press.

In March, lenders had held similar meetings over two days, where almost all large stressed cases were taken up and tough measures to counter stress were discussed. The companies that banks had met included Visa Steel Ltd, Uttam Galva Steels Ltd, Adhunik Metaliks Ltd, Aban Offshore Ltd, Bhushan Power & Steel Ltd and Bhushan Steel Ltd.

In many cases, banks had asked managements to implement these measures and show results by June end.

“We have already mandated necessary evaluation tests in almost all large stressed cases. In the meetings, we are only focussing on cases where the evaluation tests have established viability. In the other cases, we may look at some other stricter measures,” said the second person quoted above, also speaking on condition of anonymity.

An evaluation test is needed to establish viability if banks choose to go with the Reserve Bank of India’s (RBI’s) newly introduced scheme, Scheme for Sustainable Structuring of Stressed Assets (S4A). Under S4A, which was introduced last month, banks can convert up to half the loans held by corporate borrowers into equity or equity-like securities.

Raghuram Rajan coy about second term as RBI Governor

New Delhi has not yet asked Raghuram Rajan whether he would like to pad up for a second innings at the Reserve Bank of India after his term ends on September 4. In the past one month, there has been endless speculation about the equations between the government and the RBI governor — whether Rajan would be given a cold shoulder, or offered another term, or invited to play a different role.

"That question, I can't answer. First I have to be asked, 'Do you want to continue?' Then, I can answer," said Rajan at the Shiv Nadar University on Saturday when ET asked him whether he would like a second term as the RBI boss. There is a widely shared perception in financial markets and banking circles that the Centre may find it difficult to refuse a second term to Rajan if he were keen on continuing. But as of now, the Chicago school economist — who in the past three years has positioned himself as an inflation warrior — is keeping options open.

"I love teaching. I will go back to academia once I am done with my work here," Rajan said in a meeting with the Shiv Nadar University's faculty. The governor was the chief guest at the second convocation of the university, which was founded in 2011. Even though corporate India and local markets have criticised Rajan's policy to keep interest rates high and liquidity tight, foreign portfolio managers, who have gained from high rates and a stable rupee, have been vocal admirers of Rajan.

Last week, Christopher Wood, equity strategist at brokerage and investment group CLSA, said the biggest risk to the Indian bond and currency market will be if the RBI governor is not given a second term. "He (Prime Minister Narendra Modi) must recognise the constructive role played by RBI under Rajan in both imposing a tighter NPL (non-performing loan) system on banks, carrying out a stress test on banks and putting pressure on them to go after defaulting creditors," Wood wrote in the widely circulated CLSA newsletter.

Before taking over as the RBI governor in September 2013, Rajan was the chief economic adviser in the ministry of finance. Prior to that, he was a professor of finance at the University of Chicago Booth School of Business and chief economist at the International Monetary Fund. "I have no problems with India's growth. It could be better. The best is yet to come," said Rajan.

Rajan also stressed the need to have research-oriented universities. "As a country, as we grow in stature, we have to contribute ideas. We are always protesting — this doesn't look good, that doesn't look good. We are always underprepared and that's why we shout." Back in the '50s, he pointed out, ideas and concepts such as Panchsheel emerged in India, but today "we are a shouting lot".



"If we contribute ideas based on facts, based on research, we could very quickly become leaders," he said. Addressing students at the convocation, Rajan said, "India is changing, in many ways for the better. You will be able to help shape our country, the world, and your place in it. Play to your strengths." Referring to the Shiv Nadar University, founded by billionaire tech czar Shiv Nadar, Rajan said, "I would like to see places like this flourish. Thoughtful philanthropy, as reflected in the founding of this school, can further help enhance society's acceptance of great wealth."

However, adding a word of caution, the RBI governor said, "We should make sure that unscrupulous schools do not prey on uninformed students, leaving them with high debt and useless degrees." Greater Noida, where Shiv Nadar University is located, is emerging as an educational hub with around 50 colleges attracting students from across the country.

RBI releases ‘Quarterly BSR-1: Outstanding Credit of Scheduled Commercial Banks for December 2015'

The Reserve Bank of India today released the web publication ‘Quarterly BSR-1: Outstanding Credit of Scheduled Commercial Banks (SCBs), December 2015’. Under BSR-1, information on occupation/activity and organisational sector of the borrower, type of account, interest rate, credit limit and amount outstanding are collected for each loan account. Such information is aggregated at the bank group, population group and state level using locational parameters of the reporting bank offices. This web publication contains comprehensive quarterly data on gross bank credit of SCBs (other than RRBs) since December 31, 2014. The data can be accessed at http://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications#!12 through the website: Database on Indian Economy (DBIE) (http://dbie.rbi.org.in). Highlights: Bank credit registered a growth of 9.7 per cent in December 2015 as compared to December 2014 largely due to higher credit growth of private sector banks. In terms of total number of credit accounts, banking sector registered a growth of 12.2 per cent. More than four-fifth of the total credit accounts of the banking sector were concentrated in agriculture and personal loan segment. However, the concentration in terms of outstanding credit in these segments was only 30 per cent. The proportion of credit in terms of amount outstanding to industry was highest at 42 per cent in December 2015. Though large credit accounts (credit limit above ₹ 250 million) registered a y-o-y growth of 3.1 per cent in December 2015, their share in total amount outstanding declined marginally to 46.5 per cent from 47.8 per cent registered in December 2014. The weighted average lending rate (WALR) of all rupee loans and advances was estimated as 11.39 per cent in December 2015 as compared to 11.59 per cent in September 2015. The reduction in WALR was observed in all sectors. Sangeeta Das Director Press Release : 2015-2016/2572

Lok Sabha clears Finance bill: India will grow faster if monsoon forecasts hold true, says Arun Jaitley

The passage of the Finance Bill will allow formation of the six-member monetary policy committee, which will include the RBI Governor and three government nominees. 

After two consecutive years of drought, finance minister Arun Jaitley said, India can grow faster if forecasts of a better monsoon hold true as that will improve agriculture and raise rural income.

While replying to a debate on the Finance Bill in Parliament, Jaitley said: “Economy, which had been expanding on strength of public investment, highest foreign direct investment (FDI) and urban demand, can grow faster if rural demand is added.”

Even though global economic outlook remains bleak, India remains the fastest growing major economy and has the potential to grow at “an even faster pace”, he added. Indian economy grew by 7.6 per cent in 2015-16 and is projected to grow by 7.5 per cent in the current year. Latest forecasts predict above-average rainfall in India after two years of drought.

After the reply, the House passed the Finance Bill that marks the culmination of the three-stage budgetary process in the Lok Sabha. The Bill will now go to Rajya Sabha.

Jaitley also ruled out rollback of 1 per cent excise on non-silver jewellery saying the levy was not applicable on small traders and artisans and only jewellers with more than Rs 12 crore turnover last year and Rs 6 crore for this year will attract the duty.

“I have not been able to understand the politics of hatred for ‘suit’ but love for gold,” he said, adding that if the Congress has objections to the levy, it can begin by removing the 5 per cent VAT on bullion in Kerala where it is the ruling party.

Jaitley also introduced amendments to the Finance Bill, 2016, for capital gains clarifying that the long-term capital gain period in case of unlisted securities has been reduced to 24 months from 36 months.

Separately, the Central Board of Direct Taxes, in a recent order to field formations, said that income arising from transfer of unlisted shares, irrespective of period of holding, would be taxable under the head capital gain. This has been done to reduce disputes and litigation as the assessing officer could earlier treat these gains as business income.

On black money, he said efforts of government have brought Rs 71,000 crore of undisclosed assets to the books. He, however, ruled out bringing agriculture income under the tax net, saying large farm-based income was rare and people using agriculture as front to hide income from other sources would be dealt with tax authorities.

Jaitley said tax notices have been sent to all the names of those holding offshore accounts that have been disclosed in the Panama papers and action will be taken against those illegally parking money abroad.

Highlighting the problem of non-performing assets (NPAs) of banks, Jaitley said, “NPA issue with banks is an issue of concern. Some loans may have been given wrongly. I am not going into who is responsible for it. But weakened business cycle due to global economy has also impacted bank balance sheets.” He added, “Hiding NPA will not resolve the problem. It should be reflected in balance sheet and addressed via capitalisation.” Jaitley said the government has drafted the amendments to the RBI Act, which will pave the way for creation of monetary policy committee, as was announced in the Budget.

The passage of the Finance Bill will allow formation of the six-member monetary policy committee, which will include the RBI Governor and three government nominees.

Sun Capital

RBI releases “Draft Guidelines for ‘on tap’ Licensing of Universal Banks in the Private Sector”

The Reserve Bank of India today released on its website, “Draft Guidelines for ‘on tap’ Licensing of Universal Banks in the Private Sector”.  It has sought views/comments on the draft guidelines from banks, non-banking financial institutions, industrial houses, other institutions and the public at large. Suggestions and comments on the draft guidelines may be sent by June 30, 2016 to the Chief General Manager, Reserve Bank of India, Department of Banking Regulation, Central Office, 13h floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai-400001. Suggestions/comments can also be emailed by clicking here.

Final guidelines will be issued and the process of inviting applications for setting up of new universal banks in the private sector will be initiated after receiving feedback, comments and suggestions on draft guidelines.

In a departure from the earlier guidelines on universal banks dated February 22, 2013, the present guidelines include (i) resident individuals and professionals having 10 years of experience in banking and finance as eligible persons to promote universal banks; (ii) large industrial/business houses are excluded as eligible entities but permitted to invest in the banks to the extent of less than 10 per cent; (iii) Non-Operative Financial Holding Company (NOFHC) has now been made non-mandatory in case of promoters being individuals or standalone promoting/converting entities who/which do not have other group entities; (iv) The NOFHC is now required to be owned by the promoter/promoter group to the extent of at least 51 per cent of the total paid-up equity capital of the NOFHC, instead being wholly owned by the promoter group; and (v) Existing specialised activities have been permitted to be continued from a separate entity proposed to be held under the NOFHC subject to prior approval from the Reserve Bank and subject to it being ensured that similar activities are not conducted through the bank as well.

Key features of the guidelines:

(I) Eligible Promoters

1. Existing non-banking financial companies (NBFCs) that are ‘controlled by residents’ and have a successful track record for at least 10 years.
2. Individuals / professionals who are ‘residents’ and have 10 years of experience in banking and finance.
3. Entities / groups in the private sector that are ‘owned and controlled by residents’ [as defined in FEMA Regulations, as amended from time to time] and have a successful track record for at least 10 years, provided that if such entity / group has total assets of ₹50 billion or more, the non-financial business of the group does not account for 40 per cent or more in terms of total assets / in terms of gross income.

(II) ‘Fit and Proper’ criteria

Promoter/promoting entity/promoter group should have a past record of sound financials, credentials, integrity and have a minimum 10 years of successful track record.

(III) Corporate structure

The requirement of Non-Operative Financial Holding Company (NOFHC) is not mandatory for individual promoters or standalone promoting/converting entities who/which do not have other group entities. Individual promoters/promoting entities/converting entities that have other group entities, shall set up the bank only through an NOFHC. The NOFHC shall be owned by the promoter/promoter group to the extent of not less than 51 per cent of the total paid-up equity capital of the NOFHC. Specialised activities would be permitted to be conducted from a separate entity proposed to be held under the NOFHC subject to prior approval from the Reserve Bank and subject to being ensured that similar activities are not conducted through the bank.

(IV) Minimum capital requirement

The initial minimum paid-up voting equity capital for a bank shall be ₹5 billion. Thereafter, the bank shall have a minimum net worth of ₹5 billion at all times.

The promoter/s and the promoter group/NOFHC, as the case may be, shall hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked-in for a period of five years from the date of commencement of business of the bank. The promoter group shareholding shall be brought down to 15 per cent within a period of 12 years from the date of commencement of business of the bank.

(V) Foreign shareholding in the bank

The foreign shareholding in the bank would be as per the existing foreign direct investment (FDI) policy subject to the minimum promoter shareholding requirement indicated in paragraph (IV) above. At present, the aggregate foreign investment limit is 74 per cent.

(VI) Corporate governance prudential and exposure norms

The bank shall comply with the provisions of Banking Regulations Act, 1949 and the existing guidelines on prudential norms as applicable to scheduled commercial banks. The bank is precluded from having any exposure to its promoters, major shareholders who have shareholding to the extent of 10 per cent or more of paid-up equity shares in the bank, the relatives of the promoters as also the entities in which they have significant influence or control.

(VII) Business plan for the bank

The business plan submitted by the applicant should be realistic and viable and address how the bank proposes to achieve financial inclusion.

(VIII) Other conditions

The bank shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank.

The bank shall open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census). The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic scheduled commercial banks. The board of the bank should have a majority of independent directors.

(IX) Procedure for application

• The licensing window will be open on-tap, and the applications in the prescribed form along with requisite information could be submitted to the Reserve Bank at any point of time.
• The applications will be referred to a Standing External Advisory Committee (SEAC) to be set up by the Reserve Bank.
• The Committee will submit its recommendations to the Reserve Bank for consideration.
• The decision to issue an in-principle approval for setting up of a bank will be taken by the Reserve Bank.
• The validity of the in-principle approval issued by the Reserve Bank will be 18 months from the date of granting in-principle approval and would thereafter lapse automatically.
• The Reserve Bank’s decision in this regard will be final.
• In order to ensure transparency, the names of the applicants for bank licences and the names of applicants that are found suitable for grant of in-principle approval will be placed on the Reserve Bank’s website periodically.

Background

It may be recalled that the Reserve Bank of India (RBI) had last issued guidelines for licensing of new banks in the private sector on February 22, 2013. Consequently, the Reserve Bank issued in-principle approval to two applicants and they have since established the banks.

Recognising the need for having an explicit policy on banking structure in India in line with the recommendations of the Narasimham Committee, Raghuram G. Rajan Committee and other viewpoints, the Reserve Bank came out with a policy discussion paper on Banking Structure in India – The Way Forward on August 27, 2013. After a thorough examination of the pros and cons, the discussion paper made out a case for reviewing the current ‘Stop and Go’ licensing policy and for considering a ‘continuous authorisation’ policy on the grounds that such a policy would increase the level of competition and bring new ideas into the system. The feedback on the discussion paper broadly endorsed the proposal of continuous authorisation with adequate safeguards. The first Bi-monthly Monetary Policy Statement 2014-15 announced on April 1, 2014, among other things, then indicated that after issuing in-­principle approval for new licences, the Reserve Bank will start working on the framework for on-tap licensing as well as differentiated bank licences, Building on the Discussion Paper and using the learning from the recent licensing process, such as, the experience of licensing two universal banks in 2014 and granting in-principle approvals for Small Finance Banks and Payments Banks, the Reserve Bank has now worked out the framework for granting licences to universal banks on a continuous basis.

Sun Capital

Paytm ropes in Wipro for payments bank business

Wipro will implement core technology solutions for Paytm’s payments bank business, which is expected to be rolled out in the second half of 2016.

Wipro will implement core technology solutions for Paytm’s payments bank business, which is expected to be rolled out in the second half of 2016.

Mobile wallet and e-commerce company Paytm (One97 Communications Ltd), led by Vijay Shekhar Sharma, received in August an in-principle approval from the Reserve Bank of India to set up a payments bank.

According to the company, Wipro will also manage integration of other key systems such as anti-money laundering solution and regulatory reporting solution, and will play a crucial role in helping Paytm interface its existing systems with the core banking solution. Wipro is also expected to put in place and manage data centers for the payments bank to ensure smooth functioning of the new unit, Paytm said in a statement.

Shinjini Kumar, CEO designate (Paytm Bank), said: “They (Wipro) have a demonstrated track record in banking technology in India that will be important in ensuring that our innovative solutions are integrated with core banking systems in a compliant and secure manner, creating the right platform for service delivery at large scale. We are a young and agile organisation and the Wipro team has demonstrated agility and flexibility that will be necessary to make this partnership meaningful.”

Payment banks can accept demand deposits and savings bank deposits from individuals and small businesses, up to a maximum of R1 lakh per account. The company had last year set aside $250 million for the payment banking business. It is planning to recruit around 3,000 people for the new business unit.

Paytm has hired Saurabh Sharma, a former Airtel executive, to head merchant and agent acquisition and Vikas Purohit, formerly with Amazon India, to lead banking operations.

Soumitro Ghosh, president, India & Middle East markets, Wipro, said, “Paytm is making steady strides towards its larger vision of financial inclusion in the country. Its payments bank is another step in this direction and we are happy to partner with them in their endeavour.”

Paytm, the consumer brand of mobile internet company One97 Communications with 120 million wallet users, is funded by Ant Financials (AliPay), Alibaba Group, SAIF Partners, Sapphire Venture and Silicon Valley Bank.

Sun Capital

RBI proposes rules to regulate P2P lending

The much awaited and widely acclaimed Real Estate (Regulation and Development) Act, 2016 comes into force tomorrow i.e May 1, 2016 setting in motion the process of making necessary operational rules and creation of institutional infrastructure for protecting the interests of consumers and promoting the growth of real estate sector in an environment of trust, confidence, credible transactions and efficient and time bound execution of projects.   

            Ministry of Housing & Urban  Poverty Alleviation has notified 69 of the total 92 sections of the Act on Wednesday this week bringing the Act into force from May 1,2016 culminating the eight year long efforts in this regard. A proposal for a law for Real Estate was first mooted at the National Conference of Housing Ministers of States and Union Territories in January, 2009.

            As per the notification announcing the commencement of the Act on May 1,2016, Rules under the Act have to be formulated by the Central and State Governments within a maximum period of six months i.e by October 31,2016 under Section 84 of the Act. Ministry of HUPA would make Rules for  Union Territories without legislatures while the Ministry of Urban Development would do so for Delhi.

            Section 84 of the Act stipulates that “The appropriate Government shall, within a period of six months of the commencement of this Act, by notification, make rules for carrying out the provisions of this Act.”

            Early setting up of Real Estate Regulatory Authorities with whom all real estate projects have to be registered and Appellate Tribunals for adjudication of disputes is the key for providing early relief and protection to the large number of buyers of properties.

            Section 20 of the Act says “The appropriate Government shall, within a period of one year from the date of coming into force of this Act, by notification establish an authority to be known as the Real Estate Regulatory Authority to exercise the powers conferred on it and to perform the functions assigned to it under this Act”. These Authorities decide on the complaints of buyers and developers in 60 days time.

            Section 20 of this Act also empowers appropriate Governments to designate any officer preferably Secretary of the Department dealing with Housing, as the interim Regulatory Authority until the establishment of Regulatory Authority under the provisions of the Act.

            Regulatory Authorities, upon their constitution get three months time to formulate regulations concerning their day to  day functioning under Section 85 of the Act.

            Likewise, under Section 43 of the Act, Real Estate Appellate Tribunals shall be formed within a maximum period of one year i.e by April 30,2017. These fast track Tribunals shall decide on the disputes over the orders of Regulatory Authorities in 60 days time.

            Under the directions of the Minister of Housing & Urban Poverty Alleviation Shri M.Venkaiah Naidu, a Committee chaired by Secretary (HUPA) has already commenced work on formulation of Model Rules under the Act for the benefit of States and UTs so that they could come out with Rules in quick time besides ensuring uniformity across the country. The Ministry will also will come out with Model Regulations for Regulatory Authorities to save on time.

            The time limits of six months for formulation of Rules and one year for setting up Regulatory Authorities and Appellate Tribunals are the outer limit and the States willing to act quickly could do so and the Ministry of Housing & Urban Poverty Alleviation would notify the remaining Sections of the Act to enable relief to the buyers under the Act as quickly as possible, as desired by Shri M.Venkaiah Naidu.

            The remaining 22 Sections to be notified relate to functions and duties of promoters, rights and duties of allottees, prior registration of real estate projects with Real Estate Regulatory Authorities, recovery of interest on penalties, enforcement of orders, offences, penalties and adjudication, taking cognizance of offences etc.

After RBI push, DCB Bank lowers lending rates

Private lender DCB Bank today reduced both base rate or the minimum lending rate and the marginal cost of funds-based lending rate (MCLR), a move which will lower EMIs for its borrowers.

While MCLR has been reduced by up to 0.5 per cent, the base rate has been cut by 0.06 per cent.

MCLR for overnight lending has been slashed by 0.5 per cent to 9.32 per cent while it has been lowered by 0.2 per cent to 9.72 per cent effective May 4, DCB Bank said in a statement.

MCLR rate for other maturities has been left unchanged, it said.

DCB Bank revised its base rate to 10.64 per cent per annum from the earlier base rate of 10.70 per cent, effective May 4.

RBI had asked banks to price fixed rate loans of up to three years based on marginal cost of funds from April 1.

The lending rate based on marginal cost of funds is lower than base rate in some cases, resulting in lower EMIs for borrowers. Most banks earlier decided lending rates based on their average cost of funds.

Sun Capital

Axis Bank cuts funds based lending rate by 15 bps

Axis Bank’s one-year MCLR will now be at 9.35%, down from 9.5%

Mumbai: Axis Bank Ltd on Tuesday reduced its marginal cost of funds based lending rate (MCLR) by 15 basis points (bps) across all tenors and its base rate by 5 bps, with effect from 18 April.

One basis point is one-hundredth of a percentage point.

In a statement, the lender said that its one-year MCLR will now be at 9.35%, down from 9.5% the bank had announced as on 1 April.

Two-year MCLR is set at 9.45%, while three-year rate is set at 9.5%, the bank said.

Axis Bank’s reduced base rate will be at 9.45%, for all its existing borrowers.

Even with the latest round of rate reduction, Axis Bank’s one-year MCLR is higher than that of State Bank of India (SBI), which had set it at 9.2% as on 1 April.

Axis Bank is the first lender to reduce its lending rates after the Reserve Bank of India (RBI) announced a 25 bps reduction in repo rates on 5 April and new liquidity measures making it easier for banks to access funds. The measures are expected to have reduced the cost of funds for banks.

RBI introduced MCLR on 17 December, and the guidelines mandated that banks must price incremental loans using MCLR.

Under MCLR, banks will need to consider their marginal cost of funds, or the cost incurred on incremental deposits across different maturities. To this, banks will add their operating costs, the negative carryover of their cash reserve ratio balances with the central bank and a tenure premium. MCLR is only applicable for new customers, while existing customers may choose to shift to it from the current base rate system.

Sun Capital

Why banking in India will never be the same again

India needs more banks of different shapes, sizes and business models. The banking regulator is responding to this need

Last week, the focus was on the change in the Reserve Bank of India (RBI)’s stance on liquidity and the cut in its benchmark policy rate and many of us overlooked the structural changes in the banking industry architecture that the Indian central bank had hinted in its first bi-monthly monetary policy for fiscal 2017. If RBI is serious about it, banking in India will never be the same again.

After giving licences to two full-service or so-called universal banks, 11 payments banks and 10 small finance banks, RBI is ready to release norms for bank licensing on tap soon. It is even exploring the possibility of licensing other differentiated banks. A discussion paper on that is expected in the next few months and they could include wholesale banks, custodian banks and investment banks.

The two new universal banks, Bandhan Bank Ltd and IDFC Bank Ltd, started operations last year. While Bandhan continues to focus primarily on small loans, the mainstay of its earlier microfinance avatar, IDFC is a corporate bank with a consumer banking wing. By April 2018, we could see 20 more—10 payments banks and an equal number of small finance banks. Of the 11 entities RBI had given conditional payments bank licences to, Cholamandalam Distribution Services Ltd has withdrawn from the race, citing competition and long gestation period. A couple more could follow. Meanwhile, Jalandhar-based Capital Local Area Bank will kick off operations as the first of the small finance banks this week as Capital Small Finance Bank Ltd.

Payments banks can collect deposits of up to Rs.1 lakh, provide payments and remittance services and distribute third-party financial products. They won’t be able to give loans and issue credit cards, but can provide debit cards and Internet banking services. Essentially, they will mobilize deposits on behalf of other banks, acting as a business correspondent. Small banks, on the other hand, will offer loans. They have to give 75% of their loans to the so-called priority sector, and 50% of the loan portfolio should constitute small loans of up to Rs.25 lakh, even as they will be subject to all prudential norms like any other commercial bank. While payments banks will stick to their niche and try to take away other banks’ fee income and look for opportunities in the remittance space, successful small banks can graduate to universal banks after a few years.

By the time these new entities settle down, we will probably see a few wholesale banks, custodian banks and even investment banks to focus on new niches and lend depth and sophistication to India’s banking landscape, where the bond market is still not deep enough to meet the needs of long-term funding.

The bulk of Indian banks’ bad assets is in the infrastructure sector. Many had rushed to lend, often under pressure from the government, without understanding the risks associated with infrastructure financing. Besides, they didn’t have the long-term resources to support such loans. Wholesale banks can fill in this gap. They will be able to generate long-term funds and probably won’t be subjected to the reserve requirements such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

CRR, currently 4%, is the portion of deposits that banks need to keep with RBI on which they don’t earn any interest. SLR refers to the compulsory bond buying by banks, currently 21.25% of deposits. Such banks will also be exempted from priority sector lending—loans to agriculture, low-cost housing and small businesses. Currently, 40% of a bank’s loan must flow into these segments.

Some of the large non-banking financial companies that raise funds from the wholesale market and lend to corporations can become wholesale banks. A few foreign banks, too, will be happy to enter this space, even though they have reservations about local incorporation, which RBI has been pushing for.

Custodian banks don’t dabble in commercial and retail lending; they safeguard a firm’s or individual’s financial assets such as stocks, bonds, currency, commodities, metals and money market instruments like commercial papers. They arrange settlements of sales and purchases, ensure delivery of securities and offer accounting, legal, compliance and tax support services to customers such as commercial banks, insurance firms, mutual funds and pension funds in multiple jurisdictions around the world.

Unlike commercial banks, which offer loans using cash deposited with them, custodian banks can lend securities. Currently, Clearing Corp. of India Ltd provides guaranteed clearing and settlement functions for transactions in government securities, foreign exchange and derivatives as well as money markets, while there are two depositories—National Securities Depository Ltd and Central Depository Service (India) Ltd. Once RBI issues the guidelines for custodian banks, clarity will emerge on the future of these entities.

Almost two decades ago, in the late 1990s, RBI pulled down the barriers between development financial institutions and commercial banks and encouraged universal banking—a model that makes a bank a one-stop shop for all banking products. The experiment has not succeeded. Government-owned banks, with close to 70% market share of banking assets, have piled up bad loans due to their lack of expertise in project financing even as the share of foreign banks has been shrinking due to their failure to face the challenges in the Indian market and troubles overseas. A handful of new private banks cannot meet the diverse needs of Asia’s third largest economy. And anyway, they have mostly focused on retail business.

India needs more banks of different shapes, sizes and business models. The banking regulator is responding to this need. At the same time, it is also trying to de-risk the balance sheets of state-run banks. The consolidation move, if it succeeds, will lead to larger but fewer universal banks. Many more, relatively smaller banks offering specialized services will complete the landscape.

Sun Capital

Cross-currency trading: taking the next steps forward

This is a milestone in financial liberalization and perhaps a step towards making India a South-Asian hub for financial markets

The Reserve Bank of India (RBI) first announced its intention to allow cross-currency derivatives last September. Not many paid attention, except perhaps the exchanges and some intermediaries. While everyone thought it would take a year or more to operationalise, RBI and the Securities and Exchange Board of India (Sebi) moved with speed and are set to launch cross-currency derivatives trading in three of the most liquid pairs in the world—US dollar versus euro, British pound and Japanese yen. To facilitate trading, the cross-currency derivatives markets will be open from 9 am to 7:30 pm, so as to cover Japanese and European market timings and the first hour of the US markets.

This is a milestone in financial liberalisation and perhaps a step towards making India a South-Asian hub for financial markets. It is not often that an entirely international product is allowed to trade on our exchanges. In fact, it is a message that relevant products of all hues will be listed in India, so as to attract all stakeholders and participants to make India a world-level market. Over the years after electronic trading was introduced, the expanded product line is impressive—demat, futures, options, commodities futures, currency futures, interest rate futures and now this.

Significantly, a lot of the technology is already in place. With ready infrastructure and a close association between the RBI and Sebi, it is inevitable that more such steps are on the anvil; we have already seen the move to allow foreign direct investment (FDI) in commodity broking.

Is it also an allied effort to finally free-float and internationalise the rupee? Perhaps inspiration has also been taken from China, which has determinedly focused on internationalising the yuan, which has seen its active trading turnover increase four-fold. But this will require a two-way endeavour. Not only will we have to promote cross-currency trading in India to attract global traders, we will also have to head to the world’s largest currency trading playground—London—and work our way into that circuit so that the rupee is actively traded. It also means stocking up our foreign exchange reserves, which we have been doing.

There could be immediate benefits to the domestic trade. Intermediaries stand to benefit from the new product as it will strengthen currency futures and options (F&O) as a revenue line. It also uses the existing dealing set-up and the employees are already familiar with the products. Only brokers’ research teams will have to master the global currency pairs and put out trading recommendations. Not a big task, yet something to work on as trading multiple assets can get complex. Specialist currency research analysts will be required to decipher global and country-specific business cycles and factors.

How other assets like commodities are faring will also affect this as much as exchange rates affect commodity prices. In case of commodities, the impact of release of economic data from several countries can have tremendous impact on a range of currencies. Witness the continuous changes in the strength of the US dollar as every move by the central banks of the US, the UK, Europe and Japan is analysed. There are many such determinants; as I said earlier, it gets complex. And so there is money to be made.

For clients, it is a new trading opportunity. It also allows full price linkage between asset classes. For example, the price of gold in US dollars primarily depends on the strength of the currency versus the euro. It also reduces one leg of the transaction for traders who, till now, had to synthesise two currency pairs to create the dollar-euro pair. With abundant real-time information available online in these pairs, and market timings designed to capture overseas news flows, this is an ideal product for traders in pursuit of profit.

To ensure that end-users also utilise the markets and it does not become a ‘punters only’ segment, one important bridge still remains to be crossed. Since this market is not deliverable, unlike a position in a bank, the enterprise will have to ultimately convert its forex position back to the bank where there will be a rate differential from the futures or options prices. This will make hedging a challenge. The second test will be liquidity in contracts beyond the immediate months; something that still has to be successfully tackled in our existing commodity and currency markets.

We will also have to surmount operational challenges. Currency is traded 24 hours every day, starting Monday morning in Japan to Friday evening in New York. Trading continues on holidays as well. If there is a holiday in, say, the US, trading will still take place in the rest of the world.

Read in conjunction with the recently announced benefits to Gujarat International Finance Tec-City Co. Ltd, also known as GIFT City, Sebi’s growing responsibilities, FDI in commodities broking, and trying to get interest rate futures off the ground (which is a necessity before the rupee becomes fully convertible), the big picture is clear. There are many ifs and buts, yet allowing cross-currency derivatives is a brave move with far-reaching consequences for the vibrant financial services industry in India.\

Sun Capital

RBI on Tuesday decided that from 1 April, fixed rate loans upto three years

RBI on Tuesday decided that from 1 April, fixed rate loans upto three years shall be priced with reference to MCLR (Marginal Cost of Funds based Lending Rate), whereas Fixed rate loans of tenor above three years will continue to be exempted from MCLR system.

Rating agency Moody’s said on 20 Dec’15 that the measures will reduce pressure on net interest margins (NIMs) of banks. However, ahead of RBI policy meet on 5 April, such measures in addition to expected Repo rate reduction would be positive for the industry as their cost of funding would go down.

Sun Capital
 (source: bit.ly/1MPoSke). 

Bankers see base rates falling after cuts in small savings interest rates

Bankers say reduction in interest rates of savings schemes will boost their ability to cut deposit rates.

The odds of banks paring base rates in April have increased given that interest rates on government savings schemes have been sharply lowered.

The government on Friday pared interest rates on most of its savings schemes, including public provident funds and social schemes such as the Sukanya Samriddhi scheme. Public Provident Fund rates were cut to 8.1% from 8.7% and those on one-year time deposit have been reduced drastically to 7.1% from 8.4%. The interest rate paid by the government on Kisan Vikas Patra (KVP), which matures in 110 months, has been cut to 7.8% from 8.7% till 31 March.

Following the cuts, these rates are now comparable with bank deposit rates and in some cases even lower. Banks have often complained that small savings schemes eat into their deposit base as the rates offered are high. Indeed, banks have pared deposit rates sharply in fiscal 2016 but have been stymied in their efforts to continue to do so by high rates in small savings schemes. The one-year deposit of State Bank of India (SBI), the country’s largest bank, now offers 7.5% and most banks’ one-year deposits offer similar rates. In contrast, the government-sponsored one-year deposit offered 8.4%, which now stands reduced to 7.1%.

Bankers said the reduction in interest rates of these schemes will boost their ability to bring down deposit rates and, thus, pass on the reduction in their cost of borrowings to customers by a reduction in lending rates.

“I think this is a very good move and will lead to better transmission of the Reserve Bank of India’s (RBI’s) policy rate cuts to lending rates,” said N.S. Venkatesh, executive director and chief financial officer, IDBI Bank.

The sharp slowdown in deposit growth of banks in FY14 to a 51-year-low of 11.4% underscored the problems faced by bankers in raising deposits. Part of this fall in deposits was attributed to the high interest rates offered by government schemes. Deposit growth stayed below 12% in FY15 and was 10% for the first 11 months of FY16, data from RBI showed.

RBI slashed its policy rates by a cumulative 125 basis points (bps) in calendar 2015 but banks pared lending rates only by 70 bps. “This is because high rates on small savings schemes make banks’ fixed deposits uncompetitive and, in turn, do not allow banks to reduce the cost of funds,” wrote Soumyakanti Ghosh, chief economist at SBI in a note dated 21 March. One basis point is one-hundredth of a percentage point.

The sharp reduction in small savings rate, coupled with an expected cut in policy rate by RBI in its April policy, could prod banks to bring down base rates faster. Currently, the lowest base rate in the industry is 9.3% offered by SBI. “The cut is extremely well timed. The adoption of MCLR (marginal cost of fund-based lending rate) itself would have brought down lending rates to new customers. Most banks would take a call at their ALCO (asset-liability committee) meeting in the first quarter on lending rates,” said an executive at a public sector bank requesting anonymity as he is not authorized to speak to the press.

RBI introduced the MCLR in December that would replace the base rate regime from April and will mandate banks to add a spread over their marginal cost of funds and a tenor premium for every maturity. MCLR is expected to reduce lending rates, especially for short-term loans.

Sun Capital