Tuesday 2 August 2016

ICICI Bank, Apollo to set up asset reconstruction firm

ICICI Bank to hold 30% stake, rest to be picked up by Apollo subject to passage of amendment in Sarfaesi Act proposed in the budget



ICICI Bank, the country’s largest private sector lender, has tied up with private equity firm Apollo Global Managementand Aion Capital Management to set up an asset reconstruction company (ARC) in India.

In a statement, the lender said they have entered into a memorandum of understanding (MoU) to work together for debt resolution in the country, in an effort to revitalise and turn around over-leveraged borrowers.


“The objective of the collaboration will be to streamline the operations of borrowers, facilitate deleveraging and arrange additional funding on a case-by-case basis. The collaboration will bring together ICICI Bank’s experience and understanding with respect to the Indian corporate sector, and Apollo’s experience of more than two decades in private equity and alternative investments, including special situations,” the statement said.

People familiar with the development said ICICI Bank will have 30 per cent stake, while the remaining will be picked up by Apollo subject to the fact that the amendment suggested in the Union Budget is passed. In case, if the Bill isn’t cleared, then they will look for a third partner to pick up a 20 per cent stake.

In the Budget, Finance Minister Arun Jaitley had proposed to amend the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, to allow sponsors to hold 100 per cent equity stake in ARCs and that non-institutional investors would be allowed to invest 100 per cent in security receipts.

The Aion fund was earlier established through a strategic partnership between ICICI Venture Funds Management Company and an affiliate of Apollo Global Management.

ICICI Bank already has a 13.26 per cent in another ARC, Arcil. Sources familiar with the development said the lender is not immediately looking at selling out this stake and will take a call on it in due course. Despite having an investment in Arcil, ICICI Bank is believed to have had gone ahead with the plan of setting up another ARC because as a result of multiple partners and a small stake, it wasn’t possible for the lender to make any significant decisions on its own.

“The bank will use this to resolve some stress on our own books but we will like it to be an open architecture where other banks can also sell their bad loans. But the main focus will be on resolution of some large assets first so that it makes a meaningful difference on the balance sheet,” said a person privy to the deal.

The lender has been facing asset quality pressure for the past few quarters. In the quarter ended June, its gross non-performing assets (NPA) as a percentage of total advances jumped to 5.87 per cent from 3.68 per cent a year ago. In absolute terms, the gross NPA rose to Rs 27,194 crore against Rs 15,138 crore in the first quarter of the previous financial year.

The increased interest by players in ARCs has increased after the Department of Industrial Policy and Promotion said in a notification that 100 per cent foreign direct investment (FDI) in reconstruction companies will be allowed under the automatic route.

According to an Assocham report, the average recovery rate for ARCs in India has been around 30 per cent of the principal and the average time taken has been anything between four and five years.

These ARCs in the country has been facing a problem due to capital constraints and disagreeing on valuation with the banks. However, considering that the total gross NPA in the banking sector at the end of FY16 was Rs 5,41,763 crore (7.43 per cent of total advances), these ARCs do see a big opportunity in India. Several other players like KKR and Brookfield, among others, are also investing in the ARC space.

Our immediate focus is to increase deposit base: Bandhan Bank’s Ghosh

‘In next two to three years, we intend to reach out to people across urban and unbanked areas’

CHANDRA SHEKHAR GHOSH, MD and CEO, Bandhan Bank

Bandhan Bank became a reality in August 2015. Chandra Shekhar Ghosh, Founder, Managing Director and CEO of the bank, maintains that the bank’s focus will be to grow its deposit base. In a little over the first three months of the current fiscal, its deposits increased by 3,000 crore. On the sidelines of a CII event, Ghosh spoke to BusinessLine on the journey (as a new bank), focus areas in the coming days and the bank’s corporate and retail lending operations. Excerpts:
How has the journey been for Bandhan Bank during these 11 months?
In one word fantastic. People have reposed faith in us. And we have been able to build trust. Our deposit base, which stands at 15,000 crore as on date (12,000 crore till March 2016) is proof of that. Loan disbursals stand at 16,000 crore of which 200-250 crore is non-microfinance related disbursals. We have around 89 lakh customers, majority of whom are micro-credit related. Around seven lakh will be non-micro-credit customers.
What are your immediate plans?
Our immediate focus is increasing our deposit base. For the next two to three years, we intend to reach out to people across urban and unbanked areas.
Any plans for increasing the branch network?
Yes. We currently have 689 branches in 29 States. We would look to take that up to 850 by March (2017).
As a new bank, you need to compete with established players in urban areas. What strategy are you following?
Urban growth is faster than rural and semi-urban areas. People here look for variety of products and fast services. We now have that bouquet of offerings.
For example, our current account offering competes with any other private sector bank. Similarly, in the savings account we are offering 6 per cent rate of interest for deposits over 1 lakh.
In terms of services, we are also looking to add a personal touch — meeting people, reaching out to customers.
For us, it is more about giving a personal touch, making people comfortable, rather than just a mechanical form of banking.
In any service industry, personal interactions matter. It may be old-school or a traditional approach. But for a new bank like us, it is very important.
Bandhan is still hesitant on corporate lending…
As a bank I cannot say that we will not lend to corporates. But, there are specific areas of focus. We are open to lending to MSMEs (micro, small and medium enterprises), and small and medium-sized corporates. We have already lent to Wow Momo (a Kolkata-based start-up). When it comes to large corporates or those in the stressed sectors, we would like to maintain caution for now. Six months or one year from now, we might have a different strategy.
What about retail lending?
Microfinance loans apart, in retail lending we are exploring the housing loan segment in the range of 35-50 lakh. We would also like to tap/ target people who generally go to housing finance companies for loans. There is a big market out there, and as a bank we are well positioned to tap it.
Let me explain. I have been working in a village with the unbanked for a decade now. But, there were other people too with different needs. As an MFI we did not focus on them. But as a bank we can target these people.


When banks return to retail lending

Banks burdened by NPAs in areas such as infrastructure seem to be back in the retail game, after a retreat in the years since 2005-06. How will this play out?


With an increase in the bad loans burdening the books of the banking sector, commercial banks once again seem to be focusing on the retail lending business. While broadly defined as lending to individuals, retail lending covers a host of loans: those meant for investment in housing, those for purchases of consumer durables and automobiles and those for education, deferred payments on credit card expenditures or unspecified purposes.
The post-liberalisation changes in banking practices included an increased emphasis on retail lending, which transited from being a risky and cumbersome business to one considered easy to implement, profitable and relatively safe. In some instances, such as housing, the income earned (rent received) or expenditure saved (stoppage of rent payment) from the investment is seen as providing a part of the wherewithal needed to service the loan.
In other areas, confidence that future incomes to be earned by the borrower would be adequate to meet interest and amortisation payments provides the basis for enhanced retail lending.
Too much exposure
The result of the transition in perception has been a sharp increase in the share of retail lending in total advances since the early 1990s. After having risen gradually from 8.3 per cent of total outstanding bank credit at the end of 1992-93 to 12.6 per cent in 2001-02, the share of personal loans rose sharply to touch 23.3 per cent at the end of 2005-06 (Chart 1). This was a time when total bank credit too was booming.
It is to be expected when there is a sharp increase in lending to a few sector of this kind, those who would have earlier been considered risky or not creditworthy could enter the universe of borrowers.
Not surprisingly, by this time the fear that overexposure could result in an increase in defaults had begun to be expressed.
Addressing a seminar on risk management in October 2007, when the subprime crisis had just about unfolded in the US, veteran central banker and former chair of two committees on capital account convertibility, SS Tarapore, warned that India may be heading towards its own home-grown sub-prime crisis (‘Sub-prime crisis brewing here, warns Tarapore’ BusinessLine, October 17, 2007).
Banks too began to hold back as reflected in a gradual decline in the ratio of personal loans to gross bank credit from 23.3 per cent to 15.6 per cent in 2011-12. While this was still above the level at the beginning of the previous boom, the decline in share did suggest that the retail lending splurge had moderated.
However, more recently, this decline in the share of retail lending has reversed, rising from 15.6 per cent in 2011-12 to 16.6 per cent in 2014-15. Figures on rates of growth tell a clearer story.
According to Care Ratings, over the financial years ending March 2015 and March 2016, while overall non-food credit grew at 8.6 and 9.1 per cent respectively, personal loan growth rates were 15.5 and 19.4 per cent respectively.
Over the financial year ended March 2016, the home loan segment grew by 19.4 per cent, vehicle loans by 22 per cent, and credit card outstanding by 23.7 per cent.
House of cards
The reason for this turn are not difficult to find. First, the other major area of growth in bank lending has been infrastructure, which today accounts for a large proportion of the non-performing assets on the books of the bigger banks. So banks have been seeking out new avenues of lending. With industry not performing too well and agriculture languishing, retail lending emerges as the preferred choice.
Second, since retail lending was discouraged in the period prior to financial liberalisation, the exposure of the retail sector to debt is still quite low.
The ratio of personal loans to personal disposable income has indeed increased in India, from 2.4 per cent at the end of 1995-1996 to 13 per cent in 2007-08, and it still is at a historically high level of around 12.5 per cent (Chart 2).
However, this is extremely low when compared with, say, South Korea, where in 2013, when it faced a housing loan crisis, the ratio of household debt to household disposable income was around 150 per cent.
While that may be far too high a figure for a country like India with a much lower per capita income to approach, it has considerable headspace in this area.
Finally, default rates on retail lending, even if increasing, are still quite low. In the case of the State Bank of India for example, NPAs in its retail loan portfolio are placed at a little above 1 per cent, whereas the aggregate NPA ratio is above 6 per cent according to recent estimates. So shifting to retail lending seems a sound idea.
Segments of concern
That of course depends on the degree to which increasing exposure in the retail market requires diversifying the retail portfolio of banks. As of now, housing loans overwhelmingly dominate that portfolio, accounting for well above 50 per cent of the total (Chart 3).
With loan-to-value ratios in housing still low in many cases, and housing serving as good collateral, NPAs in this segment are among the lowest. There are three other areas that account for a reasonable share of personal loans outstanding: automobiles, education and credit card outstanding.
Of these, while the automobile loan segment is not a high default area, education is definitely proving to be so. Government policy mandates provision of education loans of up to ₹4.5 lakh without collateral.
So recovery too is difficult. Yet the inability to find jobs after financing education with loans is resulting in rising defaults, which, according to reports, average 8 per cent of such loans.
Moreover, well over a quarter of retail lending is in the “others” category, and possibly includes personal loans for unspecified purposes advance without collateral or lending against shares, etc. by banks trying to build their retail portfolio.
Here too, rising default is a probability as aggregate lending increases and recovery difficult.
That prospect notwithstanding, it is more than likely that India would witness another retail lending boom, led by banks trying to maximise their presence in this ostensibly underexploited area.
That may well result in exposure of a kind that warrants the fears expressed earlier by the late SS Tarapore.

RBI clears decks for universal banking

Issues new norms for ‘on-tap’ licensing; large industrial houses barred


The Reserve Bank of India on Monday unveiled guidelines for ‘on-tap’ licensing of new private banks, opening the door for entities such as Edelweiss Financial Services, JM Financial, LIC Housing Finance, Magma Fincorp, Muthoot Finance, Shriram Capital and UAE Exchange & Financial Services, which had missed the bus in the last round, to float universal banks.
The guidelines in respect of promoter eligibility, corporate structure, foreign shareholding, dilution of promoter group shareholding and listing on the stock exchanges appear liberal as compared to the 2013 guidelines under which IDFC Ltd and Bandhan Financial Services were allowed to set up banks.
Under the new guidelines, resident individuals and professionals with 10 years’ experience in banking and finance are eligible to promote universal banks. Previously, only entities/groups in the private sector, entities in the public sector and non-banking financial companies (NBFCs) were eligible.
Large industrial houses are excluded as eligible entities, but can invest in the (universal) banks up to 10 per cent. A universal bank is a bank offering retail, wholesale and investment banking services under one roof.
Under the new guidelines, a Non-Operative Financial Holding Company (NOFHC) is not mandatory for setting up a bank in case the promoters are individuals or stand-alone promoting/converting entities who/which do not have other group entities.
The RBI has said that in case a bank is to be set up through an NOFHC, a promoter/promoter group should hold not less than 51 per cent of the total paid-up equity capital in the holding company. Earlier, entities/groups had to set up a bank through a wholly owned NOFHC.
Entities/groups in the private sector that are ‘owned and controlled by residents’ and have a track record of at least 10 years, are eligible as promoters. If such entity/group has total assets of ₹5,000 crore or more, the non-financial business of the group should not account for 40 per cent or more in terms of total assets/gross income.
Existing NBFCs ‘controlled by residents’ with a track record of at least 10 years are also eligible as promoters. However, any NBFC, which is a part of the group that has total assets of ₹5,000 crore or more and where the non-financial business accounts for 40 per cent or more is not eligible.
Paid-up capital

The initial minimum paid-up voting equity capital has been left unchanged at ₹500 crore. However, thereafter, the bank must have a minimum net worth of ₹500 crore at all times.
The criteria requiring promoter/s and the promoter group / NOFHC to hold at least 40 per cent of the paid-up voting equity capital, which will be locked-in for five years from commencement of business, remains unchanged. The promoter group shareholding will need to be brought down to 15 per cent within 15 years (from 12 years earlier).
The (universal) bank has to get its shares listed on the stock exchanges within six years (from three years earlier) of the commencement of business.
The current aggregate foreign investment limit is 74 per cent will apply to universal banks. Under the earlier regime, the aggregate non-resident shareholding could not exceed 49 per cent for the first five years.

George Antony, Managing Director, UAE Exchange India, said: “…The final call on application for the universal banking licence will be decided post the board meeting to be convened shortly.”

Inter-bank squabbles delay NPA resolution

There is discontent about larger banks striking bilateral deals with promoters of firms with stressed assets



While the Reserve Bank of India does not prohibit a bank from conducting bilateral dealings with a borrower, it doesn’t seem to have foreseen private deals struck outside the joint lenders’ forum. Photo: Aniruddha Chowdhury/Mint
Cracks in the joint lenders’ forum (JLF) experiment, aimed at timely resolution of stressed loans, are beginning to show and the picture isn’t pretty.
According to at least four people in the know, there is discontent among factions of lenders about larger banks in the forums striking bilateral deals with promoters of firms with stressed assets, making it difficult for JLFs to effectively implement a resolution or recovery procedure.
“In some large cases, larger banks have taken possession of land parcels or other fixed assets, reducing the outstanding debt of the company. This allows them to maintain a standard asset classification on the asset for some time,” said a senior official at a large public sector bank, the first of the four people quoted above. The banker spoke on condition of anonymity as discussions at JLFs are confidential.
These decisions are usually taken outside the JLF in direct discussions with borrowers, said the banker quoted above. What such deals end up doing is reducing the pressure that the JLF would put on an errant borrower and delaying the resolution process further.
Indian banks have gross bad loans of Rs.5.8 trillion, a number which bankers expect to rise.
“The JLF mechanism is a time-bound process; so, any delays in it will only hurt the bankers involved. We have issued a clear mandate that if any such bilateral dealings are discovered from now, they will be reported to the regulator immediately and action will be requested,” he added.
To be sure, the Reserve Bank of India (RBI) does not prohibit a bank from conducting bilateral dealings with a borrower.
In January 2014, the central bank issued norms that require banks to form a JLF as soon as an account delays repayment by over 60 days. The JLF will be organized by the lead lender in a consortium lending case and by the largest lender in cases with multiple lenders. The JLF is then required to come up with a corrective action plan within 30 days and a majority of the lenders are required to sign off on the plan within 30 days.
Delays in decision-making or implementation of the plan are met with accelerated provisioning on the case, according to the regulatory norms.
But RBI doesn’t seem to have foreseen private deals struck outside the JLF.
In April, private sector lender Axis Bank acquired control over Jaypee Group’s headquarters in Noida, in exchange for reducing debt. In the same month, IDBI Bank Ltd and State Bank of India (SBI) were also offered parcels of land to reduce the debt. At the beginning of the year, ICICI Bank, too, had taken over 275 acres from Jaiprakash Associates Ltd and reduced nearly Rs.1,800 crore worth of debt of the company.
Eventually, the promoter was forced to offer an option to other lenders as well to take over unencumbered land. The proposal is still under discussion and yet to be approved, the first person confirmed.
SBI, IDBI Bank, Axis Bank, ICICI Bank and a spokesperson from the Jaypee Group did not respond to e-mails seeking comment.
In the case of Bhushan Steel Ltd, according to a public sector banker who is the second of the people quoted above, most public sector banks had moved to classify the account as a non-performing asset (NPA) in April. However, some of the private sector banks continued with a standard asset classification on the account.
“Divergence in asset classification tends to work against any recovery measures as lenders won’t ever be on the same page. Besides, if a majority of the banks in the consortium have classified the account as NPA, it is unfair that others continue with it as standard,” the second person said.
While it is unclear why some banks continued with a standard asset classification in this case, a probable reason could be some short-term repayments which were received by them, added the second person.
Bhushan Steel has over 40 lenders, most of which are public sector banks. SBI and Punjab National Bank (PNB) are the lead lenders. Calls and text messages to spokesperson for PNB and Bhushan Steel remained unanswered till the time of going to press.
“Some smaller private banks and foreign banks who have small loan exposures in certain cases also break protocol and threaten to file winding-up petitions, even as the JLF process is going on. If lenders are quibbling among themselves, then you cannot force the borrower to do anything,” said the second person.
However, the blame for any delays in JLF proceedings does not just lie upon private sector or foreign lenders. According to a senior official at a large private sector bank, state-owned lenders often have an elaborate and rather slow decision-making process, which makes the JLF resolution very cumbersome.
“There have been cases where smaller state-owned lenders agreed to give additional working capital loans to a borrower and then never sanctioned it because the head office differs from what the banker at the JLF has agreed to. If the borrower cannot run daily operations, it would be unfair to expect them to pay back their dues,” the private sector banker said.
According to RBI’s financial stability report released last month, gross non-performing assets of banks rose to 7.6% of total advances in the March compared with 5.1% in September 2015. The top 100 borrowers accounted for nearly a fifth of these bad loans. A large number of these top borrowers have a JLF looking at possible solutions to ensure recovery.
“These differences among lenders point to the fact that probably the JLF system is not working to the extent that it was meant to. Bankers will have to sit together and resolve their differences themselves. It is likely that the deadlines that were talked about earlier will be stretched further,” said Saswata Guha, Fitch India Services Pvt. Ltd.
In December, RBI governor Raghuram Rajan said that banks would be required to clean up their balance sheets by 31 March 2017. This meant recognizing visibly stressed assets, providing for them and coming up with a resolution plan.


Monday 1 August 2016

BANKS ARE ILL, LONG LIVE NBFCs


Shares of Bharat Financial Inclusion Ltd, earlier known as SKS Microfinance Ltd, on Friday closed at 909.20—inching closer to the price at which retail investors had bought its shares in an initial public offering (IPO) six years ago. The 1,654 crore SKS IPO in July 2010, the first by any microfinance company in India and second in the world, was subscribed 13.7 times. The shares were sold at 985 in the IPO, but retail investors were given a discount of 50. It was listed on 16 August 2010 and soon rose to 1,490. That was before a crisis hit the microfinance industry following the promulgation of a state law in Andhra Pradesh. The law prompted large-scale defaults by borrowers and drying up of bank funds to the microfinance sector, and the SKS stock soon plunged to 54.5 as investors rushed to sell. 

The company posted a net profit of 235.91 crore in the June quarter, an almost four-fold increase from 61.16 crore a year ago on higher total income and a 96.85 crore tax write-back, beating analysts’ estimates. The gross non-performing assets (NPAs) for the quarter were 0.1% and, after setting aside money for bad loans, the net NPAs were 0.03%. Its loan portfolio rose 76% to 8,463 crore from 4,797 crore in the year-ago period.

Another listed microfinance company which is on its way to become a small finance bank, Ujjivan Financial Services Ltd’s stock rose to 540.85 on Friday before closing at 511.40. In May, Ujjivan’s 887 crore IPO was subscribed 41 times. In less than three months since its listing, the stock price has more than doubled. On Friday, Ujjivan announced a 71.37 crore net profit for the June quarter, more than double the profit it had reported in June 2015. Its loan book jumped 66% in the past one year to 5,850 crore. Its gross NPAs in June were 0.18% and net NPAs, 0.04%.

The third listed microfinance entity, Equitas Holdings Ltd, closed at 196.35 on Friday, losing around 2.5%, but it’s still trading at around 80% higher than its IPO price of 110. Its 2,163 crore IPO in the first week of April was subscribed 17 times. Its June-quarter net profit rose 60%.

Clearly, there is a re-rating of non-banking financial companies (NBFCs); investors are pulling out of banks and putting their money in NBFCs as they are growing faster than banks and their quality of assets is far better. The price-to-book ratio of Bharat Financial— which we get by dividing the current price of the stock by the book value per share—is probably the highest among all NBFCs barring mortgage lender Gruh Finance Ltd. Bharat Financial’s one-year forward price-to-book ratio is around 5.5, far higher than the best-performing private banks on the stock market like HDFC Bank Ltd and Kotak Mahindra Bank Ltd (both around 3.75), IndusInd Bank Ltd (3.5) and Yes Bank Ltd (close to 3). Among public sector banks, only State Bank of India’s one-year forward price-to-book value is higher than 1. Many of them are trading at half of their book value.

This is because most public sector banks have bloated bad loans and very few of them are actually growing the loan books. A handful of them announced their June-quarter earnings and they indicate that there is no respite from adding to the pile of bad loans and shrinking balance sheets.

The banks are not lending for fear of accumulating more bad loans and the NBFCs are taking advantage of that. What we are witnessing in the Indian financial sector now is quite unique. The Reserve Bank of India seems to be pushing for a bank-led financial system, but the business of lending is increasingly becoming sector agnostic because of the emergence of new channels such as mobile and Internet.

The banking regulator has given conditional licences to eight microfinance institutions to set up small finance banks; it also wants some of the larger NBFCs to become wholesale banks. However, for an NBFC, particularly a microfinance entity, the incentives to become a bank is far less today than in the past. They don’t need to entirely depend on banks for resources anymore; the Micro Units Development and Refinance Agency Bank as well as the National Bank for Agriculture and Rural Development are giving them funds. Besides, they can also collect deposits from the borrowers and cater to their need for savings by being a business correspondent of banks. Finally, new channels are being used to disburse loans.

Indeed, they will have to follow stricter norms for recognizing bad loans—from non-payment for 180 days to 90 days, on the line of banks—but this is not happening overnight. Similarly, their capital requirement by the end of the current financial year will not be as high as it was prescribed by an RBI panel in 2014. Finally, the drop in the yield of 10-year government bond, currently trading at its lowest since 2009, indicates that their cost of borrowing can only go down. No wonder then that the NBFCs have aggressively been building their retail books and the banks, though reluctant to lend to the borrowers directly, are happy to increase their exposure to these companies.

The NBFCs have got a fresh lease of life in the Indian financial system but does that explain the investors’ bullishness on a few of them, particularly the two MFIs that will become small finance banks? One thing is for sure that once they become banks, they will not be able to sustain the pace of growth in their loan book as they would need to focus on raising liabilities from the public in the form of deposits and that won’t be a cakewalk. There is also no clarity on whether Ujjivan and Equitas would need to tap the market again after three years of starting the bank. Under the RBI norms, listing is mandatory for a bank within three years. Both the entities have listed their holding companies. Of course, the regulator can always relax the norms either by accepting the listing of a holding company as a proxy for a bank or giving them more time for the bank listing.

There’s a need to develop corporate debt market: H.R. Khan (Former Deputy Governor of RBI)

H.R. Khan, former deputy governor of RBI, speaks of the need to develop India's corporate bond market and verious steps in how to go about it


H. R. Khan
Let me start where the governor ended his previous monetary policy press interaction; he said that repo in corporate bonds will be allowed and Mr. Khan is going to be in-charge of a committee that will present the roadmap to it. Can you tell us how soon we will be having repo in corporate bond markets? 
 Let me give you a bit of a background about corporate debt market, which we have been talking since ages.
There are structural issues and in fact, not many countries also have very robust corporate debt market and many countries like India have a bank-dominated system but corporate debt market is assuming criticality because there is a risk diversification, it compliments and supplements (what) banks are doing and more particularly in Indian context, it has also assumed importance because given the bank’s position in terms of their non-performing loans (NPLs) and other constraints, there is a need to develop corporate debt market and particularly when we are also planning to see that corporates at an aggregate level, they should not get overexposed to the banking sector part of their financial requirement should go to the market and through the bond market.
So if that is the case, then we need to do what all need to be done to develop corporate debt market.

It was in that context that I thought it was very crucial that RBI is contemplating allowing corporate debt in the repo transactions?
The whole idea is that it would be a major change in terms of— we are only taking sovereign papers so far as the repo is concerned. However, if you see world over, there are central banks whether it is unconventional monetary policy or quantitative easing and all, they have gone for corporate debt paper and expanding their balance sheet.
In RBI, we have been conservative and rightly so because given the illiquidity of corporate bond market and credit risk that may come and probably it may have impact on the balance sheet but we have to move on in the sense that we want to develop the corporate market, we have to do something which will be a game changer.

Is that committee report, which you were leading, ready, submitted?
FSDC has been discussing about this corporate debt market for quite some time. Then about few months ago, the sub-committee of the FSDC decided that let us have a group of all regulators and government to give a list of implementable recommendations, not go for a big report because there have been many reports on this corporate bond market to call out what all can be done and what new things we can do for the corporate debt market. So, we had all the regulators and government we sat together and we have worked out—the job is almost done and it is being submitted. Broadly, we had tried to look at what are the factors, which can further enable development of corporate debt market, which I put it in a characteristic manner in terms of issuer, in terms of investor, in terms of infrastructure, in terms of intermediaries, in terms of instruments and incentive and innovation.

Therefore, from what you are saying, it looks like a repo of corporate bond in RBI’s liquidity adjustment facility (LAF) is only one part. You have many other recommendations?
Yes; many other parts, and all the parts have to play together and in fact, most of the regulators and particularly RBI and Sebi are mostly involved and we have good understanding and quite a few things, implementers and timelines are also being suggested. So, we will see a lot of action in the next couple of months in terms of actual implemention.

So, which other areas? The LAF is one. What are the other things possible?
If I can take you through very quickly for example, on the issuance side, we have not seen much reissuances. And volumes are not there so liquidity is not there. And on corporate side, there is a problem because bunching will be there. So, what we are trying to say that whether you can have same International Securities Identification Number (ISIN) number but different redemption date so you can do it so, National Securities Depository Ltd (NSDL) and the Central Depository Services India Ltd (CDSL) will probably work on that. And the other thing is that if you do reissuances, the stamp duty can be removed so that there is an incentive for reissuances.
Similarly, in the case of, for example, investor. We have not allowed foreign portfolio investors to invest. So, now as announced in the budget, now unlisted bonds and PTC they will be allowed to invest. And if you talk of intermediaries, the very critical point is market making. So, what we are looking at is whether some of the brokers can be market makers and if they become market makers, what sort of support they can get. So, they probably will get an access to repo and corporate bond market which is not allowed to them. So, if they get an access through repo to the market repo, probably they can make market. But then exchanges are working out a scheme and I think it is in advanced stage of being implemented.
And the other is in terms of banks, and primary dealers are already trading members. So, they could be also encouraged to become market makers. And if you see the infrastructure side, there are quite a few things. For example, one is electronic book for this private placement. And there is integrated trade repository where both primary and secondary market issuances one place, prices, volume, everything is available.
And one critical element of infrastructure is credit rating agencies who play very important role. So, they will be encouraged to become members of credit information bureaus. So, they can access information. They are eligible users, but many of them are not members. And also possibly, going forward, whether they can be given access to Central Repository of Information on Large Credits (CRILC) data, but that has to be used very carefully, because SMA-2, SMA-2 does not mean that it is full default. So, probably that is one area.
And other critical part is some of the instruments we have introduced, they have not really taken off. Take the example of credit default swap (CDS), repo in corporate bond. For example, in CDS we allowed few things, it does not work. In the corporate debt repo, we have reduced the haircut.

So you will allow more partial re-enhancement?
So, what we are trying to do is in terms of CDS, the main issue which has been a stumbling block as per the market is this netting issue involving public sector because of that capital charge increases. So, we were in dialogue with the government whether we have that amendment to the RBI act, netting and if that is not possible, pending that whether based on legal opinion we got second tracked whether the netting can be allowed. So, that will be a big boost.
And so far as repo is concerned, we would like to have a screen based platform. Some cases where the liquidity can be a central counter-parties (CCP) facility and some where it is not liquid it can be without CCP facility. So, that is one area where we can work for this instrument. And other is of course, tripartite repo but better collateral management. The other issue is very important
So, it can be increased, maybe 30-50%. And also, NBFCs were providing credit enhancement, for them there may not be any limit.

But what is the timetable for all this?
Another very critical point in terms of incentive as I have stated is that corporates’ exposure to the banking system as a whole should come down and part of that, they should go to market. So, that is a work in process and RBI will come out with their own recommendation. And of course, finally, as you mentioned is this LAF eligibility.
The whole idea is that once the market repo, tripartite repo gets some traction, there is some liquidity, probably we can open up this for LAF, but we have to see the legal aspect because RBI act is not very clear in terms of whether we can accept or not accept. That will be examined. My hunch is that pending RBI act amendment, possibly we can do. And very important thing which has happened is this bankruptcy code which is one of the main stumbling blocks. We have now the bankruptcy code in place, but the challenge lies in creating the infrastructure of ports and insolvency professionals.

The most attractive proposal or rather one of the more attractive proposals is allowing corporate bonds to be used in the LAF window. The legal opinion at that time was that the RBI would only take sovereign paper. Is this settled?
I would say it is not settled, but we will be in a position to interpret that it can be taken. Of course there has to be very sound risk management practices in terms of ratings, in terms of haircuts and all that. But if there are ambiguities, better to get the act amended. So that view has to be taken.

Now, I wanted to know the timetable. When can we expect some of these?
Many of the things should happen over the next two months.

So in the current governor’s tenure itself some of it may be implemented?
I suppose so. Some of the things will happen. For example, allowing FPIs to invest in unlisted debt and PTCs can happen anytime. And few things market making and all that SEBI is in advanced stage of doing it. And we are also in dialogue with Pension Fund Regulatory and Development Au t h o r i t y (PFRDA) and insurance companies, they will also slightly relax their norms for investment. And for example, even bonds of banks, so insurance companies and PF bonds, they will probably be investing. So, we are in dialogue with them. So, some of the major recommendations are likely to be implemented sooner than what was expected because the whole idea of this group is to give the recommendation and lay down some time frame.




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