Month: February 2021

Asset reconstruction companies (ARCs) – the 29 existing ones – are pinning hopes that they would get a level-playing field with the to-be-formed National Asset Reconstruction Company announced in the recent Budget.

They feel there should not be differentiated regulations for the two sets of ARCs, said sources in the industry.

Hybrid model

While the government is not going to put in equity in the newly-announced ARC, there is now talk of government giving a guarantee, which has led to concerns among existing ARC players. The way things are moving – it looks like the final ARC that will be set up on the ground will neither be bank-led nor government-led. It is more likely to be a hybrid model, where the government is expected to chip in with its support in terms of guarantees, said industry observers.

Finance Minister Nirmala Sitharaman had, on Sunday (post an industry event in Mumbai), told mediapersons that the government may have to give some guarantees for the National ARC.

In the absence of guidelines on how the Budget-announced mechanism will work, there is still no clarity on whether the government will give out guarantee on the Securitised Receipts or any debt raised by National ARC. There are concerns among existing ARCs – mostly private sector based ones – as to whether public sector banks will be given relaxations or benefits on provisioning if they transfer the bad debt in their books to the National ARC.

There are still several loose ends before bad bank can take off, said sources in the banking industry. For instance, there is no clarity on how will the transactions be treated in cases where the net book value in books of a PSB becomes zero (written off accounts or post 100 per cent provisioning for any account). Will the bank as an organisation be ready to transfer that account to an ARC at ‘0’ value if net book value is prescribed as the metric for valuation, industry sources wondered.

Also when the asset is eventually realised by the National ARC, there is still an unanswered question on who will bear the capital losses, if any.

ARC are not worried about competition with a new player joining the fray. They only wish rules are same for all. Today, in the absence of guidelines from the government on how the new mechanism announced in Budget will work, things have turned out into the famous story of ‘a group of blind men and the elephant’, with every stakeholder drawing his own conclusion on how the new mechanism will eventually work to solve the country’s bad loan mess in banking system, an industry veteran quipped.

On its part, the Reserve Bank of India is not in a position to put forth its specific views as no specific proposal has reached it post the budget announcement, sources said. However, the central bank has expressed its readiness to examine any such proposal.

Bank of Maharashtra (BoM) has entered into a strategic co-lending agreement for MSME (micro, small and medium enterprise) loans with LoanTap Credit Products Pvt Ltd, a Pune-based non-banking finance company.

The co-lending model provides ease of loan sanctions at borrower’s convenience through digital lending platforms, the Pune-headquartered public sector bank said in a statement.

Digital lending covers end-to-end loan processing cycle without manual intervention, from on-boarding of customers to loan disbursement and monitoring.

Under the co-lending model, the bank will have an exposure of up to 80 per cent to an MSME customer. LoanTap will take the balance exposure.

AS Rajeev, Managing Director and CEO, BoM, said the co-lending arrangement will enhance credit flow to the unserved and underserved sectors and make available funds to the ultimate beneficiary at an affordable cost.

Hemant Tamta, Executive Director, BoM, said that the co-lending model will help the bank to meet the priority sector lending target. It will be beneficial for all – NBFCs having wider outreach and customers – who will be facilitated with low-cost credit from banks.

The demand for Government Securities (G-Secs) by banks could be affected with the economic recovery gaining momentum as there will be a pick up in credit growth and banks’ appetite to lend to the private sector, according to Crisil.

While in pandemic-hit 2020, yields strayed from fundamentals and drooped to decadal lows despite a record rise in government borrowing, the credit rating agency, in its report, ‘Bond fatigue, dwindling options’, said: “This year will be different, though.”

In 2020, yields drooped because of extraordinary easing moves by both, the Reserve Bank of India (RBI) and global central banks.

The Centre has budgeted to borrow ₹12.1-lakh crore next fiscal, only a shade less than the ₹12.8-lakh crore in fiscal 202 (revised estimate) and much higher than ₹7.1-lakh crore in fiscal 2020. Stressed state finances means supply of state development loans could be copious as well, it added.

Referring to the economic recovery gaining momentum, Crisil said this implies a pick-up in credit growth.

Banks will now have more options than the government to lend to, which could put some pressure on G-Sec yields, said Dharmakirti Joshi Chief Economist, Dipti Deshpande, Senior Economist and Pankhuri Tandon, Economist, in the report.

Crisil estimates bank credit growth to double to 8-10 per cent next fiscal from about 4-5 per cent this fiscal. Simultaneously, an increase in spending leading to dissavings by households could moderate deposit inflows at banks.

The economists observed that the RBI will have to keep an eye peeled for inflation amid an expansionary fisc and rising input costs, though in general, inflationary pressures are expected to remain under control.

Inflation pressures

“As of now, the RBI is not short on ammunition. But it may need to turn back the accommodative tap if inflation pressures rise. Some normalisation of liquidity has already begun,” they said.

Meanwhile, rising crude prices could lend an upside to yields. Crisil expects Brent crude to rise to $50-55 per barrel in calendar 2021, almost $10 per barrel higher than in 2020.

The report emphasised that the RBI is also concerned about easy liquidity fuelling asset-price inflation and destabilising markets.

In other words, though the February 5 monetary policy review confirms the RBI’s intent to support the government’s borrowing programme next fiscal, maintaining such high levels of liquidity may no longer be easily possible, it added.

Overall, Crisil believes, supply pressures will have a bearing on the 10-year G-sec yield once the RBI starts unwinding its ultra-accommodative monetary policy stance.

The agency expects the yield to settle at about 6.2 per cent by March 2021 and rise to 6.5 per cent by March 2022, which would still lower than the decadal average of 7.7 per cent.