Month: May 2021

Govt may table amendment to DICGC Act in monsoon session, BFSI News, ET BFSI

Banking & Finance

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In a bid to ensure timely support to depositors of stressed banks, the government may bring amendment to DICGC Act in the monsoon session with the objective to provide account holders easy and time-bound access to funds to the extent of the deposit insurance cover.

Last year, the government raised insurance cover on deposit five-folds to Rs 5 lakh with a view to provide support to depositors of ailing lenders like Punjab and Maharashtra Co-operative (PMC) Bank. Following the collapse of PMC Bank, Yes Bank and Lakshmi Vilas Bank too came under stress leading to restructuring by the regulator and the government.

The amendment to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961 is the budget announcement made by the Finance Minister and the Bill is almost ready, sources said.

It is expected that the Bill will be tabled in the upcoming monsoon session after being vetted by the Union Cabinet, sources added.

Once the Bill becomes the law, it will provide immediate relief to thousands of depositors who had their money parked in stressed lenders such as PMC Bank and other small cooperative banks.

As per the current provisions, the deposit insurance of up to Rs 5 lakh comes into play when the licence of a bank is cancelled and liquidation process starts.

DICGC, a wholly-owned subsidiary of the Reserve Bank of India, provides insurance cover on bank deposits.

Finance Minister Nirmala Sitharaman in the Budget speech in February said the government had approved an increase in the Deposit Insurance cover from Rs 1 lakh to Rs 5 lakh for bank customers last year.

“I shall be moving amendments to the DICGC Act, 1961 in this session itself to streamline the provisions, so that if a bank is temporarily unable to fulfil its obligations, the depositors of such a bank can get easy and time-bound access to their deposits to the extent of the deposit insurance cover. This would help depositors of banks that are currently under stress,” she had said.

It could not be presented in the Budget session due to curtailment of the last session following the spread of second wave of COVID-19 pandemic.

It is to be noted that the enhanced deposit insurance cover of Rs 5 lakh is effective from February 4, 2020. The increase was done after a gap of 27 years as it was static since 1993. The cover is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI.

With increased insurance cover, the banks are paying a higher premium of 12 paise against 10 paise per Rs 100 deposited without any additional burden on account holders.

The deposit insurance scheme covers all banks operating in India, including private sector, cooperative and even branches of foreign banks. There are some exemptions such as deposits of foreign governments, deposits of central and state governments, and inter-bank deposits.

It can be recalled that way back in 2009, the Raghuram Rajan committee on financial sector reforms had recommended strengthening the capacity of the DICGC, a more explicit system of prompt, corrective action, and making deposit insurance premia more risk-based.



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Reserve Bank of India – Press Releases

Press Releases

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The Reserve Bank of India, in the public interest, had issued Directions to Mantha Urban Co-operative Bank Limited, District: Jalna, Maharashtra in exercise of powers vested in it under sub-section (1) of Section 35A read with Section 56 of the Banking Regulation Act, 1949 (AACS) from the close of business on November 17, 2020. The validity of the above Directions was for six months i.e upto May 16, 2021.

The Reserve Bank has now further extended the Directions for a period of three months from May 17, 2021 to August 16, 2021, subject to review. The Directions stipulate certain restrictions and/ or ceiling on withdrawal/ acceptance of deposits. The detailed Directions are displayed on the bank’s premises for interested members of public to peruse. Reserve Bank of India may consider modifications of the Directions depending upon circumstances. The issue of Directions should not per se be construed as cancellation of banking license by the Reserve Bank of India. The bank will continue to undertake banking business with restrictions till its financial position improves.

(Yogesh Dayal)     
Chief General Manager

Press Release: 2021-2022/216

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Will Interest Rates On PPF, NSC, Post Office Deposits Be Cut On July 1?

Personal Finance

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Investment

oi-Sunil Fernandes

|

There is some speculation that there could be a cut in interest rates on post office small savings schemes like PPF, NSC, Sukanya Samriddhi, Senior Citizens Savings Scheme, Kissan Vikas Patra and post office time deposits.

Reasons to conclude for a cut in interest rates

What is happening right now is that it is very difficult to keep bond yields low, the sovereign bond yields low and the government has some huge borrowing lined-up. The fiscal deficit of the government for 2021-22 has been projected at 6.8%, thanks to the cascading impact of Covid-19. This means the government has to borrow heavily and higher the costs at which it has to borrow, the pressure would show on the fiscal deficit.

Will Interest Rates On PPF, NSC, Post Office Deposits Be Cut On July 1?

Also, a lot of the government borrowings, can push bond yields higher. The worry right now is that unless interest rate on small savings comes down, it is difficult to push interest rates overall lower. Apart from this there is an anomaly between the interest rates being offered by banks and the post office. Take a look at the table below.

Quick comparison between small savings and bank deposits rates

1-2 years 2-3 years 5 years and above
SBI 4.90% 5.20% 5.40%
HDFC Bank 4.90% 5.15% 5.50%
ICICI Bank 4.90% 5.15% 5.25%
Post office time deposit 5.50% 5.50% 6.80%
Public Provident Fund 7.10%
Kissan Vikas Patra 6.90%
National Savings Certificate 6.80%
Senior Citizens Savings Scheme 7.40%
Sukanya Samridhhi 7.60%

Clearly, post office rates are better, which might prompt the government to reduce the interest rates. Apart from this lower interest rates on deposits would push lower rates on borrowings, which in turn could propel borrowings and hence the economy.

The government revises the interest rates on the different post office schemes every quarter. So, the next due date for revision is July 1, 2021. It’s always difficult to predict what the authorities would do. However, investors have the time until July 1, to decide if they want to invest now on the hope that interest rates would fall.

We advise investors not to look for longer term tenure of instruments like 5 years and beyond. Invest for the shorter term and more like medium term. This is because if interest rates rise, which we believe it should, you would benefit.

GoodReturns.in

About author:

Sunil Fernandes, the author of this article has spent 2 and half decades covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers and investment magazines in India and abroad.



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Covid-19 takes a toll on low-income group’s capacity to buy home

Banking & Finance

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The Covid-19 pandemic took a toll on the capacity of the low-income group (LIG) to buy a home in FY21, going by housing finance bellwether HDFC’s loan approval numbers.

However, the appetite of the higher income group (HIG) and middle-income group (MIG) on this count remained undiminished.

In the LIG segment (annual income: above ₹3 lakh to ₹6 lakh) in number terms, housing loan approvals declined to 27 per cent of overall approvals in FY21 from 30 per cent in FY20, as per HDFC’s investor presentation.

In value terms, too, housing loan approvals in the aforementioned segment were down to 14 per cent of overall approvals against 16 per cent.

This trend could be attributed to buyers’ sentiments getting impacted due to the pandemic, which triggered job losses and salary cuts as trade and industry hunkered down, resorting to desperate cost-cutting measures to stay afloat.

HIG and MIG fare better

Housing loan approvals in the case of the HIG segment (annual income: above ₹18 lakh) in number terms rose to 19 per cent of overall approvals in FY21 from 17 per cent in FY20, as per the presentation.

In value terms, housing loan approvals in the HIG segment were up to 40 per cent of overall approvals against 36 per cent.

In the MIG segment (annual income: above ₹6 lakh to ₹18 lakh), housing loan approvals showed disparate movement in number and value terms .

In number terms, MIG housing loan approvals moved up to 48 per cent of overall approvals in FY21 from 47 per cent in FY20.

However, in value terms, housing loan approvals declined to 44 per cent of overall approvals from 46 per cent. This probably indicates that the cost-conscious MIG segment drove a hard bargain with property developers, who were sitting on huge unsold inventory.

Housing loan approvals to the EWS segment (annual income: up to ₹3 lakh) remained unchanged at 6 per cent in number terms and 2 per cent in value terms of the overall loans approved.

Average home loan size up

In sync with the increased number of home loan approvals to the HIG and MIG segment, HDFC’s average home loan size rose to ₹29.5 lakh in FY21 from ₹27 lakh in FY20.

The average loan to value (the amount of loan that a lender gives relative to the property’s value) declined to 69 per cent from 70 per cent at origination.

The average home loan term and the average age of the borrower came down by a year to 11 years and 38 years, respectively, in FY21.

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PNB raises ₹ 1,800 crore via QIP offering

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Punjab National Bank (PNB), the country‘s second largest public sector bank, has raised ₹ 1,799.99 crore through its latest Qualified Institutional Placement (QIP) offering that saw the bank issue 53.33 crore shares at ₹ 33.75 per share, which is about 5 percent discount to the floor price of ₹ 35.51 per share, to institutional investors.

The QIP issue, which had opened on Monday and closed on Friday, saw several marquee institutional investors including Life Insurance Corporation (₹400 crore), Societe Generale(₹417 crore), BNP Paribas Arbitrage ₹240 crore), Morgan Stanley Asia (Singapore) Pte (₹ 150 crore) getting allotments more than 5 per cent of the equity shares offered in the QIP, sources said.

Also read: Geojit inks pact with PNB to provide 3-in-1 account

PNB was, through this QIP, looking to raise about ₹ 1800 crore including an option to retain over subscription of up to ₹ 600 crore. This was the first QIP issue that the bank offered during the current fiscal. It may be recalled that PNB had in December 2020 raised ₹ 3,788 crore through a QIP, which fell short of its then target of ₹ 7000 crore. The amount raised through that QIP included ₹ 1,500 crore investment from LIC.

CH.SS Mallikarjuna Rao, MD & CEO, PNB, had in February this year said the bank is looking for an opportune time to raise the balance ₹3,212 crore through QIP.

For the nine months ended December 31,2020, PNB had reported net profit of ₹ 1,435 crore. In the third quarter ended December 31,2020, the bank had recorded net profit of ₹ 506 crore, down 18.5 per cent over the net profit of ₹ 621 crore recorded in the previous quarter.

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CBIC Initiates Special GST Refund and Drawback Disposal Drive

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Taxes

oi-Sneha Kulkarni

|

The Central Board of Indirect Taxes and Customs (CBIC) has given its commissioners instructions to conduct a special drive to resolve all pending refund claims. The drive comes at a time when a business has been disrupted by movement restrictions in many parts of the country.

Eligible GST taxpayers can check their GST refund status online, through GST Portal.
In these difficult times, the CBIC stated that the Board has decided that it is necessary to focus on timely disposal of all pending refund/duty drawback claims in order to provide immediate relief to business entities, particularly MSMEs.

CBIC Initiates Special GST Refund and Drawback Disposal Drive

“It is hereby instructed that a ‘Special GST Refund Disposal Drive’ will be launched by all Central Tax formations during the period from 15th May 2021 to 31st May 2021 for processing and disposal of all pending GST refund claims on priority,” it said.

The CBIC also stated that the GST law allows for a 15-day period for issuing an acknowledgment or deficiency memo, as well as a total of 60 days for dealing with refund claims without the need to pay interest.

Important Things To Know

  • This applies to all GST refunds and Customs Duty Drawback claims that are still pending.
  • All pending refunds, including those for large corporations, will be extended, with a special focus on MSME.
  • The special drive is intended to expedite the resolution of pending claims, not to provide a window for correcting erroneous refunds.
  • To make it easier for exporters, all communication should be done via email, if the applicant’s email address is available.

“It is urged that in these difficult times, all central tax officers should endeavor to make their best efforts and contribution in the fight against COVID-19, by liquidating the pending GST refund claims by May 31, 2021,” the CBIC added.

GoodReturns.in



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SBI to sell three NPA accounts next month for recovery of over Rs 235 cr

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The State Bank of India (SBI) will sell three bad accounts to asset reconstruction companies or other financial institutions next month to recover dues of over Rs 235 crore, according to a sales notice.

In terms of the bank’s policy on sale of financial assets, in line with regulatory guidelines, SBI said it has placed Heavy Metal and Tubes Ltd, Khare and Tarkunde Infrastructure Pvt Ltd and Elize International Ltd for sale to recover a total of Rs 235.32 crore.

Heavy Metal has outstanding dues of Rs 116.91 crore to the bank, Khare and Tarkunde owes Rs 99.84 crore and Elize International Rs 18.57 crore. The bank has set the reserve prices for these NPA accounts for sale at Rs 27.50 crore, Rs 15 crore and Rs 8 crore, respectively.

The e-auction of Heavy Metal and Tubes; and Khare and Tarkunde will take place on June 7, while that of Elize will be on June 8.

SBI said the interested ARCs/banks/NBFCs/FIs can conduct due diligence of these assets with immediate effect, after submitting expressions of interest and executing a non-disclosure agreement with the bank.

Ahmedabad-based Heavy Metal and Tubes is engaged in manufacturing of stainless steel tubes and pipes, while Nagpur-based Khare and Tarkunde is engaged in real estate business.

Elize International is a Kolkata based company engaged in manufacturing of clothing.

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Post Office Vs Bank Deposits: Why Post Office Is Better Choice?

Personal Finance

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Investment

oi-Sunil Fernandes

|

Interest rates on the larger bank deposits are dangerously low and at best avoided. While not that post office are offering significantly higher interest rates, but, even a 1 to 2 per cent higher rates are good enough in the present context.

Quick compasion:

1-2 years 2-3 years 5 years and above
State Bank of India 4.90% 5.20% 5.40%
HDFC Bank 4.90% 5.15% 5.50%
ICICI Bank 4.90% 5.15% 5.25%
Post office time deposit 5.50% 5.50% 6.80%
PPF 7.10%
KVP 6.90%
NSC 6.80%
Senior Citizens Savings Scheme 7.40%

Even the time deposits of the post office are much better, if you consider a medium to longer term duration. The 5-year deposit in the post office fetches an interest rate of 6.8%, compared to a maximum of 5.5% offered by some of the larger banks in the country.

Some of the schemes of the post office like the Kissan Vikas Patra, Public Provident Fund and the National Savings Certificate also offer tax benefits under Sec80C, while under the PPF even the interest is exempted from tax.

Post Office Vs Bank Deposits: Why Post Office Is Better Choice?

Interest rates unlikely to go up in a hurry

Interest rates in the economy are unlikely to go up in a hurry, though investors are advised to stick to a duration of not more than 2 years when investing. As inflation starts edging up with economic growth gathering pace, we will see interest rates trending higher. When that happens investors who have invested for a longer term might get trapped. It is therefore advisable to stick to a shorter duration.

Conclusion

If you have to choose between post office and bank deposits, the obvious choice should be post office deposits. Yes, there are issues with regards to service, ease in opening and closing the account etc. However, if you are investing large sums of money it would be worth going through the effort.

Post office still have some way to go in order to offer investors ease and flexibility. We are living in a current regime, where interest rates are exceedingly low. This is unlikely to change anytime soon, though we expect interest rates to go higher in the next 2 years or so.

GoodReturns.in



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Why Mutual Funds Are Showing 1-Year Returns of 70-80%?

Personal Finance

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Investment

oi-Sunil Fernandes

|

If an investor is investing in equity mutual fund schemes and is looking at the track record of the last 1-year, he is going to be stunned. There are many equity mutual funds that are showing returns of 50, 60, 70, 80, 90 and even 100% returns in the last 1-year. Let’s take a look at some of these, though the list is not exhaustive.

Name of the fund 1-year return
SBI Small Cap Fund 99.91%
Union Small Cap Fund 98.51%
Axis Small Cap Fund 88.47%
Tata Midcap 75.20%
Mirae Emerging Bluechip 78.71%
UTI Flexi 72.20%
Tata Largecap 62.20%
DSP Flexi 64.41%

Now, let’s see one of the biggest reasons for mutual funds generating such a stellar rally over the last 1-year.

Sensex closing May 18, 2020 Sensex closing May 14, 2021 % Change
30028.98, 48,732.55 62.29%

At the same time last year, the Sensex was hovering around the 30,028 points mark, while the Sensex now is around 48,732.5, which itself is a gain of 62.29%. So, the Sensex has rallied 62.29%, thanks to the slump in the markets last year, due to the lockdown after Covid-19 infections surfaced.

Honestly, there is nothing much to read into the stupendous returns of equity mutual funds over the last 1-year, except the fact that there has been crazy buying by FPIs in the last 7-10 months, which has pushed benchmark indices higher.

Will the solid returns continue for equity mutual funds?

Markets are over priced at these levels as the price to earnings multiples for the Sensex and the Nifty are way above historical averages. However, the world is flush with money from low interest rates and easing, which should continue to push stocks higher. These days liquidity matters and fundamentals take a back seat. It will not be a surprise to see markets moving even higher from here, given the low interest rates across the globe. Unless inflation surfaces and interest rates rise, stock markets are not going to fall in a hurry. This means that the returns from mutual funds would continue.

Why Mutual Funds Are Showing 1-Year Returns of 70-80%?

As far as investors are concerned, it would be advisable not to invest large sums in the stock markets. A better option would be to invest money through SIPs as you would be able to hedge your risks. Investors with a long term perspective may stay invested, however, it is also not a bad idea to take a little bit of money and keep liquidity, so as to invest at lower levels.



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Tax Query: How will spouse of NRI be taxed on stock trading gain funded by joint bank account in India?

Personal Finance

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I am an NRI and I have an NRE trading account and savings account with one of the private banks of India. I have a regular resident bank account, jointly with my spouse. Can I open a stock trading account in my spouse’s name (an income tax payer, working in state government) and start paying for the trades from the resident joint savings bank account? If so, how will my spouse be taxed on the gains in such transactions?

S Nagarajan

Our response below is based on Income Tax Act, 1961 and doesn’t include the applicability of FEMA regulations relating to investment in equity scrips by NRIs in India.

Under the Income Tax Act 1961 (Act), characterisation of income earned from sale of shares shall depend up on the motive behind the investment in such shares and accordingly taxed either under the head ‘Profit and Gains from Business’ (BI) or ‘Capital Gain’ (CG). Thus, sale proceeds from shares held as stock in trade (trading) shall be taxable as business income (BI) while the proceeds from shares held as investment (capital asset) shall be taxable as capital gains (CG) under the Act.

Assuming that the shares would be held as investment, Long term CG in excess of ₹1 lakh from sale of listed shares are chargeable to tax at the rate of 10 per cent. Short term CG (STT paid) shall be taxable at the rate of 15 per cent. Besides, surcharge (if applicable) and health & education cess at 4 per cent shall apply.

It may be noted that effective from FY 2020-21 (1 April 2020 to 31 March 2021) dividend distribution tax has been abolished, consequently, dividend income from shares are taxable in the hands of the shareholders at the applicable tax slab rates. As per Section 64 of the Act, any income from investment made or assets purchased in the name of close relatives (spouse, minor child or daughter-in-law) is clubbed with the income of the person making the investment and taxed accordingly. This applies to all types of investments such as shares, fixed deposits, etc.

Accordingly, the income earned from investment in shares shall be clubbed in your total income and taxed at the applicable rates as discussed above.

The writer is Partner, Deloitte India.

Send your queries to taxtalk@thehindu.co.in

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