Category: Banking & Finance

RBI article, BFSI News, ET BFSI

Banking & Finance

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The year 2021 could turn out to be India’s year of IPO with the domestic unicorns through their public issues setting “domestic stock markets on fire and global investors in a frenzy”, an RBI article said on Tuesday. The successful Initial Public Offerings (IPOs) by new age companies in the recent months are a reflection of bullishness about Indian technology, it said.

“…growth impulse is igniting financial markets. 2021 could well turn out to be India’s year of the IPO. Debut offerings by Indian unicorns – unlisted start-ups – kicked off by a food delivery app’s stellar IPO that was oversubscribed 38 times, have set domestic stock markets on fire and global investors in a frenzy,” the central bank said in an article on the ‘State of Economy’.

The article has been authored by a team lead by RBI Deputy Governor Michael Debabrata Patra. The central bank said views expressed in the article are those of the authors and do not necessarily represent the views of the Reserve Bank.

The RBI article was referring to the IPO of Zomato which got oversubscribed 38 times.

The article further said that “the USD 2.2 billion proposed listing by a payment and financial services app symbolises investor excitement surrounding India’s digitalisation – digital payment solutions; e-commerce; logistics”.

Noting that the IPO of a specialty chemical manufacturing exporter was subscribed 180 times, the RBI said “these IPOs of new age companies arrive as bullishness about India mounts, especially around Indian tech”.

India’s tech boom, it added, has been long awaited, with strong global and domestic appetite for what are widely believed to be world class businesses in the pipeline, notwithstanding initial losses that have largely stemmed from the deep discount business models adopted by them.

These listings coincide with a broader rush by Indian companies to tap the market and the fomo (fear of missing out) factor driving investors, which have taken the benchmark indices to records, the RBI article said.

“A new era has clearly begun. It is estimated that India has 100 unicorns (Credit Suisse, 2021), with 10 new ones created in 2019, 13 in 2020 in spite of the pandemic and 3 a month in 2021 so far. They do not rely on inherited wealth or dependence on bank loans or extra-business connections, but on talent and innovative ideas. These are the children of liberalisation, not of the wealthy,” it said.

Referring to the recent update by the UK-based The Economist of its Big Mac Index, an informal guide to currency valuation, the RBI article said that in terms of Maharaja Mac, India is currently the fourth-largest economy in the world.

“…we decided to give the Big Mac’s currency valuation powers a go by and turned it on its head. Looking at affordability or how many burgers can a currency buy relative to the US dollar, we measure how much a country’s GDP is valued in purchasing power terms,” the article said.

“Voila! The results uphold conventional wisdom – in terms of the Maharaja Mac, India is currently the fourth-largest economy in the world after China, the US and Japan.”



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RBI says inflation is on track to meet projections, BFSI News, ET BFSI

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Inflation is likely to remain within the Reserve Bank of India‘s (RBI) projected levels for the rest of the year, it said on Tuesday while highlighting that inflation containment comes at the cost of economic growth.

Earlier this month the RBI raised its 2021/22 inflation forecast to 5.7% from 5.1% and reiterated that it will continue to keep monetary policy accommodative as long as necessary to revive and sustain growth on a durable basis.

The retained stance and increased inflation forecast started a debate over whether monetary policy has forsaken its primary mandate of price stability in the face of the continuing COVID-19 pandemic.

The RBI is mandated to bring down retail inflation to 4% over the medium term while keeping it within a range of 2-6%, a band it has breached twice this year.

Inflation is on the central bank’s envisaged trajectory and likely to stabilise over the rest of the year, the RBI said of what it described in Tuesday’s bulletin as “a credible forward-looking mission statement for the path of inflation”.

“The MPC demonstrated its commitment and ability to anchor inflation expectations around the target of 4% during 2016-2020. The once-in-a-century pandemic ratcheted up inflation all over the world and India was not immune,” it added.

“Our MPC is India-focused; it has to be. It must choose what is right for India, emulating none, not emerging nor advanced peer,” the bulletin said.

A reduction in the rate of inflation can be achieved only by reduction in growth; an increase in growth is only possible by paying the price of an increase in inflation, always and everywhere, the RBI said.

Easing of pandemic-related restrictions and ongoing vaccination programme has helped to boost demand conditions while improving monsoon and rising agricultural sowing activity is improving supply conditions in the economy.

“The MPC voted to give growth a chance to claw its way back into the sunlight,” the RBI said.



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Thai cenbank revises bank capital rules for better risk management, BFSI News, ET BFSI

Banking & Finance

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BANGKOK, – Thailand’s central bank said on Tuesday it had revised some capital rules to help banks to manage risks and capital adequacy and to promote sustainable finance.

The adjusted rules, effective in January 2022, were not a response to the pandemic, however, but were planned beforehand in line with international standards, Assistant Governor Jaturong Jantarangs told a news conference.

Under the Pillar 2 rules, banks must have sound risk management framework and processes to assess their capital adequacy, relative to all risks and conduct proper stress testing.

Thai banks are still strong with higher capital buffers than the minimum requirements to cover risks and handle volatility in the economy, Jaturongs said.

The new rules https://bit.ly/2UtceHQ added to areas of information technology risk, legal and compliance risk as well as environment, social and governance, he added. (Reporting by Kitiphong Thaichareon and Satawasin Staporncharnchai Writing by Orathai Sriring; Editing by Martin Petty)



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Survey, BFSI News, ET BFSI

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Safety and security is the most important factor for buyers looking for home, according to a survey by BASIC home loan, a fintech company.

Over 52% of the respondents said that they trust family and friends while finalising a property and connectivity to schools and hospitals are the most important aspect they look at while finalising the property.

Nearly 47% of people prefer availing loans from public sector banks rather than private ones for buying a house, according to the study.

“Every bank is unique, be it a public or private sector one. Usually, public sector banks offer better rates in processing charges and prepayment restrictions while with private banks, there’s an advantage of quick turnaround time and better technology through the disbursal process,” said Atul Monga, Co-founder and CEO, BASIC Home Loan.

The homebuyers’ survey was conducted to understand the buying behavior and preferences of people amidst the pandemic, and took responses from 1,000+ participants.

The survey gathered responses from people across the rural and urban cities in India, and captured data from 25 cities.

“However, the borrowers tend to go with a product whose cost is low both in the long and short term. This decision is also based on the perception that a borrower has of a bank, the reference from a friend or family member, as well their eligibility for the loan,” added Monga.

Of the 1,000+ participants surveyed, nearly 470 people placed faith in public sector banks for their home loan needs, while only 270 of them said they preferred availing a home loan from a private bank.

During the pandemic period, the public sector banks reduced the interest rates on new loans by 0.68% while the private banks reduced the same by 1.34%

The survey also revealed that around 24% of the participants preferred to use their savings to build a house, while as low as 1% people would like to finance through a non-institutionalised private money lender.

Around 36% of the people, the survey also found out, preferred to inspect the quality of the property by themselves rather than depending on a professional builder or realtors.



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RBI paper, BFSI News, ET BFSI

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The newly created small finance banks (SFB) are serving the intended marginalised and under-served people, and doing so profitably, an analysis by RBI officials has revealed. This category of banks was started in 2017, and a bulk of the entities are microfinance institutions, which converted themselves into lenders, which gave them access to public deposits.

“The SFBs have been provided license with the objective to serve the under-served and marginalised sections of the society…preliminary analysis reveals SFBs to be leading in serving the priority sector,” the paper by Nitin Kumar and Sarita Sharma said.

The study contains an initial assessment of the performance of SFBs for early policy inputs, it said, stressing that its assessment should not be considered as the view of the central bank.

A basic examination reveals a relatively high credit deposit ratio of SFBs and most of them displayed healthy profitability with further improvements in recent quarters, it said.

The study went into operational financials between March 2017 and March 2020 and indicated that bank-level factors like efficiency, leverage, liquidity and banking business are significant in determining SFBs’ profitability during this early period of operation.

It can be noted that the first quarter of the FY22 was a difficult time for many of the SFBs, as the collection efficiencies declined because of the second wave of the pandemic.

Meanwhile, another paper in the RBI bulletin for August on the targeted long term repo operations said that non-bank lenders, which accessed funds through the route, have displayed an improvement in their short-term liquidity buckets compared to others.

As NBFCs were finding their footing after the IL&FS default, the COVID-19 pandemic started a chain of adverse reactions, which exacerbated their liquidity position, the paper by KM Neelima, Nandini Jayakumar, and Jibin Jose said.

The RBI and government swung into action to address the stress through a slew of measures, including the TLTRO scheme that aimed at providing targeted liquidity to sectors and entities, which were experiencing liquidity constraints and restricted market access, it added.

Banks were provided funds at the repo rate and were directed to invest in investment-grade papers of corporates, including NBFCs, it said.

The policy was beneficial in alleviating the liquidity stress faced by the treatment NBFCs in the period following COVID-19 and helped them navigate the tough times, the paper said, adding that this happened at a time when both banks and credit markets were averse to help such entities.

“The empirical exercise undertaken in this article, therefore, suggests that the Reserve Bank’s intervention for easing financial conditions proved to be timely and effective for the NBFC sector,” it noted.



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Robust Q1 earnings could brighten growth picture, says Axis Bank chief economist, BFSI News, ET BFSI

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NEW DELHI: The million-dollar question on every Indian economist’s mind is when the country shall return on a path of sustainable growth after the deep scars left by the COVID-19 crisis.

Saugata Bhattacharya, chief economist at Axis Bank, and a veteran when it comes to analysing the vicissitudes of economic cycles, believes that the proverbial glass is half full rather than half empty when it comes to India’s GDP growth.

“There are a few developments which could lend some upside to the forecast. First is the way the NSO estimates growth in the initial rounds. The Advance Estimates are constructed with significant inputs from corporate results,” Bhattacharya said in an interview with ETMarkets.com

“The financial results of manufacturing and services companies are adjusted with GDP deflators to arrive at real growth estimates. Obviously there are other quantity based indicators like IIP, freight, etc. which are also inputs. But a large contribution to the estimates comes from the corporate results. And corporate results in Q1 seem to be quite robust .Based on this, our sense is there might be an upside to this estimate of growth.”

The RBI has projected GDP growth of 9.5 per cent for the financial year 2021-22.

As the experience of the last year (and the myriad of growth downgrades emanating from entities like the RBI to the IMF) has shown, forecasting India’s growth amid a Black Swan event like COVID is no easy task.

Bhattacharya, however, bases his view on an analysis of certain high-frequency indicators.

“… signs from high-frequency indicators we track suggest that recovery has been better and deeper than what we had initially estimated,” he said.

“Automobile sales and numbers on the consumer durables – suggest demand resilience.”

The veteran economist did, however, flag concerns about the revival prospects of a large grouping of smaller companies.

“We are grappling with how much the degree of economic scarring due to the pandemic might have been, including a potential drawdown of savings, permanent reduction in incomes, etc.,” he said.

Bhattacharya maintained that at the current juncture, the most that policymakers – who are admittedly in a bind – can do is deal with the problems at hand at present, while prioritising the public health situation.

“The other economic variables are more exogenous. Be it inflation, funds flows, etc, much of those things are relatively exogenous to their control, the only thing really that policymakers, public health policy particularly, can control is vaccination.”



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SC bench, which subjected banks to RTI, to hear fresh objections, BFSI News, ET BFSI

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New Delhi: The Supreme Court on Tuesday ordered listing of a bunch of petitions by mega banks including SBI and HDFC questioning a court mandate to provide customer and commercial information to RTI querists to a bench headed by Justice L N Rao, which had ruled that the RBI was bound to provide information sought about operations of banks under RTI.

Agreeing with advocate Prashant Bhushan, a bench of Justices S Abdul Nazeer and Krishna Murari ordered that since a bench headed by Justice Rao had dealt with the issue at length and returned a verdict, it would be in the fitness of things to list the fresh pleas by the banks before the same bench.

The leading banks have moved the SC questioning the efficacy of subjecting them to RTI and said, “banking operations and the financial transactions, including the details of individual accounts, are held in confidence by the banks and that the SC judgment would seriously jeopardise the confidential clauses applicable to the banking operations under various statutes.”

On April 29 this year, a bench headed by Justice L N Rao had dismissed applications by major banks, including SBI and HDFC, for recalling the SC’s six-year-old judgment directing the banking regulator RBI to provide information under RTI about functioning of banks under the Act. Solicitor general Tushar Mehta, senior advocate Mukul Rohatgi and K V Vishwanathan had argued –

“How can the bank breach the trust and faith of the account holder just because a RTI activist desires to know what another person’s bank balance is, or what credit lines he has sought for his business empire for a confidential future venture? No one is against transparency in banking operations.

But, why should the banks, mandated by statute to maintain confidentiality, reveal information in breach of account holders’ trust and reveal future business plans to rivals, who could get the information by employing an RTI activist’s services?”

“We know how and who would use the RTI to seek information about business rivals. If the banks reveal to which sector loans are being given, then there will be no commercial confidentiality for any future project envisioned by an industrial house. A nine-judge bench of the SC has ruled that individual privacy is a part of right to life. Should account holders in banks not enjoy privacy about their bank accounts,” they asked.

Bhushan strongly resisted the fresh move by banks to wriggle out of their obligations to provide information sought under RTI through the RBI.



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World Bank’s IFC extends over Rs 550 crore debt support to IndoSpace logistics fund, BFSI News, ET BFSI

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The World Bank Group member IFC has extended $75 million or over Rs 557 crore debt support to Industrial real estate and logistics parks’ developer IndoSpace’s logistics fund to develop logistics and industrial parks with an objective to enhance warehousing and supply chain infrastructure in India.

The development financial institution is extending the loan to IndoSpace Logistics Parks III LP, a $580-million vintage fund, and the first tranche of this amount has already been disbursed to IndoSpace.

The $580 million fund, post leverage is expected to create a corpus of over $1.2 billion to develop and acquire industrial and logistics-related real estate investments in the country.

IFC’s investment is expected to help IndoSpace expand and lease to e-commerce players and online retailers in the country to meet their growing demand for warehouses.

“IFC’s long-term finance in a challenging credit environment will enable us to continue our business plan and be market-ready as the economy recovers and the demand picks up in the near future. The timely investment will contribute toward developing a reliable and efficient logistics ecosystem in India, facilitating domestic and foreign trade while supporting local manufacturing,” said Rajesh Jaggi, Vice Chairman – Real Estate, Everstone Group.

IndoSpace is a joint venture between the Everstone Group, an India and Southeast Asia-focused private equity and real estate investor, GLP and Realterm, a US-based global industrial real estate group.

“In keeping with IFC’s priorities in India, the project will help accelerate a green post-Covid recovery by supporting a strong business infrastructure, which is critical to attract investment and boost the country’s industrial capacity,” said Rana Karadsheh, Regional Industry Director for Manufacturing, Agribusiness and Services, Asia Pacific at IFC.

According to her, while businesses look at recouping growth, they will have ready access to industrial and warehousing facilities, minimizing challenges to establishing or expanding their operations in India. This will help contribute to the resilience of real sector markets, helping the country overcome disruptions posed by the global pandemic.

The first investment from this loan facility will help IndoSpace build a warehouse in Luhari III, a site near with connectivity into Gurgaon, Delhi, and other key areas in the North.

In late 2020, IndoSpace partnered with KoolEx, a leading pharma cold chain logistics service provider, to build three temperature-controlled pharmaceutical distribution centers across India. The first one, near Mumbai, will be India’s largest stand-alone temperature-controlled warehousing facility.

With pandemic-related lockdowns creating pressure on traditional supply chains and prompting consumers to shift to online purchasing, IFC’s support will help strengthen warehousing facilities to accommodate the increasing demand for essentials, including pharmaceuticals and fast-moving consumer goods (FMCG).

Moreover, as India emerges from the pandemic-led crisis, the financing will help accelerate construction and development of parks, preserving thousands of jobs.

Logistics costs in India are estimated to be high at around 13% t0 14% of gross domestic product (GDP), compared with around 9% to 10% in the US and Europe. While warehousing is a fundamental part of logistics and supply chains, it is significantly undersupplied in the country. Further, the sector is largely fragmented with unorganized players accounting for nearly 90% of the market.

Against this backdrop, several estimates show that around $13 billion funding is required for the development of new warehousing capacity in India over the next decade. Given the market opportunity, a robust warehousing and logistics infrastructure that meets global standards, can help attract investment in the country and enable more commerce in the region, driving competitiveness.



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ICICI Bank, StanChart, HSBC cut deals in ‘Swaption’ in a first, BFSI News, ET BFSI

Banking & Finance

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MUMBAI: Private sector lender ICICI Bank Tuesday cut India’s first set of ‘swaption’ deals with HSBC and Standard Chartered Bank, heralding a new era of risk management in the country’s interest-rate derivatives market that needs to introduce world-class solutions to draw more overseas funds into local debt assets.

The ‘swaption’ interest-rate derivative product should help both local borrowers and investors to rein in funding costs in a rising rate scenario and retain investment returns in a falling rate scenario. In June, 2019, the Reserve Bank of India (RBI) issued guidelines for ‘swaption’ deals.

A swaption contract gives the buyer the right, but not the obligation, to enter into an interest-rate swap deal.

Three people familiar with the matter told ET that ICICI Bank and the two overseas lenders transacted ‘swaptions’ on Overnight Index Swap (OIS) for a total notional sum, which formed a significant majority of the total worth of transactions reported on day one. Trading in the instrument began Tuesday on a Clearing Corporation of India (CCIL) platform, which showed six separate deals for a total notional sum of Rs 700 crore.

“These transactions are a welcome step toward managing interest rate risks more effectively,” said B Prasanna, Group Head, Global Markets, Sales, Trading and Research, ICICI Bank. “Issuers who have issued bonds with Put options which get exercised in rising interest rate markets now have a tool that can protect them. These products will help make our debt markets reach global standards, and attract more international debt investors.”

If a borrower raises local bonds with a ‘put’ option, investors could well surrender those papers in a rising rate scenario, forcing a borrower to issue new bonds at higher rates. This is where the utility of the instrument is evident for the borrower.

If the borrower buys a swaption contract, the instrument will protect the borrower against any losses from rate movements in the event of investors exercising their put options.

Similarly, if a borrower raises bonds with call options, and exercises them in a falling interest market, the investor has to invest at lower rates. If s/he buys a swaption contract, it will shield for any rate losses.

“We expect the demand for interest rate swaptions from domestic clients to increase in the short to medium term as the proportion of external benchmark linked lending by banks continues to rise,” said Parul Mittal Sinha, Head – Financial Markets, India Standard Chartered Bank.

HSBC declined to comment on the matter.

The transactions took place at the lenders’ Mumbai offices, sources told ET.

To be sure, ICICI Bank and State Bank of India are the only two banks in India that are traded in the global Credit Default Swap (CDS) market, which has significantly gained traction after the Lehman Brothers collapse in 2008.



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Retail Stress: Auto-debit bounces ease in July, still above levels before Covid

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According to data released by the National Payments Corporation of India, of the 86.47 million debit requests made in July over the National Automated Clearing House (NACH) platform, 28.74 million bounced.

The bounce rate on auto-debit transactions eased to 33% by volume in July from 36.5% in the previous month. The failure rate of such transactions, many of which are debit requests for EMIs, still remain higher than their pre-Covid levels, indicating high stress in the retail segment.

According to data released by the National Payments Corporation of India, of the 86.47 million debit requests made in July over the National Automated Clearing House (NACH) platform, 28.74 million bounced. In terms of value, the bounce rate on auto-debit requests stood at 27.35% in July, almost at par with the levels seen before the second Covid wave emerged in April.

Data from the NACH platform does not include intra-bank transactions and, therefore, do not represent all debit requests made in the financial system. EMI payments to smaller non-banking financial companies (NBFCs) and fintech lenders account for a large share of requests made through the NACH platform.

The easing of repayment stress ties in with the commentary from banks and other lenders, who reported an improvement in collections during June and July. State Bank of India (SBI) saw a slippage ratio of 2.47% in Q1FY22, due in large part to a hit to collections. Chairman Dinesh Khara told analysts that a significant amount of the slippages came from the retail portfolio, where collections are closely linked to the force of the recovery effort. “However, the good news is that in July 2021, we have been able to regain some ground and are confident that we will be in a position to pull back and see much better performance in the days and weeks going forward,” Khara said.

In the non-bank segment, stress rose in specific segments like vehicle finance, high-ticket loans against property (LAP), lease rental discounting (LRD), small and medium enterprises (SME) and microfinance, Kotak Institutional Equities (KIE) said in a note on Tuesday. Within housing loans, retail asset quality broadly held up well, though there was a marginal rise in stress in the self-employed segment.

Analysts at KIE expect the pace of recovery to be uneven across lending institutions. “Almost all companies reported a rise in collections month-on-month in July 2021. Softer bucket delinquencies are, however, likely to remain high as it will take time for customers to regularise repayments,” KIE said.

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