Category: Banking & Finance

Repo rate hike may still be three-four quarters away

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There has been a lot of volatility in the fixed income market in the last one-and-a-half years on the domestic as well as global fronts amid the pandemic. As the pandemic spread across the world, central banks cut rates and infused liquidity into the market.

By December 2020, when the world felt it has overcome the problem, the second wave struck. As we come out of the second wave, governments all over the world are cautious about the Delta wave.

In this backdrop, as members of the Monetary Policy Committee (MPC) go into a huddle between August 4 to 6, they will size up the retail inflation reading, which has been above the MPC’s upper tolerance level of 6 per cent in May and June, and the anaemic growth.

The members are seen voting in favour of keeping the repo rate unchanged and persisting with the accommodative policy stance to nurture economic recovery and sustain it.

Once growth gains momentum and is back to the pre-pandemic levels, the MPC is expected to gradually drain the excess liquidity from the financial system, then change the policy stance and, finally, start hiking rates.

Given that the MPC is committed to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, a rate hike may be three-four quarters away.

Focus on growth

So, in the upcoming bi-monthly monetary policy review, the MPC is expected to stay focussed on growth since the economy is opening up gradually and, by October policy, the RBI may react in line with global rates, which may start inching upwards. The 10-year yield is expected to trade in the range of 6.00-6.25 per cent in the near term and may start moving upwards gradually.

There was a lot of debate when inflation numbers started inching upwards during the pandemic. How can inflation increase when there is a slowdown? In the backdrop of two consecutively high retail inflation readings above 6 per cent (MPC has a comfort level at 4 per cent), RBI Governor Shaktikanta Das emphasised that these numbers are transitory in nature, and the headline number is expected to come below 6 per cent, going ahead.

The main culprit driving the rising inflation numbers was higher commodity prices, which pushed the input prices upwards, and it further percolated into prices of end products. If input prices keep increasing, firms will pass on this increase to end consumers as demand recovers after the second wave.

At its last meeting, OPEC decided to increase oil production, which has helped bring oil prices down. However, at about $73 a barrel, oil prices continue to be higher than last year’s $45. India, being a net importer of oil, will bear the brunt.

Also, the service industry (contact-intensive sector), which faced severe slowdown due to the pandemic, might see price increase when it opens up. Monsoon will play a key role in food inflation since July is the month when one-third of sowing takes place normally. Hence, most of the sowing will depend on monsoon, going ahead.

Q2 expected to be good

Growth numbers have been volatile since March 2020. As the second wave abated faster than feared, economies all over the world started opening-up gradually. Developed countries with faster vaccination roll-out are opening-up much faster than emerging markets, which are struggling with vaccination due to supply constraints.

On the domestic front, by mid-July 2021, high frequency indicators such as power demand, E-Way bills, power consumption and mobility index were showing positive signs with the gradual unlocking of States.

Government spending is expected to be good even as private investments take some time to pick up. Exports will be the silver lining that will balance the shortfall in growth numbers.

After the second wave, there has been a sharp increase in unemployment rate in rural areas. The MNREGA scheme of the government will play a key role in rural employment and bringing rural consumption back on track.

Overall, the July to September 2021 quarter is expected to be good based on pent-up demand, vaccination drive, favourable policy initiatives in the past and global growth.

Fiscal policy

MPC was the prime moving force last year after Covid outbreak, but going ahead, rate cuts will be less effective. Hence, the baton passes on to fiscal policy from the MPC. It has become imperative for the government to provide employment, food and health-related support to vulnerable sections of the society, and continue with aggressive disinvestment when the equity markets are high.

The downside risks include limited capex plans, partial restrictions in key States and concerns over the third wave, which may impact the industrial as well as service segments. Prolonged economic recovery, if the third wave hits, along with no significant improvement in current vaccination drive due to supply constraint, remain major unforeseen risks.

(The author is CIO-Fixed Income, LIC Mutual Fund. Views expressed are personal)

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Why demand for Covid health cover is infectious

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The Covid-19 pandemic has, in a way, redefined the perceptions around health insurance, acting as a catalyst for the growth of health cover.

According to insurers, it has given the biggest push to health insurance demand since liberalisation in the 1990s, triggering positive shifts in the perception, processes and products in the industry.

The catalytic impact of Covid on the health insurance scenario is quite phenomenal in terms of demand.

“There has certainly been an increase in demand for health insurance policies, owing to the awareness raised by Covid-19 pandemic,” TA Ramalingam, Chief Technical Officer, Bajaj Allianz General Insurance, told BusinessLine.

The perception about health insurance has changed from a mere tax-saving tool to an indispensable financial security tool.

“We have observed that there has been approximately a 40 per cent year-on-year increase in demand for health insurance policies,” said Ramalingam.

In a new trend, many customers are also looking to increase the sum insured of their base policy, he added.

There has been a realisation of the need to have an adequate cover to meet a major chunk of health expenditure in case of unforeseen risks such as Covid. “For instance, if a person has a ₹3 lakh health cover, they are looking to increase it to ₹5 lakh cover; a person with ₹5 lakh cover is interested in buying a ₹10 lakh cover. Additionally, they are also opting for super top-up policy to enhance their sum insured,” said Ramalingam.

According to Sanjay Datta, Head -Underwriting & Claims, ICICI Lombard General Insurance Company, there has been much learning from the Covid experience.

“One of the major learnings is the recognition of the need to have a risk product to cover oneself and one’s family members.

“The digital offerings, as well as customer awareness of digital solutions to meet health cover requirements, have also gone up. There has been a lot of streamlining of processes as well,” said Datta.

Product innovation and standardisation are now an integral part of the lexicon for all stakeholders – the Insurance Regulatory and Development Authority of India (IRDAI), industry players and customers.

Shift in demand

There are shifts in the nature of demand for health cover. Unlike last year, now there has been a decline in demand for Covid-specific health insurance policy for two reasons. “This is being driven by reduction in Covid cases in our country. Secondly, and more importantly, people are now looking to buy comprehensive health insurance policies,” said Ramalingam.

In a significant move, the insurance regulator had introduced standard Covid-specific products, Corona Kavach and Corona Rakshak, to be offered by non-life and life insurers mandatorily for a period of nine-and-a-half months in July last year.

Though the initial response was dull, the demand for Covid-specific cover picked up significantly between March and September 2020 in the backdrop of surging cases.

Assuming that there will be no third wave, general insurers expect greater demand for standard basic health cover policy, Aarogya Sanjeevani, introduced by the IRDAI before the attack of the pandemic.

It has been seen as a game-changer for health cover as it offers a simple, understandable basic health cover.

However, the product has been overshadowed by Covid concerns and people preferred Covid-specific policies to a standard health over. Once Covid becomes history, this product could catch the attention of general public, feel experts.

Claims

“Due to the second wave, we have seen more than 100 per cent of Covid claims in the first quarter of the current fiscal compared to the entire FY21. Covid-19 claims constitute around 45 per cent of overall health claims in Q1 FY22, compared to 17 per cent for the same period last year,” Ramalingam added.

However, insurers expect lower traction, going forward. There is already a declining trend of Covid cases in some parts of the country, and insurers are hopeful that as the vaccination drive gains more momentum, there could be an even more decline in the number of cases.

Is it sustainable?

While all these factors have boosted demand since April 2020, industry experts are also hoping that the new levels of demand for health insurance will be sustained, going forward.

“The massive surge in demand is a welcome trend. However, there are fears of the ensuing third wave all around, which might have contributed to increase in demand. We are keeping our fingers crossed that the situation attains normalcy,” said the CEO of a large private life insurer.

He also sees customer satisfaction as a challenge. “In most cases, an objective examination of Covid claims being made allows us to settle only a part of the claim, leading to disaffection. Insurance goes by defined norms in claim settlement. We need to educate customers, too, on this front,” said the CEO.

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Goldman Sachs to raise pay for junior investment bankers: report

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Goldman Sachs Group Inc is raising salaries for its junior employees in the investment bank division, Business Insider reported on Sunday.

The bank’s second-year analysts will now make $125,000 in base compensation, while first-year associates will earn $150,000, Business Insider reported citing two people familiar with the situation.

No formal announcement about the pay raise has been made and it was unclear which other levels of employees at the investment banking division have also been given salary increases, the report from the financial and business news website said. Goldman Sachs declined to comment.

Goldman Sachs sets up centre in Hyderabad

Investment banks have raised pay for first- and second-year associates this summer in an attempt to ease the strain on these workers and compensate them more for their work supporting more senior staff in a year of unprecedented deal making.

Citi Group, Morgan Stanley, UBS Group AG and Deutsche Bank AG have already increased pay for their first-year analysts to around $100,000, a raise of about $15,000.

‘Saturday rule’

In February, a group of junior bankers in Goldman’s investment bank told senior management they were working nearly 100 hours a week and sleeping five hours a night to keep up with an over-the-top workload and “unrealistic deadlines.” Half of the group, which consisted of 13 first-year employees, said they were likely to quit by summer unless conditions improved.

Goldman Sachs to set up 250 beds across 4 hospitals in Bengaluru

Goldman’s Chief Executive Officer David Solomon has said the bank was working to hire more associates to help with the workload, and vowed to enforce the “Saturday rule,” which prohibits employees from working between 9 pm Friday night and 9 am on Sunday, except in certain circumstances.

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As markets soared, PSBs raised a record Rs 58,700 via debt, equity, BFSI News, ET BFSI

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Make hay while the sun shines. As the stock market soared during the pandemic, public sector banks raised a record Rs 58,700 crore from markets in FY2020-21 through a mix of debt and equity to enhance the capital base.

Series of successful QIP reflect the confidence of both domestic and global investors in PSBs and their potential.

The fundraise

This included Rs 4,500 crore raised by Mumbai-based Bank of Baroda from qualified institutional placement (QIP). Punjab National Bank mobilised Rs 3,788 crore through share sale on a private placement basis during the financial year ended March 31, 2021.

At the same time, Bengaluru-based Canara Bank raised Rs 2,000 crore from QIP, as per data collated from regulatory filings.

In addition, 12 PSBs raised funds from Tier I and Tier II bonds taking the total fund mobilisation to Rs 58,697 crore, highest amount garnered in any financial year.

Government reforms

Various reforms undertaken by the government including recognition, resolution and recapitalisation resulted in progressive decline in non-performing assets (NPAs) and subsequent rise in profit.

NPAs of PSBs had declined to Rs 7,39,541 crore as on March 31, 2019, Rs 6,78,317 crore on March 31, 2020 and further to Rs 6,16,616 crore as on March 31, 2021 (provisional data). Provision Coverage Ratio (PCR) at the same time increased sequentially to a high of 84 per cent.

As a result, PSBs in aggregate recorded a profit of Rs 31,816 crore, highest in five years, despite 7.3 per cent contraction in economy in 2020-21 due to COVID-19 pandemic.

The primary reason for PSBs to post such a Rs 57,832-crore turnaround from a loss of Rs 26,015 crore in 2019-20 to a combined profit of Rs 31,816 crore was the end of their legacy bad loan problem.

At the same time, comprehensive steps were taken to control and to effect recovery in NPAs, which enabled PSBs to recover Rs 5,01,479 crore over the last six financial years.

Credit growth

Overall credit growth of Scheduled Commercial Banks (SCBs) has remained positive for 2020-21 despite a contraction in GDP (-7.3 per cent) due to the COVID-19 pandemic.

As per the RBI data, gross Loans and Advances of SCBs increased from Rs 109.19 lakh crore as of March 31, 2020, to Rs 113.99 lakh crore as of March 31, 2021.

Further, as per RBI data of loans to agriculture and allied activities, micro, small and medium enterprises, housing and vehicles have witnessed a year-on-year growth of 12.3 per cent, 8.5 per cent, 9.1 per cent and 9.5 per cent respectively during the year.



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RBI’s new rules on interchange fee, 24/7 bulk clearing facility functional, BFSI News, ET BFSI

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The Reserve Bank of India‘s new directions on raising interchange fee and making available the facility of bulk clearing round the clock have become effective from Sunday onwards.

The RBI in June raised the interchange fee for financial transactions from Rs 15 to Rs 17, while for non-financial transactions the increase was done from Rs 5 to Rs 6. These new rates have become applicable from August 1, 2021, as per the RBI’s direction.

An interchange fee is a fee charged by banks to the merchant who processes a credit card or debit card payment.

Besides, the National Automated Clearing House (NACH) has been made available on all days of the week, effective August 1, 2021.

NACH, a bulk payment system operated by the National Payments Corporation of India (NPCI) facilitates one-to-many credit transfers such as payment of dividend, interest, salary and pension.

It also facilitates the collection of payments pertaining to electricity, gas, telephone, water, periodic instalments towards loans, investments in mutual funds and insurance premiums.

During the bi-monthly monetary policy review in June, RBI governor Shaktikanta Das had announced that in order to further enhance the convenience of customers, the NACH will be available on all days of the week.

The facility was available only when banks were open, usually between Monday to Friday. Auto-debit instructions given by the bank account holder were not processed on days the bank were closed like Sundays, bank holidays and even gazetted holidays. Further, since most companies use NACH for salary credits these also did not happen on bank holidays.

Meanwhile, ICICI Bank has revised charges for cash withdrawals from ATMs, cheque books and other financial transactions from August 1. The revised charges will be applicable for domestic savings account holders including salary accounts.



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Banks’ use of FD-OD fix irks RBI, BFSI News, ET BFSI

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Banks are cutting new deals with corporates to dodge a recent Reserve Bank of India (RBI) rule. The tactic is not going down well with the regulator, which has got wind of it.

Loosely called the ‘FD-OD’ deal, it’s a simple arrangement where a company parks some funds as fixed deposits (FD) and the bank gives an overdraft (OD) to the client. The innocuous transaction is being used as a ploy to overcome the rule prohibiting a bank from having a current account of a company to which it has given little or no loans. According to the regulation, abank with less than 10% of total approved facilities — comprising loans, non-fund businesses such as guarantees and overdrafts —to a company cannot have its current accounts, which are sought after by lenders as zero-interest deposits lower cost of funds.

RBI had directed all banks to give up such current accounts by July 30. The regulator, according to media reports, had even frozen accounts after some banks failed to meet the deadline.

In the past few weeks, though, here’s what many companies and banks have done. Say, total facilities by the banking industry to a company is Rs 1,000 crore, while the bank that holds the company’s current accounts has only Rs 10 crore loan exposure to the entity. According to the RBI directive, it has to then surrender the current account. Now, to bypass this rule, the FD-OD arrangement is entered into. To maintain the current account with the same bank, the company makes an FD of Rs 105 crore with the bank, which, in turn, extends a ‘secured OD’ of Rs 100 crore. Since the bank’s exposure to the company (by virtue of the OD) is now 10% of the total facilities approved by the banking industry, the current accounts are retained by it without taking any extra risk.

“RBI has come to know of these back-to-back deals,” said a senior banker. “Senior supervisory managers (of RBI) assigned to various banks are enquiring with banks to check whether the regulation is being followed in letter and spirit. Deputy governor MK Jain is serious about the directive, even though it boils down to micromanagement by the central bank. Even if an RBI official thinks differently, he has to follow the instructions.” (Jain’s responsibilities include supervision and HR, among other things).

“Technically, banks are not breaking any rules. So, on what grounds would RBI stop ODs?” said the banker.

The regulation stems from RBI’s belief that errant corporate borrowers will find it tougher to divert funds if their current and collection accounts lie with lending banks. However, industry sources say that current accounts are often kept with non-lending banks due to genuine business reasons. Not all lending banks, say industry sources, have good cash-management practices that corporates require for vendor payments, escrow accounts, collection from sales etc.

TEMPORARY SOLUTION

Bankers, however, know that the FD-OD deal can only be a temporary solution, as companies may pull out FDs if there is a sudden fund crunch.



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BIS Innovation Hub, Monetary Authority of Singapore propose enhancing global real-time retail payments network connectivity, BFSI News, ET BFSI

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The Bank for International Settlements Innovation Hub Singapore Centre and the Monetary Authority of Singapore (MAS) has published a proposed blueprint for enhancing global payments network connectivity via multilateral linkages of countries’ national retail payment systems.

Titled Project Nexus, this blueprint outlines how countries can fully integrate their retail payment systems onto a single cross-border network, allowing customers to make cross-border transfers instantly and securely via their mobile phones or internet devices.

“Project Nexus is trying to achieve the equivalent of internet protocols for payments systems. That means creating a model through which any country can join by adopting certain technical and governance requirements,” said Benoît Cœuré, Head of the BIS Innovation Hub.

The main elements

The Nexus blueprint comprises Nexus Gateways, which would be developed and implemented by the operators of participating countries’ national payment systems, will serve to coordinate compliance, foreign exchange conversion, message translation and the sequencing of payments among all participants. These gateways will be predicated on a common set of technical standards, functionalities and operational guidelines set out within the proposal.

Another element of the blueprint is overarching Nexus Scheme that sets out the governance framework and rulebook for participating retail payment systems, banks and payment service providers to coordinate and effect cross-border payments through the network.

Sopnendu Mohanty, Chief FinTech Officer, MAS, said “To achieve significant cost-reduction in cross-border payment transfers, enhancements must be made on two fronts: direct connectivity between domestic faster payment systems, and frictionless foreign exchange on shared common wholesale settlement infrastructures. The BIS Innovation Hub Singapore Centre is working on both. The Nexus project maps out a much-needed set of standards to achieve seamless cross-border payment systems connectivity.”

How it will work

Under the Nexus blueprint, participating countries will only need to adopt the Nexus protocols once to gain access to the broader cross-border payments network. This removes the need for countries to negotiate payment linkages with each jurisdiction on a bilateral basis.

The Nexus blueprint was developed through extensive consultation with multiple central banks and financial institutions across the globe. It builds on the pioneering bilateral linkage between Singapore’s PayNow and Thailand’s PromptPay launched in April 2021, and benefits from the experience of the National Payments Corporation of India’s (NPCI) development and operation of the Unified Payments Interface (UPI) system. The blueprint can be built upon through continued research and engagement with regulators, payment operators, banks, and other industry participants collaborating towards a technical proof-of-concept.

“Country-to-country and regional payment connections already exist,” notes Andrew McCormack, Head of the BISIH Singapore Centre. “But they require significant coordination efforts, which increase exponentially with more participants. Three countries require three bilateral links but 20 countries would require 190 bilateral links.”

“This blueprint will bring like-minded regulators and instant payments operators along with global bodies like the G20 and the Committee on Payments and Market Infrastructures (CPMI) together to make real-time cross-border payments a reality in the next two to four years”, noted Arif Khan, Chief Digital Officer, NPCI.



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From Indian FinTech to Wall St, companies roll out red carpet for young talent, BFSI News, ET BFSI

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As the pay gap between tech firms narrows, wall Street banks are going the extra mile to retain junior workers.

As young workers quit or face burnout, companies are trying to turn the tide with raises, bonuses, vacations and even free Pelotons.

Investment bank Houlihan Lokey Inc, is offering a five-night stay at a Caribbean retreat where a room night costs $1,000, as a reward after a year of record profits.

It’s also never been more lucrative for aspirants to work outside the gilded world of finance with tech firms creating enormous wealth on the stock market.

A presentation prepared by 13 first-year analysts at Goldman Sachs Group Inc. earlier this year drove a reckoning across Wall Street after it shone a spotlight on the working conditions for junior bankers — some of them were toiling hundred hours a week while their physical and mental health suffered. Goldman responded by easing up on weekend hours and pledging to increase staff in its most-active businesses.

The new six-figure salaries for first-year analysts at Citigroup Inc., JPMorgan Chase & Co. and others are close to double the estimated national average wage. BlackRock Inc., the world’s largest asset manager, joined the war for workers by announcing an 8% blanket raise for employees.

BharatPe offers

In India, BharatPe has offered all new tech team joinees an option to choose between “Bike Package” or “Gadget Package”, according to reports. The Bike package has 5 bikes as options – BMW G310R, Jawa Perak, KTM Duke 390, KTM RC 390 and Royal Enfield Himalayan. The gadget package includes – Apple iPad Pro (with Pencil), Bose Headphone, Harman Kardon Speaker, Samsung Galaxy Watch, WFH desk and chair, and Firefox Typhoon 27.5 D bicycle.

The company will also host its entire Tech Team in Dubai for the ICC Men’s T20 World Cup from October 17- November 14, 2021.

Demanding workers

It’s not just in finance that workers are becoming more demanding — a similar scenario playing out nationwide. Businesses from McDonald’s Corp. to country clubs in Nashville, Tennessee, have raised wages and offered hiring bonuses to lure new workers. From March to May, the rate of U.S. workers voluntarily quitting their jobs rose to its highest level in at least two decades. In Washington, lawmakers are sparring over raising the minimum wage to $15 an hour.

Last month dozens of the US’s top law firms raised first-year wages to $202,500, give or take a couple of thousand. They’re also offering multiple annual bonuses and extra time off as they fight to retain talent and their workers face burnout.

Wall Street banks

JPMorgan is also encouraging more personal time for employees to be offline and will enforce many policies already in place to protect weekends and provide extra flexibility for junior bankers.

Goldman Sachs Group Inc’s chief last month responded to complaints from junior bankers by saying the management is going to work harder to give them Saturdays off and to shift bankers from other divisions to the busiest teams in the investment bank. read more

JPMorgan also plans to conduct a quarterly review to evaluate how junior bankers are spending their time and will hold senior management accountable in their performance reviews and year-end compensation.

Additionally, every group head is required to call two to three junior bankers daily and ask “what’s working and what’s not?”



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Insurers have settled about 6 out of 10 Covid claims so far

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The settlement of Covid-related health insurance claims is hovering around 60 per cent of the total claims made so far.

According to the latest industry data, as on July 19, 2021, total reported claims stood at ₹27,640 crore, of which, only claims worth ₹16,396 crore have been settled.

On an average, the settled amount ranges between 55 per cent and 65 per cent of the claim .

In the first wave of the pandemic (up to February 22, 2021), insurers reported claims worth ₹13,736 crore, of which ₹7,125 was settled. In the second wave – from February 23 to July 19 – general and standalone health insurers received claims worth ₹13,905 crore, of which ₹9,271 crore has been settled.

When contacted, the chief of a private general insurer said: “Settlement of Covid claims has been a challenge as most customers tend to claim much higher than what they are eligible for under various schemes.

“In some cases, claims are not supported by valid documents. In very few cases, we have detected fake documents, including Covid certificates.”

Intensity of second wave

The intensity of the second wave of the pandemic is also testified by the number of claims.

“The number of claims we received during the few months of the second wave are higher than the claims reported during the entire first wave of Covid-19,” said Sanjay Datta, Chief – Underwriting & Claims, ICICI Lombard said.

According to TA Ramalingam, Chief Technical Officer, Bajaj Allianz General Insurance, Covid claims constituted 45 per cent of the overall health claims during the first quarter of the current fiscal compared to 7 per cent in the same period last year.

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₹8,000 crore quantum tech fund awaits budgetary approval

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The ₹8,000 crore quantum technologies fund may get further delayed as the project is yet to get budgetary approval. Announced by the Union Budget in February 2020, the National Mission on Quantum Technologies and Application (NM-QTA) was expected to be launched this month.

“The current status of the project is that it is under processing for approvals and allocation of budget,” Dr KR Murali Mohan, Scientist-G & Head, Frontier & Futuristic Technologies Division, Department of Science and Technology (DST) said while responding to queries from BusinessLine.

Funding

NM-QTA is seeking to dole out ₹8,000 crore in funding to uplift research and entrepreneurship in the quantum ecosystem. The mission aims to focus on four key areas — quantum communication, quantum simulation, quantum computation, and quantum sensing and meteorology.

NM-QTA was in the process of getting final approvals for this project from several ministries including The Ministry of Electronics and Information Technology, Defence Research and Development Organisation, Indian Space Research Organisation among others. These approvals seem to be complete.

“In the last few months, several Ministries have also finalised their activities and participation in the Mission including ISRO, DRDO, MeitY, CSIR, etc. This would bring even greater synergies and muscle to the Mission,” Mohan said.

Selection of projects

The detailed project report, outlining the core strategies behind how this budget will be spent, still remains under wraps. However, he said that the mission is a pan-India one and selection of projects and disbursement of the funds would be carried out on merit and competitive basis through open calls with transparent mechanisms.

According to Abhishek Chopra, Founder & CEO of BosonQ Psi, a quantum computing SaaS-based enterprise, funding from the government for burgeoning quantum technologies is necessary.

“At the moment, investor interest in quantum technologies, especially quantum computing is very limited. Quantum technologies are treated as the technology of tomorrow out of science fiction. In this scenario, it becomes hard for start-ups to invest into core R&D and hire immerse tech talent that India has to offer.”

“India has some of the greatest technological minds and has already missed out on key global technological waves ushering in a new era of computing technology. It can be one of the global leaders here and it is important that they capitalise on this now,” he said.

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