Category: Banking & Finance

LIC’s auditor appointment made a board process, ahead of IPO

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The Centre has taken one more step towards making Life Insurance Corporation (LIC) ‘IPO ready’ by turning the statutory auditor appointment into a board driven process, in line with SEBI’s listing requirements. Hitherto, the statutory auditor for central office and zones required the Centre’s approval.

The Finance Ministry’s Department of Financial Services has amended the LIC Rules, 1956 for a new framework on the selection of auditors.

No longer will the government appoint the auditor, but it will be the shareholders at the Annual General Meeting, according to LIC observers.

Under the new process, LIC’s Audit Committee will recommend to the board for adoption a policy for selection of auditors. On the Board adopting this policy, the Audit Committee will draw up a panel of auditors and recommend to the board an individual or a firm for appointment. The board will then place the matter before shareholders for their approval at the AGM.

 

SN Ananthasubramanian, former ICSI President and practising company secretary, said: “The amendments to the LIC Rules which introduce various aspects of board-monitored governance, are essentially to make LIC IPO ready.”

Ashok Haldia, former CA Institute Secretary, said that the overhaul in auditor appointment provisions, “together with other amendments to the LIC Act/Rules is a step that could enhance corporate governance and transparency, giving more comfort to investors looking to come on board LIC,”

The Centre has brought made 27 amendments to the LIC Act through this year’s Finance Act. It is expected to issue later this month a request for proposals/expression of interest for appointment of merchant banks for the mega LIC IPO, which is set to mop-up at least ₹1-lakh crore for the government. While retaining its ‘corporation’ status, the government is moving to align the LIC Act’s corporate governance provisions with SEBI’s listing requirements. Recently, the government tweaked Securities Contracts Rules to enable public float of large issuers (like LIC), eyeing post listing market capitalisation of over ₹1-lakh crore.

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With rise in hospital bills, demand for high-value cover goes up

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Worries over high medical costs for Covid-19 treatment are pushing a number of people to look at high-value health insurance covers of as much as ₹1 crore.

Insurers say that while the overall average sum insured for health insurance has increased to at least ₹5 lakh, many are even taking up policies of ₹1 crore.

“Of late, there is demand for ₹1 crore sum-insured health insurance covers. Earlier, there was not so much of demand. With the kind of expenditure incurred in Covid-19 treatment, many people are looking at such policies. Also, there isn’t a huge increase in premium if a person moves from a ₹20 lakh policy to ₹1 crore cover,” said Rakesh Goyal, Director at Probus Insurance. There are also additional features in such high net policies with global insurance cover. This is not a mass market product, he further said.

Also read: Insurers settle Covid claims worth over ₹15,000 cr

Vivek Gambhir, Senior Vice-President and Product Head – Accident and Health at Tata AIG General Insurance also said there is a move towards higher sum-insured with the average size being between ₹5 lakh and ₹10 lakh.

“Some companies are also offering ₹1 crore policies,” he said.

Higher medical inflation

Gambhir, however, attributed this high sum insured to not only Covid -19 but also to increased medical inflation over the last four to five years. “Covid has had an impact but in the last four to five years, the average room rent has increased significantly. So, average claim size also increases,” Gambhir added.

While many first-time customers are purchasing health covers of ₹1 crore, others with existing policies are also going for a top-up cover.

“In severe Covid cases, often long duration on a ventilator or even ECMO is needed. A high value policy can take care of such expenditure,” noted an executive with another insurance company, pointing out that many insurers were offering such covers even in the past.

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Investments into Neobanking space dip

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While the Neobanking space in India has been abuzz in 2020 with many pureplay lending and wealth management start-ups diversifying their offerings to enter the segment, funding activity plunged 70.57 per cent as compared to a sudden jump in 2019.

Total funding raised in 2020 across the neobanking sector stood at $32.2 million over 7 deals against $109.4 million raised through 13 deals in 2019, according to data from Tracxn. Investment in the sector picked up in 2018, wherein $31.9 million was raised across nine deals as compared to just $9.6 million across four deals.

In 2021, year-to-date, there has been seven deals so far raising $22.2 million.

 

Sujith Narayanan, co-founder and CEO, of neobanking start-up, Fi told BusinessLine said a number of neobanks, including Fi, launched in 2019 so a lot of the early funding flowed into the space that year. “It takes time to build a full-service neobanking platform. Unlike creating a UPI payment app which would take two-three months, here you are working with banking partners and have to build the whole gamut of services including KYC, onboarding, statements, debit cards – you are creating the entire infrastructure stack and that takes time. The gestation period is much longer, around 18 months, for neobanking start-ups as it has never been done before in India,” Narayanan explained.

Rightly so, around 16 new neobanks or digital banks were launched in 2019, 10 in 2020 and at least two in 2021.

Fi launched its first product a savings suggesting bot in May 2021. The platform has a few lakh users on its waitlist and has been signing up 1,000 customers per day. In the next 24 months, it plans to have two million customers.

“When it comes to millennials, inertia is a big issue in investing and saving. We have created an automated bot which makes it easy to save. For instance, every time you order from Swiggy or shop from Amazon, the bot will ask you to keep ₹50-100 aside as savings,” he said.

The Big Fish

Most of the Neobanks are targeting working professionals in the age group of 21-35 years. Top investors in India in the space include Matrix Partners India, Sequoia Capital, Better Capital, Rainmatter Technology and AngelList.

In terms of total funding raised till date, Niyo leads the pack having raised $49.35 million so far. This is followed by Avail Finance which raised $37.75 million, and Open at $36.24 million. However, all the three players have reported ballooning losses in the financial year (FY) ended 2020. Niyo’s losses stood at $12.4 million in FY20 up from $4.6 million in FY19. For the same period, revenue stood at $4.2 million in FY20 against $3.1 million in FY19.

For Open, losses increased to $6 million in FY20 from $984,400 in FY19. The startup clocked in revenue of $1.2 million up from $73,900 in FY19.

“We are still in the investment phase. During this period (FY19-20), we have launched multiple products, invested in technology and teams. We also acquired two other companies,” Virender Bisht, Co-founder & CTO, Niyo told BusinessLine. Founded in 2015, Niyo has till date serviced over two million customers and has around half a million active users.

Why Neobanks?

Unlike traditional banks, Neobanks have been focussing on a particular segments.

“Banks have been offering products and services with one size fits all. Online banking is used by someone who is 19 as well as a 70 year old. In contrast, Neobanks have a razorsharp focus on the segment they are focusing into,” said Narayanan.

“Neobanks are working with existing banks and trying to create a customer value layer. Companies like Niyo, Jupiter and Epifi (Fi) have partnered with incumbent banks offering more solutions to customers. Others like Open and RazorpayX are servicing SMEs and MSMEs. A few others are creating customer offering over a prepaid product,” Bisht explained.

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Banks’ exposure to airports doubles over last year

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The outstanding amount of gross bank credit by Indian airports has doubled to ₹9,464 crore as of May 2021 compared to ₹4,519 crore last year, according to data put out by the Reserve Bank of India.

Industry experts believe that the increase in bank credit is because of many airports facing a cash crunch due to the Covid-19 pandemic. Some airports may have taken credit to undertake expansion activities as well.

The domestic passenger traffic, which had started seeing a steady ramp-up post resumption of airport operations from May 25, 2020, reaching 64 per cent of the previous year levels in February 2021, had again suffered a setback due to the second wave of restrictions.

Expansion projects

But at the same time, major airports have been undertaking significant expansion projects. In Bangalore, there was a runway expansion. Hyderabad, too, has come up with a new terminal, significantly upping its capacity targeting close to over 30 million passengers. Delhi, too, is coming up with a fourth runway.

Post FY19, the debt in the airport sector was expected to rise as most airports had initiated large capital expenditure (capex) to increase their capacity. As these airports started using their past accruals towards the initial capex requirements, the overall debt started rising during the last 12-18 months, Vishal Kotecha, Associate Director at India Ratings explained. Some airports may also avail additional debt to shore up their liquidity due to the uncertainty in traffic patterns leading to cash flow mismatches, the experts said.

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How can risk management professionals switch between banking & insurance?, BFSI News, ET BFSI

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Life insurance and the banking sector are the two core sectors where customers keep money with the trust that their money is safe. Both the sectors protect the customer’s money. This article looks at both the assets and liabilities of the banking and insurance sector to find out the similarities and differences. The article also looks at the risks of both sectors to find whether there are opportunities for cross-pollination of people working from both sides.

In both sectors, customers place their money with the respective institutions such as banks and insurance companies. In the banking sector, deposited money creates liability to be returned upon withdrawal. Similarly, in the insurance sector, the premium received creates liability which is paid when a claim arises (death, maturity, and surrender). So, money placed by customers in both sectors creates liability.

Safer asset creation accords secured returns

On the other hand, the money collected by both institutions is invested to back the liabilities which create assets. Under the insurance sector, the money received in the form of a premium is used to purchase the assets like government securities, corporate bonds, equities, and other assets. These assets so purchased to match the amount and tenure of liabilities.

In the banking sector, the money deposited by customers is used to create assets in the form of Government securities, corporate bonds, and equities while other assets are created by giving loans. The bank charges a higher rate of interest from the loanee compared to the depositor to meet expenses and profit margin.

Both the institutions take credit risk by investing to back their liabilities. In the insurance sector, investments are highly regulated with a high percentage of investment in Government bonds and a relatively lower percentage in corporate bonds, and even lesser in equities, thereby having relatively lower credit risk from the point of the probability of default. On the other hand, in banks, most of the assets are created by giving loans to individuals and institutions subject to higher default risk, thereby they have high credit risk. The mechanism of the creation of credit risk under both institutions is similar.

Managing the risk of liquidity

Liquidity risk in the banking sector is a key risk from the customer’s deposit point of view, that is, customers to be paid on demand. Therefore, the banks in India are to maintain a certain Cash Reserve Ratio (CRR). The money kept under CRR may be used to pay when the demand arises from bank customers. The CRR is the ratio of cash required to keep as a reserve as a percentage of total deposits. This cash is either stored in the bank’s vault or deposited with the Reserve Bank of India (RBI) on which no interest payment is made. The current CRR is 4% of Net Demand and Time Liabilities (NDTL). This money cannot be used for investment and lending.

One of the applications of CRR is to control inflation as high CRR will reduce the amount available for lending in a form of loan thereby reducing banks’ liquidity leading to reduced circulation of money in the economy.

Similar to CRR, another tool used to manage the liquidity in the banking system is the Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits (NDTL) that is to be invested in gold, cash, and other securities. These deposits are kept with banks and not with RBI. The current SLR is 18%.

Similar to CRR, SLR is also used to trap the circulation of money in the economy which can control inflation. Also, SLR is used to control the ability of the banks to lend; higher SLR would restrict bank’s ability to give loans.

The restrictions applied in the banking system in a form of CRR and SLR helps in managing the liquidity position of the banks to enable payment to depositors. Similarly, in the insurance sector, to enable the payment of claims, the regulator has prescribed a very strict investment norm with a high percentage of investment in government bonds for the security of money. Such investment in government bonds can be easily liquidated to help maintain liquidity in the insurance sector. Both the sectors use the same methodology of either cash flows or liquidity coverage ratio to assess the liquidity position along with stress tests to identify higher requirements of liquid cash.

In the banking sector, CRR and SLR act like a reserve to be used when required paying to customers on increase in withdrawals, similarly, in the insurance sector, insurance companies are to keep reserves to pay claims when arises. These reserves are calculated at prudential assumption based on guidelines given by the insurance regulator. Such reserves are to be invested based on the regulatory investment guidelines. The purpose of the reserve is to meet the customer’s claims when they arise. In both sectors, there are prudential norms to safeguard the money of the customers in meeting liabilities.

There is a similar inherent mechanism under both the banking and insurance sector to protect the customer’s money, managing the credit and liquidity risk. There can be opportunities for cross-pollination of skills between the two sectors. Actuaries are very strong on the liability side while banking folks are strong on the asset side, an amalgamation is possible.

The blog has been authored by Sonjai Kumar, Certified Risk Management Professional from IRM London

DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



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SC seeks response of Centre, RBI on plea of PNB against disclosure of info under RTI, BFSI News, ET BFSI

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NEW DELHI: The Supreme Court has refused to grant interim stay on the RBI‘s notice asking Punjab National Bank to disclose information such as defaulters list and its inspection reports under the RTI Act, and sought responses from the Centre, federal bank and its central public information officer.

The apex court tagged the plea of the Punjab National Bank (PNB), which is a public sector unit bank, with a similar pending case filed by HDFC Bank against the RBI’s direction.

“Issue notice. Tag with writ petition (Civil) No.1159 of 2019 (HDFC plea),” a bench comprising justices S Abdul Nazeer and Krishna Murari said, and fixed the plea for hearing on July 19.

Banks are aggrieved by the notices issued by the RBI to them under Section 11(1) of the Right to Information (RTI) Act asking them to part with information pertaining to their inspection reports and risk assessment.

The RTI Act empowers the RBI’s central public information officer (CPIO) to seek information from banks for information seekers.

Earlier on April 28, the top court, on legal grounds, had refused to recall its famous 2015 judgment in the Jayantilal N Mistry case, which had held that the RBI will have to provide information about banks and financial institutions (FIs) regulated by it under the transparency law.

Several FIs and banks, including Canara Bank, Bank of Baroda, UCO Bank and Kotak Mahindra Bank had filed applications in the top court seeking a recall of the 2015 judgment in the Jayantilal N Mistry case, saying the verdict had far-reaching consequences and moreover, they were directly and substantially affected by it.

The banks had contended that the pleas for a recall of the judgment, instead of a review, is “maintainable” as there was a violation of the principles of natural justice in view of the fact that they were neither parties to the matter nor heard.

“A close scrutiny of the applications for a recall makes it clear that in substance, the applicants are seeking a review of the judgment in Jayantilal N Mistry. Therefore, we are of the considered opinion that these applications are not maintainable,” the apex court had held.

While dismissing the pleas, the bench, however, had made it clear that it was not dealing with any of the submissions made by the banks on the correctness of the 2015 judgment.

Now, the apex court is seized of several pleas of banks like HDFC and Punjab National Bank against the RBI’s direction to disclose information under RTI.



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EDs in Public Sector Banks: Banks Board Bureau recommends 10 candidates in 2021-22

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New Delhi, Jul 3

The Banks Board Bureau (BBB) has recommended ten candidates to the panel that will be used for filling vacancies of Executive Directors in various Public Sector Banks (PSBs) in the year 2021-22.

These names have been shortlisted after the BBB, which is the head hunter for the government for filling top level posts in PSBs, insurance companies and other financial institutions, interfaced with 40 candidates (chief general managers and general managers) from various PSBs on July 2 and 3 for the position of Executive Directors, sources close to the development said.

The ten names that have been recommended (in the order of merit) for the Panel are Rajneesh Karnatak; Joydeep Dutta Roy; Nidhu Saxena, Kalyan Kumar; Ashwani Kumar; Ramjass Yadav, Asheesh Pandey, Ashok Chandra; A V Rama Rao and Shiv Bajrang Singh.

This panel will be operated in the financial year 2021–22, subject to availability of vacancies in the panel year 2021–22, sources said.

It maybe recalled that this time round the criteria for interviews had been tightened. Only those officers who had completed at least two years as General Managers or/and Chief General Manager and have three years of residual service as on April 1,2020 were considered.

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RBI warns against combination of high public debt, low interest rates, BFSI News, ET BFSI

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New Delhi: As economies around the world witness ultra-low interest rates and rising public debt amid the pandemic, the Reserve Bank of India (RBI) has said that the combination would pose challenges.

The pandemic response saw a tight interaction of monetary and fiscal policy. As monetary policy has sought to control a larger segment of the yield curve, the overlap with public debt management has grown, noted RBI’s Financial Stability Report for July.

It noted that with monetary policy committed to an easy stance for some time in many countries, the fiscal stance becomes important.

Too loose a fiscal stance could cause inflation surprises and financial conditions could tighten, it said, adding that a more constrained fiscal policy would add pressure on monetary policy.

“It would test the efficacy of further monetary expansion and could heighten intertemporal tradeoffs,” it said.

The extraordinary combination of high debt-to-GDP ratios and ultra-low interest rates raises three challenges, said the central bank’s report, with the first being the risk of fiscal dominance.

Further, it may also lead to a situation where fiscal positions may ultimately prove unsustainable and the complications of the possible joint “normalisation” of fiscal and monetary policies would also crop.

Growth-friendly fiscal policy, the RBI suggested, can help by effectively targeting public infrastructure and productivity.



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RBI, BFSI News, ET BFSI

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About 15.9% of loans less than Rs 25 crore to the MSME sector for public sector banks has turned bad as of March 2021, according to the Reserve Bank of India.

This was against an NPA ratio of 13.1% at the end of December 2020 and 18.2% at the end of March 2020. Loans due past zero days and 30 days also rose significantly to 60.7% and 10.6% respectively.

On the other hand private sector lenders recorded NPA ratio of 3.6% at the end of March 2021 against 2% at the end of December 2020 and 4.3% at the end of March. Loans due beyond zero days and 30 days also rose by 89.6% and 3.7% respectively.

As of February 2021, 80% of the MSME borrowers moved into high-risk category as per data released by the regulator.

MSMEs worst hit

The medium, Micro and Small Enterprises are among the worst hit and they face enormous stress in meeting their payment obligations, the Reserve Bank of India said in its latest edition of the Financial Stability Report.

“Despite the restructuring, however, stress in the MSME portfolio of PSBs remains high,” the regulator noted. “While PSBs have actively resorted to restructuring under all the schemes, participation by PVBs was significant only in the COVID-19 restructuring scheme offered in August 2020,” RBI said.

“Given the elevated level of debt of the stressed cohort, the implications of business disruptions following the resurgence of the pandemic could be significant,” the RBI said

The restructuring

Since 2019, weakness in the MSME portfolio of banks and NBFCs has drawn regulatory attention, with the Reserve Bank permitting restructuring of temporarily impaired MSME loans (of size up to Rs 25 crore) under three schemes.

As per data with the RBI, the banking industry together restructured loans worth Rs 36,000 crore under the August 2020 Covid loan restructuring scheme. Public sector banks held the lions share at Rs 24,816 crore while private banks recast MSME loans worth Rs 11,027 crore.

In contrast to this PSBs have been laggards in lending to this sector with aggregate MSME exposure growing at a paltry 0.89% in the last fiscal year ended March 2020. For private lenders this exposure grew 9.23% during the same time.

“Growth in credit to MSMEs during 2020-21 was aided by the ECLGS scheme, with aggregate sanctions at Rs 2.46 lakh crore at the end of February 2021,” RBI noted. “For Public sector banks credit to the sector remained flat and new disbursements turned negative, after adjusting for interest accretion on past loans; private banks on the other hand, showed relatively robust increase in exposure.”



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RBI tweaks norms for interest on unclaimed amount after deposit matures, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) on Friday tweaked the norms for interest on the amount left unclaimed with the bank after a term deposit matures.

Currently, if a term deposit matures and the proceeds are unpaid, the amount left unclaimed with the bank attracts the rate of interest as applicable to savings deposits.

“On a review, it has been decided that if a term deposit (TD) matures and proceeds are unpaid, the amount left unclaimed with the bank shall attract the rate of interest as applicable to a savings account or the contracted rate of interest on the matured TD, whichever is lower,” the RBI said in a circular.

The new norms are applicable for deposits in all commercial banks, small finance banks, local area banks, and cooperative banks.

Term deposit refers to an interest-bearing deposit received by the bank for a fixed period. It also includes deposits such as recurring, cumulative, annuity, reinvestment deposits, and cash certificates.



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