Category: Banking & Finance

NARCL may prompt existing ARCs to reorient their business: ARCIL Chief

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The National Asset Reconstruction Company Ltd, (NARCL), which is slated to become the mother of all Asset Reconstruction Companies (ARCs), will prompt existing ARCs to change their business orientation and start focussing on buying the stressed retail and MSME assets, according to Pallav Mohapatra, MD & CEO, Asset Reconstruction Company (India) Ltd (ARCIL).

He emphasised that ARCs have a huge business opportunity to buy stressed assets aggregating about ₹1 lakh crore in the retail and micro, small and medium enterprise (MSME) segments.

Stressed assets with principal outstanding of ₹500 crore and above, aggregating about ₹2 lakh crore, are expected to be transferred by lenders to NARCL.

In an interaction with BusinessLine, Mohapatra, who was MD & CEO of Central Bank of India before taking the reins at ARCIL in March 2021, emphasised that there is enough scope for existing ARCs (28 at the last count) to buy stressed assets below ₹500 crore from Banks.

Excerpts

Will the setting up of NARCL, does not diminish the business prospects of existing ARCs?

NARCL’s mandate is basically to acquire stressed assets where the total exposure of the banking sector is more than ₹500 crore.

But I feel there is enough scope for getting the business (buying stressed assets) below ₹500 crore. As of today, most of the ARCs were playing in the big-ticket corporate stressed assets.

Now I feel they will change their orientation and start focusing on stressed retail and MSME assets where the size will increase in the backdrop of the Covid-19 pandemic. It (increase in size) will not be there in the case of corporates to a reasonably large extent. This is because, to a great extent, things have been sorted out. There will be a few cases but not as many as it used to be earlier. So, if the ARCs equip themselves with infrastructure, technology, and human resources skills to handle the stressed retail and MSME assets, that is going to be a very huge business opportunity for ARCs.

How big will the business opportunity be?

The business opportunity will be sufficiently large. The opportunity will be bigger than the total existing Assets Under Management (estimated at about ₹60,000 crore) of all the ARCs put together. This particular pool (of stressed retail and MSME assets) could be about ₹1 lakh crore.

Given that sale of stressed assets by banks to ARCs has been declining in the last couple of years, will ARCIL change tack?

We want to focus more on resolution and recovery of non-performing assets and earn income after some time rather than focusing on earning income from fees or some other structure.

If you look at the Profit & Loss accounts of ARCs, normally there are three channels of income — management fee income (for managing the acquired assets), interest income (arising from restructuring) and when ARCs can recover more than the face value of the Security Receipts, they get an upside income.

Our focus is to basically increase the proportion of the upside income. This will have beneficial effects — one is there will be a better churning of the capital in ARCs; second, they will also be earning income, with the upside income going straightaway to P&L; and third is it will be good for the economy as such because there will be recovery and resolution.

So, instead of focusing on earning management fees, which will cover our capital investment, we are looking at earning income, as far as possible, by doing resolution and recovery.

Banks want to sell stressed assets on all cash basis but capital could be constraint for ARCs. How do you deal with this situation?

Banks want all-cash deals because of the non-redemption of SRs. If they know that ARCs are going to redeem the SRs as well as give them upside income, why will they not sell their stressed assets for a mix of cash and SRs?

From the capital and availability of funds point of view, ARCIL doesn’t have a problem. Even if there is a funding gap, we always try to get some investor. If we are doing a 100 per cent cash deal with a bank, we try to pay 100 per cent to the bank. But when it comes to our capital deployment, we try to make it 15 per cent or a maximum of 20-25 per cent, and we always get an investor who will put the money. Now, the advantage of this is that since the investor is putting in 75-85 per cent of the money, they will be very keen on resolution of the assets. The investors will not be keen that the ARC is earning the management fees they have to pay for. They will have regular interaction with the ARC because they want a return on their money. And investors are keen to work with those ARCs that have a very fair, open and transparent business model.

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RBI imposes penalties on 4 cooperative banks, BFSI News, ET BFSI

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The Reserve Bank on Tuesday said it has imposed penalties on four co-operative banks, including a Rs 112.50 lakh fine on Hyderabad-based Andhra Pradesh Mahesh Co-operative Urban Bank, for contravention of certain regulatory directions. A penalty of Rs 62.50 lakh has been imposed on The Ahmedabad Mercantile Co-operative Bank, Ahmedabad; Rs 37.50 lakh on SVC Co-operative Bank, Mumbai; and Rs 25 lakh on Saraswat Cooperative Bank, Mumbai.

The penalty on Andhra Pradesh Mahesh Co-operative Urban Bank was for non-compliance with directions issued by RBI contained in Master Directions on ‘Interest Rate on Deposits’ and ‘Know Your Customer’.

The Ahmedabad Mercantile Co-operative Bank has been penalised for violation of norms contained in Master Directions on ‘Interest Rate on Deposits’.

As per the RBI, it imposed penalty on SVC Co-operative Bank for non-compliance with directions on ‘Interest Rate on Deposits’ and ‘Frauds Monitoring and Reporting Mechanism’.

Saraswat Cooperative Bank was penalised for non-compliance with directions on ‘Interest Rate on Deposits’ and ‘Maintenance of Deposit Accounts’.

The penalties, the RBI said, have been imposed for based on deficiencies in regulatory compliance and are not intended to pronounce upon the validity of any transaction or agreement entered into by the banks with their customers.



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RBI sets July 30 deadline for banks to move current accounts, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) has set a deadline of July 30 for banks to give up current accounts of all companies where their exposure is below a cut-off decided by the regulator.

RBI communicated this in a letter to banks a fortnight ago, two senior bankers told ET.

The move, initiated more than a year ago, could trigger a migration of many lucrative current accounts – which lower a bank’s fund cost and cash management business – from MNC banks to public sector lenders and some of the large private sector Indian banks.

According to the new rule, a bank with less than 10% of the total approved facilities – which include loans, non-fund businesses like guarantees, and daylight overdrafts (or intra-day) exposure – to a company is barred from having the client’s current account.

“RBI is probably upset that banks are taking a long time to shift the accounts. But the delay may also be because several PSU banks may not be ready with the technology. Now, RBI can’t direct companies which have been doing business with a bank for years to move to another bank. At one point many MNC banks and companies had opposed it, but they have realised that it’s fait accompli,” said a banker.

Notified in August 2020, the regulation after a review was expected to be implemented by January 31, 2021.

Backed by a former chairman of the country’s largest lender State Bank of India and some of the PSU bankers, the regulation stems from the belief that errant corporate borrowers will find it tougher to divert funds if their current and collection accounts lie with lending banks.

Regulation doesn’t cover MFs, insurers
It’s aimed at curbing the practice of companies who run current accounts to collect sale proceeds and other receivables with banks outside the lending consortium to delay loan servicing.

Over the years, some of the MNC banks, without being large lenders, had put in place technology to integrate fund flows between a large company and its customers, vendors and associates. Besides enjoying the float, the relationship with the corporate opened an opportunity to cross-sell products to group companies. Significantly, it was a strategy to earn fees without committing larger capital for loans, and the risk of some turning into NPAs.

However, the present rule, said another banker, could also impact a few smaller Indian banks, including state-owned lenders. Some large private banks, who are in favour of the rule, have been raising their exposure above the 10% threshold to retain the current accounts. As per the rule, a bank having a current account with less than 10% exposure will be required to move funds to another bank which meets the exposure rule. The 10% rule does not pertain to regulated entities like mutual funds and insurers.



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Banks, experts pin hopes on bad bank to cut NPA pile, BFSI News, ET BFSI

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The National Asset Reconstruction Company (NARC) is likely to help banks cut their bad loan piles.

The bad bank and healthy provisioning buffers against doubtful advances should help India’s banks mitigate the impact of delinquencies and asset quality slippages in the aftermath of the second Covid wave, according to Boston Consultancy Group.

The formation of National Asset Reconstruction Co Ltd will help lenders keep up the momentum of recovery in stressed assets in 2021-22 (Apr-Mar), State Bank of India Chairman Dinesh Kumar Khara said.

Along with the resumption of courts and the roll-out of pre-package for resolution through the insolvency law, this will help banks make judicious use of recovery options, Khara said.

The NARC would help reduce sticky assets exposure to 1.8% – 2.3% of total loans, BCG said.

Asset quality is still a major concern for many Indian banks even as nonperforming assets (NPA), on average, could be contained, the global consultancy firm said.

Asset quality

“The second wave of the coronavirus pandemic poses risk to asset quality even as banks retain healthy provisioning buffers,” it said.

Banks have identified 22 bad loans totaling Rs 89,000 crore to be transferred to the NARC in the initial phase.

The State Bank of India plans to transfer bad loans worth around 200 bln rupees to NARCL.

The report also said that bad loans sold to asset reconstruction companies (ARCs) as a proportion of banking system stressed assets increased to about 34% at the end of FY20, up from 25% in FY18, with banks taking a much higher haircut on these sales.

Haircuts on sales to ARCs have risen to 66% in FY20 compared to 62% in the prior financial period, it said.

The bad bank

The bad bank was proposed in the Union Budget for 2021-22.

In the last financial stability report released in January, the central bank said that banks’ gross non-performing assets may rise to 13.5% by September 2021 from 7.5% as of September 2020. In the event of extreme stress, the ratio could rise to 14.8%.

Former Reserve Bank of India deputy governor Rakesh Mohan has also warned that higher stress on assets in the banking system threatens financial stability.

Recoveries through various channels have bounced back to about 16% in FY20 from decadal lows of about 10% in FY16 before the pandemic struck.



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Global banks announce bumper dividends, but Indian peers face a cap, BFSI News, ET BFSI

Banking & Finance

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Global wall street banks are hiking dividend payouts after US Federal Reserve gave them go-ahead last week after annual stress test results. However, the Indian bank shareholders have to wait has curbed banks’ dividend-paying ability in the financial year 2020-21 citing the impact of an ongoing second wave of coronavirus.

Morgan Stanley, JPMorgan, Bank of America, Goldman Sachs and Wells Fargo said on Monday they were hiking their capital payouts after the US Federal Reserve gave them a clean bill of health following their annual “stress tests”.

Analysts and investors had expected the country’s largest lenders to start issuing as much as $130 billion in dividends and stock buybacks from next month after the Fed last week ended emergency pandemic-era restrictions on how much capital they could give back to investors.

Morgan Stanley

Morgan Stanley delivered the biggest surprise to investors, saying it would double its dividend to 70 cents a share in the third quarter of 2021.

The Wall Street giant also said it would increase spending on share repurchases.

Morgan Stanley CEO James Gorman said in the announcement that the bank could return so much capital because of the excess it has accumulated over several years. The action, he said, “reflects a decision to reset our capital base consistent with the needs we have for our transformed business model.”

Bank of America

Bank of America Corp said it will hike its dividend by 17% to 21 cents a share beginning in the third quarter of 2021, and JPMorgan Chase & Co said it will go to $1.00 a share from 90 cents for the third quarter.

Goldman Sachs Group said it planned to increase its common stock dividend to $2 per share from $1.25.

Wells Fargo

Wells Fargo & Co, which has built up capital more rapidly than rivals due in part to a Fed-imposed cap on its balance sheet, said it plans to repurchase $18 billion of stock over the four quarters beginning in September.

The repurchase target amounts to nearly 10% of its stock market value and is line with expectations from analysts.

Wells Fargo, which for years has been trying to move past a series of costly mis-selling scandals, said it was doubling its quarterly dividend to 20 cents a share, consistent with analyst expectations.

“Since the COVID-19 pandemic began, we have built our financial strength … as well as continuing to remediate our legacy issues,” CEO Charlie Scharf said in a statement.

“We will continue to do so as we return a significant amount of capital to our shareholders,” Scharf added.

Citigroup

Citigroup, meanwhile, confirmed analysts’ estimates that a key part of its required capital ratios had increased under the stress test results to 3.0% from 2.5%.

A hike of that size will limit Citigroup’s share buybacks, versus its peers, a report from analyst Vivek Juneja of JPMorgan shows. Juneja expects Citigroup will have the lowest capital return of big banks he covers.

Citigroup CEO Jane Fraser said the bank will continue its “planned capital actions, including common dividends of at least $0.51 per share” and buying back shares in the market.

In India

The Reserve Bank of India has curbed banks’ dividend-paying ability in the financial year 2020-21 citing an ongoing second wave of coronavirus that comes with an economic cost.

“In view of the continuing uncertainty caused by the ongoing second wave of Covid-19 in the country, it is crucial that banks remain resilient and proactively raise and conserve capital as a bulwark against unexpected losses, the Reserve Bank of India said in April.

“Banks may pay dividend on equity shares from the profits for the financial year ended March 31, 2021, subject to the quantum of dividend being not more than fifty percent of the amount determined as per the dividend payout ratio prescribed,” it said.

Private lender HDFC Bank has announced that the board has declared a dividend of Rs 6.50 per share for the year ended 31 March 2021.



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RBI imposes monetary penalty on 4 co-operative banks

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The Reserve Bank of India (RBI) has imposed monetary penalty on Andhra Pradesh Mahesh Co-operative Urban Bank, (₹112.50 lakh); Ahmedabad Mercantile Co-operative Bank (₹62.50 lakh), SVC Co-operative Bank (₹37.50 lakh) and Saraswat Co-operative Bank (₹25 lakh).

RBI, in a statement, said it has imposed monetary penalty on Hyderbad-based Andhra Pradesh Mahesh Co-operative Urban Bank (Hyderabad) for non-compliance with its directions on ‘Interest Rate on Deposits’and ‘Know Your Customer’.

The central bank said it has imposed monetary penalty on The Ahmedabad Mercantile Co-operative Bank for non-compliance with its directions on ‘Interest Rate on Deposits.’

RBI said it has imposed monetary penalty on Mumbai-based SVC Co-operative Bank for non-compliance with its directions on ‘Interest Rate on Deposits’ and ‘Frauds Monitoring and Reporting Mechanism’.

In the case of Saraswat Co-operative Bank, the central bank said, it has imposed monetary penalty for non-compliance with its directions on ‘Interest Rate on Deposits’and ‘Maintenance of Deposit Accounts’.

In all the four aforementioned cases, RBI said: “This action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.”

Saraswat Co-operative Bank, SVC Co-operative Bank , Andhra Pradesh Mahesh Co-operative Urban Bank, and Ahmedabad Mercantile Co-operative Bank are among the top 10 urban co-operative banks in the country.

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No more than 4 free withdrawals a month at SBI

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State Bank of India has decided to allow to its basic savings bank deposit (BSBD) account holders to withdraw cash beyond four free transactions a month for a fee, and offer free non-financial and transfer transactions, among others.

The aforementioned “additional value-added services” will be introduced for BSBD account holders with effect from July 1.

Currently, BSBD customers are allowed four free withdrawals, including ATM withdrawals, in a month free of charges. No further withdrawals are allowed beyond these four transactions.

With effect from July 1, India’s largest bank will allow withdrawals beyond the four free transactions by charging ₹15 plus GST per cash withdrawal transaction at branch channel/ATM or at other bank’s ATM.

Cheque book

The bank will offer first 10 cheque leaves free in a financial year to all BSBD customers.

Thereafter, a BSBD customer will be charged ₹40 + GST for a 10 leaf cheque book; ₹75 + GST for a 25 leaf cheque book; and ₹50 + GST for emergency cheque book for 10 leaves or part thereof.

However, senior citizen customers are exempted from the aforementioned conditions.

Currently, one cheque book of 25 leaves is issued free to senior citizens and differently abled persons per year. For other BSBD account holders, no cheque book is issued

As per the bank’s website, BSBD accounts are primarily meant for poorer sections of society to encourage them to start saving without any burden of charges or fees. There is minimum balance requirement. Also, there is no cap on the deposit amount.

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Investors’ interest in 2030 G-Sec wanes

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Bond market players seem to have lost interest in the so-called 10-year benchmark Government Security (G-Sec) as the central bank has accumulated a chunk of this paper, reducing its attractiveness for trading.

The number of trades in the 2030 G-Sec (carrying 5.85 per cent coupon rate) has shrunk drastically from 993 on May 28 to 31 on June 29.

The Reserve Bank of India (RBI) has been mopping up this paper via Special Open Market Operations (OMO) and G-Sec Acquisition Programme (G-SAP).

This is aimed at keeping G-Sec yields on a leash as the government has a huge borrowing programme of ₹12.10 lakh crore in FY22. RBI has been focussed on buying this paper to ensure a stable and orderly evolution of the yield curve.

New benchmark

Given that the central bank is holding almost three-fourth of the ₹1.20 lakh crore outstanding amount in the 5.85 per cent 2030 G-Sec and liquidity has dwindled in this paper, market experts say it’s time the government introduced a G-Sec maturing in 2031, which will become the new 10-year benchmark.

They emphasised that at the weekly auctions of the 5.85 per cent 2030 G-Sec over the last one month or so, RBI has either devolved it on primary dealers (PDs) or rejected all the bids as investors want to buy it at a lower price (or higher yield).

Referring to the tug-of-war between institutional investors and RBI, experts say investors want the yields to go up, but the central bank wants to suppress the yields to ensure that the government can borrow at a cheaper rate.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “They (Government) may float a new 10-year G-Sec after a week or two. Nobody has interest in the 5.85 per cent 2030 G-Sec.

“About three-fourth of this paper is with RBI and the rest is with nationalised banks. So, who will trade in it? There is no tradability in this paper.”

Madan Sabnavis, Chief Economist, CARE Ratings, observed that the market is still demanding more (in terms of yield) from the government given the large borrowing programme as well as the rising inflation trend.

Since the 5.85 per cent 2030 G-Sec was first introduced on December 1, 2020, its price has declined by ₹1.455 to Rs 98.67 on Tuesday, with its yield rising about 20 basis points to about 6.04 per cent. Bond price and yields are inversely related and move in opposite directions.

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SBI to issue electoral bonds at 29 branches from July 1-10

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The Centre on Tuesday announced that electoral bonds will be issued by the State Bank of India’s 29 authorised branches across the country from July 1-10.

The Electoral Bonds would be valid for fifteen calendar days from the date of issue and no payment shall be made to any payee Political Party if the Electoral Bond is deposited after expiry of the validity period, an official release said. The Electoral Bond deposited by an eligible Political Party in its account shall be credited on the same day, the release added.

The Electoral Bonds can be encashed by an eligible Political Party only through a Bank account with the Authorized Bank.

A person being an individual can buy Electoral Bonds, either singly or jointly with other individuals. Only the Political Parties registered under Section 29A of the Representation of the People Act, 1951 and which secured not less than one per cent of the votes polled in the last General Election to the House of the People or the Legislative Assembly of the State, would be eligible to receive the Electoral Bonds, the release added.

Electoral Bonds may be purchased by a person who is a citizen of India or those incorporated or established in India.

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KG Information Systems acquires Malaysian insurtech firm AETINS

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The ₹250-crore Coimbatore-based KG Information Systems Pvt Ltd, a part of the $750-million business conglomerate KG Group, has acquired Malaysian firm AETINS Sdn. Bhd through its wholly owned subsidiary in Malaysia, KG Information Systems, for an undisclosed sum. The acquisition is a part of KGISL’s growth strategy in the InsurTech space.

Aetins, which has around 250 employees, brings a range of insurance solutions for life, general and ‘Takaful’ (Islamic insurance). It serves clients in Asia Pacific, West Asia and North Africa.

KGISL has had its market presence in the Malaysia InsurTech space since 2006 and has grown with its point of sale and claims management solution for the non-life insurance segment. The acquisition will bring core insurance product and insurance solution framework into KGISL’s product offerings and open doors to enter the wider Asia Pacific, West Asia and Africa markets covering the life, non- life and Takaful insurance segments, said a release from KGISL.

Prassadh Shanmugam, Director and CEO, KGISL, said Aetins’ core insurance products, Takaful offerings and the West Asia market are the missing pieces in KGISL’s insurance offerings. “It would have taken years for us to build this capability, so the acquisition is a perfect fit for KGISL,” he said.

Speaking to BusinessLine, Shanmugam said the acquisition would be with immediate effect. Aetins’ products and solutions will alone bring over ₹200 crore revenue for KGISL in the next couple of years.

Aetins has customers in Vietnam, Pakistan, Qatar, MENA and Cambodia. The acquisition will give access to MENA markets for KGISL, which has a good presence in the Eastern markets.

KGISL currently has 260 clients, and with its new acquisition will add 30-plus larger insurance clients. Nearly 40 per cent of the company’s revenue is from the insurance space, he said.

On plans for the next four years, Shanmugam said that KGISL plans to induct 6,000 to 8,000 employees and reach revenue of around ₹1,000 crore. The company has plans to enter the UK and US markets, he said.

“We plan for an IPO in 3-4 years with employee stock options. We will continue to look for acquisition for growth,” he said.

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