Category: Banking & Finance

Microfinance sector: Average collection efficiency improves to 95% in Q2 from 85% in Q1

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Talking to FE, Satish said collection efficiencies in Assam and Kerala improved in the second quarter compared to the first, but the figures lagged far behind the national average due to “external issues”.

The country’s microfinance sector saw a significant improvement in loan repayments in the second quarter of the current fiscal year, when average collection efficiency for micro loans increased to over 95% from around 85% in the first quarter.

Asset quality of the lenders of the sector improved on a sequential basis with portfolio at risk (PAR) above 30 days falling to 10.18% as on September 30 from 16.56% as on June 30, 2021, according to the quarterly review of the sector by Sa-Dhan, a self-regulatory organisation for the sector.

At the end of the second quarter, this fiscal year, the micro credit portfolio of the lenders stood at Rs 2,25,331 crore, down by 1.1% year on year. Total disbursement of all lenders, however, grew 95.4% YoY to Rs 66,694 crore in the second quarter of FY22 compared to Rs 34,135 crore during the same period of FY21. Average ticket size also rose to Rs 35,106 from Rs 34,756.

Sa-Dhan executive director P Satish said, “The sector which was affected in Q1 of this financial year due to the second Covid wave, has seen improvement in repayments and fresh disbursements. The decline is slowing down, although there remains stress on fund access and operations of mid- and small- MFIs.”
Satish said Sa-Dhan hoped and expected a gradual recovery by the third quarter as borrowers’ incomes further stabilised. “We have written to the government to sanction an additional `7,500 crore under the Credit Guarantee Scheme for the sector,” he said.

Talking to FE, Satish said collection efficiencies in Assam and Kerala improved in the second quarter compared to the first, but the figures lagged far behind the national average due to “external issues”.

The Assam government has started the process of providing the one-time relief to the stressed microfinance borrowers in the state after it had signed a memorandum of understanding with microfinance lenders in August for implementation of the relief scheme. For Kerala, high number of Covid positive cases and the recent flood impacted loan repayments.

For the industry as a whole, portfolio at risk (PAR) above 60 days improved to 4.72% as on September 30 from 6.41% as on June 30, 2021. And, PAR above 90 days stood at 2.96% at the end of the second quarter as against 3.01% at the end of the first quarter this fiscal year.

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NBFC bad loans set to rise with RBI clarification on IRAC norms, say analysts

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There is no categorisation of standard and non-performing loans for NBFCs under this system.

Bad loans reported by non-banking financial companies (NBFCs) may rise after March 2022 as the Reserve Bank of India’s (RBI’s) latest clarification on upgradation of non-performing assets (NPAs) kicks in. Analysts said while banks have been following the new rule on upgrades, it will be a fresh start for most NBFCs.

On Friday, the central bank had said loan accounts classified as NPAs may be upgraded to ‘standard’ assets only if entire arrears of interest and principal are paid by the borrower. The rule will apply to both banks and NBFCs. According to sector experts, most NBFCs currently upgrade gross stage-3 loans, or NPAs, to gross stage-2 loans — or special mention account (SMA)-2 — upon payment of just a single installment.

Anil Gupta, vice president – financial sector ratings, Icra, said the rule on upgradation of bad loans can lead to a rise in NPAs reported by some NBFCs. Also, there could be some ambiguity with regard to classification of such accounts where part of the dues may have been cleared, but some installments may still be due. “If such accounts have payments that are due for less than 90 days then they are currently classified as stage-2. But as these accounts will be NPA going forward, these could be classified as stage 3 also. This could lead to an increase in provisioning against such accounts classified as stage 3,” he said.

NBFCs in India follow the Ind-AS guidelines, under which delinquent loans are classified as gross stage-1 (loans overdue by up to 30 days), gross stage-2 (loans overdue between 31 and 89 days) and gross stage-3 (loans overdue for over 90 days). There is no categorisation of standard and non-performing loans for NBFCs under this system.

In a report on Monday, Kotak Institutional Equities (KIE) said as a market practice, all NBFCs have preferred to have a uniform definition for non-performing loans and gross stage-3 or 90 days past due (dpd) loans. “However, NBFCs may choose to have parallel reporting under Ind-AS and regulatory filings to RBI. Our preliminary discussion with market participants suggests that NBFCs may not go for parallel reporting and continue the current practice (uniform definition for non-performing loans and gross stage-3). Hence, gross stage-3 loans will likely increase,” KIE said.

Some analysts are of the view that while bad loans may rise, the regulatory clarification may not have a significant impact on provisioning. Prakash Agarwal, director and head – financial institutions, India Ratings and Research, said non-banks will report higher NPAs, especially in small-ticket unsecured loan asset classes. “However this is unlikely to have a significant impact on the provisions for the NBFCs and hence P&L (profit and loss) may not get impacted much,” he said.

On the other hand, Agarwal expects that the co-lending market could get a push from the new norms on asset classification. “This would give a fillip to co- lending as the norms of banks and NBFCs will be aligned. This was one of the important issues that was a cause of challenge for co-lending,” he said.

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Have far deeper issues with cryptocurrencies: RBI chief

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For the second time in a week, RBI Governor Shaktikanta Das on Tuesday expressed concern over cryptocurrencies, saying there are “far deeper issues” involved in virtual currencies that could pose a threat to the country’s economic and financial stability.

The statement comes within days of the Prime Minister holding a meeting o the cryptocurrencies amid worries over misleading claims of huge returns from cryptocurrency investments.

“When the RBI, after internal deliberation, says there are serious concerns on macro economic and financial stability, there are deeper issues, which need much deeper discussions and much more well informed discussions,” he noted.

He doubted the crypto trading numbers and said investors are being lured by offer of credit.

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Bank boards must diligently discharge oversight functions: RBI Governor

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Pointing out that both bank managements and boards had become cozy in their roles, RBI Governor Shaktikanta Das underscored the active role of boards, especially in challenging the proposals of the management.

Banks should ensure that their business models and business strategies are conscious choices, after a robust strategic discussion in the board, instead of being a mechanical ‘follow the market’ approach, Das said at the SBI’s Banking and Economics Conclave here on Tuesday.

Growth strategies

The Reserve Bank chief emphasised that in their endeavour to grow, banks should avoid the herd mentality and look for differentiated business strategies.

He said the RBI has started taking a close look at the business models and strategies of banks.

“Certain banks had followed the high risk and high return business strategy, with a skewed priority for serving only the interest of their investors.

“The active role of the board, especially in challenging the proposals of the management, thus becomes critical,” Das said, adding that this will contribute towards a more diligent and balanced approach to decision making.

Das said that the RBI’s intention is not to create a divergence between the board and the management.

The latter has a certain role and the former a certain role. And each is expected to play that role, he said.

Referring to his earlier remark that the board should challenge certain norms, certain risk-taking practices and certain models of the management, Das said this is only to ensure that right decision is taken.

“And the board, which is in charge of oversight of the bank, is expected to play that role as a guide and to discharge its oversight functions in a prudent manner… Let me clarify, we don’t want a fight between the board and the management,” he said.

Responsible governance

The Governor noted that the board carries the responsibility of being the guardian of the trust that depositors have reposed in a bank.

A bank’s responsibility towards depositors should, therefore, be weighed against its responsibility towards shareholders of the bank.

“To ensure good governance, the Reserve Bank has high expectations from the oversight role of the board, its composition, directors’ skill profile, strong risk and compliance structure and processes, more transparency and a robust mechanism of balancing various stakeholder interests.

“Thus, business priorities need to be complemented with responsible governance and ethical actions,” he said.

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Inside Freecharge’s neo banking gameplan

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In its mission to become a personalised comprehensive digital bank or neobank, Axis Bank-owned fintech Freecharge has started phased closed user group (CUG) testing of the product with over 18,000 organic users sign-ups. The neobank is scheduled to launch in the fourth quarter of the current fiscal and will be having several personalised features to keep the user engaged including financial goal management, financial scores to analyse financial stability and a spend analyser to help track expenses.

“Freecharge will become a comprehensive financial services platform. In the first phase, we launched our buy now pay later (BNPL) product in the first quarter, which has been growing 40X QoQ. In the second phase, in October, we started the lending product. And now, the focus will be the launch of the neobank in the next few months,” Siddharth Mehta, CEO, Freecharge, told BusinessLine in an exclusive interview.

The neobank will show up as a separate section within the Freecharge app.

Comprehensive suite

Targeted at the 22-32 age group of salaried professionals, the neobank will be providing a host of services including fixed deposits, lending, BNPL, digital credit cards, and investing options like mutual funds and digital gold in one app.

The app’s in-house built proprietary software will enable value-added features such as goal management, financial score to gauge how financially stable and healthy you are what you need do more, and spend analyser.

Also see: Axis Bank inks pact with Army Insurance Group for retail mortgage loans

What’s interesting is these ultimately will become a part of Axis Bank’s universe, helping the bank strengthen its portfolio of products and even cross-sell them across the two platforms. Entering slightly late into the market, this, Mehta said, will be a key USP (unique selling proposition) among existing neobanks such as Niyo, Fi, Open, Jupiter, Avail Finance and many more.

“Being a subsidiary of a trusted bank like Axis Bank is the biggest advantage to Freecharge as compared to any other neobanks. We are able to provide comprehensive suite not only of products but also services. If I am onboarding the customers through my neobank, the parent bank has all the capabilities to profile the customers, and build products that we can cross-sell across the two entities,” he said.

‘Evolving banks’

Speaking of having agility as a part of a legacy bank over a new-age fintech, he added, “Banks are evolving very fast on digital. I would like to call them evolving banks instead of ‘legacy’. In the next two years you will see them work in a very different way. For instance, Axis has built a new cloud-first platform called Jarvis for digital lending. It’s agile and working real-time, even the technology updates. The ability of launching an end-to-end digital lending platform and to be able to optimise it regularly clearly shows that the banks are agile and moving fast.”

Lending proposition

Freecharge, along with Axis Bank, is currently working on creating a merchant lending product with daily EMI and a daily investment product. Overall, at Freecharge’s level, the focus going forward will be on building a strong lending proposition.

Also see: ‘Bank-backed brokerages keep losing market share to discount brokers’

Freecharge will launch its personal B2B loan product in another two months, which will have a tenure of 12 months. Borrowers will be offered loans of ₹3,000 to 100,000 depending on their profiles, at an interest rate of 24-30 per cent. This product will be focussed on merchants having one or two stores and not the larger SMB ecosystem, Mehta said. While BNPL comes at zero interest rates, there will also be another consumer loan product of ticket size of ₹500-10,000 at 15 to 20 per cent interest.

“We want to add at least a million accounts three years from launch for the neobank,” Mehta added.

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Board’s carry responsibility of being guardians of trust depositors have reposed in a bank: Das

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Calling attention to situations where both bank management and Boards had become cozy, RBI Governor Shaktikanta Das on Tuesday underscored the importance of the active role of the Board, especially in challenging the proposals of the management.

Avoid herd mentality

Banks should ensure that their business models and business strategies are conscious choices, following a robust strategic discussion in the Board, instead of being driven by mechanical ‘follow the market’ approach, Das said at the SBI Banking and Economics Conclave

Also see: Borrowers moving towards fixed rate loans: RBI chief

The Governor emphasised that in their endeavour to grow, banks should avoid herd mentality and look for differentiated business strategies.

Business strategies

He observed that the RBI has started taking a closer look at business models and strategies of banks.

“Certain banks had followed the high-risk and high-return business strategy, with a skewed priority for serving only the interest of their investors.

“The active role of the Board, especially in challenging the proposals of the management, thus becomes critical,” Das said, adding that this will contribute towards a more diligent and balanced approach to decision making.

Particular roles

The Governor observed that RBI’s intention is not to create divergence between the Board and the management.

The management has a certain role and the Board has a certain role. And each is expected to play that role, he said.

Also see: Don’t ban cryptos: Experts, stakeholders to House panel

Referring to his earlier remark that the Board should challenge certain norms, certain risk taking practices and certain models of the management, Das said this is only to ensure that the right decision is taken.

“And the Board, which is in charge of oversight of the bank, is expected to play that role as a guide and to discharge its oversight functions in a prudent manner…Let me clarify we don’t want a fight between the Board and the management,” he said.

Responsibility towards depositors

The Governor noted that the Board of Directors carry the responsibility of being guardians of the trust that depositors have reposed in a bank.

A bank’s responsibility towards depositors should, therefore, be weighed against its responsibility towards shareholders of the bank.

“To ensure good governance, the Reserve Bank has high expectations from the oversight role of the Board, its composition, Directors’ skill profile, strong risk and compliance structure and processes, more transparency and a robust mechanism of balancing various stakeholder interests.

“Thus, business priorities need to be complemented with responsible governance and ethical actions,” he said.

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Borrowers moving towards fixed rate loans: RBI chief

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There is a trend among borrowers to move towards fixed rate loans even as the Reserve Bank of India (RBI) moves towards rebalancing liquidity, according to Governor Shaktikanta Das.

“I think most of the banks till now have been giving floating interest rate loans. Now, there is a trend of people are moving towards fixed rate loans,” said Das in reply to a question posed by State Bank of India (SBI) Chairman Dinesh Kumar Khara at the SBI Banking and Economics Conclave

Asking banks to be investment-ready when the investment cycle picks up, the Governor emphasised that giving loans at floating or fixed interest rate is a commercial judgment of banks, and typically the RBI does not like to enter into those areas.

“Irrespective of the fact that the liquidity is in surplus, I think risk pricing of the various loans being extended by the banks has to be done diligently by them.

“The mere fact that there is excessive liquidity should not lead to any mispricing of loans because this excessive liquidity is not going to be a permanent feature,” said Das.

Business models

The Governor observed that the RBI has started taking a closer look at the business models and strategies of banks. In their endeavour to grow, banks should avoid herd mentality and look for differentiated business strategies, he added.

“.…Take your commercial decisions, we will not interfere. But we will see what kind of vulnerabilities or risks are building up and our first priority would be to caution the banks themselves.

“…So, therefore, that is what I was alluding to – that we are looking at business models also now. While banks take their commercial decisions, I think they should factor in how much of liquidity is available and what kind of interest rate structures they are providing,” said Das.

On the interest rates – the quantum of interest rates and the structure of interest rates (floating or fixed) on loans – the Governor opined that it is a commercial decision, which banks should take based on prudent principles.

The Governor underscored that there will be always adequate liquidity to meet the requirements of the productive sectors of the economy.

“But slowly we want to rebalance the economy in a manner that banks are left with that much liquidity which they need and not excess. This has been our approach in the liquidity management,” he said.

Khara, in his question, referred to the trend of some sectors reaching out for fixed interest rate loans and non-availability of any kind of interest hedging instruments as of now.

The SBI chief also alluded to the challenge of mis-pricing of loans amid excess liquidity and the anxiety on the part of bankers to grow their book.

Calling attention to the Variable Reverse Repo Rate almost reaching 4 per cent, the SBI chief said corporates seem to read it as an early indication of the emerging interest rate scenario in the days to come.

“And invariably, it is said that liquidity when required is not available. So, when the investment will come in, perhaps it will be at a very high interest rate. This is one of the concerns which many of the corporates have in mind,” remarked Khara.

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PIDF corpus at ₹614 crore

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The corpus of the Payments Infrastructure Development Fund (PIDF) stands at ₹613.89 crore. Over 2.45 lakh physical devices and more than 55.36 lakh digital devices were deployed for payment acceptance under the PIDF by September-end 2021.

“Contribution to the PIDF is made by the Reserve Bank, authorised card networks and card issuing banks; the corpus currently stands at ₹614 crore,” the Reserve Bank of India said on Tuesday in a status update on the scheme.

RBI’s contribution

Of this amount, while the RBI has contributed ₹ 250 crore, authorised card networks have contributed ₹153.72 crore and card issuing banks have put in ₹210.17 crore.

The PIDF Scheme, operationalised by the RBI from January 1, 2021, subsidises deployment of Points of Sale infrastructure (physical and digital modes) in Tier-3 to Tier-6 centres and north-eastern States of the country.

From August 26 this year, beneficiaries of PM Street Vendor’s AtmaNirbhar Nidhi in Tier-1 and Tier-2 centres are also covered.

In terms of deployment of payments acceptance devices, 98,504 physical devices and 20,46,075 digital devices were deployed in Tier 3 and 4 centres. Another 84,968 physical devices and 30,47,750 digital devices were deployed in Tier 5 and 6 centres.

Physical devices include PoS, mobile PoS, GPRS, PSTN or Public Switched Telephone Network and digital devices include inter-operable QR code-based payments such as UPI QR, Bharat QR.

In the north-eastern States, 18,449 physical devices and 2,42,145 digital devices were deployed while under the PM SVANidhi Scheme, 44,021 physical devices and 2,00,708 digital devices were deployed.

PIDF will be operational for three years from January 1, 2021 and may be extended for two more years depending upon the progress. It aims to increase payments acceptance infrastructure by adding 30 lakh touch points – 10 lakh physical and 20 lakh digital payment acceptance devices every year.

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Maveric Systems to hire 1,200

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Maveric Systems, a global banking technology transformation company, plans to hire around 1,200 employees over the next 12 months amidst a spike in digital adoption by banks and financial institutions since the onset of the Covid-19 pandemic.

“The scale up this year has been very intense. In March, we started with about 2,000 people (only delivery team) and we are likely to end up with 3,200 employees by March 2022. Out of this, 800 people have already been recruited in the first half and 400 people are likely to be recruited in the next half,” said Ranga Reddy, Global CEO, Maveric Systems.

“For the next financial year, we might need another 800-1,000 people. So, between now and September 2022, we would be adding 1,200 people,” he added.

Started in 2000, Maveric Systems is a banking-only focused technology transformation company with a specialisation on retail, corporate banking and wealth management segments.

Budget for IT

Reddy said banks typically have two types of budgets for IT : ‘Change the bank budget’ which are strategic in nature involving investments in technological transformation and ‘Run the bank budget’, which are investments in technology to run day-to-day operations. Currently, 75 per cent of Maveric’s revenue comes from the strategic side while ‘run the bank’ solutions account for the remaining.

“The major difference between large IT competitors and Maveric is that 75 per cent of our team is capable of doing transformation whereas in large IT firms, 75 per cent of people are capable of running the bank operations,” Reddy said.

The choice to focus on the strategic side of the bank paid off as the Covid-19 pandemic accelerated the pace of digital adoption by banks and financial institutions.

“Last financial year and this year, we have grown at 40 per cent CAGR. We have the potential to grow at a CAGR of 30 per cent year-on-year for the next 3 years organically without acquiring new customers,” Reddy said.

The company estimates to close the current fiscal with ₹520 crore in revenue and projects a revenue of about ₹640 crore for the next fiscal based on current projections and demand from customers.

Maveric categorises its customers into strategic accounts (comprising top 15 global banks), key accounts (regional banks) and fintechs with a revenue contribution of 50 per cent, 40 per cent and 10 per cent respectively.

Maveric Systems has presence across 15 countries with regional delivery capabilities in Bengaluru, Chennai, Dubai, London, Poland, Riyadh and Singapore. It plans to foray into the European market in March 2022.

“We are preparing for a new game to acquire more key accounts in Europe. Come March, we will enter Europe with client acquisition as a focus. We would like to add three more strategic accounts and six more key accounts all coming from Europe,” he added.

Currently, it has five strategic accounts, six key accounts and five fintechs.

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PMC Bank: Proposed scheme of amalgamation could be a test case for RBI

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The proposed amalgamation of the scam-hit Punjab and Maharashtra Co-operative (PMC) Bank with the newly floated Unity Small Finance Bank could be a test case for the Reserve Bank of India (RBI) regarding its approach towards how individual depositors with deposits up to ₹2 crore and those with deposits of ₹2 crore and above can be dealt with when it comes to withdrawal of money.

The Scheme being put together by the central bank is expected to be placed in public domain in a week or so for suggestions and objections from members, depositors and other creditors of transferor bank (PMC Bank) and transferee bank (Unity SFB).

As per Reserve Bank of India (Interest Rate on Deposits) Directions, 2016, a “Bulk Deposit” means a single Rupee term deposit of ₹2 crore and above for Scheduled Commercial Banks (excluding Regional Rural banks) and Small Finance Banks.

So, a deposit of up to ₹2 crore is considered as a “Retail Deposit”.

The question uppermost on individual depositors’ (under the bulk deposit category) mind is whether the central bank will treat retail deposit and individual bulk deposit on an equal footing vis-a-vis withdrawal.

Phased withdrawal

Chander Purswani, President, PMC Depositors’ Forum, said the Scheme should clearly specify the threshold up to which individual deposits can be freely withdrawn and how deposits beyond this threshold can be withdrawn in a phased manner over, say, 3-5 years.

City Co-op Bank wants to emulate PMC Bank for reconstruction

Further, interest accrued on individual depositors’ deposits, be it retail or bulk, should be allowed to be withdrawn in toto.

He underscored that PMC Bank depositors have suffered over the last 26 months amid the Covid-19 pandemic as deposit withdrawal has been capped at ₹1 lakh of the total balance in their account(s) during the entire period that their Bank is under RBI’s Directions.

What this means is that depositors, especially senior citizens (who usually depend on interest earnings to meet monthly expenses), had to make do with only ₹3,846 a month over the last 26 months.

PMC Bank’s resolution could become a template for rescuing other weak UCBs

Purswani assessed that after taking into account deposit withdrawals of up to ₹1 lakh, PMC Bank has about 1.42 lakh depositors with deposits of over ₹1 lakh. Of this, there are about 43,000 depositors, including individuals, trusts, cooperative societies, etc, with deposits of over ₹5 lakh.

DICGC, a wholly-owned subsidiary of RBI, had upped the limit of insurance cover for depositors in the insured banks fivefold to ₹5 lakh per depositor with effect from February 4, 2020.

Individual depositors, including those with large deposits, need an assurance that they can systematically withdraw their money from Unity SFB, the Forum’s chief said.

Limited period incentive

He opined that the Scheme could also incorporate a limited period incentive, whereby PMC Bank depositors can earn higher interest rate over the card rate so that they are encouraged to keep the deposits with Unity SFB.

PMC Bank came to grief as its high exposure to real estate company HDIL turned non-performing.

The central bank red-flagged the fraud/financial irregularities in the bank and manipulation of its books of accounts.

Last month, RBI granted banking licence to Unity SFB, which has been established jointly by the Centrum Financial Services Ltd (CFSL) and Resilient Innovations Private Limited (BharatPe), to carry on SFB business in India.

RBI had accorded “in-principle” approval to CFSL, which is a wholly-owned subsidiary of Centrum Capital Ltd, on June 18, 2021, to set up an SFB.

The “in-principle” approval was in specific pursuance to CFSL’s February 2021 offer in response to PMC Bank’s November 2020 Expression of Interest (EoI) notification.

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