Category: Banking & Finance

The Reserve Bank of India (RBI) has asked lenders to disclose the aggregate ‘interest on interest’ amount to be refunded/ adjusted in respect of their borrowers in their financial statements for the year ending March 31, 2021.

The follows the Supreme Court’s judgment last month directing banks and financial institutions to refund the compound interest (interest on interest or penal interest) collected on EMIs during the Covid-19 pandemic-related loan moratorium period, from March 1, 2020, to August 31, 2020, in the matter of Small Scale Industrial Manufacturers Association vs UOI & Ors and other connected matters.

As per RBI’s circular on ‘Asset Classification and Income Recognition following the expiry of Covid-19 regulatory package’, all lending institutions have to immediately put in place a board-approved policy to refund/ adjust the ‘interest on interest’ charged to the borrowers during the moratorium period in conformity with the above judgment.

“In order to ensure that the above judgment is implemented uniformly in letter and spirit by all lending institutions, methodology for calculation of the amount to be refunded/ adjusted for different facilities shall be finalised by the Indian Banks Association (IBA) in consultation with other industry participants/ bodies, which shall be adopted by all lending institutions,” said the RBI.

The above reliefs will be applicable to all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed, it added.

The central bank said asset classification of borrower accounts by all lending institutions following the above judgment shall continue to be governed by the extant instructions.

Bank lending to non-banking finance companies/NBFCs (other than microfinance institutions) for on-lending to agriculture, MSME and housing will continue to be classified as priority sector lending (PSL) for six more months, according to the Reserve Bank of India.

The dispensation, whereby bank lending to NBFCs for on-lending to specified sectors was recognised as PSL, was available from August 13, 2019 till March 31, 2021.

But now it has been further extended for another six months, up to September 30, the RBI said in its latest Statement on Developmental and Regulatory Policies.

With a view to encouraging farm credit to individual farmers against pledge/ hypothecation of agricultural produce, the RBI has enhanced the loan limit under PSL from ₹50 lakh to ₹75 lakh per borrower.

This enhanced limit is against the pledge/ hypothecation of agricultural produce backed by Negotiable Warehouse Receipts (NWRs)/electronic-NWRs (e-NWRs) issued by warehouses registered with the Warehousing Development and Regulatory Authority (WDRA).

For other Warehouse Receipts, the loan limit for classification under PSL will continue to be ₹50 lakh per borrower.

Bankers and experts said the continuation of the accommodative stance and the status quo on rates in the first bi-monthly Monetary Policy of 2021-22 is on expected lines and provides reassurance amid the surge in Covid-19 cases.

Welcoming the policy announcements, Raj Kiran Rai G, Chairman, Indian Banks’ Association, and Managing Director and CEO, Union Bank of India, said: “Only deviation in the policy statement is that accommodative stance is not linked to specific time frame, but indicated its continuance to “sustain growth on a durable basis”. Considering the uncertainty around the second wave of the Covid pandemic, providing a definite time frame for the stance would not be appropriate.”

State Bank of India Chairman, Dinesh Kumar Khara said the RBI policy announcement is an acknowledgement and continuation of doing whatever it takes to maintain an orderly, seamless, and non-disruptive liquidity management policy to support debt management.

‘A bold step’

“Towards this end, an extension of enhanced HTM limit, relaxation of funds availability under MSF, an extension of on-tap TLTRO to NBFCs, deduction of credit disbursed to ‘New MSME borrowers’ from their NDTL for calculation of CRR, will calibrate credit flow and liquidity management. Allowing retail participation in the G-Sec market is a bold step towards the financialisation of a vast pool of domestic savings and could be a game-changer,” he noted.

‘Overall a good policy’

SS Mallikarjuna Rao, Managing Director and CEO, Punjab National Bank, said it is overall a good policy to support and nurture the economy amid the recent surge in second wave of infections.

“While liquidity has been ensured via TLTRO in case the demand picks up, the opportunity of onlending through NBFCs, enhancement of loan limit against warehouse receipts and liquidity facility for All Indian financial Institutions are all good moves to ensure continued availability of credit, which aid faster economic recovery,” he said.

AK Das, Managing Director and CEO, Bank of India, said the policy announcement represents a balanced approach to make economic revival deep rooted, ensure orderly development of the financial market, and keep price movement at manageable levels.

Abheek Barua, Chief Economist, HDFC Bank, said: “The focus of the policy was clearly on yield management and the announcement of the G-sec acquisition program (GSAP 1.0) is likely to stabilise and support long-term yields. Although the extension of tenures for the VRRR (variable rate reverse repo auctions) might lead to some hardening at the short-end of the curve.”

In a note, HSBC Global Research said the RBI has, in a novel step, provided some upfront assurance on the quantum of bond purchases in a bid to provide more certainty to bond markets.

“We believe inflation risks cannot be ignored, and the RBI will embark on a gradual exit once the current wave subsides and the vaccination drive reaches critical mass,” it further said.

The RBI has extended the deadline of the on-tap Targeted Long-Term Repo Operation (TLTRO) scheme by six months up to September 30,to increase the focus of its liquidity measures on revival of activity in specific sectors.

To nurture the revival of activity in sectors that have multiplier effects on growth, the Reserve Bank had announced on-tap TLTRO with tenors of up to three years for a total amount of up to ₹1-lakh crore at a floating rate linked to the policy repo rate in October 2020.

The liquidity availed by banks under the scheme is to be deployed in corporate bonds, commercial paper, and non-convertible debentures issued by the entities in five sectors (agriculture, agri-infrastructure, secured retail, micro, small and medium enterprises/ MSMEs, and drugs, pharmaceuticals and healthcare) over and above their investments in these instruments as on September 30, 2020.

Moreover, to enable banks to exploit the synergies between central bank liquidity under on-tap TLTRO scheme and the Emergency Credit Line Guarantee Scheme 2.0 (ECLGS 2.0) of the Central government, the RBI expanded the scope of the on-tap TLTRO in December 2020 to all stressed sectors identified by the Kamath Committee, in addition to the five sectors announced earlier in October 2020.

In February 2021, the RBI allowed lending by banks to NBFCs under the TLTRO on-tap scheme for incremental lending to specified stressed sectors.

The Reserve Bank of India (RBI), on Wednesday, said it will provide liquidity support aggregating ₹50,000 crore to All India Financial Institutions (AIFIs) – NABARD, NHB and SIDBI – for fresh lending.

The National Bank for Agriculture and Rural Development (NABARD) will get ₹25,000 crore; National Housing Bank/NHB (₹10,000 crore); and Small Industries Development Bank of India/SIDBI (₹15,000 crore)

The RBI had provided special refinance facilities of ₹75,000 crore to NABARD, SIDBI, NHB and Export-Import Bank of India during April-August 2020.

“To nurture the still nascent growth impulses, it is felt necessary to support continued flow of credit to the real economy.

“Accordingly, liquidity support of ₹50,000 crore for fresh lending during 2021-22 will be provided to AIFIs: ₹25,000 crore to NABARD; ₹10,000 crore to NHB; and ₹15,000 crore to SIDBI,” said the RBI in its Statement on Developmental and Regulatory Policies.

The Reserve Bank of India has proposed to enable regulated payment system operators to take direct membership in Central Payment Systems such as RTGS and NEFT.

“It is now proposed to enable non-bank payment system operators such as Prepaid Payment Instrument (PPI) issuers, card networks, White label ATM operators and Trade Receivables Discounting System (TReDS) platforms regulated by the Reserve Bank, to take direct membership in CPSs,” said RBI Governor Shaktikanta Das on Wednesday.

This facility is expected to minimise settlement risk in the financial system and enhance the reach of digital financial services to all user segments, he further said.

At present, membership to the RBI-operated Centralised Payment Systems –RTGS and NEFT – is currently limited to banks, with just a few exceptions such as specialised entities such as clearing corporations and select development financial institutions.

The Statement on Development and Regulatory Policies noted that over the last few years, the role of non-bank entities in the payment space has grown in importance and volume, as they have innovated by leveraging technology and offering customised solutions to users. The proposal is expected to reinforce this trend and encourage participation of non-banks across payment systems.

“These entities will, however, not be eligible for any liquidity facility from the Reserve Bank to facilitate settlement of their transactions in these CPSs,” said the RBI, adding that necessary instructions will be issued separately.

Meanwhile, to measure the extent of financial inclusion in the country, the RBI will construct and periodically publish a Financial Inclusion Index (FI Index). “The FI Index will be based on multiple parameters and shall reflect the broadening and deepening of financial inclusion in the country,” it said, adding that to begin with the FI Index will be published annually in July for the financial year ending previous March.

Government securities rallied on Wednesday after the Reserve Bank of India (RBI) Governor Shaktikanta Das announced that the central bank would be buying government bonds from the secondary market to enable a stable and orderly evolution of the yield curve amid comfortable liquidity conditions.

The RBI Governor said the central bank will conduct a secondary market G-Sec acquisition programme or G-SAP 1.0, under which it will commit upfront to a specific amount of open market purchases of government securities. Following the announcement, the benchmark yield closed 4 basis points down on Wednesdayat 6.08 per cent – its lowest level since mid-February.

For the first quarter of FY22, the RBI will conduct a G-SAP of ₹1-lakh crore. Experts indicated that the unanticipated move has been taken positively by the market.

According to bond market participants, the primary concern of the market was the government’s huge borrowing programme and the subsequent supply of high-quality paper that could have possibly pushed the yields higher, going forward. With the central bank explicitly stating a bond-buying programme, worries over the impact of any additional borrowing by the government seem to have been quelled for good, say experts. Bond dealers believe the benchmark yield could remain in the range of 5.95-6.25 per cent in the near term.

The first purchase of government securities for an aggregate amount of ₹25,000 crore under G-SAP 1.0 will be conducted on April 15, 2021, said the RBI.

Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund, said the decision to announce longer term variable reverse repo and an upfront QE style market intervention needs to be seen in this context. This should enable a gradual normalisation of money market rates as well as a reasonable support to ensure a smooth borrowing program,” said Radhakrishnan.

Orderly evolution

RBI Governor Shaktikanta Das stated during the monetary policy meet that the central bank’s endeavour is to ensure orderly evolution of the yield curve, governed by fundamentals as distinct from any specific level thereof. “Our objective is to eschew volatility in the G-sec market in view of its central role in the pricing of other financial market instruments across the term structure and issuers, both in the public and private sectors,” said Governor Das.

Indeed, keeping the yields from hardening serves two important purposes: one, it helps in bringing down government borrowing costs from the bond market. Two, it also keeps corporate and State-borrowing costs under check even as these entities depend heavily on the bond market for their funding needs.

Manish Wadhawan, Managing Partner at Serenity Macro Partners, said the central bank has been buying bonds from the market over the past many years, but that has been on an ad-hoc basis. “A formalisation of this process has, therefore, been taken positively by the market which has led to the fall in yields,” said Wadhawan.

The Reserve Bank of India has proposed to make interoperability mandatory for full-KYC prepaid instruments (PPIs) and for all payment acceptance infrastructure.

The RBI had issued guidelines in October 2018 for adoption of interoperability on a voluntary basis for full-KYC PPIs.

RBI Governor Shaktikanta Das, on Wednesday, noted that the migration towards interoperability has not been significant.

“To incentivise the migration of PPIs to full-KYC, it is proposed to increase the current limit on outstanding balance in such PPIs from ₹1 lakh to ₹2 lakh,” he further said.

Consumer-friendly move

The move towards mandatory interoperability is being seen as consumer friendly as it will allow customers of mobile wallets to transfer funds from one wallet to another.

The Statement on Development and Regulatory Policies said: “To promote optimal utilisation of payment instruments (cards, wallets), and given the constraint of scarce acceptance infrastructure (PoS devices, ATMs, QR codes, bill-payment touch points), the RBI has been stressing on the benefits of interoperability amongst the issuing and acquiring entities alike, banks or non-banks.”

Further, as a confidence-boosting measure, and to bring uniformity across PPI issuers, it is now proposed to allow cash withdrawals for full-KYC PPIs of non-bank PPI issuers.

“This measure, in conjunction with the mandate for interoperability, will boost migration to full-KYC PPIs and will also complement the acceptance infrastructure in Tier III to VI centres,” said Das.

At present, cash withdrawal is allowed only for full-KYC PPIs issued by banks.

“The increase in the current limit on the outstanding balance in full-KYC PPIs from ₹1 lakh to ₹2 lakh will incentivise migration to full-KYC PPIs, which will further bring financial inclusion across the country. We support an open and interoperable digital payments ecosystem and are looking forward to the detailed guidelines on this subject,” said Satish Gupta, MD and CEO of Paytm Payments Bank.

Manoj Chopra, V-P and Head, Products and Innovation, InfrasoftTech, said interoperability brings wallets on a par with cards and banks. “This will be beneficial as the customer can use his/her wallet balance across multiple merchants. Ideally, a customer can now use only one wallet for all digital payments,” he noted.