Category: Banking & Finance

Canara Bank will conduct a mega e-auction on March 26 to sell around 2,000 properties under its possession under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act.

The bank has successfully sold 1,450 properties, valued at ₹886 crore, in the current financial year.

For the auction, the bank has included different properties – residential flats, apartments, independent houses, industrial lands, commercial complexes, office spaces and vacant land sites. The properties are located in various cities such as Delhi, Mumbai, Kolkata, Bengaluru, Chennai, and also in other smaller towns and and semi-urban areas.

SARFAESI Act, which is proved to be an effective tool of recovery of non-performing assets (NPAs), provides for sale of mortgaged property by the bank’s /financial institutions giving prior notice to the defaulting borrowers.

The property sale is conducted through online e-auction, where the prospective bidders can participate in the bidding process from anywhere. “The interested bidders can also approach the respective branches to have detailed information about the properties put for sale. The sale process is totally transparent and the bidder offering the highest price for the property will be declared as successful bidders,” the bank said in a release.

Mid- and small-sized banks could face some challenges in the issuance of AT-1 bonds as these could see poor appetite from investors despite the relief provided by SEBI in the amended valuation rule for perpetual bonds.

Experts and bankers welcomed the glide path provided by SEBI for valuation of these perpetual bonds, but said its impact would be felt in case of incremental issuances by banks.

“The real risk of investing in these bonds has come to the surface recently with instances like YES Bank and Lakshmi Vilas Bank where investors lost money. Earlier, it was only thought to be theoretical,” said Ashutosh Khajuria, Executive Director and CFO, Federal Bank.

Based on the representation of the mutual fund industry to consider a glide path for the implementation of the policy, SEBI has now decided that the deemed residual maturity for the purpose of valuation of existing and new bonds issued under Basel III framework will be achieved over a period of two years

Appetite still weak

Analysts, however, said appetite of mutual funds may still remain weak.

“Mutual funds are sizeable investors in AT-1 bonds. Since their investment appetite is waning, issuances will remain a challenge for banks.

“Other investors also invest in AT-1, but if a sizeable investor goes out of the market, the yield will tend to harden on the AT-1s. The cost will become higher for incremental issuances and volumes of these bonds may also get reduced,” noted an analyst who did not wish to be named.

So, banks that are not highly rated may face a problem in such issuances.

According to a recent note by ICRA, mutual funds hold 30 per cent of the Tier I bonds outstanding and 14 per cent of the Tier II bonds outstanding in February 2021.

As per ICRA’s estimates, the total stock of AT-I bonds outstanding is ₹1.03-lakh crore as on February 28, 2021, of which, 70 per cent is issued by public sector banks.

Further, the perpetual debt instruments outstanding of NBFCs and other corporates is estimated to be less than ₹10,000 crore, of which, some portion is held by mutual funds.

“There will continue to be some impact of this change in norms by SEBI as they have prescribed a glide path. Most banks have finished fund raising for this year and will now look at raising funds only by September 2021, which is when this will come into play,” said another expert.

The amendment proposed by Finance Minister Nirmala Sitharaman to the Budget provision related to capping of employee provident fund contribution for tax exemption is only meant for the subscribers of General Provident Fund/Statutory Provident Fund.

Tax exemption

In order to rationalise tax exemption for the income earned by high-income employees, it was proposed in the Budget to cap tax exemption to the annual contribution of ₹2.5 lakh on the interest earned. This restriction, it was proposed, will be applicable only for the contribution made on or after April 1.

“This amount is now being raised to ₹5 lakh only in those cases where there is no contribution by the employer in that fund,” the FM had said while explaining that in most cases there is contribution from the employee and employer. But in cases where there is only contribution from by the employee without any contribution from the employer, that amount is raised to ₹5 lakh, she said. “While there is no change in provisions for normal EPFO subscriber, when we talk about a fund where both employer and employee are at least contributing 12 per cent each of basic plus DA and contribution for tax-free interest is capped at ₹2.5 lakh, effectively it could be ₹5 lakh if we consider contributions from both employer and employee,” explained an official from the Finance Ministry.

Accumulated balances

Neha Malhotra, Director at Nangia Andersen, said that the prevailing provisions of the Income Tax Act grant an exemption in respect of any payment from specified provident funds. Additionally, accumulated balances due and payable to an employee by specified provident funds are also exempt, subject to certain conditions. Now, amendment has been proposed in the Act.

“The amendment shall impact only government-sector employees, who contribute to the Statutory Provident Fund/ General Provident Fund. Consequently, while private sector employees earning interest on Provident Fund on annual contribution exceeding ₹2.5 lakh would be required to pay tax on interest accruing on such excess contribution, for government employees, the monetary ceiling shall be ₹5 lakh,” she said.

Non-banking financial companies (NBFCs) have already made provisions for non-performing assets and do not expect a sharp spike in bad loans following the Supreme Court verdict.

“Most companies were already making provisions for. All of us were prepared and we don’t see a significant quantum jump or change happening to that extent,” said Raman Aggarwal, Co-Chairman, FIDC, and Independent Director, Paisalo Digital, on Wednesday.

Responding to questions at a virtual press meet by the Finance Industry Development Council (FIDC), NBFCs said they have made provisions for NPAs, but hope the additional relief is provided from the Centre.

Most NBFCs and lenders have already applied for the earlier round of relief that was given to borrowers, they said, adding that they are yet to get it.

“It is an ex-gratia relief, we have filed our claims,” Aggarwal explained.

Meanwhile, NBFCs also reported improvement in collections and continued demand post the Covid-19 pandemic and lockdown.

“NBFCs are adequately capitalised, although there may be some pressures on smaller firms,” said Ramesh Iyer, Chairman, FIDC, VC and MD, Mahindra Finance, adding that collections have also improved on a month-on-month basis.

FIDC has also given suggestions on the discussion paper by the Reserve Bank of India on revised regulatory framework for NBFCs.

“FIDC welcomes the tiered approach,” said KV Srinivasan, Director and CEO, Profectus Capital, adding that it has highlighted the issue of smaller NBFCs and minimum capital requirement.

“Based on increase in prices, real GDP and regulatory judgement, the entry point norms will be revised from ₹2 crore to ₹20 crore,” the discussion paper had proposed on the minimum net owned funds.

Srinivasan said it has been suggested that this should be extended and companies with less than ₹2 crore capital should be given sufficient time to reach the threshold.

K Ram Kumar

A uni-State Urban Co-operative Bank (UCB) can metamorphose into a multi-State UCB through amalgamation with a uni-State bank registered in another State, going by the Reserve Bank of India’s guidelines on amalgamation of two or more UCBs.

Freedom from interference

What this means is that a UCB can get freedom from interference in their functioning by the State Registrar of Co-operative Societies (RCS) and come under the benign influence of the Central RCS via the aforementioned amalgamation route.

While a uni-State UCB is a bank registered as a Society in a single State, a multi-State UCB is registered with the Central RCS (CRCS) under the Multi-State Co-operative Societies Act.

Referring to the RBI’s Master Direction on ‘Amalgamation of Urban Cooperative Banks’, Co-operative Banking expert Krishna Damarla said: “Two well-managed uni-State UCBs from two States can get amalgamated into one multi-State UCB and get out of the clutches of State Registrars to come under more benign regulations (as applicable to multi-state co-operative societies) of CRCS.”

Damarla observed that uni-State UCBs in contiguous States such as Maharashtra and Gujarat, Maharashtra and Karnataka could explore amalgamation possibilities.

A State’s RCS exercises control and regulation of UCBs as co-operative societies. The RBI exercises control and regulation of UCBs on their function as a bank.

Through its auditors, RCS examines UCBs overdue debts; does valuation of assets and liabilities; ensures observance of the provisions of the State Co-operative Act, Rules and Byelaws; and award audit classification to the society, among others.

As per the ‘Amalgamation of Urban Cooperative Banks, Directions, 2020’, the RBI may consider proposals for merger and amalgamation among UCBs under three circumstances, including when the net worth of the amalgamated bank (the UCB which proposes to transfer its business to another UCB) is positive and the amalgamating bank (the UCB which is to acquire the business of the amalgamated bank) assures to protect entire deposits of all depositors of the amalgamated bank.

The second circumstance for considering proposals are when the net worth of amalgamated bank is negative, and the amalgamating bank on its own assures to protect deposits of all the depositors of the amalgamated bank.

The third circumstance is when the net worth of the amalgamated bank is negative, and the amalgamating bank assures to protect the deposits of the depositors of the amalgamated bank with the financial support from the State government extended upfront as part of the process of merger.

Among the incentives that the RBI is offering for consolidation among UCBs include not insisting on minimum entry point capital prescribed for multi-State UCBs in case the amalgamating UCB becomes a multi-State UCB, only on account of the amalgamated UCB being registered in a different State; and permission to the amalgamating UCB to close down the loss-making branches of the amalgamated UCB or merging branches of the amalgamated UCB with its own.