Category: Banking & Finance

The Reserve Bank of India (RBI) plans to allow retail users undertake transactions in permitted credit derivatives for hedging their underlying credit risk, according to its Draft guidelines on Credit Default Swaps (CDS).

Non-retail users shall be allowed to undertake transactions in credit derivatives for both hedging and other purposes.

The RBI has come up with ‘Reserve Bank of India (Credit Derivatives) Directions, 2021 – Draft’ as development of CDS market is sine qua non for the development of a liquid market for corporate bonds, especially for the bonds of lower rated issuers.

CDS is a credit derivative contract in which one counterparty (protection seller) commits to compensate the other counterparty (protection buyer) for the loss in the value of an underlying debt instrument resulting from a credit event with respect to a reference entity.

The protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier.

CDS is a tool to transfer and manage credit risk in an effective manner through redistribution of risk. The RBI will allow only single-name CDS contracts.

According to the draft Directions, Exchanges may offer standardised single-name CDS contracts with guaranteed cash settlement. Retail users shall undertake transactions in exchange-traded CDS only for hedging their underlying credit risk.

User classification

Any user who is not eligible to be classified as a non-retail user will be classified as a retail user.

Non-retail users will include insurance companies, pension funds, mutual funds, alternate investment funds, foreign portfolio investors. These entities will also be eligible to act as protection seller in CDS.

Standalone primary dealers (SPDs) and non-banking finance companies (NBFCs), including housing finance companies (with minimum net owned funds of ₹500 crore) and resident companies (with minimum networth of ₹500 crore), too, will be classified as non-retail users.

Eligible debt instruments

Debt instruments which will be eligible to be a reference / deliverable obligation in a CDS contract include Commercial Papers, Certificates of Deposit and Non-Convertible Debentures of original maturity up to one year; Rated Indian Rupee (INR) denominated corporate bonds (listed and unlisted); and Unrated INR bonds issued by the Special Purpose Vehicles set up by infrastructure companies.

The RBI said the reference/deliverable obligations shall be in dematerialised form only.

Asset-backed securities/mortgage-backed securities and structured obligations such as credit enhanced/guaranteed bonds, convertible bonds, bonds with call/put options etc. shall not be permitted as reference and deliverable obligations.

Market-makers – entities which can buy and sell protection from/to users and other market-makers in order to provide liquidity to the market – will include Scheduled Commercial Banks (except Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks) and NBFCs, including HFCs, and SPDs with minimum net owned funds of ₹500 crore.

They will also include Export-Import Bank of India, National Bank of Agriculture and Rural Development, National Housing Bank and Small Industries Development Bank of India.

Restrictions

The RBI said market-makers and users shall not enter into CDS transactions if the counterparty is a related party or where the reference entity is a related party to either of the contracting parties.

Further, market-makers and users shall not buy/sell protection on reference entities if there are regulatory restrictions on assuming similar exposures in the cash market or in violation of any other regulatory restriction, as may be applicable.

India has reported isolated cases of two new variants of SARS-CoV2 virus that first emerged in South Africa and Brazil in recent months. While there were four reported cases of the South African variant, the sole case of the Brazilian variant was detected in a person who arrived from a South American country and returned in the first week of February.

Coming on the heels of the emergence of the UK variant, which has spread to 186 countries, including India, there are concerns over the two new strains that are said to have higher transmissibility. According to Balram Bhargava, the Director General of Indian Council of Medical Research (ICMR), both strains have mutations in the receptor binding domain of the spike protein of the virus (which the virus uses to latch onto the protein in the human lung cells), making it easy for them to infect.

According to him, the South African variant was detected in two persons who arrived from South Africa, one person each from Angola and Tanzania. He said ICMR’s National Institute of Virology is trying to isolate and culture the variant.

“The South Africa variant is worrying because it can significantly escape antibodies as well as reduce the efficacy of the vaccines,” said a genomic expert involved in studying these Covid-19 strains.

Similarly, the Brazilian variant, which first emerged in January this year, was suspected to be the reason for the spike in fresh cases, particularly in the Manaus region in Brazil. The strain has been isolated and cultured in ICMR-NIV, and scientists are attempting to assess the effectiveness of the current Covid-19 vaccines against the strain. The UK strain, on the other hand, was found in 187 people so far.

Health Secretary Rajesh Bhushan, however, indicated that there would not be a ban on flights from Brazil as they have found that testing at airports is a better strategy. However, the worry is that there are no direct flights from either of these countries, indicating that travellers from South Africa and Brazil could be entering through multiple transit points.

He said the Health Ministry would be holding a meeting with officials from Ministry of Civil Aviation to chalk out a testing strategy. As of now, all infected persons and their contacts have been tested and quarantined.

Progress of vaccination

The Covid vaccination, which completed a month on Tuesday, however, is only making slow progress.

Though all healthcare workers need to be given the first dose by February 24, only 60 per cent of them have been given the first shot so far.

Emergency funds during the Covid-19 pandemic for medical expenses and credit refinancing was the main reason why millennials took digital loans in 2020, a new survey has revealed.

Post the lockdown, there was a surge in loan demand, mainly for home renovation and shopping, said the ‘Millennial Loan-o-Nomics’ survey by digital lending company CASHe.

“Compared to the trend in 2019, borrowing by millennials was skewed towards purchase of consumer durables,” it said.

Among the key reasons for borrowing, 29 per cent was for medical reasons, 23 per cent for home renovation, 17 per cent for shopping, 16 per cent for credit refinancing, and 15 per cent for other needs.

The 2020 report analysed data of an active pool of over 4 lakh loan applications received from customers outlining multiple data points and key insights showcasing the typical consumption patterns, buying behaviour and borrowing habits of millennials across India.

Loan demand was highest at 81 per cent from millennials earning between ₹10,000 to ₹50,000.

In terms of loan size, 76 per cent of the millennials preferred small-ticket loans ranging between ₹ 10,000 to ₹50,000.

Among cities, Bengaluru was ahead in terms of millennial credit demand, followed by Hyderabad, Chennai, Mumbai, Pune, Gurugram and Kolkata.

Yogi Sadana, CEO, CASHe, noted: “The pandemic has created a spurt in digital payments and digital lending in India that are seeking to address the unmet credit needs of young salaried millennials and under-banked individuals.”

Religare Enterprises Ltd is hopeful of finalising the debt restructuring of Religare Finvest Ltd by the end of the current fiscal, and is also looking at a possible listing of its health insurance subsidiary, possibly in the coming year.

“We are at a very advanced stage of the resolution plan being discussed with the lenders. Within this fiscal year, we expect to have a clear roadmap for that business,” said Nitin Aggarwal, Group Chief Financial Officer, Religare Enterprises Limited (REL).

In an interaction with BusinessLine, Aggarwal said talks are on with the bankers on what option has to be taken for the restructuring.

“We have investors ready to invest, and REL is also ready to hold the company and invest in the company,” he said, when asked about the options available.

Revival of lending biz

Aggarwal is optimistic about the revival of the lending businesses after the restructuring is done.

“Lending will start after the restructuring. We are doing small-scale lending in the home finance business. SME lending we will be able to start lending only after the debt restructuring is completed and we have permission from the Reserve Bank of India,” he said.

Previously, the RBI had rejected a proposal to allow TCG Advisory, which is part of NRI investor Purnendu Chatterjee’s The Chatterjee Group, to pick up a stake in the company.

However, the other two arms of REL – health insurance and retail broking – are now on an upswing.

“If RFL is put on track this fiscal year, then next fiscal all four businesses will be on a good growth path. That is what the entire Religare team is working towards,” he said.

REL is a Core Investment Company (CIC) which owns and manages RFL (SME lending), Care Health Insurance, Religare Broking, and Religare Housing Development Finance Corporation (affordable housing finance).

Aggarwal noted that Care Health Insurance is now the second largest standalone health insurer in the country and is profitable and working well.

With the business now reaching maturity, he said REL will try and take it public either in the next fiscal year or early part of 2022.

“We have started thinking about it. It is towards maturity now,” he said. In June last year, PE firm Kedaara had taken a six per cent stake in the insurer and invested about ₹567 crore, including ₹300 crore of growth capital. The company was renamed from Religare Health Insurance to Care Health Insurance.