Category: Banking & Finance

Punjab & Sind Bank, BoM and BoI are likely privatisation candidates

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Lack of interest among potential buyers remains a key concern given the structure of these banks.

The market is betting on Punjab & Sind Bank, Bank of Maharashtra and Bank of India as the likely candidates for the finance minister’s ambitious bank privatisation plan. In her Budget speech, finance minister Nirmala Sitharaman said the government planned to privatise two sate-run banks, other than IDBI Bank. Analysts believe that the likely candidates will be from the pool of banks which were not part of the merger process. The government had earlier allowed merger of 13 banks into five banks.

Anil Gupta – vice-president and sector head, financial sector ratings, ICRA, said Punjab and Sind Bank and Bank of Maharashtra looked probable candidates for privitisation. Of the six banks kept out of merger, Indian Overseas Bank, Central Bank and UCO Bank are under PCA (prompt-corrective action), he explained. The Reserve Bank of India had kept the three banks in the PCA framework after a massive asset quality deterioration, losses in the books and lower capital levels. Gupta said PCA banks were unlikely to be offered for privatisation due to poor investor demand.

Leaving State Bank of India and five merged banks, there are six public sector banks in the banking system. The six banks include Bank of India, Punjab and Sind Bank, Bank of Maharashtra, Indian Overseas Bank (IoB), Central Bank of India and Uco Bank. Gupta also said the government was unlikely to consider privitisation of Bank of India due its large size. “The government may want to test the water with smaller banks first,” he added.

According to JM Financial, “While the details are awaited, we believe the most likely candidates will be from the pool of banks which were not part of consolidation. While these candidates are small and are not expected to provide any material resources to the government, we believe that this is a step in the right direction and can act as a test case for privatisation of other major public sector banks in future.”

In a note to its clients, Kotak Institutional Equities said the task of privatising two PSU banks may be difficult to achieve but could result in more privatisations, if successful. Lack of interest among potential buyers remains a key concern given the structure of these banks, Kotak said.

In an interview with CNN News 18, Niramala Sitharaman said the government wanted more public sector banks which are functionally strong, professionally managed and can meet the demands of growing aspirational India. “If I am going to be sitting around with such public sector banks which are just not in a mood or a position to stand up, is it right to pour tax-payers money into such banks? When there may be buyers who can buy and run it efficiently,” she said.

The government has proposed to introduce required legislative amendments for privatisation of two PSBs in the Budget session itself.

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NBFCs can initiate recovery in Rs 20-lakh loan default under SARFAESI Act: FM

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In the absence of lower threshold limits, NBFCs had to file cases at civil courts for recovery.

Finance minister Nirmala Sitharaman has proposed to lower the threshold for non-banking financial companies (NBFCs) to initiate recovery proceedings against loan defaulters under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. In her Budget speech, the FM proposed to lower the threshold of loan defaults to `20 lakh, compared to `50 lakh earlier.

“To improve credit discipline while continuing to protect the interest of small borrowers, for NBFCs with minimum asset size of `100 crore, the minimum loan size eligible for debt recovery under the SARFAESI Act, 2002, is proposed to be reduced from the existing level of `50 lakh to `20 lakh,” she said.

Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas, said reducing the amount for taking SARFAESI action will provide lenders better access to fast track and out of court enforcement mechanism, which would lead to better discipline in the financing world. “The borrowers can no longer use long-drawn litigation as an excuse to delay on their contractual obligations and it is, therefore, a crucial step in ensuring quick recovery, which is a critical pillar in any financing,” she added.

Sonam Chandwani, managing partner at KS Legal and Associates, said relaxation in threshold for NBFCs under SARFAESI is likely to strengthen financial health of lenders and simultaneously improve credit discipline while continuing to safeguard borrowers’ interests.

“This move enables NBFCs to recover smaller loans thereby catering to a larger pool of loans, which ultimately strengthens their balance sheets and overall financial health,” she said.

FE learned that NBFCs had earlier requested the finance minister to reduce threshold limits for initiating recovery proceedings. In the absence of lower threshold limits, NBFCs had to file cases at civil courts for recovery. The recovery under SARFAESI is applicable only to secured loans. Under the SARFAESI Act, a lender can take possession of the property or mortgaged assets after a 60-day notice. The Act is applicable to home loans, loan against property and loan against collateral for micro small medium enterprises (MSMEs).

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Governance structures, liability key to DFI success

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The experience of DFIs globally holds proof that the government needs to be involved in a hands-on fashion.

The assurance of sustainable sources of long-term liabilities and a strong governance framework will be crucial for the success of the proposed new development finance institution (DFI), industry participants and market experts said. The government will have to play a role not just as a provider of capital, but also as a facilitator of policy tweaks like credit enhancements for projects financed by the DFI. There is also speculation that India Infrastructure Finance Company (IIFCL) may be merged into the new sovereign-backed DFI.

Before 1992, DFIs enjoyed a set of benefits which made it easy for them to tap into long-term liabilities. They had access to funding at concessional rates from multilateral agencies. DFI bonds enjoyed a statutory liquidity ratio (SLR) status, which meant that banks were a captive source of funds for these institutions. They also received direct funding from the Reserve Bank of India (RBI) through long-term operations (LTO).

Niranjan Rajadhyaksha, research director and senior fellow, IDFC Institute, said of these three routes, only the first still remains an option. “Maybe this DFI with some sovereign guarantee could raise money and then give rupee loans to local infrastructure companies. So we will have to await the details and see if the government comes up with a new rupee instrument to bridge the long-term liability gap,” he said.

Some industry executives believe that the pre-1992 concessions for DFIs may have to be brought back to make the structure effective. RK Bansal, who heads Edelweiss ARC and has earlier worked with IDBI, explained that if the older funding benefits are not restored, the bond market will have to be deepened significantly for DFIs to work.

“The government will also need to offer credit enhancement because new infra projects cannot be highly rated. Finally, a high degree of policy support will be required from the government and they must ensure that different departments coordinate among themselves to help complete the projects,” he said.

The experience of DFIs globally holds proof that the government needs to be involved in a hands-on fashion. Without policy-level handholding from the government, infrastructure projects cannot achieve fruition and it will be the DFI that will be left holding the can, experts said.

There is also a view that the new DFI must on-board private partners in order to establish a strong governance framework. Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services (APAS), said, “Apart from raising long-term liabilities to fund long-term assets, the other challenge would be to develop a sound governance framework. That was what distinguished the better-managed private DFIs ICICI and HDFC from the others. If the government can conceive of some measure by which the DFI can raise long-term liabilities, then it could sustain with the help of good governance practices.”

Sound governance practices will also inspire confidence among potential long-term investors such as pension funds and sovereign wealth funds, Parekh added.

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Bank Nifty constituents hit new highs after Budget 2021, BFSI News, ET BFSI

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by Syed Fasiuddin

Bank Nifty constituents hit new highs shortly after Finance Minister Nirmala Sitharaman announced her budget for 2021. The Bank Nifty, since the announcement of the budget, which included numerous reforms aimed towards the BFSI sector, including the setting up of a bad bank, amendments towards the Insurance Act of 1938, the recapitalisation of public sector lenders, and the proposed divestment of two public lenders and one general insurer, amongst others, sparked cheer in the market – recording a 3074 point jump.

Public Bank stocks jump
Government owned lenders and constituents of the Bank Nifty Index – including the State Bank of India, Punjab National Bank (PNB), Bank of Baroda, recorded sharp single and double digit rises in values since February 1, when the budget was first announced. SBI within the day recorded a spectacular jump of 7.21%, closing at Rs 333.10 – rising by Rs 22.40. PNB and BoB recorded jumps of 1.26% and 1.01%, respectively, on February 2. PNB at the end of day traded at Rs 36.20, whilst BoB traded at Rs 74.65 – rising by 0.45 and 0.75 points, respectively.

Private lender stocks cheer
Private lenders RBL Bank, Federal Bank, HDFC Bank and Bandhan Bank recorded the highest jumps since the budget was first announced, rising by 11.52%, 10.08%, 9.9% and 9.84% respectively. RBL Bank recorded a jump of 25 points, closing at RS 242.00 at the end of market hours. HDFC Bank alone rose by 140.9 points, trading at Rs 1560, since the budget was announced, whereas Bandhan Bank rose by 30.40 points, to close at Rs 339.35, on February 2. Kerala based Federal Bank also recorded a 7.35 point jump to trade at Rs 80.25 by the close of the BSE.


Other constituents of the Bank Nifty, including ICICI Bank, Kotak Mahindra Bank and Axis Bank, recorded similar gains, jumping by 9.61%, 8.47% and 8.13%, respectively. ICICI Bank rose by 54.20 points to close at Rs 618.45, whereas Kotak Mahindra Bank and Axis Bank recorded an increase of 145.50 points and 53.65 points, respectively, to close at Rs 1863.50 and Rs 713.70.

Bankers remain optimistic
Both public and private bankers expressed optimism at the budget unveiled by Nirmala Sitharaman, on February 1. Dinesh Kumar Khara, Chairman of the State Bank of India (SBI), said “The Union Budget has unveiled a set of well-crafted and robust policies that encompasses the vision of an Atmanirbhar Bharat. The Budget has rightly envisaged a substantial jump in capital expenditure that has a strong multiplier impact on the economy. The decision to open up the insurance sector, setting up a DFI and an ARC, privatizing a couple of public sector banks are all positive steps for the financial sector.”

The Chairman of India’s largest lender further said “One of the cornerstones of this budget is fiscal numbers that are transparent and has the potential to surprise us on the upside. In principle, the budget has rationalized the off-balance-sheet borrowings and headline fiscal deficit numbers, which will overtly please markets and even rating agencies. The fact that the expenditure announcements in the budget have been matched with the status quo on taxes will please everyone and bolster market sentiments.”

Kotak Mahindra Bank founder Uday Kotak, expressing his views on the budget, tweeted “A Budget for growth with next-gen reforms. Focus on healthcare, infra, financial sector. A stable tax regime, higher borrowings for capex. Specific reforms: disinvestment & monetization, opening up of insurance, cleanup plan for stressed assets. Sign of a self confident India.”

Chandra Shekhar Ghosh, MD & CEO, Bandhan Bank, noted “The government has prioritised spending on growth at this stage, in the hope that such growth would help manage the fiscal deficit subsequently. A substantial increase announced in the expenditure on healthcare and infrastructure will help boost economic growth, including the MSME sector and generate employment. Overall, it was a growth-centric Budget aimed at securing India’s long-term economic interest.



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‘Proposed LIC Act tweaks aimed at getting insurance behemoth ready for listing’

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Budget 2021 not only had loads of goodies on the privatisation front, it also has taken special efforts to expedite the process of legislative amendments to enable the government shed stakes in both Life Insurance Corporation and IDBI Bank.

A day after the Budget was presented in Parliament, Debashish Panda, Secretary, Department of Financial Services, shared the various aspects of changes related to financial services sector introduced through the Finance Bill 2021. Excerpts:

Why use the Finance Bill to bring amendments in LIC Act?

The last Budget had announcements about LIC IPO and IDBI. The Finance Minister made announcements this time too. We had to bring necessary legislative changes. For LIC, we have brought 26-27 consequent amendments through the Finance Bill. The LIC Act 1956 did not have provisions for listing or how shares will be distributed.

In both LIC and IDBI, the Consolidated fund of India will receive the funds. So it becomes part of the money bill and to expedite the process, the changes has been put as part of Finance Bill – which is a money Bill.

Will the intent be to corporatise LIC under Companies Act or will it remain a corporation even after listing?

No, the Life Insurance Corporation of India Act will remain. The character of LIC will remain. We are only enabling compliance with listing regulations and allowing shares to be issued. We are specifying an authorised capital (₹25,000 crore from the current level of ₹ 100 crore) and detailing the Board structures etc in the amendments

How much will the government look to dilute in LIC? Will it be 5 per cent or 10 per cent?

It is for the DIPAM (disinvestment department) to take a call on this. We are looking at other aspects like getting the legislative changes done, get embedded value calculated, appointing actuarial consultants for this etc. Based on the embedded value, the enterprise value will be calculated and then listing will happen. I cannot say anything about the timing.

What was the purpose of going in for a new Development Financial Institution when you could have used an existing entity?

The proposed government-owned DFI — National Bank for Financing and Infrastructure Development — will play a catalytic role in development of the corporate bond market. It will also be a market maker and do technology-based monitoring of projects – which is missing in today’s infrastructure financing. The first pillar of this new DFI is the developmental role while financing role will be its second pillar. Going forward, the government may even look to bring down its holding, in this DFI, to 26 per cent. The new DFI Bill will also open the doors for private owned DFIs to enter this space. IIFCL can also be subsumed for a quick start as it already had domain expertise and trained manpower in this field. This new DFI will start a post Covid-19 new investment cycle in project financing. It will anchor the new ₹111-lakh crore National Infrastructure Pipeline of projects for the next five years.

Budget has proposed a new structure of ARC and AMC to deal with bad loans of public sector banks (PSBs). Will government put money in these entities towards capital?

The government will not and has no plans to put any equity in the new mechanism. It is for the banks to come together and set them up. The bad assets will get transferred from the banks to the ARC entity at net book value (book value-provision made) and as consideration for this 15 per cent cash and 85 per cent securities receipts will be issued.

Budget has proposed privatisation of two PSBs. Will the exiting prompt corrective action banks be eligible as candidates for privatisation?

All of them are eligible. It could be anyone from one to twelve PSBs. The three level of committees as mentioned in the recently approved policy – NITI Aayog, core group of secretaries and alternate mechanism. Also the banks that are now under prompt corrective action have been doing well in recent months and hopefully could come out soon.

Will government ask LIC to join the centre in shedding stake in IDBI Bank?

That will be for the LIC Board to take. It is not for us to determine how much and when they should sell.

So what is the purpose of bringing amendments to the IDBI repeal Act?

The main purpose is to take care of the licensing issue and how it should be dealt with if the control of the bank changes hands.

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SC asks Franklin to disburse ₹9,000 crore to investors

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The Supreme Court on Tuesday ordered that ₹9,122 crore be disbursed within three weeks to the unitholders of Franklin Templeton’s six mutual fund schemes that are proposed to be wound up.

A Bench of Justices SA Nazeer and Sanjiv Khanna said the disbursal of money would be done in proportion to unitholders’ interest in the assets.

In the proceedings conducted through video conferencing, the Bench asked State Bank of India Mutual Fund to disburse the money as all the counsels gave consent to the court’s order.

The Bench granted liberty to the litigating parties to approach the court in case of any difficulty in the disbursal of money to the unitholders. The court also gave the parties liberty to move applications in case of any difficulty arising out of the process.

The lawyer, representing Franklin Templeton Trusts Services Limited, told the Bench that the company would render cooperation to SBI Mutual Fund.

A Franklin Templeton spokesperson said: “We are pleased that, as requested by us and in the best interests of unitholders, the court has directed the distribution of ₹9,122 crore (distributable surplus as of January 15, 2021) to unitholders. As previously stated, we went ahead with the difficult decision of winding up these schemes because of our firm belief that this was the right decision to preserve value for investors, as evidenced by the generation of cash in these schemes over the last 9 months.”

The Bench, had on January 25, said it would first deal with the issues related to objections to the e-voting process for winding up of the six mutual fund schemes and distribution of money to the unitholders. Prior to this, the apex court had granted three days for filing of objections to the e-voting on winding up of six mutual fund schemes of the company. It was also told by counsel for Franklin Templeton that an order be passed for allowing distribution of money to the unitholders.

E-voting process

Earlier, the apex court had asked the Securities and Exchange Board of India to appoint an observer for overseeing the e-voting process.

The voting on the winding up of Franklin Templeton’s six mutual fund schemes had taken place in the last week of December and was approved by the majority of unitholders.

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Pragmatic in approach, nuanced by construction

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Against the backdrop of sharp deceleration in growth in the wake of an unprecedented global health crisis, the FY22 Budget has emphatically provided a much needed thrust for healthcare spending, job creation, and overall economic recovery, all within the ambit of deft fiscal rectitude. The announcements made by the Finance Minister should be seen in conjunction with government’s previous announcements under various fiscal packages encompassing Pradhan Mantri Garib Kalyan Yogana and Atma Nirbhar Bharat Abhiyan.

From an objective standpoint, in a year of difficult fiscal computations, the Finance Minister has walked a tightrope to balance the stretched revenue receipts with necessary expenditure support. At 6.8 per cent of GDP, FY22 fiscal deficit is a realistic display of support to reinvigorate India’s Real GDP growth, which is projected at 11 per cent, albeit supported by low base.

The Basics: Healthcare and Capex

With the pandemic exposing the vulnerabilities in the healthcare sector, the FY22 Union Budget makes a bold attempt to improve the situation allocating ₹2.23-lakh crore — an increase of 137 per cent from the last year’s budget. For Covid-19 vaccines itself, a significant allocation of ₹35,000 crore has been provided, with more support likely in case required

I reckon the government’s thrust on increased capex spending — budgeted to rise by 26.2 per cent over FY21 — will provide the much-needed supply side push to the economy

Creation of an Asset Reconstruction Company was the need of the hour, to reinvigorate risk taking appetite that was getting bogged down by the monumental requirements for provisioning on account of stressed assets. In my opinion, this singular step, with active participation from the financial sector, should help in de-clogging of investments in the country in a formal institutionalised setup

The laying out of the DFI structure is a structural medium term reform to garner infrastructure financing, which is currently being carried out by banks, which as an entity is prone to ALM mismatches as far as financing long term infrastructure projects are concerned. Earmarking of ₹20,000 crore for bank recapitalisation is a step in the right direction. With fiscal situation expected to get comfortable in the coming quarters, possibility of a top-up in this case cannot be ruled out

Continued capital account liberalisation in insurance, with FDI cap getting raised to 74 per cent from 49 per cent is a fantastic move and is likely to pave way for greater insurance penetration in the country The disinvestment target of ₹1.75-lakh crore is bound to unlock value while also leading to diversification of ownership under the Net Public Sector Enterprises Policy

The significant others

Government’s allocation of ₹15,700 crore for MSMEs will bolster growth further. The earlier allocation towards Production Linked Initiative Scheme (PLI), creation of Mega Investment Textiles Parks, and adjustment in customs duty on a range of products will provide protection to this segment to recover from the Covid-19 shock. Further, change in the definition for Small Companies by increasing the thresholds for paid-up capital by 4 times and turnover by 10 times is a welcome move as it eases the compliance requirements of more than two lakh small companies

For incentivising start-ups as well, extending the eligibility for claiming tax holiday and capital gains exemption for investment in start-ups by one more year, until 31st March 2022, will not only free up the working capital of these firms but also revive entrepreneurial spirits

Overall, FY22 Budget is a pragmatic and visionary statement which distinctly lays its focus on consumption and investment drivers to speed-up the economic recovery. The government has prudently laid its long term focus on nurturing growth while also consolidating its fiscal position. Accordingly, it plans to trim fiscal deficit to 4.5 per cent by FY26. This should be broadly acceptable at the time when India needs a strong engine of growth to push it towards achieving the goal of a $5 trillion economy.

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G-Sec: Prices harden for second straight trading session this week

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Government security (G-Sec) prices hardened for the second straight trading session this week as the government, on Monday, announced additional borrowing of ₹80,000 crore in the February-March 2021 period.

Bond market players fear that the higher fiscal deficit numbers announced in the Budget for the current financial year (revised estimate of 9.5 per cent of GDP against Budget estimate/BE of 3.5 per cent) and the next (6.8 per cent BE) could push up the cost of financing in the economy.

In Tuesday’s trading, yield on the benchmark 10-year G-Sec (carrying a coupon of 5.77 per cent) went up about 7 basis points (bps) to close at 6.1495 per cent over Monday’s close, with its price declining 48 paise to ₹97.30.

Bond yields and price move in opposite directions..One basis point is equal to one-hundredth of a percentage point.

On Monday, when the Budget was was announced, yield on the aforementioned benchmark G-Sec jumped about 13 bps, with its price declining about 91 paise.

Referring to the ₹12-lakh crore government borrowing in FY21, Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, observed that: “During this period, the Reserve Bank of India (RBI) injected liquidity and cut the policy rate.

“Now as we step into FY22, the leeway to cut (the policy rate) is limited. Liquidity is getting sucked out gradually and the borrowing amount is still ₹12-lakh crore. Hence the yields are hardening.”

Irani expects the RBI to gradually suck out liquidity in a non disruptive manner and maintain stance status quo in the forthcoming monetary policy review.

He is of the view that the bond market needs some support from the RBI by way of open market operation (purchase) of G-Secs.

Abheek Barua, Chief Economist, HDFC Bank, in his report ‘Budget 2021-22: The Queen’s Gambit’ noted that the unexpectedly large fiscal deficit numbers both for the current and the next year entail huge borrowings, much beyond market expectations.

“Government bond yields have hardened quite a bit in the wake of the recovery. The Finance Ministry and the RBI will have to work closely together to check the rise in yields and ensure that the Budget doesn’t ultimately result in a rise in borrowing costs across the board,” he said.

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LIC’s pension and group schemes fetch over ₹1-lakh crore of premium income

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Our Bureau

Life Insurance Corporation of India’s pension and group schemes vertical that looks after group schemes and superannuation business has clocked over ₹1-lakh crore of premium income during the first 10 months of the current fiscal.

“This is the first time ever any single vertical of the insurer has crossed such a gigantic premium income figure successively for two years,” said LIC in a statement on Tuesday, adding that it holds great significance as it was achieved in the middle of the Covid-19-led economic uncertainty.

Pension and group schemes vertical of LIC holds about 80 per cent market share in new business premium post opening of the life insurance sector, it further said.

This vertical of LIC manages funds of over ₹7-lakh crore through over 80,000 gratuity, superannuation and leave encashment schemes.

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RBI gives banks three more months to appoint Chief Compliance Officer

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Our Bureau

The Reserve Bank of India (RBI) has given banks three more months to appoint Chief Compliance Officer (CCO) as per the guidelines it issued in September 2020.

This breather has been given due to the difficulties being faced by many banks on the issue of appointment of new CCO meeting all requirements of the September 2020 guidelines/ circular on ‘Compliance Functions in Banks and Role of Chief Compliance Officer (CCO)’.

“In view of the difficulties expressed by banks, they may follow the indicated processes for selection of CCO in the above circular within a period of nine months from the date of the circular – September 11, 2020 – and are free to reappoint the current incumbent as the CCO if she/he meets the requirements,” the RBI said in the frequently asked questions (FAQs) on the circular.

The circular, which was issued to bring uniformity in approach followed by banks to appoint a designated CCO selected through a suitable process with an appropriate ‘fit and proper’ evaluation/ selection criteria to manage compliance risk effectively, had originally given Banks six months for compliance.

Age limit

On the “not more than 55 years” eligibility criteria for appointment as CCO, the central bank said if a person identified for CCO role is more than 55 years but she/ he has been continuously associated with the compliance function prior to completing the age of 55 years, the person would be eligible for such appointment.

Referring to the prescription that the CCO shall have an overall experience of at least 15 years in the banking or financial services out of which minimum 5 years shall be in the Audit / Finance / Compliance / Legal / Risk Management functions., the RBI said: “…if a regional/ zonal/ business head had the requisite responsibility/ experience on the control functions of the business lines for 5 years or more, she/ he shall be eligible for the post of CCO under this condition.”

The RBI reiterated that compliance is a shared responsibility of the business units and the compliance function. Therefore, adherence to applicable statutory provisions and regulations must be the responsibility of each staff member of the bank and it is the work of the compliance function to ensure the same.

There should also be appropriate mechanisms for co-operation among departments and with the Chief Compliance Officer, it added.

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