Category: Banking & Finance

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Public Sector Banks (PSBs) may require up to ₹43,000-crore capital during FY22 not only for growth but also to replace Additional Tier I (AT-I) bonds where a call option would fall due, according to credit rating agency ICRA.

The agency expects PSBs to break even in a worst-case scenario as well with the possibility of a return on equity (RoE) of about 5 per cent in a favourable scenario during FY22, which means their capital requirements will be lower because of the losses.

“The capital requirements would, however, arise on account of the estimated ₹23,000-crore Additional Tier I (AT-I) bonds where a call option would fall due next year.

“Hence, public banks will require capital not only for growth but also to replace these bonds to maintain their capital profiles,” ICRA said in a note on ‘Union Budget 2021-22 Expectations’.

Factoring in the aforementioned two requirements, ICRA estimates the capital requirements for public banks to be negligible in a favourable scenario (RoE of 5 per cent), but up to ₹43,000 crore in a worst-case scenario.

ICRA observed that the appetite of investors towards the AT-I bonds of public banks has improved recently with more public banks issuing AT-I bonds in FY21 compared to FY20.

Recapitalisation burden

If the banks can raise a part of the ₹43,000-crore capital through AT-Is and market sources, it could reduce the Government of India’s (GoI) recapitalisation burden for the coming fiscal, it added.

Though clarity is likely to emerge on this front only in H2 (October 2021-March 2022) FY22, ICRA expects GoI to allocate some quantum to the PSBs in the Budget itself (unlike last year when they made the announcement later) to provide some additional comfort to the markets.

As per the Reserve Bank of India’s (RBI) ‘Report on Trend and Progress of Banking in India 2019-20’, preliminary estimates suggest potential recapitalisation requirements for meeting regulatory purposes as well as for growth capital may be to the extent of 150 basis points (bps) of the common equity tier I (CET I) ratio for the banking system.

According to the report, 15 PSBs collectively raised ₹36,439 crore in FY21 (up to November 2020). Three private sector banks collectively raised ₹32,443 crore.

NBFCs

The agency opined that for the Non-Banking Finance Companies/ NBFCs (non-infra), extension of the Reserve Bank of India (RBI) and GoI-backed funding and guarantee schemes, which were rolled-out in the current fiscal, are likely to be the keys for the sector’s near-term liquidity.

“Considering the moderate growth expectation of 7-9 per cent in FY22, it would also be critical to provide guidance on the medium-term support framework for the sector to boost investor confidence and for sustainable growth revival,”the note said.

The expected boost to infrastructure spending would kindle demand for infra-focussed NBFCs, however, most of these are public sector undertakings (PSUs).

The agency is of the view that establishment of institutions, which can extend long-term funding to these infra-NFBCs and also banks for infrastructure development, would ensure adequate sectoral liquidity.

ICRA said benefits and additional incentives for MSMEs and tax-breaks to home-buyers and builders in the housing sector, especially affordable housing, would also augur well for the sector, which is expected to be faced with asset quality headwind.

Aadhar Housing Finance has filed its DRHP with SEBI for an initial public offering of ₹ 7,300 crore.

“The IPO comprises fresh issuance aggregating up to ₹1,500 crore by the company (fresh issue) and an offer for sale of aggregating up to ₹5,800 crore by BCP Topco VII PTE. Ltd,” it said in a statement on Tuesday.

The net proceeds from the fresh issue are proposed to be utilised towards augmenting its capital base to meet the future capital requirements, it further said.

Blackstone-promoted Aadhar Housing Finance is the largest affordable housing finance company in the country in terms of asset under management (AUM), as of March 31, 2020.

Gross AUM increased from ₹ 7965.92 crore in 2017-18 to ₹10,015.75 crore in 2018-19 and ₹ 11,431.66 crore in 2019-20.

As of September 30, 2020, gross AUM comprised 64.83 per cent loans to salaried customers and 35.17 per cent loans to self-employed customers.

ICICI Securities, Citigroup Global Markets India, Nomura Financial Advisory and Securities (India) and SBI Capital Markets are the Book Running Lead Managers to the issue, it further said.

The equity shares are proposed to be listed on BSE and NSE.

Sundaram Home Finance has reported a 36 per cent increase in its net profit at ₹56.24 crore for the quarter ended December 31, 2020 compared with ₹41.31 crore registered in Q3 of the previous fiscal, aided by recovery in major markets.

Disbursements for December quarter stood at ₹ 416.57 crore compared to ₹536.33 crore in the year-ago quarter.

“We have seen a revival of real estate markets all across major metros as well as smaller towns. A few States have also driven the demand revival through a reduction in stamp duty and premium. In addition, builders/developers have softened prices to liquidate stock,” Lakshminarayanan Duraiswamy, Managing Director, Sundaram Home Finance, said in a statement.

He added that interest rates were at an all-time low making it quite unprecedented from a home buyer perspective. “We are nearing pre-Covid levels in terms of new business and that is a positive sign of the growth coming back,” he said.

The company’s deposit base stood at ₹1,825 crore as on December 31, 2020.

Growing demand

Sundaram Home Finance is presently witnessing renewed interests from builders in terms of new launches, across locations.

“From a residential housing perspective, demand for ready-to-move-in homes is the first one to take off. Affordable housing segment continues to grow at a fast pace with the demand continuing to be quite attractive,” he added.

The company raised over ₹3,600 crore in the first nine months of the year through a mix of debt instruments, term lending from banks, fixed deposits and refinance from the National Housing Bank.

On the outlook, he said: “There is a shortage of houses and the pent-up demand is huge. Our outlook is positive as we believe there is enough room to grow the business. Our focus will continue to be on the Southern market as that offers huge opportunities.”

Budget expectations

Lakshminarayanan said he is looking forward to an increase in interest subsidy on home loans, infrastructure status for all residential projects in tier-2 and tier-3 towns to boost demand and for greater push in employment generation to aid housing demand.

The Reserve Bank of India (RBI), on Monday, clarified that it has no plan to withdraw the old series of ₹100, ₹10 and ₹5 banknotes from circulation in near future.

In a tweet, the central bank said: “With regard to reports in certain sections of media on withdrawal of old series of ₹100, ₹10 and ₹5 banknotes from circulation in near future, it is clarified that such reports are incorrect.”

After the demonetisation exercise, whereby the legal tender status of ₹500 and ₹1,000 denomination banknotes of the Mahatma Gandhi Series was withdrawn between November 10, 2016, till December 30, 2016, there have been rumours on and off about the central bank withdrawing ₹2,000 denomination notes.

As per RBI annual report, in 2019-20, the volume as well as value of ₹2,000 bank notes in circulation declined by about 17 per cent year-on-year. The data on indent and supply of banknotes shows that there was no printing of ₹2,000 bank notes in 2019-20 (April-March).

In value terms, the share of ₹500 and ₹2,000 bank notes together accounted for 83.4 per cent of the total value of bank notes in circulation at end-March 2020, with a sharp increase in the share of ₹500 bank notes.

In volume terms, ₹10 and ₹100 bank notes constituted 43.4 per cent of total bank notes in circulation at end-March 2020, the report said.

In January 2018, the RBI said that it had come to its notice that in certain places there was reluctance on part of traders and members of public to accept ₹ 10 coins due to suspicion about their genuineness.

The central bank then clarified that it puts into circulation, the coins minted by mints, which are under the Government of India. The Reserve Bank requested members of the public to continue to accept coins of ₹10 denomination as legal tender in all their transactions without any hesitation.

Repco Bank on Monday announced that it has bagged three awards at the Frontiers In Cooperative Banking Awards (FCBA) 2020, a National Cooperative Banking Summit held at a virtual session on January 22 and 23.

The awards include women leader of the year award for Repco Bank MD RS Isabella, Best Digital Bank Award and Best Fraud Control Initiative among co-operative banks.

The award ceremony was presided over by Purshottam Rupala, Union Minister of State, Agriculture & Farmers Welfare. Repco Bank, which renders services to the rehabilitation and upliftment of repatriates from Burma and Sri Lanka, currently has a business mix of ₹16,000 crore covering a client base of more than 10 lakh customers.

A greater push to health insurance, reduction in Goods and Services Tax (GST), and a separate deduction for home insurance top the wish list of the general insurers in the upcoming Budget 2021-22.

There are also expectations of broader healthcare reforms that can augur well for the health insurance segment, which has been in the limelight, thanks to increased awareness driven by Covid.

According to Mayank Bathwal, CEO, Aditya Birla Health Insurance, health insurance was growing even before the pandemic. However, the pandemic has reinforced the essential nature of having a safety net for healthcare costs. In this situation, it is necessary to have health insurance as every family today faces questions on their preparedness coping with unforeseen and emergency healthcare costs, he said.

To give a further push, the industry is expecting some positive action by the government in the upcoming Budget. “Given the global focus on health, we anticipate that this year’s Budget will have a larger thrust on health reforms,” said Bathwal.

As family health insurance premiums versus the tax benefits are skewed, it becomes important to increase the limits defined for mediclaim premium tax deduction under section 80D of the Income Tax Act to ₹1,00,000 ( ₹50,000for self and spouse, in addition to ₹50,000 for parents).

“Further, allowed dependent relationships should be re-looked. It is also crucial to reintroduce the medical reimbursement with a higher limit of ₹50,000 tax deduction, which got merged in standard deduction during the finance budget 2018,” said the Aditya Birla Health Insurance chief.

Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance, expect more traction on the Ayushman Bharat-Pradhan Mantri Jan Arogya Yojana (PMJAY).

“Looking at the way PMJAY scheme is evolving (case in point is PMJAY-SEHAT in J&K UT), I feel that the scheme should further enhance its coverage by not limiting it to specific strata of people, but should be provided for all citizens of our country,” he said.

This, coupled with reducing the GST on insurance premiums and increasing the tax exemption cap limit under 80D, will encourage more people to opt for health insurance.

“These measures will not only help people access quality medical treatment but also better their lifestyle, thereby increasing the life expectancy of people in our country even further,” Singhel added.

Given India’s low insurance penetration and that insurance is intended to provide financial support against sudden human or economic loss, the government should lower the applicable GST rate on insurance premiums.

The non-life companies are mandatorily participating in pooling arrangements such as Terrorism Pool, which should be exempted from GST. In the case of the insurance business, investments or transactions in securities are governed by the Insurance Act and Regulations framed thereunder to protect the policyholders’ interest over the long term.

Hence, the insurance industry feels that provisions of inclusion of transactions in securities in ‘exempted supply’ should not apply to insurance companies, said Ramandeep Sahni, Chief Financial Officer, Bajaj Allianz General Insurance.

A separate deduction for home insurance is also needed, feel industry experts. “Given that most individuals exhaust their 80C limits through investments/savings, the limit for deduction under section 80C should be increased to ₹175,000, with a separate deduction made available for home insurance up to ₹25,000,” Sahni added.

Having posted improvement in asset quality and profitability for four subsequent quarters starting March 2020, UCO Bank is hopeful of coming out of the Prompt Corrective Action (PCA) measure of the Reserve Bank of India.

According to Atul Kumar Goel, MD and CEO, UCO Bank, now that the bank has been able to adhere to all four parameters required to come out of PCA for four subsequent quarters, it has urged the RBI to consider taking it out of the framework.

Improvement in profitability

Riding on the back of a higher net interest income, UCO Bank registered a net profit of ₹35 crore for the quarter ended December 31, 2020, compared to a net loss of ₹960 crore during the same period last year.

On a sequential basis, net profit was up by nearly 17 per cent from ₹30 crore during the quarter ended September 30, 2020.

Net interest income grew by 14 per cent to ₹1,408 crore during the quarter under review compared with ₹1,237 crore in the same period last year. Operating profit was up by 10 per cent at ₹1,334 crore (₹1,210 crore).

Other income was up by 16 per cent at ₹864 crore (₹743 crore).

The percentage of gross non performing assets (NPA) to total advances declined to 9.8 per cent during the quarter under review against 19.45 per cent in the same period last year. Net NPA came down to 2.97 per cent (6.34 per cent).

Provision coverage ratio improved to 91.22 per cent during the quarter under review against 83.71 per cent in the same period last year.

Total deposits increased by seven per cent to ₹20,2421 crore, while advances grew by around three per cent to ₹11,6797 crore.

Despite a marginal decrease in yield on advances and a higher cost of funds, the bank has witnessed a growth in net interest margin to 2.86 per cent (2.62 per cent), said Goel.

The bank’s capital adequacy ratio stood at 12.08 per cent.

“We are comfortable on the capital front till March 2021. We have board approval to raise around ₹3,000 crore and we are looking for an opportune time to raise around ₹1,000 crore via QIP. We are in the process of appointing merchant bankers for the same,” he said.

On Monday, the bank’s scrip closed at ₹13.08, up by 1.55 per cent on the BSE.