Category: Banking & Finance

Rupee surges 27 paise to 74.19 against US dollar in early trade

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The rupee surged 27 paise to 74.19 against the US dollar in opening trade on Monday supported by dovish central banks.

At the interbank foreign exchange, the rupee opened strong at 74.25 against the dollar and gained further ground to 74.19 in early deals, a rise of 27 paise over its previous close.

On Thursday, the rupee had settled at 74.46 against the US dollar.

The forex market was closed on Friday for ‘Diwali Balipratipada’.

The Indian Rupee opened stronger this Monday supported by dovish central banks, Reliance Securities said in a research note.

Fed’s taper announcement

Fed Chair Jerome Powell said he was in no rush to hike borrowing costs, as there was still ground to cover to reach maximum employment. The central bank did announce a $15 billion monthly tapering of its $120 billion in monthly asset purchases.

Additionally, flows into the market could also lend support. However, the Reserve Bank of India’s presence could cap the appreciation bias, the note said.

Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, fell 0.01 per cent to 94.31.

Global oil benchmark Brent crude futures rose 1.02 per cent to $83.58 per barrel.

On the domestic equity market front, BSE Sensex was trading 221.26 points or 0.37 per cent lower at 59,846.36, while the broader NSE Nifty declined 56.75 points or 0.32 per cent to 17,860.05.

Foreign institutional investors were net sellers in the capital market on Thursday as they offloaded shares worth ₹328.11 crore, as per exchange data.

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Banks Board Bureau to soon start appointment process for MD, DMDs at NaBFID, BFSI News, ET BFSI

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The government had recently said that beginning October 2021, all pens would be taxed at 18%.

The finance ministry will soon start the process for the appointment of managing director (MD) and deputy managing directors (DMDs) of the newly set up Rs 20,000 crore development finance institution NaBFID, to catalyse investment in the fund-starved infrastructure sector.

Last month, the government appointed veteran banker KV Kamath as the chairperson of the National Bank for Financing Infrastructure and Development (NaBFID) for three years.

The finance ministry will soon intimate the Banks Board Bureau (BBB) about the appointment of MD and DMDs of NaBFID.The Bureau will issue advertisements and undertake a selection process, sources said.

The BBB is the headhunter for state-owned banks and financial institutions. The MD, DMDs and whole-time directors would not hold office after attaining the age of 65 years and 62 years respectively.

As per the National Bank for Financing Infrastructure and Development (NaBFID) Act, 2021, the institution would have one MD and not more than three DMDs.

The national infra bank

The government has committed a Rs 5,000-crore grant over and above Rs 20,000 crore equity capital. The central government will provide grants by the end of the first financial year. The government will also provide a guarantee at a concessional rate of up to 0.1 per cent for borrowing from multilateral institutions, sovereign wealth funds, and other foreign funds.

The development finance institution (DFI) has been established as a statutory body to address market failures that stem from the long-term, low margin and risky nature of infrastructure financing.

The DFI, therefore, has both developmental and financial objectives. To begin with, the institution will be 100 per cent government-owned.

It will help fund about 7,000 infra projects under the National Infrastructure Pipeline (NIP) which envisages an investment of Rs 111 lakh crore by 2024-25.

The DFI will remain outside the purview of CAG, CVC and CBI, a move aimed at enabling faster decision-making. The government expects the DFI to leverage this fund to raise up to Rs 3 lakh crore in the next few years.

Development finance institutions

During the pre-liberalised era, India had DFIs which were primarily engaged in the development of the industry. ICICI and IDBI, in their previous avatars, were DFIs. Even the country’s oldest financial institution IFCI Ltd functioned as a DFI.

In India, the first DFI was operationalised in 1948, with the setting up of the Industrial Finance Corporation of India (IFCI).

Subsequently, the Industrial Credit and Investment Corporation of India (ICICI) was set up with the backing of the World Bank in 1955. The Industrial Development Bank of India (IDBI) came into existence in 1964, to promote long-term financing for infrastructure projects and industry.



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Bankers must do proper due diligence before joining corporates, says Amarjit Chopra, BFSI News, ET BFSI

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The arrest of Former SBI Chair Pratip Chaudhuri sends a clear message to the bankers that they must lot of due diligence of companies particularly NBFCs whose boards they are joining post-retirement, says Amarjit Chopra, who has held several directorships in public sector banks, and was also a former president at the Institute of Chartered Accountants of India (ICAI).

“Firstly credentials of promoters and secondly past relationship of bankers in their various capacities in banks with such companies need to be kept in mind. Not following this gives rise to unnecessary suspicion and speculations,” Chopra said, as he reflected on the arrest of Chaudhari’s arrest by Enforcement Directorate earlier this month in connection with a loan scam case. Below are edited excerpts from the interaction:

Q: What is your initial impression on the arrest of Ex SBI Chair Pratip Chaudhuri in a loan scam case?

Amarjit Chopra: It is extremely unfortunate that a person of his stature with an impeccable track record has been arrested without an appreciation of facts. His reputation has been tarnished for no reason. And to me his arrest is a big setback to the morale of banking personnel particularly when the economy needs a boost in credit expansion

Q: SBI Chair Dinesh Kumar Khara has said Chaudhuri has not been given an opportunity to be heard, Also, many bankers have described this as high handedness by enforcement agencies/ police. What is your view?

Amarjit Chopra: From the reports it appears that Pratip Chaudhuri was not given any opportunity to be heard before his arrest. Prima facie his arrest reflects high handedness on the part of enforcement agencies and police.

One needs to understand the facts to appreciate the wrong done to Pratip Chaudhuri. The promoters of the Jaisalmer hotel project, Garh Rajwada, approached SBI for a loan to construct a hotel. The loan of Rs 24 crore would have been sanctioned following a process. Going by the amount and the fact that the bank involved was SBI the case would not have gone to the level of MD/Chairman of that period..

Loan proposal along with technical and financial feasibility report of the project, valuation report of the land and other documents etc would have been obtained and appraised before any recommendation for sanction of loan by any official/ committee.

The loan was disbursed in the year 2008. The borrower did not complete the project. A key promoter passed away in 2010. Needless to say that as per banking norms opportunities would have been given to the borrower to settle the amount or to complete the project which the promoters failed to do. Consequently, the loan was classified as NPA.

Going by my experience in all such cases the banks do try to persuade the borrowers in such cases to settle the matter before resorting to other measures. This case would have been no exception to the same. In this case as the promoters neither settled the account nor completed the project the bank was left with no alternative but to follow the process of selling the NPA to ARC Alchemist in 2014 and ARC stepped into the shoes of the lender bank. This was done four years after the death of the key promoter.

Q: What according to you could have prompted the enforcement agencies to arrest Chaudhuri in the first place?

Amarjit Chopra:

It may be interesting to note that Pratip Chaudhuri became Chairman in April 2011 i.e. after sanction and disbursal of loan and rather after the account had turned NPA and retired in September 2013 i.e. before the sale of the asset to ARC Alchemist..

Pratip Chaudhuri joined Alchemist Board in October 2014 after completing a mandatory cooling period of one year after his retirement from SBI. Alchemist had stepped into the shoes of the lender by acquiring the asset. To my mind, ARC would have tried to negotiate it with borrowers but later on sold the asset to another party, an NBFC in 2017.

So far as I understand the process clearly, the bank before selling the asset to ARC Alchemist would have obtained a valuation report and would have advertised the sale in newspapers. In case promoters had any objection they should have filed the objection at that time rather than filing any complaint later after the sale of the asset. They had an opportunity to settle the account presale with the bank and postsale with ARC. So, there appears to be no justification in their filing a protest petition with Chief Judicial Magistrate later and alleging sale of the asset at lower price.

It is surprising that the court has taken cognisance of a complaint by a defaulter who failed to execute the project and later on refused to settle the account. Enforcement agencies having taken cognisance of such complaints would only encourage more financial indiscipline on the part of defaulters..

It is crystal clear that Pratip Chaudhuri was not even Chairman of SBI when the sale to ARC happened. So the allegation against him cannot be in his capacity as a banker. A protest petition has been filed against ARC Alchemist and all of its directors without making SBI a party. It is shocking that Alok Dhir, the promoter of ARC Alchemist, has evaded arrest. It may not be wrong to presume that the action that Chaudhuri faces is not because of being Chairman of SBI. Rather he faces this action being on the Board of ARC Alchemist as this company was involved in the purchase and sale of the asset.

Q: Does Enforcement Directorate seem to have jumped the gun in this case?

Amarjit Chopra: Probably yes! The Supreme Court in a recent judgement in case of Ravindranatha Bajpe versus Mangalore Special Economic Zone Ltd and others has clearly held that no vicarious liability would come on any director for any criminal offences of the company till the time it is proved that he had consented or had knowledge of a fraud.

In the given case based on protest petition even if enforcement agencies/police had to proceed, the same could have been based on investigations into conduct of various parties including the borrowers and the findings thereof. An action like arrest cannot be based upon surmises and conjectures..

Q: What does Chaudhuri’s arrest imply for the banking industry?

Amarjit Chopra: In recent years after the arrest of certain top functionaries of Bank of Maharashtra, IDBI etc bankers had become risk-averse and the same affected credit expansion adversely. The slowdown in credit expansion also resulted in economic sluggishness in the country.

It may be worthwhile to point out that Bank of Maharashtra officials were later exonerated of all charges but the damage was done to the morale of banking staff.

A couple of days back the government issued instructions to ensure that enforcement agencies need to distinguish between genuine banking business decisions and actions taken with an intent to defraud. It was done primarily with a view to infuse confidence in bankers that a protection cover is being provided to them for their genuine business decisions.

But this one case has nullified the impact of those instructions. It is despite the fact that apparently, this action against Chaudhuri has nothing to do with his role as a banker as stated earlier.

In my opinion, going by human psychology it would certainly affect credit expansion as well as cleaning up of the balance sheets of banks particularly through sales of bad loans to ARCs. Here I will certainly like to add that all these years the role of various ARCs has not been free from controversy and needs to be looked into. The government and RBI would do well to constitute a group to suggest some measures to improve the functioning of ARCs..

Q: What is the signal reflected by the enforcement agencies here?

Amarjit Chopra: It is difficult to answer. But one message is loud and clear that top functionaries in banks need to do a lot of due diligence of companies, particularly NBFCs whose boards they are joining post-retirement. Firstly credentials of promoters and secondly past relationship of bankers in their various capacities in banks with such companies need to be kept in mind. Not following this gives rise to unnecessary suspicion and speculations.

Motives can be imputed and at times certain genuine business decisions may be looked at with a different mindset by public and enforcement agencies. Keeping oneself engaged post-retirement is fine but joining the boards of companies with which one has dealt with in various capacities as banker may not be a healthy trend..

Unfortunately in the recent past, there has been an increasing trend amongst bankers and bureaucrats joining the boards of such companies that they dealt with as senior functionaries. One may be honest but it is equally important to appear as honest.

It may not be an exaggeration to say that enforcement agencies in the given case probably acted upon the surmise that Chaudhuri happens to be a director on the board of Alchemist and earlier he and the company had a business relationship. So, better avoid such conflicted appearing positions.

Q: Do you have any suggestions for the government/ RBI?

Amarjit Chopra: The government and RBI would do well to review the extent of mandatory cooling period that officials of banks and bureaucrats may have to observe post-retirement before taking up an assignment with private entities, particularly whose files they have dealt with in the last three years of their official position.



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India ahead of China in financial inclusion metrics: Report

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India is now ahead of China in financial inclusion metrics according to a report authored by Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India.

Sound financial inclusion policies have a multiplier effect on economic growth, reducing poverty and income inequality, while also being conducive for financial stability.

India has stolen a march in financial inclusion with the initiation of PMJDY accounts since 2014, enabled by a robust digital infrastructure and also careful recalibration of bank branches and thereby using the BC model judiciously for furthering financial inclusion. Such financial inclusion has also been enabled by use of digital payments as between 2015 and 2020, mobile and internet banking transactions per 1,000 adults have increased to 13,615 in 2019 from 183 in 2015.

“The number of bank branches per 100,000 adults rose to 14.7 in 2020 from 13.6 in 2015, which is higher than Germany, China and South Africa. Our research also shows that States with higher PMJDY accounts balances have seen a perceptible decline in crime. We also observed that there is both statistically significant and economically meaningful drop in consumption of intoxicants such as alcohol and tobacco products in States where more PMJDY accounts are opened,” the report said.

BC Model

The Banking Correspondent (BC) model in India is enabled to provide a defined range of banking services at low cost and hence is instrumental in promoting financial inclusion. Interestingly, the new branch authorisation policy of 2017 – which recognises BCs that provide banking services for a minimum of 4 hours per day and for at least 5 days a week as banking outlets has progressively obviated the need to set up brick and mortar branches. For example, the number of ‘Banking Outlets in Villages – BCs’ has risen from 34,174 in March 10 to 12.4 lakh in December 20. Such progress shows an impressive outreach of banking services through branchless banking.

However, the success of financial inclusion depends upon BCs who are micro-level entrepreneurs. As per RBI guidelines, under the BC Model, while a BC can work for more than one bank, at the point of customer interface, a retail outlet or a sub-agent of a BC shall represent and provide banking services of only one bank. Interoperability of transactions is permitted by RBI at the retail outlets or sub-agents of BCs (i.e. at the point of customer interface), subject to certain conditions. Herein lies the problem.

“It is sometimes observed that there is no uniformity among the BCs across banks regarding adherence to the above guidelines. PSBs mostly follow ‘branch-led BC model’ , while other banks follow ‘branch less/corporate BC model’. The BCs of PSBs extend basic banking services, including opening of accounts, from a fixed location under the oversight of specific bank branch. The BCs of other banks operate through ‘micro ATM/kiosk application on mobile’ and primarily provide fee-based financial services, viz. withdrawals and remittance services, using hand-held devices. This also adds to the bottom-line by way of interchange fee from the PSBs or remittance fee from PSB customers. As a typical example, BCs convert AePS ON-US transactions of one set of bank customers, to AePS OFF-US issuer transactions and also carry out multiple AePS ON-US and AePS OFF-US transactions on the primary bank application/software,” the report said.

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Dollar firm as US inflation poses next test, BFSI News, ET BFSI

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SYDNEY: The dollar made a steady start to the week on Monday but was kept below Friday peaks, as currency traders seek a path between markets’ volatile interest rate projections and central bankers vowing to keep rates low even as inflation surges.

Figures due Wednesday are expected to show U.S. consumer price growth running hot at 5.8% year-on-year, the next big test of faith in the Federal Reserve‘s insistence it will be patient with interest rate hikes.

In early Asia trade, the dollar was marginally higher against the yen and crept from a one-week low to 113.49 yen.

After briefly touching a 15-month top of $1.15135 on the euro in the wake of strong U.S. labour data on Friday, the greenback steadied at $1.1566 per euro.

Sterling, which was walloped when the Bank of England surprised traders by holding rates steady last week, fell to a five-week low of $1.3425 on Friday, before bouncing to hold at $1.3487 on Monday.

The Bank of England’s surprise triggered a sharp reversal late last week in what had become quite aggressive bets on imminent rate hikes in Britain and globally, while stocks have meandered higher through the maelstrom in bond markets.

“Central banks have distorted a whole lot of markets, pumping up the equity market and pumping up the bond market,” said Jason Wong, a strategist at Bank of New Zealand in Wellington.

“Currencies are sort of in the middle of all that, wondering what the hell’s going on,” he said, with the market seemingly in a holding pattern but with risks building up, especially in China where a slowing economy brings global implications.

The risk-sensitive Australian and New Zealand dollars struggled to make much headway in early trade, with the Aussie

pinned just below $0.74 and the New Zealand dollar

around $0.7108.

“AUD/USD risks remain skewed to the downside this week in our view,” said Kim Mundy, an analyst at Commonwealth Bank of Australia, especially if U.S. inflation data is strong or if Australian employment data on Thursday is particularly weak.

“A dip towards $0.7300 is possible,” she said.

Elsewhere, weekend data showed Chinese exports unexpectedly strong, but imports unexpectedly soft in another indicator of underwhelming demand, especially as China tightens movement restrictions to keep a lid on COVID-19.

The Communist Party begins a meeting on Monday which is expected to pass a resolution in praise of President Xi Jinping and lay the groundwork for a third term of his leadership.

Traders are also looking ahead to Chinese producer and consumer price data due on Wednesday, with annual producer price growth seen surging to 12% in perhaps a harbinger of further price pressure to come through global supply chains.

The Chinese yuan was marginally weaker in early trade at 6.3951 per dollar. The U.S. dollar index was flat at 94.225, putting it roughly in the top half of a range it has traded for a little more than a month.



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IndusInd Bank, BFSI News, ET BFSI

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IndusInd Bank on Saturday admitted that its micro-finance arm gave nearly 84,000 loans “without customer consent” due to a “technical glitch” in May 21, but denied whistleblowers’ allegations of “ever greening” — a ploy to mask defaults with new loans. An independent review has been initiated by IndusInds “to see if there is any process lapse or accounting failure at Bharat Financial Inclusion (BFIL), the bank’s wholly-owned micro-lending subsidiary, said an IndusInd release. “The Bank wishes to reiterate that there is a strong risk management and control framework in place, both within the Bank and at BFIL,” said the bank.

In multiple emails to the Reserve Bank of India (RBI) and the IndusInd board in October, a whistleblower group comprising officials of the BFIL had alleged that the bank had ever-greened loans, inflated revenues and under-reported nonperforming assets. The emails followed a month after similar allegations by former BFIL vice-chairman MR Rao who, in his resignation letter, had said that the loans disbursed without customer consent did not appear as “process lapse” but a “deliberate attempt to shore up repayments.” The letters from the whistleblower group and Rao’s parting observations were reported by ET on Friday.

Reacting to the whistleblowers’ allegations, a statement issued by the bank on Saturday, said, “…the technical glitch was rectified expeditiously. Out of the above, only 26,073 clients were active with the loan outstanding at Rs 34 crore, which is 0.12% of the September end portfolio. The bank carries necessary provision against this portfolio. The standard operating procedure (SOP) has since been revised to make biometric authorisation compulsory.”

While strongly denying allegations of ‘ever greening’, the IndusInd statement said, “All the loans originated and managed by BFIL, including during the Covid period which saw the first and second waves ravaging the countryside, are fully-compliant with the regulatory guidelines… During the pandemic, the customers faced operational difficulties and some have turned intermittent payers, though a large part of them demonstrated a strong intent to repay on many occasions. Basis the requirements, the Bank adopted a multi-pronged approach depending upon the need of the client. (sic)”

The whistleblower group has blamed BFIL CEO Salabh Saxena and CFO Asish Damani for the alleged under-provisioning of loans running into thousands of crores. Neither of them responded to ET’s query on the whistleblower emails. According to a media report, both Saxena and Damani may soon quit BFIL and join Spandana Sphoorty, a micro-finance institution.

However, this could not be independently confirmed. According to the IndusInd release, the loans follow a weekly repayment model and the customers are required to make payments week on week. “.. if there is any default, the same gets recorded as missed instalments. In view of the weekly repayment model, the concept of ever greening is infeasible,” said the statement. “The level of non-performing assets reported by BHIL is significantly lower than other MFIs. So, we would like to know more, given that many lenders have seen a drop in collection efficiency during the pandemic.. If a loan is given by mistake without taking the borrower’s consent, it should be reversed,” said an analyst who did not wish to be named.



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DHFL recovery lifts PSU banks’ Q2 net profits, offsets Srei group account slip, BFSI News, ET BFSI

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Most top public sector banks have reported steady second-quarter earnings, with lower slippages as the economy opened up and COVID-19 cases fell.

State Bank of India reported a robust performance as it bravely fought off the COVID-19 impact and displayed remarkable resilience in asset quality performance.

India’s largest bank reported a steady quarter, with net earnings growing 67% YoY to Rs 7630 crore, aided by controlled provisions, as asset quality showed remarkable strength, despite the impact of the second Covid wave.

The bank has been reporting continued traction in earnings, led by controlled provisions. However, business trends remain modest, impacted by continued deleveraging by corporates. The bank has been able to maintain a strong control on restructured assets at 1.2% of loans, while the special mention account (SMA) pool declined sharply.

It created a family pension provision of Rs 7,420 crore, instead of amortizing it over five years, thus prudently deploying one-off gains from the DHFL recovery and tax refund. The bank has fully provided for its exposure towards the SREI group.

GNPA/NNPA ratios improved by 42 basis points /25bp quarter on quarter (QoQ) to 4.9%/1.5% as fresh slippage subsided to Rs 4180 crore. Restructured book remained in check at 1.2% of loans, while the SMA pool declined sharply to Rs 6,690 crore (27bp of loans).

According to analysts, the slippage trajectory of the bank is likely to moderate further assuming there is no third Covid wave, while credit cost may undershoot the normal cyclical trends. The bank has a healthy PCR of 70% and holds unutilized Covid-related provisions of Rs 6200 crore.

Canara Bank

State-run Canara Bank reported a three-fold jump in its standalone net profit at Rs 1,333 crore in the quarter ended September, aided by lower bad loan provisioning, rise in non-interest income, and recovery from DHFL resolution. The lender had reported Rs 444 crore profit in the year-ago quarter.

“Despite moderate credit growth of 6% YoY and soft NIMs (Net interest margin), Canara Bank reported a strong beat on PAT versus our estimate, mainly helped by higher treasury income, contained provisions and cash recovery from DHFL,” said Emkay in a note.

Union Bank

Union Bank of India reported healthy earnings, supported by recovery from the DHFL resolution.

The bank reported a PAT of Rs 1530 crore, up 195% year on year, supported by higher recoveries from written-off accounts of Rs 1760 crore, including recovery of

Rs 1,650 crore from the resolution of the DHFL account.

Furthermore, fee income trends improved, while domestic margins declined; muted loan growth affected net interest income growth. On the other hand, asset quality performance was stable despite elevated slippage, largely led by Corporate – this includes slippage from SREI Infra (Rs 2,600 crore). However, higher write-offs and upgrades aided improvement in asset quality on a sequential basis. Moreover, it now carries provisions of 65% on SREI Infra (higher versus peers).

The SMA-2 book declined to 2.3% of loans (versus 3.7% of loans in first quarter of FY22). Thus, slippage would moderate from fiscal 2023 onwards, and credit costs are expected to come in at 2.2%/1.9% for FY22/FY23, according to analysts.

Punjab National Bank

Punjab National Bank (PNB) delivered a weak operating performance in the second quarter as the bank was impacted by a decline in net interest income with domestic margins contracting sharply by 36 basis points quarter on quarter, while net earnings grew 78% year on year, aided mainly by tax reversals. The total recovery from the DHFL resolution was Rs 1,270 crore and was predominantly utilised for making provisions for one large corporate account (SREI Infra). On the business front, loans/deposits grew 2% sequentially.

PNB reported a 78% YoY and 8% QoQ increase in PAT at Rs 1,110 crore aided mainly by tax reversals (Rs 340 crore) and controlled provisions (34% QoQ decline). However, PNB’s operating performance was weak with the PPoP declining 27% YoY due to a decline of 25% YoY in net interest income and domestic margins declining sharply by 36 bps QoQ to 2.45%.

On the asset quality front, slippages were elevated (~5.4% annualised) due to two large corporate accounts (Rs 3600 crore) which included slippage of Rs 2,800 crore from Srei Infra. However, higher recoveries and upgradations supported the bank’s asset quality with its GNPA/NNPA ratio declining by 70bp/35bp sequentially. PNB’s total restructured book (earlier Covid schemes) stood at 3.1% of loans, while total SMA overdue (Rs 5 crore) amounted to Rs 25,000 crore.

UCO Bank

UCO Bank’s net profit for July-September jumped 581.9% on year to Rs 210 crore on improvement in asset quality, lower overall provisions, and growth in other income. Sequentially, the net profit increased 101.7%. In the quarter ended September, provisions and contingencies excluding current tax, stood at Rs 1,020 crore, down 21.7% on year and largely unchanged on quarter. Provisions for tax were at Rs 100 crore, against a Rs 260 crore write-back last year. Provisions for non-performing assets stood at Rs 1,590 crore, up 54.6% on year and 88.9% on quarter.

The bank said it had identified two Kolkata-based accounts of the same group as non-performing assets during the quarter, post lifting of a legal stay on identifying them as bad loans. While UCO Bank didn’t name the account or group, it possibly referred to Srei Infrastructure Finance and Srei Equipment Finance.

The Srei twins are under the scanner after the Reserve Bank of India superseded their boards, citing corporate governance issues. UCO Bank said it had provided for these two stressed accounts as per regulatory norms. Despite this, UCO Bank’s gross non-performing asset ratio eased to 8.98% as on September 30 from 9.37% on Jun 30, and 11.62% a year ago.

The net non-performing asset ratio fell to 3.37% as on Sep 30 from 3.85% a quarter ago and 3.63% a year ago. The bank said that to guard against the impact of any future waves of Covid on its books, it was making an ad hoc provision of 2.5 bln rupees in July-September, taking the total provisions linked to Covid to Rs 750 crore as on September 30.



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Ten steps for overhaul of ARCs as competition for bad bank arrives, BFSI News, ET BFSI

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In a bid to streamline the functioning of asset reconstruction companies (ARCs), a Reserve Bank committee has come out with a host of suggestions including the creation of an online platform for the sale of stressed assets and allowing ARCs to act as resolution applicants during the IBC process.

Amortise loss

To incentivise lenders to sell their financial assets to ARCs at an early stage of stress, the RBI panel has recommended a dispensation to lenders, on an ongoing basis, to amortise the loss on sale, if any, over a period of two years. To optimise upside value realisation by lenders, it recommends a higher threshold of investment in security receipts (SRs) by lenders, below which provisioning on SRs held by them may be done on the basis of Net Asset Value (NAV) declared by the ARC instead of IRACP norms.

Online platform

An online platform may be created for sale of stressed assets and infrastructure created by the Secondary Loan Market Association (SLMA) may be utilised for this purpose. For all accounts above Rs 500 crore, two bank-approved external valuers should carry out a valuation to determine the liquidation value and fair market value and for accounts between Rs 100 crore to Rs 500 crore, one valuer may be engaged. Also, the final approval of the reserve price should be given by a high-level committee that has the power to approve the corresponding write-off of the loan.

Acquiring financial assets

In the interest of debt aggregation, the scope of Section 5 of the SARFAESI Act, and other related provisions, may be expanded to allow ARCs to acquire ‘financial assets’ as defined in the Act, for the purpose of reconstruction, not only from banks and ‘financial institutions’ but also from such entities as may be notified by RBI. RBI may consider permitting ARCs to acquire financial assets from all regulated entities, including AIFs, FPIs, AMCs making investment on behalf of MFs and all NBFCs (including HFCs) irrespective of asset size and from retail investors. ARCs should be allowed to sponsor SEBI registered AIFs with the objective of using these entities as an additional vehicle for facilitating restructuring/ recovery of the debt acquired by them.

Binding on lenders

If 66% of lenders (by value) decide to accept an offer by an ARC, the same may be binding on the remaining lenders and it must be implemented within 60 days of approval by majority lenders (66%). 100% provisioning on the loan outstanding should be mandated if a lender fails to comply with this requirement. Given that the debt aggregation is typically a time-consuming process, the planning period is elongated to one year from the existing six months. In cases where ARCs have acquired 66% of debt of a borrower, the Act should provide for two years of moratorium on proceedings against the borrower by other authorities. The Act should also provide that Government dues including revenues, taxes, cesses and rates due to the Central and state governments or local authority will be deferred in such cases.

Equity sale

For better value realisation for originators and enhancing the effectiveness of ARCs in recovery, even the equity pertaining to a borrower company may be allowed to be sold by lenders to ARCs which have acquired the borrower’s debt. The Committee recommends that ARCs may be allowed to participate in the IBC process as a Resolution Applicant either through a SR trust or through the AIF sponsored by them.

Allowing HNIs to buy SRs

For giving impetus to listing and trading of SRs, the list of eligible qualified buyers may be further expanded to include HNIs with minimum investment of Rs 1 crore, corporates (Net Worth-Rs 10 crore & above), all NBFCs/ HFCs, trusts, family offices, pension funds and distressed asset funds with the condition that (a) defaulting promoters should not be gaining access to secured assets through SRs and (b) corporates cannot invest in SRs issued by ARCs which are related parties as per SEBI definition.

Minimum SR investment

The interest of investors and investing lenders should be weighed against the need for distribution of risk among the willing investors. Therefore, it recommends that for all transactions, per SR class/ scheme, the minimum investment in SRs by an ARC should be 15% of the lenders’ investment in SRs or 2.5% of the total SRs issued, whichever is higher.

Credit rating agencies

Recognising the critical role of Credit Rating Agencies (CRAs) in the valuation of SRs and, therefore, the need for continuity in engagement of CRAs, the Committee recommends that ARCs must retain a CRA for at least three years. In case of change of a CRA, both parties must disclose the reason for such change.

Tax pass through

In the matter related to taxation of income generated from investment in SRs issued by ARCs, the possibility of a ‘pass-through’ regime for AIF investors may be looked into by the Central Board of Direct Taxes (CBDT). The CBDT may consider clarifying on the tax rate applicable to FPIs.



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Good Banking: The role of banking in driving ESG goals

Banking & Finance

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Rajashekara Maiya

By Rajashekara Maiya

The 2030 Agenda for Sustainable Development that includes 17 Sustainable Development Goals (SDGs) and the landmark Paris Agreement, which came into force in 2016, as well as the growing awareness on climate change have had an impact on Environmental, Social, and Governance (ESG) goals of organisations across industries, including banking and financial services. As per a BCG report on sustainable finance, large institutional investors are increasingly incorporating ESG metrics into their capital allocation and stewardship criteria.

Banks undoubtedly hold considerable clout in shaping and enabling the ESG goals of industries and corporates. In addition, they also have an opportunity to enable their own ecosystem by embracing the right technology and designing policies around employment and inclusivity. Some of the areas where banks have an opportunity to participate and drive ESG goals are:

Financial inclusion
Financial inclusion is key to achieving the goal of ‘ending poverty’ as part of the UN SDGs for 2030. Banks have an opportunity as well as a responsibility to provide banking services to the unbanked and underbanked population across the globe, thereby allowing them to participate effectively in the economic arena. Access to banking helps encourage savings and makes inclusion into welfare schemes easier.

Inclusive financing, which entails a systemic mandate to encourage access to finance for populations that traditionally fall outside the ambit of traditional financing is key. Grameen Bank in Bangladesh is a successful example. Ujjivan Small Finance Bank in India has successfully followed a similar model. Besides these private players, government initiatives such as the Pradhan Mantri Jan Dhan Yojana, a financial inclusion programme of the government of India have had a significant impact.

Investor activism
Shareholders and investors are seeking greater openness and disclosure around issues that concern ESG, whether it is about curbing the gun culture in the US, penalising chronic polluters such as big oil, or encouraging sustainable businesses. The fact that banks and financial institutions play a key role in providing the necessary funding and capital for the functioning of various industries, puts them in the center of the ESG revolution.

Sustainable operations
Aside from lending policies and customer offerings, there is also an opportunity to streamline internal operations of banks to make them more ESG friendly. This includes the adoption of technologies such as cloud, AI etc. to ensure more efficient operations, inclusive hiring policies, and adopting eco-friendly practices that help reduce their carbon footprint. The pandemic has created its own challenges and opportunities. For example, remote banking operations have become mainstream, spurred by the need for social distancing as well cost cutting.

Overall, banks need to be mindful of their impact on larger environmental, social, and governance issues and closely track their reputational risk index. As governments, customers, shareholders, become more aware, banks must rise to the occasion and deliver.

The writer is vice-president, global head – Business Consulting-Finacle at Infosys

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Festival season brings cheer to bond market

Banking & Finance

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Although the week was short due to the festive season and yield movements were narrow, all the newsflow last week turns out to be positive for the domestic bond market. The benchmark yield closed at 6.36 per cent on Wednesday, down by almost 3 basis points compared to the week before.

Global events

On the global front, the US Fed announced tapering of its bond buying programme on much anticipated lines at $15 billion per month. The 10-year US treasury yields, which had been having a negative impact on the domestic bond market, cooled down to 1.45 per cent last week compared to 1.56 per cent the week before. Brent crude prices also softened a bit, even nudging the $80/barrel mark last week before closing near the $83/barrel level.

Domestic development

On the domestic front, the Centre announced an excise duty cut of ₹5 per litre on petrol and ₹10 per litre on diesel last week. Bond dealers say this will be a positive for the market which expects the yields to fall further down to near the 6.3 per cent mark. Meanwhile, the Reserve Bank of India continued to absorb the excess liquidity out of the system even as it conducted a 15-day variable rate reverse repo auction where the cut-off rate stood at 3.99 per cent. The central bank accepted offers worth ₹4.34 lakh crore against the notified amount of ₹5 lakh crore.

Subdued CPI expected

This week, the market is looking forward to the announcement of the consumer price index inflation print. Market participants say the CPI figure will most likely stand below the 4 per cent mark owing to the base effect for October, post which it may slightly start moving up gradually.

Vijay Sharma, Senior Executive Vice-President at PNB Gilts opined that so far, all the developments seen during the week are positive for the domestic bond market. “The two factors that were responsible for the upward movement in yields have turned positive over the last few days. The US Treasury yields came down even as the Fed decision on tapering stood pretty much in line with the market expectations. Crude prices coming down and a cut in excise duty are also conducive for the yields. It seems the benchmark yield could move towards the 6.3 per cent level in the short term. The inflation print for October is expected to come down below 4 per cent, mostly due to base effect.”

 

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