Tag: banking

RBI open to examining bad bank proposal, says Shaktikanta Das; wants lenders to identify risks early

Banking & Finance

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The RBI Governor said that the idea of a bad bank has been under discussion for a long time.

Reserve Bank of India Governor Shaktikanta Das today said that the central bank is open to looking at a proposal around setting up a bad bank. “Bad bank under discussion for a long time. We at RBI have regulatory guidelines for Asset reconstruction companies and are open to looking at any proposal to set up a bad bank,” Shaktikanta Das said while delivering the 39th Nani Palkhivala Memorial Lecture on Saturday. Das touched up on a range of issue during the event as he lauded the role played by the RBI during a pandemic.

Bad Bank for India?

The RBI Governor said that the idea of a bad bank has been under discussion for a long time now but added that the RBI tries to keep its regulatory framework in sync with the requirement of the times. “We are open (to look at bad bank proposal) in the sense, if any proposal comes we will examining it and issuing the regulatory guidelines. But, then it is for the government and the private players to plan for it,” Das said. He added that RBI will only take a view on any proposal only after examining it. 

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The Idea of setting up a bad bank to help the banking system of the country has picked up after Economic Affairs Secretary, Tarun Bajaj earlier last month, said that the government is exploring all options, including a bad bad, to help the health of the lenders in the country. However, earlier in June last year, Chief Economic Advisor Krishnamurthy Subramanian had opined that setting up a bad bank may not be a potent option to address the NPA woes in the banking sector.

Discussion the idea of bad banks, domestic brokerage and research firm Kotak Securities this week said that it may be an idea whose time has passed. “Today, the banking system is relatively more solid with slippages declining in the corporate segment for the past two years and high NPL coverage ratios, which enable faster resolution. Establishing a bad bank today would aggregate but not serve the purpose that we have observed in other markets,” a recent report by Kotak Securities said.

Banks, NBFCs need to identify risks early

Looking ahead, Shaktikanta Das said that integrity and quality of governance are key to good health and robustness of banks and NBFCs. “Some of the integral elements of the risk management framework of banks would include effective early warning systems and a forward-looking stress testing framework. Banks and NBFCs need to identify risks early, monitor them closely and manage them effectively,” he added.

Talking about recapitalising banks, the RBI governor said that financial institutions in India have to walk on a tight rope. The RBI has advised all lenders, to assess the impact of the pandemic on their balance sheets and work out possible mitigation measures including capital planning, capital raising, and contingency liquidity planning, among others. “Preliminary estimates suggest that potential recapitalisation requirements for meeting regulatory norms as well as for supporting growth capital may be to the extent of 150 bps of Common Equity Tier-I 10 capital ratio for the banking system,” Shaktikanta Das said.

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Ground seems ready for new options to resolve stressed assets: IBBI chief

Banking & Finance

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The ground seems to be ready to experiment new options for resolution of stress and the market is anticipating a hybrid framework between a court-supervised insolvency framework and an out-of-court restructuring schemes, IBBI Chairperson M S Sahoo has said.

In place for more than four years, the Insolvency and Bankruptcy Code (IBC) is helping in resolution of stressed assets in a market-linked and time-bound manner, and the proposal for “pre-pack” framework is also in the works.

“Since some tasks of an insolvency proceeding are completed before the formal process begins, and some elements of formal process are avoided, pre-pack saves both on costs and time,” Sahoo told PTI.

The Insolvency and Bankruptcy Board of India (IBBI), a key institution in implementing the IBC, has also taken various steps to address difficulties of stakeholders concerned.

According to him, insolvency regimes in most jurisdictions are not designed to address delinquencies arising from the COVID-19-like crisis when several viable businesses simultaneously fail to stand on their feet for force majeure conditions. Also, the availability of resolution applicants to rescue them remains a concern.

“This has highlighted the need for pre-pack which is considered fast, cost efficient and effective in resolution of stress, with the least business disruptions.

In an e-mail interview, Sahoo also pointed out that with considerable learning and maturity of the ecosystem, and a reasonably fair debtor-creditor relationship in place, the ground seems ready to experiment new options for resolution of stress.

“The market has been advocating and anticipating a resolution framework which is a hybrid between the court-supervised insolvency framework and out-of-court restructuring schemes that incorporates the virtues of both the worlds sans their demerits. The most popular form of such dispensation is pre-pack,” he noted.

Generally, under a pre-pack (pre-packaged) process, main stakeholders like creditors, shareholders and the existing management/ promoter can come together to identify a prospective buyer. Then, they can negotiate a resolution plan before submitting the same to the National Company Law Tribunal (NCLT) for formal approval.

Corporate Insolvency Resolution Processes

From December 1, 2016 till the end of September last year, total 4,008 CIRPs (Corporate Insolvency Resolution Processes) have commenced under the IBC.

Out of the total, 473 CIRPs have been closed on appeal or review or settled, 291 have been withdrawn, 1,025 have ended in orders for liquidation and 277 have ended in approval of resolution plans, as per data compiled by the IBBI.

The provisions relating to CIRP came into effect from December 1, 2016.

In the wake of the Covid-19 pandemic, the government has suspended fresh proceedings under the IBC since March 25 last year. Last month, the suspension period was extended till March, which means that fresh cases cannot be filed under the IBC for almost the whole of the current fiscal — April 2020 to March 2021 period.

On whether there is a possibility of a flurry of insolvency cases coming up once the suspension is done away with, Sahoo said the number of applications for initiating insolvency is likely to increase but the increase may not be significant.

He noted that stakeholders are continuing to resolve stress through various modes such as scheme of compromise or arrangement under the Companies Act, 2013, and the RBI”s prudential framework. Entities are also going for corporate insolvency resolution process in respect of stress other than related to Covid-19.

According to him, stakeholders are exploring innovative options for resolution of stress while taking several cost cutting measures to avoid stress.

Also, Sahoo said viable companies would have normal business operations after the pandemic subsides, higher threshold of default for initiation insolvency proceedings keeps most MSMEs out of insolvency proceedings and Covid-19 period defaults remain outside insolvency proceedings forever.

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Lendingkart to launch ‘credit intelligence services’ for banks

Banking & Finance

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Lendingkart, a digital lending fintech start-up in working capital space, plans to launch ‘credit intelligence services’ for banks from April, helping them evaluate credit worthiness of self-employed small- and micro-enterprises based on their cash flows, said its co-founder and Managing Director, Harshvardhan Lunia.

Lendingkart will assign a probability of default score, give out a risk premium and suggest the amount that banks could lend to such small and micro enterprises, especially those in Tier-2 and Tier-3 cities, Lunia told BusinessLine.

 

Banks could always go with their own underwriting model and use the score provided by Lendingkart as an additional tool to evaluate the borrower, he said.

Lendingkart is the only fintech in the country that has built an algorithm-based and cash flow based decision engine, he said.

The use of the cash flow based decision engine would obviate the need for institutions and banks to rely on financial statements and income tax returns (ITRs) to evaluate a borrower.

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Rollback of policy support can impact health of banks: RBI

Banking & Finance

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The Reserve Bank of India has warned that as policy support is rolled back, the impact of the Covid-19 pandemic can make a dent in the health of banks and non-banks in 2020-21.

With the gradual rollback of policy measures, deterioration in asset quality may pose challenges, although the build-up of buffers like Covid-19 provisions and fund-raising from market may help alleviate the stress, the RBI said in the Report on Trend and Progress of Banking in India 2019-20.

The RBI observed that with the loan moratorium coming to an end, the deadline for restructuring proposals is fast approaching. And, with the possible lifting of the asset quality standstill, banks’ financials are likely to be impacted in terms of asset quality and future incomes.

Going forward, the housing finance sector may need to brace for large slippages of loan assets and higher provisioning, said the report.

The RBI underscored that the data on gross non-performing assets (GNPA) of banks are yet to reflect the stress, obscured as they are under the asset quality standstill with attendant financial stability implications. An unprecedented economic contraction has taken its toll on the financials of banks and non-banks and purveyed a generalised risk aversion that has reduced the efficacy of the financial intermediation function, it added.

“Although stretched asset valuations are in apparent disconnect with the real economy, life support in the form of adequate credit flows to some of the productive and Covid-stressed sectors has been deficient. Going forward, the restoration of the health of the banking and non-banking sectors depends on how quickly the animal spirits return, and on the revival of the real economy,” the RBI said.

Its analysis of published quarterly results of a sample of banks indicates that their GNPA ratios would have been higher, in the range of 0.10 per cent to 0.66 per cent, at end-September 2020. Scheduled commercial banks’ GNPA ratio declined from 9.1 per cent at end-March 2019 to 8.2 per cent at end-March 2020 and further to 7.5 per cent at end-September 2020.

Subdued profitability

The central bank assessed that going forward, the muted credit expansion, the persistence of a low interest rate environment and the impending asset stress on account of the pandemic suggest that the profitability of banks is likely to remain subdued.

Covid-19 provisioning and ploughing back of dividends would help shield banks’s balance-sheets from stress to a certain extent, it said.

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Cashaa to launch crypto bank

Banking & Finance

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Cashaa, a blockchain-based fintech, has joined hands with United Multistate Cooperative Society, a credit cooperative society, to launch crypto bank joint venture UNICAS that allows users to transact in cryptocurrency and fiat from one account.

While the online services of UNICAS has already gone live, as many as 14 physical branches will be rolled out by January 2021 across the NCR, Rajasthan and Gujarat.

UNICAS plans to rapidly expand to 100 branches by the end of 2022. “This will allow us to build, scale and offer customised financial and crypto products for the Indian market,” said Dinesh Kukreja, CEO of UNICAS, in a statement.

The JV will enable Cashaa to access United’s regulatory licences, its physical branches and overall banking infrastructure. United Multistate Cooperative is registered in Delhi under the Multi-state Cooperative Society Act 2002 and is serving in Gujarat, Rajasthan and Delhi with a network of 43 branches.

Being a multi-State credit cooperative society working under Registrar of Societies and providing services only to members, United Multistate Cooperative Society does not need the RBI permission, Kukreja said.

Users will be able to deposit and withdraw through a savings account, the way they operate with traditional banks in India. This is the first time in the world a financial institution has enabled cryptocurrency trade through physical branches.

“If we are planning to move ahead with the aim of digital India, then we cannot hesitate in adopting new technologies and finding innovative ways to bring it to Tier 1 and Tier 2 cities in India. In addition to banking, UNICASwill also provide information and guidance on the level of convenience and security that blockchain technology offers.” said Kumar Gaurav, CEO and Founder of Cashaa.

In India, currently cryptocurrency is not regulated. It may be recalled that in March this year, a three-judge bench of the Supreme Court revoked a Reserve Bank of India (RBI) ruling that banned any entity from dealing in or getting involved with cryptocurrency transactions.

UNICAS will be providing banking services for both fiat and crypto assets. Services include savings accounts, crypto exchange, crypto loan and debit cards to spend crypto. Users may receive an instant loan digitally by depositing crypto assets in the UNICAS wallet and requesting the equivalent value of rupee on their card or bank account.

The joint venture is merging United’s decade of experience in Indian traditional finance with Cashaa’s international banking and cryptocurrency experience to transform both the Indian fintech space and the crypto industry.

With the rollout of the initial 14 branches, UNICAS aims to onboard 25,000 customers within the first quarter of 2021. Cashaa, launched in October 2018, has already been providing its services to more than 200 crypto exchanges, wallets and start-ups dealing in crypto.

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Embedding a gender focus across financial inclusion efforts in the Indian banking sector remains crucial, BFSI News, ET BFSI

Personal Finance

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Over the past six years, India has made significant strides in widening the scale and impact of its financial inclusion efforts. Owing to the Government of India’s initiative to provide a bank account to every household, under the Pradhan Mantri Jan Dhan Yojana (PMJDY),an estimated 80% of Indians presently own a bank account .

But while ownership of Jan Dhan accounts improved remarkably (from 35% in 2011 to 80% in 2017), usage of these accounts continues to remain low. To increase engagement with Jan Dhan’s vast customer base, banks must focus on increasing awareness, reaching out to them via relevant communication and distribution channels, but most importantly, they must acknowledge the potential of women customers as the key lever to household financial empowerment and prosperity.

Low-income women customers are among the most important segment as they form a majority (nearly 55%) of the entire Jan Dhan portfolio . But according to Findex 2017only 33%of women actively use their accounts. This is also because many financial products simply don’t work for women. In the absence of disaggregated data, institutions don’t often realize that women have unique needs and gender neutral policies may be limited in providing solutions tailored to their needs.

Relooking at the financial inclusion agenda with a gender lens has the power to accelerate India’s banking sector’s efforts towards the objective. Data proves that when products are created with women’s specific needs in mind, men are just as or even more interested .Data also shows that any inclusion effort that focuses on women results in better conditions for children, household nutrition, and for the larger community . Women’s increased control over household finances leads to more investment in children and has a positive impact on economic growth. Overall, full, and sustainable financial inclusion of women could have a great impact on the reduction of both poverty and income inequality levels.

How banks can embed a gender focus across financial inclusion efforts

To start with, India’s banking sector needs to understand the unique needs and preferences of its Jan Dhan women customers and design for them. To engage women, banks need to understand their barriers and provide women reasons to proactively engage with the bank. For example, women regularly save small amounts of money, but use informal methods due to habit and convenience. Similarly, a pilot with a large public sector bank found that the promise of an overdraft (linked to small frequent savings) acted as a strong motivator to nudge this behaviour change .

But to understand these differences, it is important for financial service providers to collect and act on sex-disaggregated data in order to understand women customers, and their unique needs, better. Going a step further, regulators can play a crucial role by encouraging, or if needed mandating, sex-disaggregated data collection and usage by FSPs and policymakers.

Secondly, it is important to develop an outreach strategy for the Jan Dhan women customer base that increases their awareness of account benefits and welcomes her. Women customers need to understand how using their Jan Dhan account can benefit them; they need to see the value in changing their established habits of using informal banking methods. Women also find banks unfamiliar and perceive them not be relevant for their small savings. Awareness of savings benefits, low cost micro-insurance, access to overdraft, etc.in the Jan Dhan account is also low among women customers. One of the biggest challenges for the banking sector is to be able to reach women customers directly and through usage of alternate channels. This makes SMS, WhatsApp videos, word of mouth, local community influencers even more important. A sector wide awareness drive supported by government could go a long way in addressing these awareness gaps and provide a boost to financial inclusion.

Finally, India’s banking sector needs to nurture Banking Correspondents as strategic channel partners to deepen the engagement with the Jan Dhan customer base–especially with women. Women prefer transacting at local Banking Correspondent (BC) points because of either proximity or because they trust them .Furthermore, women BCs are natural relationship managers and are better able to deepen banking engagement. In addition, even though 55% of the customer base is female, less than 10% of BCs are women. Banks need to transform this last mile channel into relationship managers who can nudge customers to start small savings in their accounts and cross-sell products that address their needs. Creating a cadre of women banking correspondents will help banks deepen customer engagement beyond transactions and improve the engagement rates of their women customer base.

The road ahead

The Government of India is steadily leading the way for banks to address financial inclusion with a deliberate gender focus. In a revolutionary move announced in March 2020,itundertook a Direct Benefit Transfer (DBT) of INR 500 per month for three months (April2020 to June 2020) targeting women customers under the Pradhan Mantri Garib Kalyan Yojana. The objective of the government was to bolster financial security to the most vulnerable sections of Indian society – low-income women – as payments to women customers further ensures that the money is used for basic household needs5.

As we enter 2021, there is tremendous opportunity for banks to take these efforts beyond mere government cash benefits and embed a gender specific approach to address the needs of the 225 million women Jan Dhan customer base. Building women’s leadership in regulatory organizations is equally important to ensure representation for the cause at senior level and enable a favourable environment at the intersection of leadership development and women’s financial inclusion.

Pallavi Madhok, Senior Solutions Specialist and Ajit Agarwal, Product Manager, Advisory Services at Women’s World Banking)

(The blog has been authored by Pallavi Madhok, Senior Solutions Specialist and Ajit Agarwal, Product Manager, Advisory Services at Women’s World Banking)

DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



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