Tag: credit risk

Banks want more provisions included as statutory capital, BFSI News, ET BFSI

Banking & Finance

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Banks have urged the sector regulator, Reserve Bank of India, to relax norms and allow more of the provision made towards unidentified losses to be reckoned as statutory capital.

At present, because of the regulatory cap, only provisions to the extent of 1.25% of the credit risk weighted assets are considered as tier II capital. If rules are relaxed, more funds can be freed up and made available for banks at a time when recovery is firming up and credit is expected to pick up.

On Wednesday, in its monthly economic report, the finance ministry said India is on its way to becoming the fastest growing major economy in the world and forecast a strong possibility of faster credit growth.
“There is a uniform view among banks that due to increased provision burden, the regulatory cap of 1.25% can be removed. We have also approached RBI to either remove the cap or increase eligible percentage so banks will benefit from the additional provisions made by them,” said an executive aware of developments.

As per RBI’s July 2015 circular on Basel III Capital Regulations -Elements of Tier II Capital for Indian Banks, under “General Provisions and Loss Reserves”, provisions held for currently unidentified losses, which are freely available to meet losses that subsequently materialise, will qualify for inclusion under tier
II capital. Accordingly, the general provisions on standard assets qualify for inclusion in tier II capital.

“With expected increase in standard assets provision on account of restructuring of stressed accounts under Covid-19 dispensations, ranging from 5% to 15%, substantial amount of provisions made will not be qualifying as tier II capital because of the cap,” said another bank executive, explaining the demand for removal of the cap on amount of provision reckoned as tier II capital.

Last month in a report, rating agency Crisil had said that gross non-performing assets (NPAs) of banks are expected to rise to 8-9% this fiscal from 7.5% as on March 31, but below the peak of 11.2% seen at the end of fiscal 2018.

“With 2% of bank credit expected under restructuring by the end of this fiscal, stressed assets – comprising gross NPAs and loan book under restructuring – should touch 10-11%,” it had noted in its report.



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Bankers see risk in chase for commercial papers, BFSI News, ET BFSI

Banking & Finance

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MUMBAI: Availability of cheap funds in the money markets through commercial papers is prompting financial intermediaries to arbitrage and chase higher returns. While broking firms are raising funds for funding of initial public offers (IPOs), bankers fear that the money might find a way into riskier assets.

The surplus liquidity in the money market has resulted in the heightened issuance of commercial papers. The average monthly outstanding during the first half of the current financial year has been over Rs 4 lakh crore. However, according to bankers, concerns are emerging on the nature of issuers with some borrowing at high rates.

Commercial papers, although debt instruments like bonds, are for very short tenures (usually three months), because of which issuers can get better ratings than they would for longer-term bonds. These are issued by corporates as well as finance companies and, in recent times, mutual funds have turned out to be major investors in this segment.The share of non-banking financial companies (NBFCs) in total commercial paper issuances increased to 43.2% in H1 of 2021-22 from 21.9% in the corresponding period of the previous year, while that of corporates moderated to 46.2% from 64.9% over the same period. Top-rated borrowers can raise funds at close to the reverse repo rate of 3.35%, which is the rate at which banks lend to the RBI. However, yield-chasing fund managers make small investments in high-yield papers and there have been outlier issuers at 12-13% as well.

According to bankers, there is a likelihood that the availability of cheap funds might prompt some intermediaries to arbitrate with more risky investments such as stressed assets. Although companies dealing in stressed assets do not borrow directly from money markets, they can raise money through intermediaries who have access.

Last month, SBI chairman Dinesh Khara said that the drop in credit deposit ratio has resulted in the mispricing of credit risk by banks. “There is a temptation on the part of lenders to go down the risk curve and misprice the risk. We are starting to see this,” he said. While bank deposits rose 3.2% to Rs 156 lakh crore in FY22 up to September 24, advances grew only 0.1% to Rs 109.5 lakh crore in the same period.

The RBI’s monetary policy report noted that commercial paper issuances increased to Rs 10.1 lakh crore during H1 2021-22 from Rs 7.9 lakh crore in H1FY21. Their rates were on an average 46 basis points (100bps = 1 percentage point) higher than the repo rate. However, the yields have risen due to increased issuances by NBFCs, partly to mobilise resources for investment in IPOs, but moderated subsequently, the report said.



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RBI governor, BFSI News, ET BFSI

Banking & Finance

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Amid rising concerns over mispricing of credit risk by banks due to abundant liquidity, the Reserve Bank of India today said it was for the banks to do their own risk assessment and price their loans accordingly.

‘Banks should do own risk assessment and based on it should price their loans, action lines in the domain on banks,” said RBI governor Shaktikanta Das.

“I don’t think SBI has flagged this issue as a complaint, SBI has flagged it as a concern, which is for the banks to take note of, whatever be the liquidity situation,” he said.

Mispricing of loans

A few weeks ago, SBI, the country’s largest lender, has said that mispricing of risks is a cause of concern given the fact that there is ample liquidity in the system.

Since deposits are flowing into the system and credit offtake is yet to take place, bankers may be tempted to make investments in alternative avenues like T-Bills, SBI chairman Dinesh Kr Khara said.

“The depth of this alternative investment market is shallow. There is a chance of mispricing of risks. But I feel there will be no compromise on underwriting standards as the banking system has learned the hard way due to huge NPAs,” he said.

Striking a balance

The SBI chairman said there is a need to strike a balance and unless there is improvement in growth, it will be big challenge.

Regarding offtake of credit, the banker said some industrial sectors are showing improvement but it is not universal across sectors.

“I hope the Production Linked Incentive scheme will help a lot in offtake of liquidity, particularly in the MSME sector. Now some private sector investments are likely to take place besides PSUs. The road sector is looking promising,” he stated.

Khara said given the present macroeconomic conditions it is unlikely that the central bank will alter interest rates in the coming Monetary Policy Committee meeting.



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SEBI tightens risk management rules for mutual funds

Banking & Finance

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India’s market regulator on Monday tightened risk management rules for mutual funds,including specifying guidelines to identify, measure and report various risks, in an effort to protect the interest of investors in a fast-growing industry.

The new rules mandate the appointment of a chief risk officer, creation of risk management committees and maintaining metrics such as investment risk, liquidity risk and credit risk for each scheme, the Securities and Exchange Board of India (SEBI) said.

The new framework comes a month after it barred Kotak Mahindra Asset Management, one of the country’s largest mutual fund managers, from launching any fixed maturity plans (FMPs) for six months and fined it for breaking rules.

SEBI also barred Franklin Templeton in India in June from launching any new debt schemes for two years after it found”serious lapses and violations” at the firm when it decided to suddenly shut several schemes. Franklin has appealed against the decision, but agreed it would not launch any new debt funds for the time being.

In its new rules on Monday, SEBI provided detailed guidelines on the risk management roles for an asset management company’s board, trustees, chief executive officer, chief investment officer, other senior officials and fund managers.

The mutual fund industry has grown rapidly in India,especially with interest from retail investors in systematic investment plans that allow investment of a fixed amount regularly in schemes.

Assets managed by India’s mutual fund houses have increased to about 36 trillion rupees ($487.72 billion) in August from nearly 28 trillion rupees a year earlier, according to the Association of Mutual Funds in India (AMFI).

SEBI said fund houses have to adhere to the new risk management rules from January 1 and review their compliance every year.

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Yield to maturity – The Hindu BusinessLine

Personal Finance

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A coffee time chat between two colleagues leads to an interesting explainer on bond market jargons.

Vina: Do you think I should try my luck with the bond markets?

Tina: While stock and bond market prices are unpredictable, don’t leave your investment decisions entirely to a game of luck.

Vina: Agreed! Today while bank deposit rates are at all-time lows, I came across a bond that promises a yield to maturity of around 8.8 per cent. Interest of ₹88 on a bond with a face value of ₹1000, sounds like a great deal. Doesn’t it?

Tina: No, that’s not how it works, Vina. You are mistaking the yield to maturity for the coupon rate. The two are not the same.

Vina: Jargons again! What is the interest I will earn?

Tina: The coupon rate when multiplied by the face value of a bond, gives you the the interest income that you will earn. Yield to maturity is a totally different concept.

Vina: Enlighten me with your wisdom, will you?

Tina: When you buy a bond in the secondary market, its yield will matter more to you than the coupon rate or the interest rate that it offers on face value. Because the yield on a bond is calculated with respect to current market price – which is now the purchase price for you.

The current yield is the return you get (interest income) by purchasing a bond at its current market price. Say, a bond trades at ₹900 (face value of ₹1,000) and pays a coupon of 7 per cent per annum. Your current yield then is 7.8 per cent.

Vina: What is the YTM then?

Tina: The yield to maturity (YTM) captures the effective return that you are likely to earn on a bond if you hold it until maturity. That is, the return you get over the life of the bond after accounting for —interest payments and the maturity price of the bond versus its purchase price.

The YTM for a bond purchased at face value and held till maturity will hence be the same as its coupon rate.

Vina: Hold until maturity? The bond I was referring to has 8 years left until maturity. Too long a tenure, right?

Tina: Yes! The bond whose YTM is 8.8 per cent and has a residual maturity of eight years must be paying you a coupon of 7 per cent annually. That isn’t too high when compared to what other corporates have to offer.

Vina: So, should I now look for bonds that offer even higher YTMs?

Tina: Don’t fall prey to high yields, Vina. A high deviation from the market rate often signifies a higher level of risk. Higher YTMs are a result of a sharp drop in the current bond market price, which is most likely factoring in perceived risk of default or rating downgrades.

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