Tag: Department of Financial Services

Govt biz: private banks not to have it all easy

Banking & Finance

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Private sector banks better watch out as the recent government move to lift embargo on grant of government business to them comes with strings attached.

They now run the risk of permission — for undertaking government business — being withdrawn if they are found to lag the performance of public sector banks (PSBs) in implementing social sector government initiatives through banks, the Finance Ministry has cautioned.

Put simply, the government, in consultation with the RBI, would from time to time review the performance of private sector banks on a matrix of various government initiatives and schemes.

“In case it is found that there is adverse performance by any private sector bank in the future, then the permission to the concerned bank to undertake government business could be potentially withdrawn after giving due opportunity to the bank to correct the imbalance,” said a source in Department of Financial Services (DFS).

This stance of DFS should be music to the ears of PSBs, which have time and again been complaining that private sector banks are keen only on profitable initiatives and were not willing to do heavy lifting when it came to government social schemes that are to be implemented through banks.

Ease of doing business

The Finance Ministry on Wednesday decided to lift an embargo on allocation of government business (including government agency business) to private sector banks. The objective of this move is to boost the ease of doing business and ease of living for the public, including retail customers, small and medium enterprises as also larger corporates with regard to their government-related banking transactions such as taxes and other revenue payment facilities and many other transactions.

This decision has been taken to ensure a level playing field to all public sector and private sector banks, enhancement of customer convenience, enabling innovation and latest technology in the banking sector, and spurring of competition for higher efficiency and increase in standards of customer service, ultimately leading to all-round value creation.

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Bad Bank: Seasoned public sector bankers to be roped in on deputation

Banking & Finance

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Veteran bankers from public sector banks (PSBs) will be roped on deputation to get the so-called ‘Bad Bank’ off the ground. This bank is being floated to clean up the books of PSBs.

With the Indian Banks’ Association (IBA) and the Department of Financial Services (DFS) putting the formation of the Bad Bank on fast-track, bankers feel deputation is the best option as inviting applications for filling various positions, shortlisting eligible candidates and interviewing them could be a drawn out process.

In the run-up to the formation of the Bad Bank, the association has already asked banks to furnish data on stressed accounts with principal outstanding above ₹500 crore, both under consortium and multiple banking arrangement.

The IBA is likely to sound out PSB chiefs for deputing officials in the top executive grade – General Manager and Deputy General Manager – with experience in dealing with recovery cases.

The Bad Bank, which is envisaged as an ‘Asset Reconstruction Company (ARC) – Asset Management Company (AMC)’ structure, may also take outside professional help.

Precedents to deputation

There are precedents to deputation when the bank sector undertakes joint initiatives.

For example, the erstwhile Corporate Debt Restructuring (CDR) Cell had staff deputed from lenders such as IDBI Bank, State Bank of India, and ICICI Bank, among others.

More recently, the ‘Doorstep Banking Services’ initiative of PSBs has senior officials drawn from various banks on deputation to oversee its rollout across the country.

Bad bank is actually a good idea

The association is working with the Department of Financial Services and a few lenders to set up the Bad Bank, pursuant to the announcement in this regard by Finance Minister Nirmala Sitharaman in the Union Budget.

The move to set up a Bad Bank comes in the backdrop of the macro stress tests conducted by the Reserve Bank of India indicating that the gross non-performing asset (GNPA) ratio of all scheduled commercial banks may go up from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario.

This ratio may escalate to 14.8 per cent under a severe stress scenario, cautioned the RBI in its latest Financial Stability Report.

In her Budget speech, Sitharaman observed that the high level of provisioning by public sector banks on their stressed assets calls for measures to clean up their books.

In this regard, she said an ARC and AMC would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds (AIFs) and other potential investors for eventual value realisation.

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

Banking & Finance

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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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