Tag: framework

RBI governor asks banks not to let down their guard, BFSI News, ET BFSI

Banking & Finance

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RBI governor Shaktikanta Das on Tuesday met with bank chiefs and asked them to remain vigilant to any emerging signs of vulnerabilities and take timely remedial measures to mitigate the risks. Even as Das acknowledged the resilience of the banking sector, the central bank sought to beef up pre-emptive action against weak banks by reworking its prompt corrective action (PCA) norms to enable supervisory intervention at the right time and use of lending restrictions as a tool for market discipline.

The note of caution comes at a time when there is increased optimism in respect of the economy even as pandemic-related stress continues to be felt in some sectors. Bankers have started talking of recovery even as several countries in the world are going through a third phase of lockdowns.

Das on Monday held separate meetings with the MDs and CEOs of public sector banks and some private banks through videoconferencing. He advised banks to take timely remedial measures to mitigate the risks and maintain the stability of not only the institutions themselves but also of the overall financial system. Several other matters, including credit flows, especially to micro and small enterprises, were also discussed during the meetings.

Das sought feedback from bank chiefs on the outlook for stressed assets and measures for mitigation, pricing of risks and the collection efficiencies experienced by banks. He also asked banks about their engagement with fintech entities. This was the first meeting with banks after Das was granted a fresh three-year term by the government last week. The meeting was attended by RBI’s deputy governors M K Jain, M Rajeshwar Rao and T Rabi Sankar.

The new norms for PCA come after most weak banks have exited the lending restrictions imposed by the central bank under its earlier framework for early corrective action. A record number of 11 banks were placed under PCA after banks saw a surge in bad loans following RBI’s asset quality review in 2016.

“The PCA framework does not preclude the RBI from taking any other action as it deems fit at any time, in addition to the corrective actions prescribed in the framework,” RBI said. Bankers said that in the past banks were placed under PCA based on their audited financial results and now the indications are that the RBI might impose the restrictions if it feels that they are required based on its supervision.

On Tuesday, RBI deputy governor Jain said that the central bank was also focusing on governance reforms. He said that banks need to put in place governance standards to be worthy of public trust.

“Being highly leveraged entities and with the interconnectedness, there must be a separation between ownership and management, so that they operate on professional lines,” he said.



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RBI proposes framework for offline digital retail payments

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In a move that will further popularise the use of digital payments, the Reserve Bank of India has proposed to introduce a framework for carrying out retail digital payments in offline mode across the country.

The Statement on Developmental and Regulatory Policies on August 6, 2020 had announced a scheme to conduct pilot tests of innovative technology that enables retail digital payments even in situations where internet connectivity is low or not available (offline mode). “Three pilots were successfully conducted under the scheme in different parts of the country during the period from September 2020 to June 2021 involving small-value transactions covering a volume of 2.41 lakh for value ₹1.16 crore,” said RBI Governor Shaktikanta Das on Friday, adding that the learnings indicate that there is a scope to introduce such solutions, especially in remote areas.

Also read: UPI records 365 crore transactions worth ₹6.54-lakh cr in September

This would enable users who do not have internet connectivity at all times, to be be able to use digital payment modes.

The RBI has also proposed to increase the per-transaction limit for IMPS from ₹2 lakh to ₹5 lakh for channels other than SMS and IVRS. “This will lead to further increase in digital payments and will provide an additional facility to customers for making digital payments beyond ₹2 lakh,” Das said.

The limit for an IMPS transaction through SMS and IVRS channels is ₹ 5,000.

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Few takers for restructuring under RBI’s Resolution Framework 2.0: Crisil

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There are only a few takers for the debt restructuring facility offered by the Reserve Bank of India (RBI) under its Resolution Framework 2.0 amid demand recovery, according to a Crisil Ratings survey of about 4,700 companies rated by it.

Crisil Ratings’ investment grade rated corporates have shown resilience amid the pandemic and hardly anyone is planning to avail restructuring 2.0.

Sub-investment grade

In fact, the survey shows that as much as 95 per cent of those opting for, or are inclined to seek restructuring, belong to the sub-investment grade rating category.

Within the sub-investment grade companies, four out of five are rated in the ‘B’ or lower rating categories, clearly indicating that only companies with weak credit quality are exploring restructuring, the credit rating agency said.

Crisil cautioned that any weakening of sentiment around recovery, and a likely third wave leading to fresh curbs on economic activity, will influence more companies to seek restructuring 2.0.

“This could be especially true for the smaller ones that typically experience more stress. Greater clarity will emerge closer to the September 30, 2021, deadline set by the RBI for invoking the restructuring plan,” it said.

Crisil emphasised that these are preliminary readings from the survey, and may not be reflective of the inclination among those not rated by it.

In particular, most of the micro and small enterprises in India are unrated, it added.

Resolution Framework 2.0

The RBI had, on May 5, 2021, announced the Resolution Framework 2.0 for Covid related stressed assets of individuals, small businesses and micro, small and medium enterprises (MSMEs) with aggregate exposure of up to ₹25 crore.

This facility is available provided the aforementioned entities had not availed benefits under any of the earlier restructuring frameworks (including Resolution Framework 1.0 dated August 6, 2020), and were classified as standard accounts as on March 31, 2021.

Referring to the RBI raising the aggregate debt threshold under Resolution Framework 2.0 to ₹50 crore from ₹25 crore on June 4, 2021, the agency said, “This increase in threshold led to about two-thirds of the Crisil-rated mid-sized companies becoming eligible for the restructuring 2.0 scheme.”

Corporates give restructuring option a miss

Crisil opined that the fact that only a handful of companies are exploring the restructuring option could be reflective of a relatively improved business outlook accompanying a pick-up in economic activity in the aftermath of the pandemic’s second wave.

Subodh Rai, Chief Ratings Officer, Crisil Ratings, said, “The quick recovery in demand after moderation during the second Covid-19 wave, and sanguinity around economic growth have led corporates to give the restructuring option a miss.

“The more localised and less stringent nature of curbs/restrictions during the second wave has meant relatively lower disruption in business activities compared with the first wave. So the muted response is par for the course.”

Nitin Kansal, Director, Crisil Ratings, said, “Most of the companies that have opted for, or are contemplating restructuring 2.0 belong to the low-to-medium resilience sectors such as hospitality, educational services, textiles, construction and gems and jewellery.

“Demand recovery in some of these remains uncertain because of the continuing overhang of the pandemic.”

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RBI announces framework for outsourcing payment and settlement activities

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The Reserve Bank of India on Tuesday announced the framework for outsourcing payment and settlement-related activities by payment system operators (PSO). The objective is to put in place minimum standards to manage risks in outsourcing of payment and settlement-related activities including tasks such as onboarding customers and IT-based services.

“This framework is applicable to non-bank PSOs insofar as it relates to their payment and settlement-related activities,” the RBI said, adding that it is applicable to all service providers, whether located in India or abroad.

The central bank has set a deadline of March 31, 2022 for PSOs to ensure that all their outsourcing arrangements, including the existing ones, are in compliance with the framework.

Risk management

The framework has said PSOs will not outsource core management functions, including risk management and internal audit; compliance and decision-making functions such as determining compliance with KYC norms.

Core management functions would include management of payment system operations such as netting and settlement, transaction management like reconciliation, reporting and item processing, according sanction to merchants for acquiring, managing customer data, risk management, information technology and information security management.

The Statement on Developmental and Regulatory Policies released with the bi-monthly Monetary Policy Statement on February 5 this year had announced the plan for such a framework to enable effective management of attendant risks in outsourcing of such activities.

The service provider, unless it is a group company of the PSO, will not be owned or controlled by any director or officer of the PSO or their relatives.

The RBI framework has further said the PSO will carefully evaluate the need for outsourcing its critical processes and activities and also the selection of service providers based on comprehensive risk assessment.

“Outsourcing of any activity by the PSO shall not reduce its obligations, and those of its board and senior management, who are ultimately responsible for the outsourced activity,” it has said, adding that the PSO will be liable for the actions of its service providers and will retain ultimate control over the outsourced activity.

Further, to outsource any of its payment and settlement-related activities, the PSO will have a board-approved comprehensive outsourcing policy.

Ensuring confidentiality

The PSO will also ensure the security and confidentiality of customer information in the custody or possession of the service provider and will immediately notify RBI about any breach of security and leakage of confidential information related to customers, the framework said.

“In such eventualities, the PSO would be liable to its customers for any damage,” it stated.

The PSO will also maintain a central record of all outsourcing arrangements, which will be readily accessible for review by the board and senior management.

Further, the PSO will also put in place a management structure to monitor and control its outsourcing activities.

In the case of offshore service providers, the PSO will also closely monitor government policies and, political, social, economic, and legal conditions in countries where the service provider is based, both during the risk assessment process and on a continuous basis, and establish sound procedures for dealing with country risk problems.

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E-mandate processing: RBI gives banks 6-month breather to comply with framework

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The Reserve Bank of India (RBI) on Wednesday gave Banks and payment aggregators a six-month breather by extending the timeline to comply with the “framework for processing e-mandates on recurring online transactions” till September 30, 2021.

Without this breather, millions of e-mandates set up by customers could have failed from April 1, 2021 as many banks have not upgraded capacities to comply with RBI’s requirements for enabling registering, tracking, modification, and withdrawal of e-mandates.

In fact, Banks had sent out a communication to their customers asking them to make alternative arrangements for recurring transactions for utilities and bill payments, such as registering the biller on the internet or mobile banking.

On non-compliance

While extending the timeline for processing recurring online transactions, the central bank underscored that non-compliance is noted with grave concern and dealt with separately.

“The delay in implementation by some stakeholders has given rise to a situation of possible large-scale customer inconvenience and default. To prevent any inconvenience to the customers, Reserve Bank has decided to extend the timeline.

“Any further delay in ensuring complete adherence to the framework beyond the extended timeline will attract stringent supervisory action,” RBI warned.

The Internet And Mobile Association of India (IAMAI), in a recent letter to the Niti Aayog, observed that the users should bear the cost of non-adherence to the RBI’s e-mandate circulars by the issuer banks, merchants and the non-bank entities, for no fault of theirs, resulting in huge business losses and significant disruptions to services to the consumers.

In August 2019, RBI had issued the framework for processing of e-mandates on recurring online transactions. Initially applicable to cards and wallets, the framework was extended in January 2020 to cover Unified Payments Interface (UPI) transactions.

In the interest of customer convenience and safety in the use of recurring online payments, the framework mandated use of Additional Factor of Authentication (AFA) during registration and first transaction (with relaxation for subsequent transactions up to a limit of ₹2,000, since enhanced to ₹5,000), as well as pre-transaction notification, facility to withdraw the mandate, etc.

Customer protection

The primary objective of the framework was to protect customers from fraudulent transactions and enhance customer convenience.

“Based on a request from Indian Banks’ Association (IBA) for an extension of time till March 31, 2021, to enable the banks to complete the migration, Reserve Bank had advised the stakeholders in December 2020 to migrate to the framework by March 31, 2021.

“Thus, adequate time was given to the stakeholders to comply with the framework,” RBI said in a statement.

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IDBI Bank eyes stake sales in subsidiaries, BFSI News, ET BFSI

Banking & Finance

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MUMBAI: IDBI Bank plans to ramp up growth, regain lost corporate customers and sell stakes in its insurance, capital markets and technology arms following its exit from the banking regulator’s prompt corrective action (PCA) framework for weak lenders.

IDBI Bank MD & CEO Rakesh Sharma told TOI that the bank had used the four-year interregnum to restructure its business, cut exposure to large loans and bulk deposits and create verticals for various lending businesses to speed up turnaround time. As a result, the institution has transformed from a project financier to a retail lender.

“While our retail portfolio grew during the moratorium period, we were not able to cater to the corporates. We are now looking at the mid-corporate segment, particularly the good companies which were our partners earlier and we could not extend loans because of restrictions under the PCA,” said Sharma.

He said that the bank was looking at Rs 4,000 crore of recoveries in the next fiscal year. In addition, it was willing to sell a 25% stake in Ageas Federal Life (formerly IDBI Federal Life) to the foreign partner if they wanted to acquire the stake once the increase in foreign direct investment (FDI) is allowed.

IDBI Fintech is a 100% subsidiary of the bank. The company provides end-to-end IT services to IDBI Bank, its group companies, its ultimate parent company LIC, as well as other external clients in the BFSI sector. The company was currently in the process of appointing merchant bankers to help identify a strategic joint venture partner. IDBI Capital Markets is the merchant banking arm of IDBI Bank and the lender is looking for a strategic partner in this company as well.

The RBI’s PCA places restrictions on weak banks from offering large loans to corporates and offering salary hikes for management and from expanding business. Sharma said that the bank did hire specialists from the market, but now that it was out of PCA it would do more lateral recruitments and continue to hire from campuses.



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IDBI exits RBI’s list of lenders facing curbs, BFSI News, ET BFSI

Banking & Finance

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Mumbai: IDBI Bank has finally managed to get out of the Reserve Bank of India’s (RBI’s) watchlist for troubled banks after four years. With this, the bank is no longer subject to the restriction on large loans, dividend payment, expansion of business or salary hikes. The move comes at a time when the government has announced its intent to divest stake in the bank as part of its privatisation programme.

The RBI had first placed IDBI Bank under its prompt corrective action (PCA) framework in May 2017 after it exceeded the limits set by the central bank for bad loans and its capital position weakened. Since then, the government sold its stake to LIC, which invested Rs 21,524 crore in the bank to pick up a 49.2% stake. The government retained45.5%.

LIC’s investment in the bank continues to be in the red even after an over 5% rise in the bank’s share price to over Rs 38 on Wednesday. IDBI Bank has a market valuation of Rs 41,128 crore. This values LIC’s stake at Rs 20,250 crore.

The bank has been held back because of the PCA framework as its expertise lay in its legacy business of project and corporate loans, which it was barred from under the restrictions.

According to the RBI, the performance of IDBI Bank was reviewed by the financial supervision board on February 18, 2021. The board considered the results for the quarter ended December 2020, where the bank had reported a net profit of Rs 378 crore and qualified to exit the RBI’s PCA framework.

IDBI Bank also provided a written commitment to the RBI, stating that it would ensure that its financial ratios are within the prescribed parameters. It also highlighted the structural changes that have been put in place to improve the performance of the bank.

“Taking all the above into consideration, it has been decided that IDBI Bank Limited be taken out of the PCA framework, subject to certain conditions and continuous monitoring,” the RBI said. Last month, finance ministry officials had indicated that they expected three more public sector banks — Indian Overseas Bank, Central Bank and UCO Bank — to exit the RBI’s PCA framework soon.



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