Tag: IBA

Forcing minimum claim period of 1 year on bank guarantees wrong, says Delhi HC, BFSI News, ET BFSI

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In a ruling that will help infrastructure and construction companies, the Delhi High Court said forcing a minimum claim period of 12 months for bank guarantees is wrongful, rejecting interpretations that existing laws rendered shorter claim periods void.

Ruling on a petition filed by engineering conglomerate Larsen & Toubro Ltd against Punjab National Bank, a single-judge bench of the High Court observed, “It is clear that respondent No 1 (PNB) is erroneously of the view that they are in law mandated to stipulate a claim period of 12 months in the bank guarantee, failing which the clause shall be void under Section 28 of the Contract Act.”

The court directed the lender to take a relook at such agreements.

“It (Section 28) deals with the right of the creditor to enforce his rights under the bank guarantee, in case of refusal by the guarantor to pay, before an appropriate court or tribunal,” Justice Jayant Nath observed in a 43-page order issued on Wednesday. It does not deal with the claim period – a time within which the beneficiary is entitled to claim the guarantee.

Experts said the ruling will particularly benefit infrastructure and construction companies that need to issue bank guarantees while fulfilling contracts for government bodies and public sector undertakings.

“This decision will have far-reaching consequences because it will give both banks and companies the much-needed flexibility in entering into contracts related to bank guarantees,” said Ashish K Singh, managing partner of law firm Capstone Legal.

Anil Goel, founder and chairman of insolvency professional company AAA Insolvency Professionals, said, “Construction companies bidding for projects should have the flexibility to bank guarantee from banks. Multiple options to get it should help them bid for more projects and save costs substantially.”

L&T, in its petition, argued that PNB’s insistence on a bank guarantee (BG) for 12 months, due to misinterpretation of Section 28, has unnecessarily made the company liable to pay commission charges for such extended BG when the principal contract would be for a much shorter period.

Also, companies have to maintain collateral security – or margin money against which a bank guarantee is issued – for supporting an extended claim period, which affects their capability to do business by entering new contracts, L&T said.

Hemant Kumar, group general counsel of L&T, confirmed the passing of an order by the Delhi High Court but refused to divulge any details.

An email query to PNB remained unanswered as of press time Friday.

L&T had made the Indian Banks’ Association (IBA) and the Reserve Bank of India (RBI) parties in the case.

As per the court order, PNB’s stand is due to letters issued by IBA on December 12, 2018, to its member banks, stating that if a bank issues a claim period of less than one year on top of the guarantee period then such a bank guarantee would not have the benefit of Exception 3 to Section 28 of the Contract Act.

Exception 3, inserted as an amendment to the Act in 2013, allowed lenders to limit the period to make a claim up to one year, down from the minimum of three years provided under the Limitation Act.

BGs are provided on a case to case basis depending on banks and individual clients. The margin money varies, but normally it is about 10-20% of the bank guarantee amount, industry insiders said.



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IBA CEO, BFSI News, ET BFSI

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As the government enhanced the scope of the Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS), banks on Sunday said they have sanctioned Rs 2.54 lakh crore and have room to disburse another Rs 45,000 crore under the plan.

To support the businesses affected by the second wave of COVID-19, the Finance Ministry on Sunday enhanced the scope of ECLGS, including providing concessional loans to hospitals/nursing homes for setting up on-site oxygen generation plants.

The validity of the scheme is extended by a further three months to September 30 or till guarantees for an amount of Rs 3 lakh crore are issued, the ministry said in a statement.

“Of the total kitty (for ECLGS) available, Rs 2.54 lakh crore of loans have already been covered and there is a window available for roughly Rs 45,000 crore. Of the Rs 2.54 lakh crore, Rs 2.40 lakh crore has already been disbursed,” Indian Banks’ Association Chief Executive Officer (CEO) Sunil Mehta told reporters after the ministry’s announcement.

The ministry said, under the ECLGS 4.0, a 100 per cent guarantee cover to loans up to Rs 2 crore will be provided to hospitals, nursing homes, clinics, medical colleges for setting up on-site oxygen generation plants.

The interest rate on these loans has been capped at 7.5 per cent.

“Borrowers who are eligible for restructuring as per the RBI guidelines of May 5, 2021, and had availed loans under ECLGS 1.0 of overall tenure of four years comprising of repayment of interest only during the first 12 months with repayment of principal and interest in 36 months thereafter will now be able to avail a tenure of five years for their ECLGS loan i.e. repayment of interest only for the first 24 months with repayment of principal and interest in 36 months thereafter,” the ministry said.

Also, the new scheme has made a provision of additional ECLGS assistance of up to 10 per cent of the outstanding as of February 29, 2020, to borrowers covered under ECLGS 1.0, in tandem with restructuring as per the RBI guidelines of May 5, 2021.

The government has also removed the current ceiling of Rs 500 crore of loan outstanding for eligibility under ECLGS 3.0, subject to maximum additional ECLGS assistance to each borrower being limited to 40 per cent or Rs 200 crore, whichever is lower.

Loans to the civil aviation sector were also made eligible under ECLGS 3.0, the ministry said.

“We all are aware of the scenario which emerged post resurgence of COVID 2.0. It has actually led to a lot of disruption of economic activity.

“The most vulnerable among them, MSMEs, are in need of support, which has been extended in various forms, more so in the May 5 circular of Reserve Bank of India. Now, the government today announced the modification to the ECGL scheme,” State Bank of India Chairman Dinesh Khara said.

On ECLGS 4.0, Khara said his bank will be in a position to build a book size of about Rs 2,000 crore.

He said for the resolution framework 2.0, announced by the RBI on May 5, all public sector banks have come out with a formulated templated approach for restructuring of loans to individuals, small businesses, MSMEs up to Rs 25 crore.

“The idea behind this is that those who are involved in the implementation of the resolution framework, they should not have any hardship in terms of any implementation,” Khara added.

When asked about the size of the restructuring pool banks are expecting this time, IBA Chairman and Union Bank of India‘s Managing Director and Chief Executive Officer Rajkiran Rai G said it was too early to put a number for potential recasts, as banks are only sending messages to eligible borrowers.

“Last time also we saw that the number of customers opting for this (restructuring) was not that high. So, we need to get some feedback and it is difficult to crystallise a number at this point in time,” Rai said.

Khara said during the previous restructuring scheme, SBI had about 8.5 lakh SME customers who were eligible for restructuring but only 60,000 borrowers availed it.



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SBI Chairman Dinesh Khara explains rolling out RBI’s 5-May SME loan relief measures; ECLGS extended

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State Bank of India’s (SBI) Chairman Dinesh Khara talked about loans for SMEs, Covid-19 resurgence, and RBI’s relief measures of 5 May 2021 in a press conference on May 30, 2021.

SBI Press Conference HIGHLIGHTS: State Bank of India’s (SBI) Chairman Dinesh Khara talked about loans for SMEs, Covid-19 resurgence, and RBI’s relief measures of 5 May 2021 in a press conference on May 30, 2021. Chairman Khara explained how RBI’s SME loan relief measures, which were announced on May 5, 2021, will be rolled out. He informed that PSBs have formulated templated approach for restructuring loans to individuals, small businesses and MSMEs up to Rs 25 crore. In order to approach bank for resolution, customers can file an application on the portal at the bank website, they can make manual submission of applications at the branch. Khara also informed that government will provide 100 per cent guarantee cover to loans up to Rs 2 crore to hospitals/nursing homes etc for setting up on-site oxygen generation plants, interest rate capped at 7.5%. The validity of ECLGS has also been extended to September 30, 2021, or till guarantees for an amount of Rs 3 lakh crore is issued. The disbursement under the scheme has been permitted up to December 31, 2021.

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Bank employees hard work during Covid rewarded as performance incentives roll out, BFSI News, ET BFSI

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The risk and hard work of bank employees during the Covid pandemic are being rewarded, though it is a small gain.

Employees of PSU banks which have posted profits are set to get a performance-linked component in the wage agreement signed with the Indian Banks’ Association (IBA) in November 2020.

Canara Bank this week paid out a performance-linked incentive to its employees, equivalent to 15 days’ pay. The bank has reported a net profit of Rs 2,557 crore for FY21 as compared to a Rs 5,838-crore loss in the preceding year.

Bank of Maharashtra has distributed a performance-linked incentive to its employees after posting a 187% increase in its fourth-quarter net profit to Rs 165 crore.

How much would SBI employees get

State Bank of India is also expected to announce an improvement in profits. In terms of the wage agreement, its 2.5 lakh employees would get an incentive of five days’ salary if the bank reported an increase in operating profit of between 5% and 10%, and 10 days’ if the increase is between 10% and 15%, and 15 days for any increase above 15%.

Performance-linked incentive plan

IBA had said that to inculcate a sense of competition and also to reward the performance, the concept of the performance-linked incentive (PLI) scheme has been introduced for the first time. The scheme will be effective from the current financial year.

The scheme in public sector banks is based on the operating profit or net profit of the individual bank. It is optional for private and foreign banks. As per the agreement, the PLI would be payable to all employees annually over and above the normal salary payable.

Unions opposition

The bank employees unions had opposed any move to introduce a performance-linked incentive for public sector banks proposed by Banks Board Bureau. They had said it would be a prelude to introducing differential pay as also the concept of Cost to Company at a later stage

Setting performance parameters at various levels of banking functions does not fit well into the banking environment as there are multiple functions for a few and specialist functions for another lot, they had said.

Such parameters may not work well with the functionaries in controlling offices who undertake jobs of evolving and implementing policies and guidelines at the back office. The introduction of such practices are aimed at bypassing the bipartite machinery and casting employees against their own colleagues, they had said.

Unions had also strongly opposed linking their salaries to the performance of the bank, arguing that the financial performance depends on the government policies over which they have no control. Also, most of the losses were on account of large corporate loans which are decided at the top level.

However, the IBA had insisted on the clause to reward better-performing banks and to inculcate a sense of competition among employees of public sector banks.

Improved performance

Despite the pandemic, most public sector banks are expected to improve their performance over the previous year. This is because by the time they finalised their results for FY20, the entire nation was in a lockdown and many banks made significant provisions for Covid impact. The four acquiring banks last year made significant fair value provisioning in the 10-bank mega-merger. As a result, most public sector banks are expected to report a profit during the current fiscal.



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‘Extend Covid SOP to business correspondents, contract staff’

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Our Bureau

The All India Bank Employees’ Association (AIBEA) has requested the Indian Banks’ Association (IBA) to extend its standard operating procedure (SOP) guidelines to deal with Covid-19 pandemic to stakeholders such as business correspondents and contract employees working for the banks.

CH Venkatachalam, General Secretary, AIBEA, said business correspondents, contract employees, jewel appraisers, deposit collectors and temporary employees have been kept out of the purview of any of the guidelines even though they are part and parcel of the banking system, though not at par with the regular permanent employees. “The virus does not discriminate between regular employees and these employees, therefore, the management and the IBA cannot be silent on their sufferings and difficulties. They do deserve fair treatment in the present circumstances,” Venkatachalam said in a letter to IBA.

Also read: RBI must not delegate

The Association said it has information that some of the banks do not even provide basic emergency supplies such as masks and sanitisers to these employees and they are purchasing the same from their own pockets.

Handling rush

Meanwhile, the United Forum of Bank Unions (Maharashtra State) Convenor Devidas Tuljapurkar requested the Maharashtra Government to deploy adequate police personnel at bank branches, especially in rural and semi-urban areas, so that customers’ entry is regulated.

“We would like to bring to your notice that at various places, bank branches are facing huge rush at the counters,” Tuljapurkar said in a letter to the State Chief Minister.

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Protect bank staff, prioritise vax, BFSI News, ET BFSI

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MUMBAI: The finance ministry has again written to state governments asking them to put in place a dispensation for vaccinating bank and other financial sector employees. It has also asked the states to protect financial sector employees after incidents of bank staff being manhandles by police enforcing a lockdown came to light.

Debasish Panda, secretary in the department of financial services at the finance ministry, said in a letter to all states’ chief secretaries that the home ministry has categorised the banking industry as a provider of essential services. Since bank employees have to necessarily commute from their homes to offices, and offices must remain physically open, the chief secretaries have been asked to communicate to all district magistrates and police chiefs not to hinder or impede their functioning or movement.

“This letter is very pertinent, and the messaging will help in boosting the morale of bank employees,” said Rajkiran Rai, chairman of the Indian Banks’ Association (IBA). “It sends out a message to everyone that bank employees should be treated with respect,” he added. Earlier this week, videos of police caning a bank employee on his way to work had gone viral and had caused outrage.

In March, the IBA had sought frontline worker status for bank staff. At that time, the association had pointed out that there were around 600 casualties due to Covid among bank employees. Since then, the number of casualties has doubled with the maximum deaths during the last six weeks when the country saw a surge of cases in the second wave.

Although the finance ministry has made requests to states for vaccination of bank employees, some senior executives feel that the communication for priority in vaccination needs to come from the home ministry for states to take cognisance.



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Padmakumar Nair to take charge of NARCL

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State Bank of India’s Padmakumar Madhavan Nair is set to take charge as the chief of the National Asset Reconstruction Company Ltd (NARCL), which is being set up by banks, especially from the public sector, to tackle stressed assets.

Nair is currently Chief General Manager with SBI’s Stressed Assets Resolution Group.

The Indian Banks’ Association (IBA) is spearheading the formation of NARCL in consultation with the Finance Ministry and the Reserve Bank of India. Stressed assets with principal outstanding of ₹500 crore and above, aggregating about ₹1.50 lakh crore, are expected to be transferred to NARCL. Like other ARCs, NARCL too will have to invest in at least 15 per cent of the Security Receipts (SRs) it issues to acquire stressed assets, according to industry experts. Further, the Government may give a guarantee for SRs.

Union Finance Minister Nirmala Sitharaman, in her union budget speech on February 1, 2021, 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 Asset Reconstruction Company and an Asset Management Company 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.

“We need to look at various aspects like regulations, different approvals needed, and processes. There are multiple things that need to be looked at,” said Rajkiran Rai G, MD & CEO, Union Bank of India. Rai is also the Chairman of IBA.

At a recent press meet, Rakesh Sharma, MD & CEO, IDBI Bank, said large public sector and private sector banks will be investing in NARCL, with each bank taking less than 10 per cent stake. IDBI Bank will also consider investing in the company.

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Allow us to sell bad loans back to defaulting promoters, ARCs tell RBI, BFSI News, ET BFSI

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As the government gears up to roll out National Asset Reconstruction company or bad bank, next month, asset reconstruction companies (ARCs) have sought more leeway from the banking regulator.

They have asked the RBI to let them sell assets of defaulting promoters back to them and want corporates and high net worth individuals to be allowed to invest in troubled loans through the securities issued by ARCs.

Level-playing field

Responding to the RBI’s call for suggestions to overhaul their structure in the country, it has said that special regulatory dispensation/benefit if any given to proposed ARC should apply to all existing ARCs and level playing field from the regulatory perspective be given to all existing ARCs.

ARCs were allowed to sell bad loans back to defaulting promoters under the SARFAESI Act. However, it was disallowed under the IBC clause, which has hampered the ARCs.

ARCs have asked for this minimum investment to be brought down to 2.5% in cases where the bank selling the bad loan is not the investor. Other suggestions include a request to be classified as non-banking financial companies, which will enable ARCs to borrow from banks.

Bad bank

National Asset Reconstruction Company Ltd (NARCL), the name coined for the bad bank announced in the Budget 2021-22, is expected to be operational in June.Bad bank refers to a financial institution that takes over bad assets of lenders and undertakes resolution.

The new entity is being created in collaboration with both public and private sector banks.

NARCL will take over identified bad loans of lenders. The lead bank with offer in hand of NARCL will go for a ‘Swiss Challenge’, where other asset reconstruction players will be invited to better the offer made by a chosen bidder for finding higher valuation of an NPA on sale.

The company will pick up those assets that are 100 per cent provided for by the lenders, he added.

Finance Minister Nirmala Sitharaman in Budget 2021-22 announced that the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books.

“An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt,” she had said in the Budget speech. It will then manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realisation, she added.

Last year, IBA had made a proposal for creation of a bad bank for swift resolution of non-performing assets (NPAs). The government accepted the proposal and decided to go for asset reconstruction company (ARC) and asset management company (AMC) model for this.

Mehta further said NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.

The government guarantee would be invoked if there is loss against the threshold value, he added.



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IBA CEO, BFSI News, ET BFSI

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National Asset Reconstruction Company Ltd (NARCL), the name coined for the bad bank announced in the Budget 2021-22, is expected to be operational in June.

Bad bank refers to a financial institution that takes over bad assets of lenders and undertakes resolution.

The new entity is being created in collaboration with both public and private sector banks, Indian Banks’ Association Chief Executive Officer (CEO) Sunil Mehta said.

“Various preparatory work is going on and we hope that it should be operational next month. The biggest advantage of NARCL would be aggregation of identified NPAs (non-performing assets).

“This is expected to be more efficient in recovery as it will step into the shoes of multiple lenders who currently have different compulsions when it comes to resolving a bad loan,” he said.

NARCL will take over identified bad loans of lenders, Mehta said. He added that the lead bank with offer in hand of NARCL will go for a ‘Swiss Challenge’, where other asset reconstruction players will be invited to better the offer made by a chosen bidder for finding higher valuation of an NPA on sale.

The company will pick up those assets that are 100 per cent provided for by the lenders, he added.

Finance Minister Nirmala Sitharaman in Budget 2021-22 announced that the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books.

“An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt,” she had said in the Budget speech. It will then manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realisation, she added.

Last year, IBA had made a proposal for creation of a bad bank for swift resolution of non-performing assets (NPAs). The government accepted the proposal and decided to go for asset reconstruction company (ARC) and asset management company (AMC) model for this.

Mehta further said NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.

The government guarantee would be invoked if there is loss against the threshold value, he added.

The Reserve Bank of India (RBI) has said that loans classified as fraud cannot be sold to NARCL. As per the annual report of the RBI, about 1.9 lakh crore of loans have been classified as fraud as on March 2020.

To facilitate smooth functioning of asset reconstruction companies, the RBI last month decided to set up a panel to undertake a comprehensive review of the working of such institutions.

After enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002, regulatory guidelines for ARCs were issued in 2003 to enable development of this sector and to facilitate smooth functioning of these companies.

Since then, while ARCs have grown in number and size, their potential for resolving stressed assets is yet to be realised fully.



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IBA fears precedent, wants govt to pay ‘interest on interest’, BFSI News, ET BFSI

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The Indian Banks’ Association (IBA) has sent a communication to the Finance Ministry to pay the compound interest charged to borrowers with loans above Rs 2 crore during the moratorium period of March 1 to August 31, 2020.

Though most private banks have provided for the compound interest waiver, bankers are of the view such a move will set a precedent and want the government to foot the bill. They are expecting a reversal benefit on the interest on interest payment, according to a report.

The Supreme Court order

The Supreme Court in its order last month had directed the government and the RBI to waive penal interest charges on all loans, while rejecting the demand of borrowers to extend the repayment moratorium beyond August 31 and for a complete interest waiver. The loan moratorium scheme was aimed at giving temporary relief to borrowers.

In November last, the government decided to waive interest-on-interest for borrowers below loan exposure of Rs 2 crore. It paid nearly Rs 6,000 crore to lenders to compensate them for the income loss.

Bank provisions

After waiting for the government to burden the compound interest on loan waivers, top banks have provided for payment in the fourth-quarter results.

HDFC Bank has provided Rs 500 crore for interest on interest while ICICI Bank said it has kept Rs 175 crore aside for it, according to the Q4 results announced by these banks. Axis Bank has provided Rs 160 crore while Mahindra Finance has made a provision of Rs 32 crore.

How much does it cost?

Waiving compound interest on loans above Rs 2 crore could cost nearly Rs 4,000 crore to public sector banks, Rs 2,500 crore to private banks and another Rs 1,000 crore to non-bank lenders.

While ICICI Securities had put the total compound interest burden on loans above Rs 2 crore at Rs 11,700 crore, other analysts have put it between Rs 7,000 crore and Rs 10,000 crore. As per rating firm ICRA, compound interest for six months of moratorium across all lenders is estimated at Rs 13,500-14,000 crore.

The Indian Bank Association has recently finalised a methodology for the calculation of the interest on interest component.

Under the norms, borrower accounts which were standard as on February 29, 2020, including SMA­0, SMA­1 and SMA­2 will be eligible for the refund. All loans, working capital, trade products, outstanding during the moratorium period shall be considered for the compound interest waiver.

The government stand

The government had reimbursed banks for forgoing compound interest, or interest on interest, on loans up to Rs 2 crore outstanding during March-August last year, when borrowers had the option to seek a moratorium on repayments.

Lenders have been charging compound interest on larger amounts, but the Supreme Court order means they must now refund it to borrowers. Banks were hoping that the government will take on the burden by enhancing the scope of the ex-gratia scheme to cover the additional refund after the apex court order.



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