Tag: interest

PMC Bank depositors dismayed by move to deny them interest

Banking & Finance

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Distraught depositors of the scam-hit Punjab and Maharashtra Co-operative (PMC) Bank have a simple question for the Reserve Bank of India (RBI): “How can a bank take a deposit and not pay interest on it?”

They are irked by a clause in the draft scheme of the bank’s amalgamation with Unity Small Finance Bank (transferee bank) that says, “no further interest will be payable on the interest-bearing deposits of transferor (PMC) bank for a period of five years from the appointed date”.

The clause appears at odds with the Reserve Bank of India (Interest Rate on Deposits) Directions, 2016.

PMC’s 1,100 employees can heave a sigh of relief

The master direction says that scheduled commercial banks (SCBs) cannot “accept interest-free deposit other than in current account or pay compensation indirectly”.

Co-operative banking experts opine that the treatment of bank depositors should be evenhanded, irrespective of whether it is an SCB or a scheduled urban co-operative bank.

‘Sweetener for transferee’

S Ravi, Founder and Managing Partner of the chartered accountants firm Ravi Rajan & Co. LLP, said: “It is a sweetener for the transferee bank, giving it access to interest-free cash flow for five years.

“In the case of Yes Bank and Lakshmi Vilas Bank, the bondholders lost their money. Similarly here, the depositors are losing interest. Probably, this is also a way to discourage people from coming into co-operative banks.”

The RBI may have to revisit the “no further interest” clause in the scheme of amalgamation due to its master direction.

According to the RBI’s interest rate framework, SCBs shall pay interest on deposits of money (other than current account deposits) accepted by them or renewed by them.

PMC depositors with over ₹5 lakh disappointed with draft scheme

Further, the interest rates shall be reasonable, consistent, transparent and available for supervisory review or scrutiny.

Chander Purswani, President, PMC Depositors Forum, said depositors felt shortchanged and would submit their objections to the RBI.

He observed that the 10-year period prescribed for withdrawal of large retail deposits from Unity SFB was too long and suggested halving it.

Red flag and after

As at March-end 2021, PMC Bank had deposits aggregating ₹10,535 crore. Of this, about 70 per cent are retail deposits and the rest are institutional deposits, including other urban co-operative banks (216) and co-operative societies (1,750).

PMC Bank came to grief in 2019 as its high exposure to real estate company HDIL turned non-performing.

The central bank red-flagged the fraud and/or financial irregularities in the bank and the manipulation of its books of accounts.

In October 2021, the RBI granted a banking licence to Unity SFB, established jointly by Centrum Financial Services Ltd (CFSL) and Resilient Innovations Private Limited (BharatPe), to carry out SFB business in India.

The RBI had on June 18, 2021, given an “in-principle” approval to CFSL, a wholly-owned subsidiary of Centrum Capital Ltd, to set up an SFB.

The “in-principle” approval was specific to CFSL’s February 2021 offer in response to PMC Bank’s November 2020 expression of interest (EoI) notification.

Unity SFB commenced operations on November 1, 2021.

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Why no-cost EMI is no free lunch

Personal Finance

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A coffee time chat between two colleagues leads to an interesting explainer on an emerging loan product.

Vina: Hi Tina, did you check out the ongoing festive sales online? I have shortlisted a few items to buy.

Tina: No big ticket purchases this year, Vina. Spent a lot last month. It’s time I tighten my purse strings.

Vina: Why don’t you try the no-cost EMI options offered by many sellers, including e-comm websites?

Tina: No, Vina. No-cost EMI is a misnomer.

Vina: Why do you say that? The EMI instalments include no interest or any other additional charges. Plus, you get to defer the payment on your purchases by 3 to 12 months. What more could you ask for?

Tina: That’s not entirely true. Many banks, NBFCs (Bajaj FinServ) and other financial institutions (such as ZestMoney) with whom e-commerce websites have lending tie-ups, charge a processing fee on such no-cost EMI options. Starting from ₹99, the processing fee can go up to 1 per cent of the order value. Besides, a few also levy additional charges on pre-closure of loans, which may apply even if you return the product or cancel purchase.

And like any other loan, the instalments in no-cost EMIs also include an interest component, which however is offered as an upfront discount, hence the term ‘no-cost’. This interest ranges from 12 to 15 per cent per annum.

Vina: Yeah, isn’t that good saving on the interest front? Imagine how many people could benefit.

Tina: There is another catch here. The no-cost EMIs are only available for existing customers (debit or credit card holders) of the bank with whom the e-commerce site has partnered. These customers must have an existing pre-approved credit or overdraft limit with the bank. Moreover, this option is available only on purchases over a certain limit, ₹5,000 in most cases. Besides, part payment is also not an option. You need to either make full payment or avail a no-cost EMI option in full. But the advantage is that one can avail the loan online and almost instantly, without visiting the branch and submitting numerous documents.

Vina: Oh, these are part of pre-approved loans? Clearly those who have already exhausted such limits with their bankers, or have low or no credit score cannot avail no-cost EMI options.

Tina: Right. However, there are new fintech players such as ZestMoney, that provide such no-cost EMI options online to even those with no cards, credit score or such pre-approved limits. One has to just register their Aadhaar-linked mobile number on the platform and complete basic KYC for onboarding. Post this, the website approves a certain credit limit based on your transaction history and the customer can avail the no- cost EMI option on its partnered websites. These come with varying terms and conditions.

Vina: But then again, I need to verify if such players have partnered with the store where I want to make a purchase, or if the product of my choice is entitled for such an option from the fintech players.

Tina: Right! Net-net while no-cost EMIs do sound exciting, remember that there is no free lunch, ever.

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FinMin announces repayment of oil bonds worth ₹5,000 cr

Banking & Finance

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The Finance Ministry has announced payment of ₹5,000 crore for oil bonds issued during 2005 and 2010 in lieu of selling oil product below the cost.

“The outstanding balance of ‘7.75% OMC GoI Special Bonds 2021’ is repayable at par on November 26, 2021,” the Ministry said in a statement. Further it mentioned that no interest will accrue thereon from the said date. In the event of a holiday being declared on repayment day by any State Government under the Negotiable Instruments Act, 1881, the loan/s will be repaid by the paying offices in that State on the previous working day.

Last month, the government paid ₹5,000 crore for another tranche of oil bond, taking total payout at ₹10,000 crore in the fiscal. After this, next tranche of ₹22,000 crore will be due in 2023. With this total principal amount pending would be over ₹1.20-lakh crore to be repaid between 2023 and 2026.

A mechanism of the regulated era, the bonds were issued to the oil companies for not increasing retail prices of petrol and diesel to reflect rising crude oil prices. The ‘under-recoveries’ of the oil companies due to their bearing the subsidy burden was converted into oil bonds by the then government. These bonds are interest-bearing, having a fixed coupon rate and paid on a half-yearly basis. The annual interest due of around ₹10,000 crore has been provided for in the Budget.

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How InvIT, REIT income is taxed

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Over the last few years, infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) have emerged as a popular investment option for those who want a regular income flow and are comfortable with taking on some risk.

The soaring equity market valuations and dwindling fixed income returns have only added to their appeal. With the government laying out a roadmap for monetisation of infrastructure assets, InvITs are expected to gain further ground.

An InvIT/ REIT pools money from investors (unitholders) to invest in a portfolio of income-generating infrastructure assets (80 per cent in operational assets) via subsidiaries (SPVs). REITs invest in real estate projects and InvITs in infrastructure assets, such as power transmission or road projects. The unitholders receive a regular payout, at least once every six months. Also, as units of publicly issued InvITs/REITs trade like shares on the exchanges, they offer an opportunity for capital appreciation.

Investors, however, need to wade through their complex taxation. The income of an InvIT/ REIT is passed on to unitholders in the form in which it’s received and is taxed as such.

Distributable surplus

An InvIT/ REIT receives cash flows from its project SPVs in the form of: a) dividends in return for the stake held b) interest and c) principal repayment on loans extended to them. Any other income at the InvIT/ REIT level such as capital gains from assets sold and not re-invested, and return on surplus cash invested, too, gets added to this.

Apart from this, if a REIT holds any real estate asset directly and not via an SPV, then the income flows to it in the form of rent (and not interest and dividend) and gets added as such.

All expenses incurred at the InvIT/ REIT level are deducted from the total cash inflow to arrive at the net distributable surplus (NDS). Unitholders must be paid at least 90 per cent of the NDS. A break-up of the components of the distribution is usually available on the websites/ presentations of the respective InvIT/ REIT.

Tax treatment

Distribution: The interest component of the NDS is taxed at your income tax slab rate. The dividend, too, is taxed at your slab rate if the project SPVs of the InvIT/ REIT have opted for the new concessional tax regime under section 115BAA of the IT Act. The dividend is tax-exempt if the project SPVs have not opted for the concessional tax.

Also as Hemal Mehta, Partner, Deloitte India, explains, before the interest and dividend are paid out, a 10 per cent withholding tax (for resident investors) is deducted by the InvIT/ REIT, against which the investor can claim credit.

The loan repayment component represents return of capital and is not subject to tax. Any other income at the InvIT/ REIT level such as capital gains on any asset sold or interest on fixed deposits which is passed on to the unitholders, too, is tax-exempt in their hands.

Powergrid InvIT, India Grid Trust and IRB InvIT Fund are the three publicly listed InvITs open to retail investors.

IRB InvIT Fund has distributed ₹41.30 per unit (₹30 as interest and ₹11.30 as return of capital) since its listing in May 2017 until March 31, 2021. Since most of the trust’s SPVs are loss-making (PAT level), there have been no dividends.

In case of India Grid Trust, almost all the distributions since its listing in June 2017 have been in the form of interest income. As of June 2021, India Grid Trust had opted for concessional tax for all except one of its SPVs. Any future distributions in the form of dividends will, therefore, be taxed accordingly.

Powergrid InvIT, which listed recently has not yet made any distributions. Four of the InvIT’s five project SPVs have opted for concessional tax.

In the REIT space, you have Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust, all publicly listed.

In the June 2021 quarter, they distributed ₹5.64, ₹4.60 and ₹6 per unit, respectively of which 80 per cent, 92 per cent and 24 per cent was tax-free in the hands of the investors.

Capital gains: If a unitholder sells his/her InvIT/ REIT units after holding them for up to 36 months, the short-term capital gains are taxed at 15 per cent (plus applicable surcharge and cess) without indexation benefit.

If the units are sold after being held for over 36 months, long-term capital gains (exceeding ₹1 lakh a year including from all equity investments) are taxed at 10 per cent (plus applicable surcharge and cess) without indexation benefit.

These rates are applicable to all REITs (which have to be mandatorily listed) and the listed InvITs.

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HSBC, Yes Bank cut home loan rates, BFSI News, ET BFSI

Banking & Finance

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HSBC India has reduced its home loan interest rates by 10 basis points (100bps = 1 percentage point) from 6.55% to 6.45% for balance transfer home loans. Yes Bank too has announced a limited period a offer on, ‘Yes Premier Home Loans’ at 6.7%. It gives extra 0.05% benefit (interest rate at 6.65%) for prospective salaried women homebuyers.

HSBC’s special rate is available across all loan amounts, and the bank has also waived the processing fee for these loans. This special rate of 6.45% is part of a festive home loan offer which will be effective from 1st October 2021 to 31 December 2021.

“We believe this reduction in the home loans rates will help reduce the interest burden of customers and make homeownership more affordable,” said Raghujit Narula, Head Wealth and Personal Banking, HSBC India, said,

HSBC currently offers home loans to all customer at a competitive rate of 6.70% p.a. HSBC’s mortgage offering goes up to Rs 30 crores and includes other benefits such as Top-up Loans, Loans Against Property (LAP) and interest saving variant known as ‘Smart Home’. The special rate applies only to the basic home loan scheme.

Under Yes Bank’s offer, salaried home buyers can get flexible loan tenure of up to 35 years and zero prepayment charges with minimal documentation. The offer is applicable for home loans for property purchase as well as balance transfers from other lenders.



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SBI, BFSI News, ET BFSI

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Retail depositors are earning negative returns on their bank deposits and hence, there is a need for reviewing taxes on interest earned, economists at the country’s largest lender SBI have said.

If not for all the depositors, the taxation review should be carried out for at least the deposits made by senior citizens who depend on the interest for their daily needs, the economists led by Soumya Kanti Ghosh said in a note, which pegged the overall retail deposits in the system at Rs 102 lakh crore.

Senior citizens hit most

At present, banks deduct tax at source at the time of crediting interest income of over Rs 40,000 for all the depositors, while for senior citizens the taxes set-in if the income exceeds Rs 50,000 per year. As the policy focus has shifted to growth, the interest rates are going down in the system which pinches a depositor.

“Clearly, real rate of return on bank deposits has been negative for a sizeable period of time and with RBI making it abundantly clear that supporting growth is the primary goal, the low banking rate of interest is unlikely to make a northbound movement anytime soon as liquidity continues to be plentiful,” the note said.

Bull run gives leeway

It said the current bull run in financial markets is possibly a break from the past as households may have got into the bandwagon of self-fulfilling prophecy of a decent return on their investment.

“We thus believe, it is now the opportune time to revisit the taxation of interest on bank deposits, or at least increasing the threshold of exemption for senior citizens,” the note said.

The RBI can also relook at the regulation that does not allow interest rates of banks to be determined as per age-wise demographics, it said.

It can be noted that at present, banks are lending for as low as under 7 per cent for retail loans and have been public with their preference to lend to highly-rated corporate borrowers, where the lending rates get very competitive.



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RBI tweaks norms for interest on unclaimed amount after deposit matures, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank of India (RBI) on Friday tweaked the norms for interest on the amount left unclaimed with the bank after a term deposit matures.

Currently, if a term deposit matures and the proceeds are unpaid, the amount left unclaimed with the bank attracts the rate of interest as applicable to savings deposits.

“On a review, it has been decided that if a term deposit (TD) matures and proceeds are unpaid, the amount left unclaimed with the bank shall attract the rate of interest as applicable to a savings account or the contracted rate of interest on the matured TD, whichever is lower,” the RBI said in a circular.

The new norms are applicable for deposits in all commercial banks, small finance banks, local area banks, and cooperative banks.

Term deposit refers to an interest-bearing deposit received by the bank for a fixed period. It also includes deposits such as recurring, cumulative, annuity, reinvestment deposits, and cash certificates.



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Karnataka Bank aims to grow at 12 pc in FY22, BFSI News, ET BFSI

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New Delhi, Apr 24 () Karnataka Bank on Saturday said it is targeting to grow its business at 12 per cent to over Rs 1.42 lakh crore in the current fiscal year and will gradually increase the share of retail loan in its portfolio. In a communication to shareholders, the bank said it strives to see 2021-22 as a year of excellence on the back of its healthy business growth, ‘Cost-Lite’ liability portfolio and strengthened fundamentals.

“For the new Financial Year, the Bank is planning to grow its business at a moderate 12 per cent to take the total business turnover (i.e. total of Deposits and Advances) to around Rs 1,42,500 crore,” it said.

As a realignment strategy in its advances portfolio, the private sector lender said it has been eyeing credit exposure of minimum 50 per cent to retail, 35 per cent to mid corporates and not more than 15 per cent to large corporates.

The intent is to minimise the concentration on large corporate borrowers and to ensure continued sustainability, it said.

“The bank has been moving towards the said direction in a sustainable manner. Besides, the yield on the retail and mid corporate advances has been better than the large corporates and also, the risk is widespread across the portfolio than that of concentration in the case of large corporate exposure,” Mahabaleshwara M S, Managing Director & CEO, Karnataka Bank said.

He said COVID-19 came as a challenge in 2020-21 along with the “M-cap related misleading campaign against the private sector banks, including our bank by a section of media”.

Regarding the Supreme Court‘s order on not levying any interest on loans during March-August period of 2020, the lender said it already made ex-gratia payment of difference between compound interest and simple interest for these six months to the eligible borrowers in accordance with RBI directive.

In case of remaining accounts, the penal or compound interest charged on the borrower accounts may have to be refunded and adjusted towards next installment due within a reasonable time from the date of Supreme Court order dated March 23, 2021.

“Further, with the vacation of stay order, NPA marking has also resumed,” it said.

Mahabaleshwara said in spite of turbulent banking environment and unforeseen hurdles, the bank has been able to sail through 2020-21.

On the way forward, he said the bank is striving hard to see Karnataka Bank among the top three in the peer group by focussing on a healthy, consistent, sustainable and remunerative business and by continuing the efforts in recovery process. KPM ANU ANU



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Useful tips to avoid falling prey to bank mis-selling

Personal Finance

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In investing, as in life, it is useful to learn from other people’s mistakes. Some retail investors lost big money in Yes Bank’s Additional Tier 1 (AT-1) bonds last year, after Reserve Bank of India decided to write them off as part of a bailout package. But how did safety-seeking depositors in Yes Bank end up owning these risky bonds where the principal could get written off? SEBI’s order in this case offers some learnings on how you can avoid falling victim to mis-selling.

Get it in writing

In their complaints, the 11 investors said that it was the attractive pitches from their bank’s wealth managers that convinced them to buy the bonds. Some were told that AT-1 bonds were ‘super FDs’. Others swallowed the claim that they were ‘safer than Yes Bank FDs and equity shares.’ Some investors even thought they were merely renewing their FDs with the bank at a higher rate.

Given that none of the above statements were true, it is unlikely that the bank’s relationship managers made these claims in writing to the investors. They were simply taken in by verbal sales pitches.

While selling AT-1 bonds, bank managers were mandatorily required to share two documents with investors – an information memorandum and a term sheet. Asked by SEBI why they didn’t do so in this case, they either claimed that they did, or argued that investors ought to have checked these documents for themselves from the BSE website where they are posted.

Most of us are in the habit of investing in financial products based merely on an application form. The Yes Bank case shows just how injurious this can be to our wealth. Today, no financial product can be sold to you without a formal offer document, information memorandum, term sheet or prospectus. If you’re given only an application form, don’t hesitate to ask for and get hold of these additional documents.

The depositor isn’t king

SEBI’s findings show that of the 1,346 individuals who invested in the AT-1 bonds through Yes Bank, 1,311 (97 per cent) were Yes Bank’s own customers. Of these 1,311 customers, 277 prematurely broke their FDs to invest. Going by the amounts of ₹5 lakh to ₹80 lakh that these folks individually invested, wealth managers targeted the bank’s big-ticket depositors to down-sell these bonds.

While you may wonder why a bank’s staff should wean customers away from its own deposit products, this isn’t surprising.

Bank relationship managers in India have a long history of pitching all kinds of risky products to their customers from ULIPs to balanced equity funds to NCDs as fixed deposit substitutes. While they don’t receive any direct commission from such sales, their compensation packages are often linked to how much fee income they generate for the bank from selling exotic products.

So, the next time your bank’s relationship manager sounds as if he or she is doing you a favour by asking you to switch money out of your FD into an exciting new ‘opportunity’, be sceptical.

High returns equal high risk

Investors who are super-careful about avoiding capital losses in equities often turn far less vigilant when it comes to fixed income. The moment a wealth manager or distributor mentions a higher interest rate product, they’re quite eager to switch to make the switch. But the correlation between high returns and capital losses is actually higher with debt instruments than it is with stocks.

In fixed income, if a borrower is willing to offer you a huge rate premium over safe instruments, it is usually a warning sign that they are more likely to delay or default on repayments. Yes Bank’s AT-1 bond investors should have questioned why the same issuer (Yes Bank) should offer its bond investors much higher interest than it does its depositors. The answer quite simply is that AT-1 bonds can skip their interest payouts completely or write off principal, if the bank’s financials are stressed.

An argument that wealth managers used to sell AT-1 bonds to individuals was that they were sound investments, as they were already owned by institutions. This is a poor argument, as risk appetite and return expectation of a retail investor is seldom the same as that of an institutional investor. Institutions that held those bonds probably invested a minuscule portion of their portfolios while HNIs took concentrated exposures.

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