Tag: Nirmala Sitharaman

Centre may front load capital provisioning for PSBs this year, BFSI News, ET BFSI

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New Delhi, As the Central government draws a plan to privatise at least two public sector banks (PSB) this fiscal, it has also decided to front load capitalisation of state-owned banks so that the balance sheets of some of these entities are strengthened ahead of possible sale.

Sources said that PSBs may be provided this year just after their first quarter results before October. This would be a departure from the practice of previous year when bank capitalisation was undertaken late in the year and towards the end of fiscal.

Even in FY21, a substantial portion of capital was released right at end of the fiscal year in March.

“Front loading of capital will help PSBs to strengthen their financials that may again get impacted this year with weak lending and stress coming back on a lot of their credit assets with Covid pandemic continuing to disrupt businesses. This could also help in taking out weak banks out of the PCA (prompt corrective action) framework that would be helpful in their possible privatisation this year,” said an official source on the condition of anonymity.

The Budget 2021-22 has allocated Rs 20,000 crore towards recapitalisation of PSBs to help them consolidate their financial capacity.

Source said that more than two-third of this capital may be provided by the second quarter.

The government had earlier indicated that banks under prompt corrective action (PCA) framework or weaker banks would be kept out of privatisation as it would be difficult to find buyers for them. This would have left three PSBs, Indian Overseas Bank, Central Bank and UCO Bank, out of the government’s disinvestment plan.

But now the thinking is that they could be brought out of PCA as there are visible signs of improvement in some of the key parameters such as profitability and asset quality (in net NPA terms as they have stepped up provisioning) in the last 3-4 quarters. This could allow them to be considered for privatisation.

Provision of capital earlier in the year will give the necessary boost to them.

Finance Minister Nirmala Sitharaman had announced in her Budget speech this year that two state-run banks along with IDBI Bank would be privatised in FY22.

She also said that one general insurance company would be sold off in the current fiscal.

The recapitalisation roadmap is being redrawn for the PSBs in the current fiscal as the institutions are expected to face stress from the pandemic disruptions with fears that asset quality may further weaken like last year.

Also, the changes in valuation norms AT1 bonds has made the instrument less attractive for banks to raise their capital.

SEBI, though has amended the valuation rule of perpetual bonds in line with objections raised by the finance ministry, it still has said that from April 2023 onwards, the residual maturity of AT-1 bonds will become 100 years from the date of issuance of the bond. This will make the most used route of raising capital by banks less attractive.

Sources said that the Finance Ministry has already started a preliminary exercise to determine the capital requirement of banks in wake of limitations on fund raising norms and expected rise in bad assets during the time of the pandemic. Based on the inputs received by banks, additional capital may be provided to them from budgetary resources at the earliest.

On its part, government is strengthening the banking segment by merger and amalgamation of PSBs.

Since 2017, this exercise has resulted in seven large and five smaller PSBs.

The measures (based on bad loans and regional factors) were intended to help manage capital more efficiently. But emerging regulatory needs and pandemic affected businesses continue to pose challenges for banking segment.



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Niti Aayog submits names of PSU banks to be privatised, BFSI News, ET BFSI

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The names of two state-run banks and one general insurance company that can be privatised have been submitted by NITI Aayog to the Core Group of Secretaries on Disinvestment as was announced in the Union Budget for 2021-22.

Finance minister Nirmala Sitharaman has assured that the “interests of workers of banks which are likely to be privatised will absolutely be protected whether their salaries or scale or pension all will be taken care of”.

Along with these two state-run banks and one general insurer, the government wants to conclude the privatisation process for Air India, BPCL and Shipping Corporation in this fiscal.

The government has budgeted Rs 1.75 lakh crore from disinvestment during the current financial year.

As the second wave of the coronavirus threatens to disrupt the projected economic growth in the current fiscal, the government is banking on meeting its non-tax revenue targets.

The government is aiming at creation of bigger banks.

“We brought together banks with completely different capacities and we wanted to have the synergies of both so that the bank which has extensive network in a particular area comes in also, but that bank which is sitting over mounds of deposits but doesn’t have that many branches (is) also able to benefit,” the FM had said in an interview to this paper.

Niti Aayog has been entrusted with the task of selection of names of two public sector banks and one general insurance company for the privatisation as announced in the Budget 2021-22.



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Merge RRBs with sponsor banks, AIBEA urges Finance Minister, BFSI News, ET BFSI

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Chennai, The merger of Regional Rural Banks (RRB) with their sponsor banks would avoid business cannibalization and reduction in administrative overheads, the All India Bank Employees’ Association (AIBEA) said on Monday.

In a letter to Union Finance Minister Nirmala Sitharaman, AIBEA General Secretary C.H. Venkatachalam said instead of further reforms in the RRB sector, it would be better to merge them with their sponsor banks as this will add to the rural network of the latter and at the same time, eliminate the weaknesses that they suffer presently.

“Monitoring would be much more effective since they would become part of the bank and come under the direct control of the management of the sponsor banks. This would also obviate a lot of administrative overheads and expenses,” he said.

While the objectives of RRB are laudable, their very nature of the business makes them fragile and vulnerable, he noted.

“More often than not, these RRBs even face competition from their own sponsor banks too. In this background, there have been many efforts to restructure the RRBs to make them strong and vibrant but the results have not been that encouraging because of the intrinsic reasons and they are bound to be so,” Venkatachalam said.



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Bad bank to kick off with 80 NPAs worth Rs 2 lakh crore, BFSI News, ET BFSI

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Banks are likely to transfer about 80 large NPA accounts for the resolution to National Asset Recons­tru­ct­ion Com­pany (NARCL), which is expected to be operational by next month.

NARCL is the name coined for the bad bank announced in the Budget 2021-22. A bad bank refers to a financial institution that takes over the bad assets of lenders and undertakes resolution.

Finance Minister Nirmala Sitharaman in the 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.

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

The process

The size of each of these NPAs accounts is over Rs 500 crore and the banks have identified about 70-80 such accounts to be transferred to the proposed bad bank, sources said. It is expected that NPAs over Rs 2 lakh crore will move out of the books of the banks to the bad bank.

The company will pick up those assets that are 100 per cent provided for by the lenders. It will then manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realisation.

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 a loss against the threshold value.

The loans identified by the Indian Banks’ Association include NPAs in a variety of industries — including oil, steel, cement and roads, with many admitted under the insolvency process. These loans are almost fully provided for over the years and they exclude the ones where there is fraud involved or those currently under liquidation. About 75% of the lenders by value need to approve to transfer the loans to an ARC.

No fraud loans

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 of March 2020.

To facilitate the 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 the development of this sector and to facilitate the 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.

The bad bank

Nine banks and two non-bank lenders, including the State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BoB), are coming together to jointly invest Rs 7,000 crore of initial capital in a proposed bad bank that aims to help extract funds stuck in bad loans. Two other state-run financiers of power projects will also own stock in the bad bank.

Canara Bank, Union Bank of India and Bank of India will join their larger state-run peers as investors in the bad bank. ICICI Bank, Axis Bank and Life Insurance Corp of India-owned IDBI Bank are also among the shareholders. State-owned Power Finance Corp and Rural Electrification Corp will also be equal shareholders in the new company.



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Divestment hopefuls Bank of Maha, BoI, IOB shoot up on stock market charts, BFSI News, ET BFSI

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Public sector banks Bank of Maharashtra, Bank of India, Indian Overseas Bank and the Central Bank of India, which are reportedly on the privatisation shortlist have risen manifold during the year.

The rally in PSU banks has strengthened in the last few days despite the yo-yoing markets due to the coronavirus pandemic wave.

Bank of Maharashtra shares have nearly doubled from Rs 13.55 at the start of the year to Rs 25.40 per share. It was up 2.21% over the previous close on Wednesday.

From 10.80 at the start of the year, Indian Overseas Bank’s shares have risen over 52% to 16.45. The shares were up 3.13% over the previous close on Wednesday.

From Rs 50.35 a share in January start, the Bank of India share price has climbed to 72.70 on Wednesday. It was up 4.76% over the previous close.

From 14.10 in January, the share price of Central Bank of India has jumped to Rs 18.45 on Wednesday. It was up 7.89% over the previous close.

The top PSU banks including SBI, Bank of Baroda, Canara Bank and PNB are also outperforming over divestment hopes around PSU banks.

More upside seen

Traders see another 10-15% jump in PSB shares if the Nifty holds 14500 levels.

SBI is the top investment pick in case the Nifty holds 14,400, with others offering a good trading opportunity for greater upside on talks around divestment.

PNB, Canara Bank, Bank of Baroda and SBI, which hold 74.63 per cent weight in the Nifty PSU Bank, have rallied between 4 per cent and 17.5 per cent in April 20-May 11, driving the index up by 15.05 per cent to 2,239.7 over the same period. This beats the Bank Nifty’s 6 per cent rally through 32,953 over the comparative period.

On May 12, when the Nifty and Bank Nifty corrected by more than 1 per cent, the Nifty PSU Bank closed up 3.2 per cent, underscoring the buying in these counters.

Futures prices of these stocks along with aggregate open interest change signal the market interest in these counters.

Canara Bank active futures contract has risen 17.5 per cent through 151 between April 20 and May 11. Over this period, the aggregate open interest, which measures traders’ outstanding buy-sell positions, rose 11.25 per cent, implying bullish sentiment on the counter.

Bank of Baroda’s 17 per cent gain in futures was accompanied by an 11.3 per cent decline in aggregate OI, signalling that bears were covering their sell positions. Likewise, SBI active futures contract, which has risen 11 per cent in the relevant period, was accompanied by an 8 per cent decline in aggregate OI, implying short covering. PNB futures, which rose 4 per cent, saw aggregate OI jump 40 per cent, suggesting bullish build-up.

The status

Indian Overseas Bank and Central Bank are under the Reserve Bank of India‘s stringent prompt corrective action framework.

These banks have reported net non-performing assets (NPAs) below levels that trigger PCA. However, on the proforma net NPA front, Central Bank falls short as its NNPA is 6.58% against the 6% required to be out of PCA.

The Reserve Bank of India is likely to delay regularising struggling state-run lenders that are under the prompt corrective action (PCA) framework as it has reservations over their capital adequacy levels.

Two public sector banks and one general insurance company are expected to be disinvested this year in addition to the divestment of IDBI Bank, Finance Minister Nirmala Sitharaman had announced during Budget presentation in February.



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PSU banks keep vigil over Cairn Energy raid on its overseas accounts, BFSI News, ET BFSI

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With UK’s Cairn Energy Plc looking to seize Indian assets to recover USD 1.2 billion it was awarded by an international arbitration tribunal, the Indian government has dug in heels and put banks on vigil for any such action.

Cairn Energy has said it taking necessary actions to access the USD 1.7 billion it was awarded by an international arbitration tribunal after overturning a retroactive tax demand slapped by the Indian government.

The Department of Financial Services has asked public sector banks to appoint a nodal officer amid increasing concerns that overseas assets or deposits of these lenders could be attached.

The department wrote a letter to public sector bank chiefs suggesting they immediately inform Sanjay Kumar, director – banking operations, if they receive ‘any intimation/notice/letter’ from Cairn Energy Plc and its subsidiary Cairn UK Holdings.

“Banks are advised to appoint a nodal officer in the case for any future correspondence, and share the name, designation and contact details of the official with us,” Jnanatosh Roy, under secretary, department of nancial services, nance ministry, wrote in the letter.

Cairn Energy and the government are locked in a legal battle over an arbitration order that requires India to pay $1.2 billion.

Withdraw funds

Last week, the central government has asked public sector banks to withdraw funds from their foreign currency accounts abroad, as New Delhi fears Cairn Energy may try to seize the cash after an arbitration ruling in a tax dispute.

A guidance was sent to state-run banks to withdraw funds from their nostro accounts.

A nostro account refers to an account a bank holds overseas at another bank in the currency of that jurisdiction. Such accounts are used for international trade and to settle other foreign exchange transactions.

While the Indian government has filed an appeal, the London-listed firm has started identifying Indian assets overseas, including bank accounts, that could be seized in the absence of a settlement, which Cairn says it is still pursuing.

The company has registered its claim against India in courts in the United States, Britain, France, the Netherlands, Singapore and Quebec, moves that could make it easier to seize assets and enforce the arbitration award.

The government was concerned courts abroad could order funds in their jurisdiction be remitted to Cairn.

Cairn said in February it was discussing several proposals with the government to find a solution.

India’s stand

Finance Minister Nirmala Sitharaman has earlier said that an international arbitration ruling on India’s sovereign right to taxation sets the wrong precedent, but said the government is looking at how best it can sort out the issue arising out of New Delhi being ordered to return $1.2 billion plus interest and cost to UK’s Cairn Energy Plc.

The government, which participated in an international arbitration brought by the Scottish firm against being taxed retrospectively, has appealed against The Hague based tribunal’s ruling asking the government to return the value of shares expropriated and liquidated, tax refunds withheld and dividend seized to recover a wrongly levied retroactive tax demand.

“We don’t believe in retrospective taxation,” she had said. “However, when issues are taken at arbitration… which question India’s sovereign right to taxation, we are worried that it sets a wrong precedent.” The Indian government argues that tax levied by a sovereign power should not be subject to private arbitration. Cairn had previously said the award is binding and it can enforce it by seizing overseas Indian assets.

Sitharaman, however, added that the government is looking to sort out the issue.

“I want to see how we can best sort this out,” she said, without elaborating.

The award

Cairn was awarded damages of more than $1.2 billion-plus interest and costs in December in a long-drawn-out tussle with the Indian government over its retrospective tax claims.

The Scottish firm invested in the oil and gas sector in India in 1994 and a decade later it made a huge oil discovery in Rajasthan. In 2006, it listed its Indian assets on the BSE.

Five years after that, the government passed retroactive tax law and billed Cairn Rs 10,247 crore plus interest and penalty for the reorganisation tied to the flotation.

The state then expropriated and liquidated Cairn’s remaining shares in the Indian entity, seized dividends and withheld tax refunds to recover a part of the demand.

Cairn challenged the move before an arbitration tribunal in The Hague, which in December awarded it $1.2 billion (over Rs 8,800 crore) plus costs and interest, which totals USD 1.725 billion (Rs 12,600 crore) as of December 2020.

The company has since then been in talks with the finance ministry to get the government to pay the award.



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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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RBI paper, BFSI News, ET BFSI

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Introduction of a bad bank may help “shape the operations” of the existing asset reconstruction companies (ARCs), an RBI paper said on Monday, noting that a sizable bulk of assets bought by such entities have not been resolved for a long time. The paper, published in the central bank’s monthly bulletin for April, also flagged risks of an excessive reliance on banks by the ARC industry.

It said banks supply non performing assets (NPAs) to the ARCs, hold shareholding in these entities and also lend to them, which makes it necessary to monitor if there is a “circuitous movement of funds between banks and these institutions (ARCs)”.

In her Budget speech for FY22, Finance Minister Nirmala Sitharaman had declared that a new ARC will be created to hold the sour assets of the state-run lenders and resolve such assets professionally.

“About 42 per cent of the outstanding SRs (security receipts) as on March 2020 were more than five years of age and would have to be redeemed over the next four years to avoid write-offs,” the paper said, pointing out at the difficulties being faced by the current set of ARCs in resolving the stress.

While resolving a case, ARCs pay a minor portion in cash to the selling bank while the rest is SRs to be paid over a time.

“Going forward, the introduction of a new asset reconstruction company for addressing the NPAs of public sector banks may also shape the operations of the existing ARCs,” the RBI paper said.

It added that there is a definite scope for the entry of a “well-capitalised and well-designed entity” in the Indian ARC industry and such a body will strengthen the asset resolution mechanism further.

It cited global experiences to lay down the necessary features of the new ARC announced by the government.

It advocated that the new ARC or the bad bank should have a narrow mandate such as resolving NPAs with clearly defined goals, a sunset clause defining their lifespan, supportive legal infrastructure involving bankruptcy and private property laws, backing of a strong political will to recognise problem loans, and a commercial focus including in governance, transparency, and disclosure requirements.

The paper said while proactive asset recognition is important for a correct assessment of the health of the banking system, it needs to be followed by effective asset resolution and recovery by banks.

The absence of an effective resolution and recovery mechanism can discourage recognition of NPAs by banks in the first place. The lack of recourse to timely recovery can also deteriorate the economic value of assets adding to the losses incurred by banks over time, it said.

The regulatory changes by the Reserve Bank have been broadly geared towards strengthening the ARC industry, ensuring genuine sale of NPAs by banks, enhancing the involvement of ARCs in the process of resolution and deepening the market for SRs, it said.

However, it noted that there has been a concentration in the industry in terms of AUM and SRs issued, and net owned funds.

Secondly, despite the regulatory push to broaden, and thereby enhance, the capital base of these companies, they have remained reliant primarily on domestic sources of capital, particularly banks.



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