Tag: rbi news

Cautious banks drastically cut education loans as income, job losses rise, BFSI News, ET BFSI

Banking & Finance

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The bank credit is ticking up for industry and allied sectors in line with the economic revival, but certain segments continue to stay in doldrums.

Credit to commercial real estate and education loans shrunk by 0.5% and 8.7% on year, respectively, in October.

According to RBI data on sectoral credit deployment, loans to the industry sector increased 4.1% on year to Rs 28,54,571 crore as on October 22. On the other hand, loans to commercial real estate fell 0.5% on year to Rs 2,53,582 crore while education loans credit deployment by banks by 8.7% to Rs 47,260 crore.

Experts say banks have sharply reduced exposure to unsecured credit and are focusing on secured home loans and working capital needs of high rated corporate borrowers. While they are focusing on growing the mortgage book, banks have reduced exposure to commercial real estate, given the uncertain times.

Education loan NPAs

Nearly 9.55% of education loans extended by PSU banks were labelled as non-performing assets (NPAs) as on December 31, 2020, with loans for engineering and nursing courses topping the chart.

Job and income loss and drop-out rates during the pandemic were key factors behind the surge in education loan NPAs.

Rising unemployment rate is posing major challenges to the banking system as the repayment ability of the borrowers are getting impacted accordingly.

About Rs 8,587 crore loans over 366,260 accounts have turned bad as of December 2020.

As on December 31, 2020, there are 24.84 lakh education loan accounts with an outstanding of Rs 89,883.57 crore across the country. Out of these, about 9.55% or 3.66 lakh accounts with an outstanding of Rs 8,587.10 crore have turned NPAs, the parliament was informed.

The highest defaults were in loans extended for engineering courses as Rs 4,041.68 crore spread over 176,256 accounts as on December 31, 2020.

COVID-led spike

Interestingly, the NPA rate has dropped to 7.61% in FY20 end from 8.11% in FY18. It stood at 8.29% in FY19. The category has witnessed higher NPAs than other categories of retail loans including housing, vehicle, that saw bad loans in the range of 1.52% and 6.91% in FY20 While NPAs in the housing, vehicle and other retail sector loans have remained below 2%, consumer durables NPAs have trebled to 6.91% as on March 2020 from 1.99% in March 2018.

Reserve Bank of India
Reserve Bank of India

Rising graph

Led by a rise in lending to micro and small, and medium industries, bank loans to the industry sector grew a 4.1% on year in October, sharply higher than 2.5% a month ago and contraction of 0.7% a year ago, according to the RBI data.

Loans to large corporates rose 0.5% (on a year-on-year basis) to Rs 22.7 lakh crore in October compared to a contraction of 1.8 % a year ago.

All major segments, except services including agriculture, industry and retail posted higher growth rates over the previous year. Overall bank credit rose 6.9% in October compared to 5.2% a year ago according to the latest data on sectoral deployment of bank credit released by the Reserve Bank of India.

Government schemes like emergency credit guarantee schemes targeted at such borrowers also seemed to have played a part in the pick-up in lending to these corporate borrowers during the festival season.

The 10.7% growth in gross capital formation in Q2’21-22 is driven primarily by public capital expenditure although there are also signs of a pickup in private capex in the current fiscal.



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Emkay Global, BFSI News, ET BFSI

Banking & Finance

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The recent Reserve Bank of India clarification on banks’ promoter holdings is likely to benefit IndusInd Bank, if the central bank does not have any issues related to the promoters, Emkay Global said in a report.

In IndusInd Bank, the Hinduja brothers hold a 16.5 percent stake. The increase in promoter stake will boost the bank’s financial strength, and their clients will be protected.

The RBI had recently clarified that the promoters who have recently reduced their holdings to below 26% and want to increase it back, can approach the central bank. The promoter will have a choice to bring down the promoter holding to below 26% after the initial locking period is over.

The RBI retained the norm to maintain a minimum (floor) of 40% of paid-up voting equity share capital by the promoter for the first five years, but there is no cap on the promoters’ holdings in the initial five years, Emkay highlighted. That said, the cap on the promoter’s stake over 15 years has been raised from 15% to 26%, which was implemented in the case of Kotak Mahindra Bank.

Non-promoter shareholding will be capped at 10% of the paid-up voting equity share capital of the bank for natural persons and non-financial institutions and at 15% for all categories of financial institutions, supranational institutions, public sector undertaking or government. If this is allowed, then possibly HDFC may not had to bring its stake in Bandhan to 10%, Emkay said.

In the case of invoking pledged shares of a bank, the pledgee’s voting rights will be restricted to 5% till the time the pledgee obtains permission from the RBI for the regularisation of the acquisition of these shares.

The RBI has retained non-operative financial holding company (NOFHC) as the preferred structure for all new licences to be issued for universal b anks, but it will be mandatory only in cases where the individual promoters, promoting entities or converting entities have other group entities, the report said. However, banks currently under NOFHC, such as IDFC First Bank and Bandhan Bank, may be allowed to exit such a structure if they do not have any other group entities in their fold.

The RBI has given in-principle approval to IDFC First Bank-Bandhan Bank, but IDFC will have to first divest stake in its MF/tech businesses for a reverse merger with IDFC First Bank, while Bandhan Bank is not keen on diluting the structure as of now, the report said.

Furthermore, on the relaxation of the listing norms for future small finance banks (SFBs), existing SFBs in queue, including Utkarsh, Fincare, Jana, ESAF, and even the recently-formed Unity SFB, may not get any relief. However, Unity SFB, which is a venture between BharatPe and Centrum, could have different terms, given the potential acquisition of beleaguered PMC Bank.

Small finance banks can now list within eight years from the date of commencement of operations against the earlier condition of within three years of reaching a net worth of Rs 5 billion, and against the demand for 10 years. For universal banks, the listing requirement remains the same, that is after six years of commencement of operations.



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Bank branch addition drops 82% in FY21; bankers bet on phygital model, BFSI News, ET BFSI

Banking & Finance

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The branch addition by banks fell to a decade low in fiscal 2021, felled by digitisation, pandemic and growth of alternative channels such as business correspondents.

Banks added only 1,383 branches in FY2021 as against 7,728 branches in FY2020.

As of March-end 2021, the network of offices of scheduled commercial banks increased to 1,54,485 from 1,53,102 as against a year ago, as per RBI data.

The consolidation of banks into five large banks too led to a drop in the number of branches as banks went for right sizing of operations following the amalgamation of several PSBs.

Phygital model

Even as there is a surge in adoption of digital banking, physical branches will continue to be relevant as a large percentage of customers are more comfortable doing transactions at branches, according to bankers.

Banks should make efforts in educating customers about various aspects of digital banking so that they can conveniently use these channels.

“I think branches, as a mode or a channel, will not be totally discounted. There is still a significant population who will be more comfortable in one-to-one dealings rather than only digital.

“Therefore, this world of physical plus digital or phygital will be the way forward,” State Bank of India Managing Director Ashwini K Tiwari said at ETBFSI Converge.

City Union Bank Managing Director and CEO N Kamakodi said that though the older generations are much comfortable with the manual banking channel, many of them are now trying to use the digital channel also.

“Around 90 per cent of the banking transactions in India have now started moving into the non-branch channel such as internet banking, mobile banking or ATM. The number of transactions happening at the branches are in single digit,” he said.

Business correspondent growth

The business correspondent outlets of public sector banks in villages have shrunk during 2016 and 2020 while private banks have shown positive growth.

“PSBs dominated the number of BC outlets in villages, but during the review period, on account of consolidation, their BC outlets showed negative growth,” according to an RBI study said.

PSBs’ share in BC village outlets has dropped marginally to 57 per cent in 2020 from 60 per cent in 2016.

The growth in BC outlets in villages was also negative for regional rural banks.

The share of PSBs in BC outlets in rural areas has remained consistently above 60% over the years, being the highest among the bank groups.

Private banks shine

As PSBs continued to maintain their hold, PVBs too registered a higher growth in both access and usage indicators during the review period. There was a growth in BC outlets in villages for PVBs with the growth being significantly high for the north-eastern, eastern and central regions, surpassing the growth of PSBs and RRBs together.

PVBs also significantly improved their tally of urban BC outlets during the five years with their share growing from 77 per cent in 2016 to 97 per cent in 2020. On similar lines, contribution of PVBs in the total number of BC agents too grew exponentially from 37 per cent in 2016 to 80 per cent in 2020.

The BC model grows

“From being an alternate delivery model, the BC model is emerging as the predominant delivery model. While the growth in number of rural branches remained subdued during the review period, there was a significant growth in BC outlets in both villages and urban pockets providing formal financial services at the doorstep of large number of unserved/underserved population,” the study said.

The study noted that about 56 per cent of total Basic Savings Bank Deposit Accounts (BSBDAs) and 65 per cent of General Credit Cards (GCCs) were channelled through BCs. While BCs of public sector banks (PSBs) dominated the deposit space, private sector banks (PVBs) accounted for a major share in GCCs through BCs.

During the review period, the total transactions routed through BC outlets increased considerably both in terms of volume as well as value, it said.



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Ten steps for overhaul of ARCs as competition for bad bank arrives, BFSI News, ET BFSI

Banking & Finance

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In a bid to streamline the functioning of asset reconstruction companies (ARCs), a Reserve Bank committee has come out with a host of suggestions including the creation of an online platform for the sale of stressed assets and allowing ARCs to act as resolution applicants during the IBC process.

Amortise loss

To incentivise lenders to sell their financial assets to ARCs at an early stage of stress, the RBI panel has recommended a dispensation to lenders, on an ongoing basis, to amortise the loss on sale, if any, over a period of two years. To optimise upside value realisation by lenders, it recommends a higher threshold of investment in security receipts (SRs) by lenders, below which provisioning on SRs held by them may be done on the basis of Net Asset Value (NAV) declared by the ARC instead of IRACP norms.

Online platform

An online platform may be created for sale of stressed assets and infrastructure created by the Secondary Loan Market Association (SLMA) may be utilised for this purpose. For all accounts above Rs 500 crore, two bank-approved external valuers should carry out a valuation to determine the liquidation value and fair market value and for accounts between Rs 100 crore to Rs 500 crore, one valuer may be engaged. Also, the final approval of the reserve price should be given by a high-level committee that has the power to approve the corresponding write-off of the loan.

Acquiring financial assets

In the interest of debt aggregation, the scope of Section 5 of the SARFAESI Act, and other related provisions, may be expanded to allow ARCs to acquire ‘financial assets’ as defined in the Act, for the purpose of reconstruction, not only from banks and ‘financial institutions’ but also from such entities as may be notified by RBI. RBI may consider permitting ARCs to acquire financial assets from all regulated entities, including AIFs, FPIs, AMCs making investment on behalf of MFs and all NBFCs (including HFCs) irrespective of asset size and from retail investors. ARCs should be allowed to sponsor SEBI registered AIFs with the objective of using these entities as an additional vehicle for facilitating restructuring/ recovery of the debt acquired by them.

Binding on lenders

If 66% of lenders (by value) decide to accept an offer by an ARC, the same may be binding on the remaining lenders and it must be implemented within 60 days of approval by majority lenders (66%). 100% provisioning on the loan outstanding should be mandated if a lender fails to comply with this requirement. Given that the debt aggregation is typically a time-consuming process, the planning period is elongated to one year from the existing six months. In cases where ARCs have acquired 66% of debt of a borrower, the Act should provide for two years of moratorium on proceedings against the borrower by other authorities. The Act should also provide that Government dues including revenues, taxes, cesses and rates due to the Central and state governments or local authority will be deferred in such cases.

Equity sale

For better value realisation for originators and enhancing the effectiveness of ARCs in recovery, even the equity pertaining to a borrower company may be allowed to be sold by lenders to ARCs which have acquired the borrower’s debt. The Committee recommends that ARCs may be allowed to participate in the IBC process as a Resolution Applicant either through a SR trust or through the AIF sponsored by them.

Allowing HNIs to buy SRs

For giving impetus to listing and trading of SRs, the list of eligible qualified buyers may be further expanded to include HNIs with minimum investment of Rs 1 crore, corporates (Net Worth-Rs 10 crore & above), all NBFCs/ HFCs, trusts, family offices, pension funds and distressed asset funds with the condition that (a) defaulting promoters should not be gaining access to secured assets through SRs and (b) corporates cannot invest in SRs issued by ARCs which are related parties as per SEBI definition.

Minimum SR investment

The interest of investors and investing lenders should be weighed against the need for distribution of risk among the willing investors. Therefore, it recommends that for all transactions, per SR class/ scheme, the minimum investment in SRs by an ARC should be 15% of the lenders’ investment in SRs or 2.5% of the total SRs issued, whichever is higher.

Credit rating agencies

Recognising the critical role of Credit Rating Agencies (CRAs) in the valuation of SRs and, therefore, the need for continuity in engagement of CRAs, the Committee recommends that ARCs must retain a CRA for at least three years. In case of change of a CRA, both parties must disclose the reason for such change.

Tax pass through

In the matter related to taxation of income generated from investment in SRs issued by ARCs, the possibility of a ‘pass-through’ regime for AIF investors may be looked into by the Central Board of Direct Taxes (CBDT). The CBDT may consider clarifying on the tax rate applicable to FPIs.



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NPCI launches tokenisation of RuPay cards as safety measure, BFSI News, ET BFSI

Personal Finance

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New Delhi, Oct 20 (PTI) The National Payments Corporation of India (NPCI) on Wednesday announced the tokenisation system for RuPay cards to enhance the safety of card data. The NPCI Tokenisation System (NTS) is to support tokenisation of cards as an alternative to storing card details with merchants, NCPI said.

It will further enhance the safety of customers and provide a seamless shopping experience to them.

NPCI said the sensitive customer information will be stored in the form of an encrypted ‘token’ to help secure transactions, in accordance with RBI guidelines.

These tokens will allow payments to be processed without disclosing the customer details or allowing the payment intermediaries to store customer data that could breach security and privacy, it said.

With NTS, acquiring banks, aggregators, merchants and others can get themselves certified with NPCI and can play the role of token requestor to help save the token reference number against all card numbers saved.

All these businesses can maintain their RuPay consumer base utilising token reference on file (TROF) for future transactions initiated by their respective RuPay consumers, NPCI said.

The fool-proof and transparent system will ensure that no customer-sensitive information is leaked. Tokenisation will also help in reducing the friction in the payment process by providing a faster check-out experience to the customers.

“The RBI’s guidelines on card tokenisation is to enhance the safety of the digital payments ecosystem in the country.

“We are confident that the NPCI Tokenization System (NTS) for the tokenisation of RuPay cards will instill further trust in the millions of RuPay cardholders to carry out their day-to-day transactions securely,” Kunal Kalawatia, chief of products, National Payments Corporation of India, said.

He hoped that the unique card-on-file tokenisation solution will not only safeguard customers’ confidential data but will also further strengthen the overall digital payments environment. PTI KPM HRS hrs



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RBI allows banks to sell fraud NPAs to ARCs, BFSI News, ET BFSI

Banking & Finance

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In a move that will help banks unload a major chunk of their non-performing assets (NPAs) to the bad bank, RBI has allowed the sale of loan accounts classified as fraud to asset reconstruction companies (ARCs). Earlier, banks were barred from selling NPAs classified as fraud, which had left them saddled with a resolution of several large accounts.

Banks are targeting to sell Rs 2 lakh crore worth of NPAs to the bad bank or the National Asset Reconstruction Company (NARCL) for recovery. However, they have hit a roadblock in respect of accounts that have been classified as fraud, as they were not allowed to sell them. RBI has now allowed banks to sell fraud accounts, provided the transferee is not connected to the borrower.

RBI has also said that responsibilities of the transferor with respect to continuous reporting, monitoring, filing of complaints with law enforcement agencies and proceedings related to such complaints shall also be transferred to the ARC. “The transfer of such loan exposures to an ARC, however, does not absolve the transferor from fixing the staff accountability as required under the extant instructions on frauds,” RBI said.

“Due to forensic audit in all big NPAs, in last three years, advances amounting Rs 3.83 lakh crore were declared as fraud accounts. This chunk of NPAs will be available for sale to ARCs,” Hari Hara Mishra, director, UV ARC, said.



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RBI lifts Prompt Corrective Action restrictions on UCO Bank, BFSI News, ET BFSI

Banking & Finance

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FILE PHOTO: The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai, India, February 2, 2016. REUTERS/Danish Siddiqui

The Reserve Bank of India today lifted Prompt Corrective Action (PCA) restrictions on UCO Bank, after the Board of Financial Supervision reviewed the financials of the bank, the central bank said in a statement.

The central bank said UCO Bank provided a written commitment that it would comply with the norms of Minimum Regulatory Capital, Net Non Performing Assets and Leverage ratio on an ongoing basis.

UCO Bank will, however, be continuously monitored by the RBI.

Earlier in June, UCO Bank Managing Director Chief Executive Officer AK Goel said that he was hopeful that the central bank would lift PCA restrictions on the bank.

PCA is triggered when banks breach regulatory norms such as return on asset, minimum capital, among others.

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Banks may slow ATM expansion, encourage online transactions, BFSI News, ET BFSI

Banking & Finance

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The new Reserve Bank of India rule to penalise banks Rs 10,000 for each instance of an ATM out of cash for 10 hours has an unintended fallout in the form of banks slowing down the rollout of ATMs.

According to experts, banks may rely on other banks ATMs if there are more restrictions rather than setting up new ones. With digital channels picking up banks would go slow on ATMs.

The directive may cost banks Rs 125-200 crore, according to estimates by ATM operators and cash logistics companies.

In a circular to banks, the RBI said that they should monitor the availability of cash in ATMs and ensure that there are no cash-outs. The circular said that banks would be fined Rs 10,000 if there is a cash-out at any ATM for more than 10 hours in a month.

The issue

There are 2,13,766 ATMs in the country, and most of them are managed by MSPs who appoint cash-in-transit companies to replenish the currency notes in the machines.

An ATM typically goes out of cash six times every month and nearly 50% of the ATMs face this issue. The biggest hit will be to State Bank of India which has about 64,000 ATMs.

However, there are certain locations where ATMs run out of cash within hours of being loaded. These machines may not become feasible to operate if there is a penalty every month.

The reaction

There is a mixed reaction to the move by the RBI to penalise banks Rs 10,000 for each instance of an ATM being out of cash for 10 hours. ATM operators (known in the industry as managed service providers, or MSPs) and cash-in-transit companies are throwing up their hands, stating that they will not bear the penalty.

However, it is quite likely that the banks may pass the penalty to MSPs, which will in turn pass it on to cash logistics agencies.

Experts stress the need to address the root causes of ATMs running dry, such as sub-optimal cash forecasting and delays in the availability of ATM-fit currency.

The RBI circular

Already banks are struggling to meet the 2018 RBI circular that requires banks to put in place stringent measures such as transporting cash in cassettes, in prescribed vehicles sticking to government norms on the transport of currency during specified hours of the day. According to banks, it is difficult to implement all these norms under present cost structures.



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Global banks unwind lucrative India trades after RBI warning, BFSI News, ET BFSI

Banking & Finance

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NEW DELHI: Foreign banks have been forced to unwind billions of dollars worth of profitable currency trades at the behest of India’s central bank, according to people with knowledge of the matter.

The issue in focus is a flurry of currency swap trades that involved the banks converting rupee-denominated deposits into dollars that were then used to buy foreign sovereign debt including US Treasuries, which are unlisted in India. The Reserve Bank of India warned the banks of a regulatory breach last week, saying they must limit their holdings of such unlisted securities to no more than 10% of investments classified as the non-statutory liquidity ratio portfolio.

Some lenders had racked up exposures of more than $1 billion each by using a regulatory loophole created in February to convert rupee deposits into dollars using a buy-sell swap — buying the greenback now while selling the same amount at a specified date in the future. They then used the proceeds to purchase US government debt and profited from the arbitrage, paying around 3.5% on the local currency deposits and earning 4.9% on the 12-month yield on the currency pair.

As the biggest buyer of the greenback in the forwards market, the RBI was effectively funding some of the trading profits.

The central bank, as part of its intervention strategy, had been offsetting its dollar purchases in the spot market, by entering into sell-buy swaps in the forwards markets. That had swelled its forwards book to over long $70 billion, causing dollar/rupee forward premiums to spike and foreign banks to book arbitrage gains from the trade earlier this year.

Indian entities were net buyers of almost $3 billion worth of Treasuries over April and May, according to US government data, the first inflows from the South Asian nation since October.

The biggest beneficiaries of the swap trades have been overseas lenders in India, which have easy access to large dollar investments, the people said. An email to the RBI was unanswered.

The banks are in the process of unwinding the trade, the people said. They are selling Treasuries and conducting sell-buy swaps — selling the greenback and agreeing to buy at a later date specified in the contract.

The impact of the unwinding was visible in the forward dollar-rupee rates. The implied 12-month yields rose 7 basis points on Friday and Monday after the order and is currently trading at 4.34%.



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RBI restricts continuous tenure of UCB MDs to 15 years, BFSI News, ET BFSI

Banking & Finance

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Mumbai: The Reserve Bank of India has limited the maximum continued term of managing directors and whole-time directors (WTD) of urban cooperative banks (UCBs) to 15 years in a series of steps taken to ensure professional management of these institutions that have often been found undertaking non-transparent activities right at the top.

In the latest directions given by the RBI on appointment, re-appointment and termination process of MD and WTD of UCBs, the apex bank has said that an individual will be eligible for re-appointment as MD/WTD in the same bank even after finishing continuous 15-year tenure but only after a minimum gap of three years, subject to meeting other conditions.

Moreover, during this three-year cooling period, the individual shall not be appointed or associated with the bank in any capacity, either directly or indirectly.

In general, the RBI has directed that the tenure of MD/WTD shall not be for a period more than five years at a time subject to a minimum period of three years at the time of the first appointment unless terminated or removed earlier, and shall be eligible for re-appointment. The performance of MD/WTD shall be reviewed by the Board annually, the apex bank said.

The UCBs shall ensure that the following ‘fit and proper’ criteria are fulfilled by the person being appointed as MD. The MD shall function under the overall general superintendence, direction and control of the Board of Directors (BoD).

With regard to age, the RBI has said that the person at the top of UCBs should not be below the age of 35 years and above the age of 70 years at any time during his/her term in office. But, within the overall limit of 70 years, as part of their internal policy, individual bank Boards are free to prescribe a lower retirement age, the RBI said.

To run the operations professionally, the person should also have adequate educational qualifications. He/she should be a graduate, preferably, with Qualification in banking/ co-operative banking or Chartered/Cost Accountant/MBA (Finance); or Post-graduation in any discipline.

They must also have a combined experience of at least eight years at the middle/senior management level in the banking sector, including the experience gained in the concerned UCB, or non-banking finance companies engaged in lending (loan companies) and asset financing.

The person should not be engaged in any other business or vocation or beholding the position of a Member of Parliament or State Legislature or Municipal Corporation or Municipality or other local bodies. He/she should also not be a director of any company other than a company registered under section 8 of the Companies Act, 2013. The RBI has given a long list of propriety criteria to ensure only the right candidate is appointed for the post.

The RBI also said that UCBs shall constitute a “Nomination and Remuneration Committee (NRC)” consisting of three directors from amongst the Board of Directors (BoD) and nominate one among them as Chairman of the NRC.



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