Tag: RBI

RBI may deflate hype around reverse repo rate hike: SBI report

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The Reserve Bank of India (RBI) may deflate the hype around reverse repo hike in the monetary policy by explaining the virtues of using reverse repo change as a pure liquidity tool and not a rate tool, according to State Bank of India’s economic research report “Ecowrap”.

It emphasised that delaying normalisation measures is prudent in the current situation which would also give time for economic recovery to strengthen further.

“We believe the talks of a reverse repo rate hike in the Monetary Policy Committee (MPC) meeting may be premature as the RBI has been largely able to narrow the corridor without the noise of rate hikes and ensuing market cacophony,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI.

Reverse repo rate is the interest rate that banks earn for parking short-term surplus liquidity with RBI.

Section 45Z (3) of the amended RBI Act of 2016 clearly states that, “The Monetary Policy Committee shall determine the policy rate required to achieve the inflation target”.

Ghosh emphasised that nowhere in the MPC’s mandate is there any reference to its role in liquidity management, which remains internal to the functioning of the Bank consistent with its policy stance. Thus, the RBI is not obliged to act on reverse repo rate only in MPC.

Unconventional tool

Also, change in reverse repo rate is an unconventional policy tool that the RBI has effectively deployed during crisis when it moved to a floor instead of the corridor.

In this regard, the report made a reference to Goodhart’s (2010) observations that the width of the policy corridor acts as an independent instrument for the central bank in a crisis and an asymmetric corridor is a logical outcome.

According to SBI’s economic research department, the central bank can (for whatsoever reason) supply any amount of additional liquidity without pushing short-term money market rates below the key policy rate.

“Thus, the interest rate can be set to achieve monetary goals, while the amount of liquidity in the banking system can play the role of financial market stabilisation. Since the pandemic, the RBI has done exactly this balancing act, and the pandemic is not yet over!” Ghosh said.

Referring to the US Fed indicating accelerating the bond tapering program, thereby ending it earlier than anticipated, the report observed that the rate hikes are also in offing sooner than expected as inflation is no longer considered as transitory.

“Unless Omicron proves more fatal than Delta variant, this in turn would imply strengthening of the dollar and depreciation pressures for the rupee. Thus RBI would have to look for multiple objectives,” the report said.

Ecowrap noted that the forthcoming monetary policy comes against the backdrop of the global scare of Omicron, that we are still trying to unravel.

However, the good thing is India has now vaccinated 125 crore people and this might have given the country better preparation for the future as the gap between the first and second wave was only 2 months.

“…The pandemic has also worked its way through the population resulting in larger herd immunity…” the report said.

Calibrated progress

Ghosh noted that the RBI has made a calibrated progress towards liquidity normalisation since the October policy with amount parked in overnight fixed reverse repo declining to ₹2.6 lakh crore from ₹3.4 lakh crore in pre-October policy

The lower increase in currency in circulation as more people are now using digital modes of payments has also contributed to the build-up of the surplus liquidity.

The report said the RBI has also largely achieved its objective of pushing up short term rates with 3 month T-Bill rate which was below reverse repo for major part of August now at 3.52 per cent, factoring in the impact of variable reverse repo rate. Similarly, 6 month and 1-year T-Bill rates have shifted upwards by 20-30 basis points since last MPC.

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NBFC NPAs could increase by a third due to tightening of norms: India Ratings

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The Reserve Bank of India’s clarification accounting of non-performing advances is likely to increase non-banking finance companies’ (NBFCs) non-performing assets (NPAs) by around a third, according to India Ratings (Ind-Ra).

NBFCs would also have to invest in systems and processes to comply with daily stamping requirements.

Ind-Ra noted that NBFCs have asked the RBI to privide a transition period on this requirement.

Limited impact on provisioning

However, the impact on provisioning could be modest, because NBFCs use Ind-AS (Indian Accounting Standards) and higher rated NBFCs have a more conservative provision policy than IRAC (income recognition and asset classification) requirements.

All arrears to be cleared

The credit rating agency observed that the RBI clarification would allow stage 3 (credit impaired) assets to become standard only when all overdues and arrears (including interest) are cleared.

Earlier, NBFCs would classify an account as Stage 3 when there is a payment overdue for more than 90 days. Typically, for monthly payments, this would be when there are 3 or more instalments overdue on any account.

Also see: Deposit growth in alternative fortnights a contrarian trend: SBI Ecowrap

However, when the borrower makes a part payment such that the total amount due is less than three instalments, the account is removed from NPA classification and classified as a standard asset. It remains in the overdue category if not all dues are cleared.

Now, RBI has restricted movement from Stage 3 to Standard category.

NBFC borrowers are generally a weak class of borrowers and have volatile cash flows so once an account has been classified as NPA, it could remain there for a considerable period, said Pankaj Naik, Associate Director, Ind-Ra.

Accelerated pace of NPA recognition

Referring to an RBI circular requiring daily stamping of accounts instead of a monthly or quarterly one to count the number of overdue days, Ind-Ra opined that this would result in an accelerated pace of NPA recognition for accounts.

“Where there is cash collection, NBFC borrowers typically pay their overdues with some delays. Accounts can now get into NPA category for just a day’s delay in payment and once categorised as NPA will not be able to become standard unless all arrears are cleared.

Also see: Time to convert fintech initiatives into revolution: PM Modi

“So, in other words, accounts would get categorised as NPAs at a faster pace and would remain sticky in that category for a longer period of time. Both these accounting treatments would result into higher headline number for NBFCs,” said Naik.

He noted that it may so happen that NBFCs would disclose NPA numbers as per IRAC norms and Stage 3 numbers as per Ind-AS separately in their disclosures.

Varied performance across segments

The agency assessed that borrowers in the earn-and-pay model such as commercial vehicle finance, small ticket business loans, and personal loans to self-employed customers are vulnerable with volatile cash flows.

They are generally not in a position to clear all dues in one go and so the headline numbers would look elevated.

On the other hand, home loan and salaried personal loans could exhibit a better performance.

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Study, BFSI News, ET BFSI

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The recent clarification by the Reserve Bank of India on non-performing advances (NPA) may increase non-banking financial companies’ (NBFC) bad loans by one-third, says a report.

Last month, the RBI had provided clarification on income recognition asset classification and provisioning (IRAC) norms for banks, NBFCs and All-India Financial Institutions.

The clarification included classification of special mention account (SMA) and NPA on a day-end position basis and upgrade from an NPA to standard category only after clearance of all outstanding overdues.

“The RBI’s clarification on non-performing advances (NPAs) accounting is likely to increase NPAs by around one-third for non-banking finance companies (NBFCs),” domestic rating agency India Ratings and Research said in a report on Friday.

However, the impact on provisioning could be modest, given NBFCs are using Indian Accounting Standards (IND-AS) and generally for higher rated NBFCs, provision policy is more conservative than IRAC requirements.

The report said the RBI circular also calls for daily stamping of accounts to count the number of days they are overdues instead of a monthly or quarterly stamping.

This again would result in an accelerated pace of NPA recognition for accounts, it said.

NBFC borrowers, typically where there is cash collection, pay their overdues generally with some delays. Accounts can get into NPA category just for a day’s delay in paying the instalments and once it gets categorised as NPA it will not be able to become standard unless all the arrears are cleared, the report said.

“So, in other words, accounts would get categorised as NPAs at a faster pace and would remain sticky in that category for a longer period of time. Both these accounting treatments would result in higher headline numbers for NBFCs,” it said.

It may so happen that NBFCs would disclose NPA numbers as per IRAC norms and stage 3 numbers as per Ind-As separately in their disclosures, the agency said.



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RBI moots easier rules for investing overseas, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) is batting for easier overseas investment norms for Indian tech entrepreneurs and angel investors, said people with direct knowledge of the matter. As per the current rules, if an Indian resident buys shares in an unlisted company abroad, the foreign company cannot create any more step-down subsidiaries. This has proved to be a hindrance for Indian entrepreneurs looking to invest in foreign startups since it restricts the scalability of such companies.
Now, the RBI has learnt to have given a recommendation to the finance ministry, saying if such step-down subsidiaries are being opened as part of genuine and ‘bona fide’ expansion plans of a company, the restriction should not be applied.

Consultations with Industry
Emails sent to the RBI and the finance ministry remained unanswered until press time.
“Indian tech entrepreneurs are constantly looking for acquisition opportunities especially in the other developing countries; however, current rules make it very difficult to make such investments,” said a person cited above. “These investments have potential to bring dollar money back into India if the business venture succeeds.”

The RBI has held extensive consultations with the industry and the recommendations are based on inputs so received, said people cited above. Overseas investments by Indian residents fall under the ambit of the Liberalised Remittance Scheme. “A natural outcome of growth is expansion and hence it is extremely important that the step-down subsidiaries restriction be reconsidered,” said Moin Ladha, partner, Khaitan & Co. “This will enable Indian investors to get the advantages associated with such diversification.”

Indian owns less than 10% equity in the company. Portfolio investments enjoy liberal rules since they are meant for investment purposes only.

Currently, if an Indian buys shares of an unlisted foreign company, the company is presumed to be a joint venture. For instance, say an Indian ‘A’ buys a few shares of ByteDance – the parent of TikTok and an unlisted startup. Indian regulators presume that ByteDance is a JV where ‘A’ exerts some sort of control. Accordingly, ‘A’ is required to meet the steep compliance norms under the RBI rules.

In contrast, if ‘A’ had invested in shares of a foreign listed company, say Microsoft, it would have been considered a portfolio investment and would have been exempt from the compliance norms.

“It is impractical for a minority shareholder to be able to procure information or influence decisions of an overseas entity where they hold investment,” said a person with direct knowledge of the matter. “However, the current regime treat seven a minority investment as setting up or acquiring a joint venture abroad.”

The industry is also learnt to have requested the RBI to reconsider several more regulations. Most important of them all was a request to increase the cap on the LRS route. Currently under LRS, an Indian can remit a maximum of $250,000per financial year. The industry suggested the same to be hiked to at least $350,000. However, the RBI has so far not actedon the input, people cited above said.

Until a few years ago, outward remittance rules used to be the policy domain of RBI under the Foreign Exchange and Management Act (Fema). In other words, RBI could tweak the rules on its own. However, in 2019 the Centre replaced the rules is in the hands of the finance ministry. The RBI has been assigned the role of administering the implementation of NDI rules.



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RBI report shows decline in bank credit post festival season pick-up

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The outstanding credit of all scheduled banks declined by ₹5,034 crore in the fortnight ended November 19, indicating the festival season credit pick-up witnessed in the preceding fortnight has lost steam.

In the preceding fortnight ended November 5 the outstanding credit of all scheduled banks had increased by ₹1,25,262 crore, according to Reserve Bank of India’s data on “Scheduled Banks’ Statement of Position in India”.

Sluggish loan growth

“Loan growth continues to be sluggish with no sharp recovery in any specific segment barring Small and Medium Enterprise.

“A low interest rate environment continues but spreads remain elevated. With asset quality issues gradually receding, we should see spreads decline but loan demand issues remain,” Kotak Securities Analysts’ MB Mahesh, Nischint Chawathe, Abhijeet Sakhare, Ashlesh Sonje and Dipanjan Ghosh, said in a report.

Deposits during the reporting fortnight declined by ₹2,67,623 crore against an increase of ₹3,38,451 crore in the preceding fortnight.

Deposit rates flat

As per the latest data from RBI, deposit rates were flat month-on-month at about 5.1 per cent.

“Both private and PSBs have reduced their term deposit rates by about 50 basis points (bps) over the past 12 months. Wholesale deposit cost (as measured by Certificate of Deposit rates) has seen a much sharper decline. It has been broadly stable in FY2022,” the Analysts said.

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Bank deposits contract in the post Diwali fortnight, BFSI News, ET BFSI

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Banks deposits contracted by over a lakh crore in the post Diwali fortnight as investors applied in huge amounts for the big ticket IPOs lined up during the fortnight ended November 19

Aggregate deposits in the banking system dipped Rs 2.67 lakh crore during the fortnight ended November 19 to Rs 157.8 lakh crore, latest RBI data indicates. Both demand and term deposits contracted sharply during the fortnight by Rs 1.52 lakh crore and Rs 2.67 crore respectively.

Analysts attribute this largely to investors using the money parked in banks to apply for many big ticket IPOs during the fortnight. These included PayTM, Sapphire Foods and paisabazar.com among others. “The sharp contraction in deposits during the fortnight is probably driven by withdrawal for IPOs ” said an economist with a foreign bank. “There was a big jump in deposits in the previous fortnight.”

But on a long-term basis deposits continue to post a strong growth despite banks lowering interest rates earned on them. Weighted average term deposit rates have fallen by over 50 basis points-bps over the last one year. Yet, the year-on-year deposit growth is 9.8 per cent as of November 19, as bank deposits continue to be a risk free avenue of investment for savers. It is reckoned that bank deposits account for nearly half of household financial savings in India as they have been typically risk averse. But this mind-set is slowly changing, experts say.

As for credit, there was a modest pick-up of Rs 1,158 core during the fortnight. But on a long-term basis, banks are seeing a pick-up in loan demand as economic activity picks up following easing of lockdown induced restrictions. On a year-on-year basis, credit growth worked out to 6.9 per cent as of November 19, compared to less than 6 per cent a few years ago.

As per the latest data on sectoral deployment of bank credit, loans to large corporates rose 0.5 per cent (on a year-on-year basis) to Rs 22.7 lakh crore in October compared to a contraction of 1.8 per cent a year ago. All major segments except services including agriculture, industry and retail posted higher growth rates over previous year.



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

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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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Explainer: Neo-banks Vs traditional banking

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What are Neo-banks?

Neo-banks are online-only financial technology (fintech) companies that operate solely digitally or via mobile apps. Simply put, neo-banks are digital banks without any physical branches.

How are they different from the traditional banks?

Neo-banks are disrupting the traditional banking system by leveraging technology and artificial intelligence (AI) to offer a range of personalised services to customers. On the other hand, traditional banks follow an omni-channel approach i.e. having both physical (through branches and ATMs) and digital banking presence to offer a multitude of products and services.

Right from customer acquisition to traditional banking services such as remittances, money transfers, utility payments and personal finance, neo-banks offer a wide range of offerings to customers across retail and small-to-medium enterprise (SME) categories. Typically, neo-banks apply a design thinking approach to a particular banking area and tailor their products and services in a manner that makes banking simpler and convenient to the end consumers.

How are they evolving?

The term ‘Neo-bank’ started gaining prominence globally in 2017 as they emerged as a new challenger to the traditional banks in terms of customer engagement, connectivity and reach, and most importantly, the user experience. That is why neobanks are also called ‘challenger banks’. The market potential for neo-banks is driven by the rising penetration of the internet and smartphones across the globe.

Also read: Cryptos, far from the regulators’ glare

According to a report by KBV Research, the global neo-banking market size is expected to reach $333.4 billion by 2026, rising at a compounded annual growth rate (CAGR) of 47.1 per cent. Although neo-banks are relatively new concept in India, the concept has been gaining traction over the last few years. There are around a dozen neo-banks in India including Razorpay X, EpiFi, Open, NiYo, Jupiter among others. In recent times, some of these firms raised funding from marquee global investors, who are betting on India’s hugely underbanked market potential.

Can they replace traditional banks?

Not entirely. Neo-banks offer only a small range of products and services as compared to a whole gamut of services that traditional banks offer. Besides, since neo-banks are highly digital focused, they may not be able to cater to the banking needs of non-tech savvy consumers or people from the rural parts of the country, who believe in face-to-face interaction with their financial custodians. As of 2020, India had a smartphone penetration rate of just about 54 per cent.

What are the challenges that they face?

Numerous. First and foremost is building trust. Unlike traditional banks, neo-banks don’t have a physical presence, so customers cannot literally ‘bank upon’ them in case of any issues/challenges. Secondly, neo-banks are yet to be recognised by the Reserve Bank of India (RBI).

Also watch: Five ways digital lending apps can become safer for you

So, they have to engage with regulated banks and financial institutions to offer financial products and services. Due to the absence of enabling regulations, neo-banks cannot accept deposits or offer lending products on their own books. That is why some fintechs have a non-banking financial company (NBFC) as their parent to engage in lending activities while most others partner with banks and financial institutions.

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MYRE Capital helps investors to acquire Rs 31cr office space in Mumbai; its AUM crosses Rs 100cr, BFSI News, ET BFSI

Personal Finance

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New Delhi, MYRE Capital, which facilitates investors to have fractional ownership of commercial properties, has raised Rs 31 crore from high net-worth individuals for the purchase of nearly 18,000 square feet of office space in Mumbai and announced that its asset under management (AUM) has crossed Rs 100 crore mark. Mumbai-based MYRE Capital, which is a tech-enabled fractional ownership real estate platform, has been formed by architect firm Morphogenesis.

“We have raised Rs 31 crore from investors for the acquisition of 17,817 square feet office space in Times Square office complex at Andheri, Mumbai. Our asset under management has crossed Rs 100 crore and we are targeting to reach Rs 250 crore by March 2022,” MYRE Capital Founder and Chief Executive Officer Aryaman Vir told PTI.

On its platform, MYRE Capital had offered to investors the office space, which is leased to co-working operator Smartworks and further sub-leased to IFTAS, a fully-owned subsidiary of the RBI.

The office space, which has been acquired from Ajmera Group, is expected to generate a rental yield of 10.5 per cent and an Internal Rate of Return (IRR) of 13.6 per cent to investors.

NRI investors, chartered accountants, lawyers, and high salaried professionals have mainly invested in this round, he said.

“Achieving Rs 100+ crore AUM in 10 months further pushes us to expand our horizon and to contribute significantly to democratising fractional ownership of commercial real estate,” Vir said.

For expansion, he said the company is looking for more properties in major cities for offering to investors.

“Office assets will continue to remain high on the investor radar as mobility improves and a comeback to the physical office environment picks up,” Vir said.

He noted that the concept of fractional ownership, while at its nascent stage in India, has shown a tremendous shift in mindset among HNI as well as retail investors.

In June this year, MYRE Capital raised Rs 50 crore from investors for the acquisition of nearly 47,000 sq ft prime office space at Magarpatta Cybercity in Hadapsar, Pune. It has also facilitated acquisition of 3,000 square feet at Maker Maxity, BKC, Mumbai.

“Our portfolio has reached nearly 70,000 square feet now,” Vir said.

As per the business model of MYRE Capital, properties are being acquired into an SPV (Private Limited Company) and proportional stakeholding of the SPV is allocated to the investors.

MYRE Capital serves as the manager of the investors, the property, and the SPV.

Through its platform, investors can track their investments in real-time and access all relevant documents.

The tenant continues to pay rental to the SPV on a monthly basis, which in turn gets distributed to all investors proportionately by MYRE Capital.



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You can now buy sovereign gold on RBI Retail Direct Portal also, BFSI News, ET BFSI

Banking & Finance

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Mumbai, Dec 2, The sovereign gold bond can now also be subscribed on the newly launched RBI Retail Direct Portal. Subscription of the Sovereign Gold Bond Scheme 2021-22 – Series VIII is currently open.

“The Sovereign Gold Bond Scheme 2021-22 – Series VIII, which is open for subscription till December 3, 2021, is also available through RBI Retail Direct Portal at https://rbiretaildirect.org.in,” the central bank said on Thursday.

Till now, the bonds were sold through banks (except small finance banks and payment banks), Stock Holding Corporation of India Ltd (SHCIL), designated post offices, and recognised stock exchanges viz., National Stock Exchange of India Ltd and Bombay Stock Exchange Ltd.

Last month, Prime Minister Narendra Modi had launched the RBI Retail Direct Scheme, under which individuals can directly purchase treasury bills, dated securities, sovereign gold bonds (SGB) and state development loans (SDLs) from the primary as well as secondary market.

As per the scheme, retail investors (individuals) will have the facility to open an online Retail Direct Gilt Account (RDG Account) with the Reserve Bank of India (RBI). These accounts can be linked to their savings bank accounts.

The RDG Accounts of individuals can be used to participate in issuance of government securities and secondary market operations through the screen based NDS-OM.

NDS-OM, a screen based electronic anonymous order matching system for secondary market trading in government securities owned by the RBI, is currently open only to institutions like banks, primary dealers, insurance companies and mutual funds.



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