Tag: RBI

European Union’s digital banknotes are getting ready, BFSI News, ET BFSI

Banking & Finance

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-By Ishwari Chavan

The currency aims to reach a population of 340 million, if adopted by all of the nations part of the Eurozone.

The European Central Bank, in July 2021 launched a digital euro project. The investigation phase that will start this month and last for about two years will aim to address key issues regarding design and distribution.

Central banks around the world, including the Reserve Bank of India, have been contemplating the launch of their very own CBDC. A total of 81 countries, representing 90% of global GDP, are exploring CBDC as of May 2021, compared with 35 countries in May 2020, according to Atlantic Council, a US think tank.

“Some of the other countries, like the UK and Sweden, also have their own projects, which are more or less in a similar stage in terms of progress, following their own path in terms of policy and design,” Aleksi Grym, head of digitalisation at Bank of Finland said.

The currency aims to reach a population of 340 million, if adopted by all of the nations part of the Eurozone.

What is Digital Euro?

The Digital Euro would be a form of central bank money issued by the European Central Bank, and will remain its liability at all times.

According to the ECB, the Digital Euro would still be a euro, like banknotes but digital. It would be an electronic form of money issued by the Eurosystem (the ECB and national central banks) and accessible to all citizens and firms. It will not be a parallel currency.

“The broad consensus is that CBDC would complement rather than substitute any existing part of the financial industry,” said Grym.

The operational and legislative framework to introduce the CBDC will be discussed with the European Parliament and other European institutions, and the access to the digital euro will be intermediated by the private sector.

What are the reasons to issue a digital Euro?

The Digital Euro will be a viable option for the Eurosystem, in order to support digitisation in payments. It could act as a new monetary policy transmission channel and mitigate risks to the normal provision of payment services, the ECB said.

The bank further mentioned that it could serve as a response to a significant decline in the role of cash as a means of payment.

Furthermore, the bank said that it could reduce the significant potential for foreign CBDCs or private digital payments to become widely used in the euro area while fostering the international role of the euro.

What will it look like?

The ECB has not yet specified a particular design of a Digital Euro. It wants to fulfil a number of principles and requirements including accessibility, robustness, safety, efficiency and privacy.

Although, based on the possible features of a Digital Euro, two broad types have been identified that would satisfy the desired characteristics – offline and online.

“The design of the CBDC has to be compatible with the objective of monetary and financial stability,” Grym said.

“For the Eurozone, we primarily look at retail CBDC, and the reason for that is that we already have quite a sort of advanced infrastructure for the wholesale cases,” he added.

When will the Eurozone have its CBDC?

The CBDC project was launched in July this year. However, the ECB has said that the end of this project will not necessarily result in the issuance of this currency, and that the central bank is merely preparing for the possibility of its issuance in the future.

“From the European perspective, we kind of envision what the world will look like not today but in 10, 20 or 30 years. The idea is that we’re looking at moving towards a much more digitized world, which is moving faster.That’s where cbdc will be designed for not necessarily the work we see today,” Grym said.

The investigation phase will examine the advantages and weaknesses of specific types of digital euro and how they would meet the needs and expectations of European citizens, businesses and financial intermediaries.



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As India’s bad bank knocks, ARCs seek relaxations from RBI, BFSI News, ET BFSI

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With the bad bank on the anvil, asset reconstruction companies have sought relaxation of the pricing structure for the purchase of bad loans, funding from banks, and clarity on participating in insolvency cases as a resolution applicant. These are among the suggestions made by ARCs to the committee formed by the Reserve Bank of India in April.

Usually, sales take place either on a full-cash basis or under the 15:85 structure, where 15% is paid as upfront cash and the remaining in the form of security receipts.

ARCs have sought a reduction in the minimum investment requirement to 2.5% from 15% in cases where cash is fully paid upfront.

The cash proportion of 15% has pushed the ARCs to raise their returns through securitisation and asset reconstruction.

Unless the ARC recovers 130% of the acquisition value, it will not make its return. Even at 100%, an ARC will make a loss because the management fee of 1-2% doesn’t make any ARR for ARC. Recovery should be over 130% so that 100% of security rights will be redeemed.

Also read: What are NARCL and IDRCL? How do they work and what is the plan?

Also, in September 2016, the Reserve Bank of India introduced new regulatory guidelines regarding provisioning. From April 2018 banks have to sell at 90% cash and 10% SRs. If a bank holds more than 10% SR, it had to continue provisioning for the loan which is not even on their books. So there is no incentive for them to transfer to ARCs. Now no banks transfer on 15:85 and all deals are in cash.

Bank funding

Asset reconstruction companies have asked RBI to allow bank funding for them on the lines of provided to non-banking finance companies. They have also sought doing away with dual-provisioning norms, a move which will benefit banks the most.

ARCs have suggested that bank provisioning needs to be solely based on the rating agency-determined net asset value of the security receipts.

From April 2018, banks have had to make provisions for stressed assets that are sold, assuming they remain on the books. This is applicable in cases where security receipts make up for more than 10% in the sale of non-performing assets.

Banks also have to make mark-to-market provisions in cases where the rating of security receipts is downgraded. Security receipts are valued on net asset values, linked to recovery ratings, which is an assessment of probable recovery from an underlying non-performing asset by rating agencies.

With banks not having to go for dual provisioning, they sell NPAs on a 15:85 structure, making more NPAs available for ARCs.

Currently, outstanding security receipts are estimated to be around Rs 1.1 lakh crore.

The RBI committee

In April this year, the RBI has formed a six-member panel under the chairmanship of Sudarshan Sen, former RBI executive director, to examine the role of asset reconstruction companies (ARCs) in stressed debt resolution, including under the Insolvency & Bankruptcy Code (IBC), 2016 and review their business model.

The committee is reviewing the legal and regulatory framework of ARCs and recommend measures to improve their efficacy. It will submit its report within three months from the date of its first meeting. As of January, the number of ARCs registered with the RBI stood at 28.



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RBI slaps Rs 1.95-cr fine on StanChart for lapses in compliance

Personal Finance

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The examination of the risk assessment report, inspection report and all related correspondence revealed non-compliance with directions issued by the regulator

The Reserve Bank of India (RBI) on Monday imposed a fine of Rs 1.95 crore on the Indian operations of Standard Chartered Bank for non-compliance with multiple regulatory directions. The foreign bank was found to be non-compliant with directions pertaining to reversal of the amount involved in unauthorised electronic transactions and reporting of cyber security incidents, among others.

The statutory inspection for supervisory evaluation of the bank was conducted by the RBI with reference to its financial position as on March 31, 2020. The examination of the risk assessment report, inspection report and all related correspondence revealed non-compliance with directions issued by the regulator.

The non-compliance pertained to failure to credit (shadow reversal) the amount involved in unauthorised electronic transactions, not reporting cyber security incident within the prescribed time period, authorising direct sales agents to conduct KYC verification, and failure to ensure integrity and quality of data submitted in the central repository of information on large credits.

“In furtherance to the same, a notice was issued to the bank advising it to show cause as to why penalty should not be imposed on it for contravention of / non-compliance with the aforesaid directions, as stated therein. After considering the bank’s replies to the notice, oral submissions made during the personal hearing, and additional submissions made by the bank, the RBI came to the conclusion that the charge of contravention of / non-compliance with the aforesaid RBI directions was substantiated and warranted imposition of monetary penalty on the bank, to the extent of non-compliance with the aforesaid directions,” the RBI said on its website.

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RBI slaps penalty on SBI, StanChart

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The Reserve Bank of India (RBI) has imposed a monetary penalty of ₹1.95 crore on Standard Chartered Bank (StanChart)-India and ₹1 crore on State Bank of India (SBI).

In the case of StanChart, RBI has imposed the monetary penalty for non-compliance with its directions on ‘Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Banking Transactions’, ‘Cyber Security Framework in Banks’, ‘Credit Card Operations of banks’ and ‘Creation of a Central Repository of Large Common Exposures – Across Banks’ .

Non-compliance

In the case of SBI, the central bank has imposed the monetary penalty for non-compliance with its directions contained in ‘Reserve Bank of India (Frauds classification and reporting by commercial banks and select FIs) directions 2016’.

RBI had conducted a Statutory Inspection for Supervisory Evaluation (ISE) of StanChart with reference to its financial position as on March 31, 2020. The central bank, in a statement, observed that examination of the Risk Assessment Report, Inspection Report and all related correspondence pertaining to the same, revealed, inter-alia, non-compliance with the above-mentioned directions to the extent of: failure to credit (shadow reversal) the amount involved in the unauthorised electronic transactions; and not reporting cyber security incident within the prescribed time period.

Further, RBI found non-compliance with directions relating to authorising the direct sales agents (outsourced third party) to conduct KYC (know your customer) verification; and failure to ensure integrity and quality of data submitted in Central Repository of Information on Large Credits (CRILC).

RBI said, in furtherance to the same, a notice was issued to the bank advising it to show cause as to why penalty should not be imposed on it for contravention of / non-compliance with the aforesaid directions, as stated therein.

“After considering the bank’s replies to the notice, oral submissions made during the personal hearing, and additional submissions made by the bank, RBI came to the conclusion that the charge of contravention of / non-compliance with the aforesaid RBI directions was substantiated and warranted imposition of monetary penalty on the bank, to the extent of non-compliance with the aforesaid directions,” per the central bank.

In the case of SBI, RBI had carried out a scrutiny in a customer account maintained with SBI and the examination of the scrutiny report and all related correspondence pertaining to the same, revealed, inter alia, non-compliance with the aforesaid directions to the extent of delay in reporting of fraud in the said account to RBI.

In furtherance to the same, a notice was issued to the bank advising it to show cause why penalty should not be imposed on it for such non-compliance with the said directions.

“After considering the bank’s reply to the notice and oral submissions made by the bank in the personal hearing, RBI came to the conclusion that the charge of non-compliance with the aforesaid RBI directions was substantiated and warranted imposition of monetary penalty, to the extent of non-compliance with the aforesaid directions,” the statement said.

In the case of both the banks, RBI said its action is based on the deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by them with their customers.

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RBI imposes penalty of Rs 1.95 crore on Standard Chartered Bank, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank of India has imposed a penalty of Rs 1.95 crore on Standard Chartered Bank – India, for non-compliance with the directions on customer protection, cyber security, credit card operations, among others, the central bank said in a circular.

Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Banking Transactions, Cyber Security Framework in Banks, Credit Card Operations of banks and Creation of a Central Repository of Large Common Exposures – Across Banks – were the norms the bank failed to comply with, according to the RBI.

A Statutory Inspection for Supervisory Evaluation of the bank had been conducted with reference to its financial position as on March 31, 2020, and the examination of the risk assessment report, inspection report and all related correspondence pertaining to the same revealed the non-compliance with the above-mentioned directions to the extent of failure to credit the amount involved in the unauthorised electronic transactions, not reporting cyber security incident within the prescribed time period, authorising direct sales agents to conduct KYC verification, and failure to ensure integrity and quality of data submitted.

Based on this, the RBI had issued an notice to the bank advising it to show cause as to why penalty should not be imposed on it.

After receiving the bank’s replies to the notice, the RBI came to the conclusion that it would charge a fee for the non-compliance.



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Carry your cards, ATMs are not dying, BFSI News, ET BFSI

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There are various reports and discussions on how ATMs are going to vanish soon. But I don’t find any supportive data to believe in it. Digital payments are adding billions of transactions every month and POS terminals are also trying to add the features of ATMs but ATMs will stay in the system for a long time as cash still plays a dominant role in the economy. In fact, there are many restaurants and stores which do not accept any mode of digital payments and believe in only cash. Here is what RBI data of the last two years shows: ATMs are not dying.

State of ATMs – June 2020

Banks Total ATMs ATMs in Rural
PSU Banks 1,34,518 28,900
Pvt Banks 73,098 6,034
SFBs 1,935 199
White Label 23,790 11,807
Total ATMs 2,34,267 46,965

State of ATMs – June 2021

Banks Total ATMs ATMs in Rural
PSU Banks 1,36,889 26,858
Pvt Banks 73,750 6,281
SFBs 2,156 237
White Label 25,995 13,580
Total ATMs 2,39,761 47,011

The data shows that there is a slight increase in the total ATMs from 2020 to 2021. By June 2020 total ATMs were 2,34,267 which increased to 2,39,761 by June 2021. The slight decrease is in the number of rural ATMs by PSU banks may be due to bank mergers.

ATMs are a useful product

ATM was one of the biggest innovations in the banking industry much before digital payments. It killed the long serpentine queues at the bank branches where people used to spend hours to get cash. ATMs allow people to withdraw cash anywhere, anytime according to their convenience. RBI has also ensured that banks have enough ATMs and imposes penalty on banks which don’t maintain their ATMs.

Digital versus ATM

With the rise of digital payments, people have certainly shifted to mobile payments which are far more convenient. But that doesn’t mean that they are not using the cash. India’s cash to GDP ratio is 14.7%, which is much higher compared to the OECD countries.

For online shopping and small payments, people are using mobile payments, but for large payments, they still chose either cash or cheque.

The rise of POS

I often find that POS has been another product that is equivalent to ATMs. Over the years POS also added new features and it’s not just a payment receiving terminal. It has also started dispensing cash and that trend is rising. There are more than five million merchants using POS terminals and many of them are offering cash withdrawal. Recently a payment gateway company Mswipe told me that they are dispensing cash around Rs 50 lakh per day at POS terminals. POS will certainly help small-ticket transactions and areas where there are fewer ATMs.

Need for rationalising ATMs

India has on average 20 ATMs for 100,000 people, the global average is 50. I also find a big mismatch in the placement of ATMs in urban areas. There are areas where dozens of ATMs are set up within a vicinity of 2-3 miles, but there are areas where there are no ATMs at all. I think banks and financial institutions should review their placements. Also, ATM machines need to be upgraded with new features that will inform customers about the shortage of cash before using the machine.

Though people are using digital in villages as well, I am aware of people who travel for 10-12 miles to withdraw cash from ATMs. Jan Dhan Yojana has brought millions of people into banking but still there are many more millions away from banking. And they will need cash.



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RBI asks banks to prepare for major changes in capital account convertibility, BFSI News, ET BFSI

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Hinting at further relaxation in the capital account convertibility norms, RBI Deputy Governor T Rabi Sankar has said the country is on the cusp of some fundamental shifts with regard to currency management.

India has come a long way in achieving increasing levels of convertibility on the capital account and has broadly achieved the desired outcome for the policy choices in terms of achieving a stable composition of foreign capital inflow, Sankar said while addressing the Foreign Exchange Dealers’ Association of India’s (FEDAI) annual day meeting.

Although the Indian rupee is fully convertible for current account transactions, only limited capital account transactions are permitted by the RBI.

“…India is on the cusp of some fundamental shifts in this space with increased market integration in the offing and freer non-resident access to debt on the table. The rate of change in capital convertibility will only increase with each of these and similar measures,” he said.

With that comes the responsibility to ensure that such flows are managed effectively with the right combination of capital flow measures, macro-prudential measures and market intervention, the deputy governor further said.

He futher said market participants, particularly banks, will have to prepare themselves to manage the business process changes and the global risks associated with capital convertibility.

The degree of Balance of Payment convertibility of a country usually depends on the level of its economic development and degree of maturity of its financial markets.

Therefore, advanced economies are almost fully convertible, while emerging market economies are convertible to different degrees, Sankar added.

The regulator’s job

“The regulator’s job is somewhat different. As someone once said, the job of a regulator is like the gas regulator in the kitchen – it cannot ensure the quality of the dish, but it can prevent the kitchen from blowing up.

“The quality of the dish – that is, the efficiency with which the investment needs of the country are met – is up to how well authorised dealers and other intermediaries adjust to the increasingly fuller capital account convertibility,” Sankar said.

The balance of payments (BOP) of a country records all economic transactions of a country (that is, of its individuals, businesses and governments) with the rest of the world during a defined period, usually one year. These transactions are broadly divided into two heads – current account and capital account.

The current account covers exports and imports of goods and services, factor income and unilateral transfers. The capital account records the net change in foreign assets and liabilities held buy a country.

What is capital account convertibility?

The balance of payments, a statement of all transactions made between a country and the outside world, consists of two accounts — current and capital account. While the current account deals mainly with import and export of goods and services, the capital account is made up of cross-border movement of capital by way of investments and loans.

Current account convertibility refers to the freedom to convert your rupees into other internationally accepted currencies and vice versa without any restrictions whenever you make payments.

Capital account convertibility means the freedom to conduct investment transactions without any constraints. It would mean no restrictions on the amount of rupees you can convert into foreign currency to enable you, an Indian resident, to acquire any foreign asset. Under it, there would be no restraints on NRIs bringing in any amount of dollars or dirhams to acquire an asset in India.

The Tarapore committee

The S S Tarapore committee’s report on fuller capital account convertibility in 2006 argued that even countries that had apparently comfortable fiscal positions have experienced currency crises and rapid deterioration of the exchange rate, when the tide turns.

The report had said that most currency crises arise out of prolonged overvaluation in exchange rates leading to unsustainable current account deficits. An excessive appreciation of the exchange rate causes exporting industries to become unviable, and imports to become much more competitive, causing the current account deficit to worsen. Thus, it suggests transparent fiscal consolidation is necessary to reduce the chances of a currency crisis.



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Outward remittances under LRS rose 31%

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Outward remittances under the Liberalised Remittance Scheme (LRS) for individuals rose about 31 per cent year-on-year (yoy) in July 2021 to $1.31 billion, mainly on the back of increase in expenses towards studies and travel, according to Reserve Bank of India (RBI) data.

The remittances were $995.16 million in the year ago period.

This comes even as the global economy seems to be gradually recovering from the unprecedented disruption caused by the Covid-19 pandemic.

As per RBI norms, all resident individuals, including minors, are allowed to freely remit up to $250,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.

The Scheme was introduced on February 4, 2004, with a limit of $25,000 and revised in stages.

In July 2021, remittances towards studies abroad jumped about 53 per cent y-o-y to $423 million; towards travel by 41 per cent to $347 million;gift was up about 35 per cent to $175 million; and towards investment in equity/debt by 48 per cent to $50 million.

Remittance towards maintenance of close relatives was almost static at $243 million.

T Rabi Sankar, Deputy Governor, RBI, in a recent speech, observed that LRS for individuals, while it is open for both current and capital account transactions, is largely (more than 90 per cent) in current account transactions such as travel and studies.

“As the LRS Scheme has operated for some time, there may be a need to review it keeping in mind the changing requirements such as higher education for the youth, requirement of start-ups etc.

“There might even be a case for reviewing whether the limit can remain uniform or can be linked to some economic variable for individuals,” he said.

Outward remittance under LRS had come down about 32 per cent yoy (or by $6.08 billion) in FY21 to $12.68 billion ($18.76 billion in FY22) as the pandemic raged.

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Bond yields trend higher despite softer inflation

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Benchmark yield closed marginally higher this week despite positive inflation data even as rising crude prices, higher US treasury yields and domestic liquidity factor take precedence.

During the monetary policy, the Reserve Bank of India (RBI) halted the G-SAP programme while saying it would increase the quantum of VRRR auctions to Rs6 lakh crore by December.

The central bank last week conducted an 8-day Variable Rate Reverse Repo auction in which the cut-off yield came in at 3.9 per cent. In comparision, the cut-off for a 7-day VRRR auction had come in at 3.61 per cent in the first week of October. The increasing cut-off seems to reflect the central bank’s comfort in paying a higher rate to remove excessive liquidity.

On the positive side, retail inflation dropped to a five-month low of 4.35 per cent in September. Bond market participants are of the view that the next inflation print will most likely come in below 4 per cent due to a favourable base effect. Post that, there could be some rise in inflation, they say.

However, it seems the days when market cheered this sort of news seem to be over, at least temporarily so, as other factors weigh heavily on traders’ minds.

Rising crude price

The halting of G-SAP comes at a time when crude prices are gaining an upward momentum. Brent crude prices closed near the $85-mark last week, having risen by almost $2.5 in a week. To give a context, it has risen by almost $7 / barrel since the beginning of the month.

At the same time, the 10-year US treasury yield touched 1.63 per cent last week, before cooling to 1.575 per cent.

Bond dealers say if both the crude and the US treasury yields continue to rise, it could have an impact on the domestic yields.

Vijay Sharma, senior executive vice-president at PNB Gilts opines that the market is mainly looking at only these two factors.

“Rising crude prices and hardening US Treasury yields are the main factors that are driving the G-Sec yields higher. Under these adverse global conditions, the withdrawal of G-SAP has exacerbated the upmove. The market already knows that the next inflation print would likely come in below 4 per cent given the low base effect. Market participants will be watching out whether at 6.35-6.4 per cent levels, will the RBI do something to stabilise the yields. If crude prices and US treasury yields stabilise, the benchmark bonds could find demand returning at close to 6.4 per cent,” Sharma said.

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