Tag: RBI

RBI allows banks to sell ‘fraud loans’ to ARCs

Banking & Finance

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The Reserve Bank of India on Friday allowed loan exposures classified as fraud to be transferred to Asset Reconstruction Companies (ARCs). This comes in the wake of banks reporting frauds aggregating ₹3.95-lakh crore between FY19 and FY21.

Stressed loans, which are in default for more than 60 days or classified as non-performing assets (NPA), can be transferred to ARCs. This shall include loan exposures classified as fraud as on the date of transfer.

Issuing the guidelines for transfer of loan exposure, including stressed loans, the central bank said the transfer of such loans to an ARC, however, does not absolve the transferor from fixing the staff accountability as required under the extant instructions on frauds.

Until now, when an account is declared fraud, banks had to set aside 100 per cent of the outstanding loan as provision. Under the new rules, banks can hope to recover a part of the loan. For ARCs, this will allow them to buy debt cheaper than regular loan accounts.

Swiss Challenge method

The RBI also said the transfer of stressed loans above ₹100 crore negotiated on a bilateral basis between lenders and permitted acquirers, including ARCs, must necessarily be followed by an auction through the Swiss Challenge method. Under the Swiss Challenge auction, the price bilaterally negotiated for the sale of a stressed asset becomes the floor price for inviting counter-proposals from other interested buyers.

Loan transfers are usually resorted to by lending institutions for multiple reasons ranging from liquidity management, rebalancing of exposure or strategic sales. “A robust secondary market in loans can be an important mechanism for management of credit exposures by lending institutions and also create additional avenues for raising liquidity,” the RBI said in a circular to lenders.

New guidelines

Under the new guidelines, loans can be transferred only after a minimum holding period (MHP) of three months in case of loans with tenor up to 2 years, and six months fior those with tenor of more than 2 years. In case of loans where the security does not exist or cannot be registered, the MHP shall be calculated from the date of first repayment of the loan.

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

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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 ex-Guv Subbarao explains why RBI is anxious about cryptocurrency, BFSI News, ET BFSI

Personal Finance

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The Reserve Bank of India (RBI) has stated multiple times that it has “serious” and “major” concerns about cryptocurrencies without ever explaining what those concerns could be. The central bank’s aversion to virtual currencies is seen as one of the primary motivations behind the government’s bill to ban all private cryptocurrencies.

The crypto industry believes the central bank is looking at cryptocurrencies through a narrow lens and is failing to appreciate the various use cases for such virtual currencies. The industry’s argument is that cryptocurrencies are a digital asset, and not a threat to the monetary sovereignty of the rupee.

While concerns that cryptocurrencies can facilitate money laundering and terror financing are being expressed globally, RBI, on its part, has shied away from explaining its key concerns in detail, leaving the crypto industry scratching its head.

In an interview with ETMarkets.com, former RBI Governor Dr D Subbarao said RBI’s concerns over cryptocurrencies like Bitcoin are three-fold.

Monetary Stability
RBI is the sole manager of currency in the economy and is responsible for the upkeep of the monetary system. Subbarao believes if virtual currencies gained traction, then it could threaten the monetary stability, as “it is quite possible that domestic price formation could be set in that virtual currency.”

Financial Stability
For Subbarao, the threat to the financial stability of the Indian economy from cryptocurrencies like Bitcoin is simple. “If regulated institutions, banks for example, are exposed to virtual currencies and if that currency is very volatile, then there could be financial instability,” Subbarao said.

The former finance secretary believes the threat to financial stability is particularly large from virtual currencies that do not have an intrinsic value and are backed by just algorithms, like Bitcoin and Ethereum.

Capital Outflow
Interestingly, Subbarao sees virtual currencies such as Bitcoin as a threat to the stability of the external sector of India. “Cryptocurrencies could become a conduit for capital flight, especially in a country like India where there is still no full convertibility of capital,” the former governor said.

In that light, Subbarao sees the efforts of central banks to create their own central bank digital currencies (CBDC) as a defensive mechanism. A central bank digital currency is a virtual version of the sovereign currency of the country and is issued by the central bank. This is different from private cryptocurrencies like Bitcoin, which is issued by private citizens.

Subbarao, who helmed the central bank during Global Financial Crisis as well as the infamous ‘taper tantrum’ period of 2013-14, is of the view that Facebook’s plans to launch a stablecoin back in 2016 (Libra) was the turning from when central banks saw cryptocurrencies as an assault to their sovereignty.

The former governor, who currently resides in Singapore, believes RBI’s primary motivation to launch a central bank digital currency is to not be left behind. “Main motivation is to ensure that it is not left behind in a world where CBDCs might become very ubiquitous,” Subbarao said.

CBDCs could also help the central bank reduce the high costs that it bears in printing and maintaining currency in circulation. However, in an economy where payment systems have already become very penetrative and virtual wallets are growing every minute, Subbarao sees little incentive for individuals to move away from private cryptocurrencies.



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DICGC to announce revised date for submission of claims by PMC Bank depositors

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The Deposit Insurance and Credit Guarantee Corporation (DICGC) has clarified that it will separately communicate the revised date for submission of claims and the procedure to be followed in respect of payment of deposits in the case of the scam-hit Punjab and Maharashtra Co-operative (PMC) Bank.

This clarification comes even as big depositors of PMC Bank were on tenterhooks about submitting a form that requires them to declare the “willingness of depositors to receive insurance claim amount (up to ₹5 lakh) from DICGC.”

The “willingness” clause was interpreted by some of the depositors to mean that they may not receive deposits above ₹5 lakh. Hence, PMC Bank depositors, with deposits above Rs 5 lakh, were reluctant to submit the form.

Now, the Corporation has stated that in the case of PMC Bank, there may be a need to invoke the provisions of Section 18 A (7) (a) of the DICGC (Amendment) Act, 2021.

Also read: Banking venture of Centrum Financial Services christened Unity SFB

As per the aforementioned section, “the Reserve Bank finds it expedient in the interest of finalising a scheme of amalgamation of the insured bank with other banking institution or a scheme of compromise or arrangement or of reconstruction in respect of such insured bank, and communicates to the Corporation accordingly, the date on which the Corporation shall become liable to pay every depositor of such insured bank may further be extended by a period not exceeding ninety days.”

Chander Purswani, President, PMC Depositors Forum, said: ”Our fight was never for ₹5 lakh but for the entire money. We stand by that. We are confident that the RBI and the Centrum-BharatPe combine will not let us down.”

Need for a roadmap

Purswani emphasised that RBI should give a roadmap as to how and when PMC Bank depositors with deposits above ₹5 lakh will get their money back along with accrued interest.

He said PMC Bank has about one lakh depositors with deposits up to ₹5 lakh and about 43,000 depositors with deposits above ₹5 lakh.

RBI had accorded “in-principle” approval to Centrum Financial Services Ltd (CFSL), which is a wholly owned subsidiary of Centrum Capital Ltd, on June 18, 2021, to set up a small finance bank (SFB). This approval was in specific pursuance to CFSL’s February 2021 offer in response to PMC Bank’s November 2020 Expression of Interest (EoI) notification.

Unity Small Finance Bank

CFSL has christened its proposed banking venture as Unity Small Finance Bank.

Under the “in-principle” approval, CFSL will first operationalise Unity SFB in 120 days. Thereafter, RBI will place in public domain a draft scheme of amalgamation of PMC Bank with the SFB. The last step will be government’s sanction for the scheme.

DICGC had, on September 21, 2021, asked the depositors of 21 urban co-operative banks (UCBs), including PMC Bank, Sri Gururaghavendra Sahakara Bank, Rupee Co-operative Bank and Kapol Co-Operative Bank, which are currently under the Reserve Bank of India’s All-Inclusive Directions (AID), to contact their banks and submit the declaration of willingness to enable DICGC to make payments.

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Private bank deposits grow at cost of PSBs, now 30.5% of total deposits, BFSI News, ET BFSI

Banking & Finance

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Share of private sector banks in total bank deposits continued to rise at the cost of public sector banks and stood at 30.5 per cent (29.5 per cent a year ago), accounting for about half of the deposits of financial and non-financial corporations as well as the rest of the world sectors.

Bank deposits grew (y-o-y) by 11.9 per cent during the 2020-21 (8.8 per cent in the previous year) on the back of high growth in current account and savings account (CASA) deposits; the share of CASA deposits increased to 43.7 per cent in March 2021 (41.7 per cent a year ago), according to RBI data.

Private bank deposits grow at cost of PSBs, now 30.5% of total deposits

Households dominate

Among institutional categories, the household sector held 64.1 per cent share in total deposits; individuals, including Hindu Undivided Families (HUFs), were the major constituent of the household sector and contributed 55.8 per cent in aggregate deposits.

Bank deposits of non-financial corporations surged by 18.8 per cent during 2020-21 and their share in total deposits increased to 16.2 per cent in March-2021.

Metropolitan branches of banks, which account for over half of total deposits, accounted for 59.6 per cent of incremental deposits during 2020-21 (43.2 per cent last year).

Three major states (Maharashtra, UP and Karnataka) held one-third of total household sectors’ outstanding deposits and over 40 per cent of its incremental deposits during 2020-21, according to RBI.

Private bank deposits grow at cost of PSBs, now 30.5% of total deposits

Term deposits

With the downward shift in the interest rates on term deposits, the share of term deposits carrying less than 6 per cent interest rate surged to 69.0 per cent in March 2021 from 21.3 per cent a year ago; the interest rate bracket ‘5 to less than 6 per cent had highest concentration (36.8 per cent) of total term deposits.

The majority of term deposits were originally contracted for ‘one year to less than three years’ maturity.

The share of short-term deposits (original maturity of less than one-year) rose to 32.8 per cent (25.4 per cent a year ago); in terms of residual maturity, 75.7 per cent of the term deposits were due for maturity within one year.



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Short of lending targets, banks seek priority sector tag for retail, infrastructure, BFSI News, ET BFSI

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Banks have reached out to the government seeking priority sector tag for retail trade and infrastructure.

This comes as most lenders are struggling to meet their priority sector targets with premium on lending certificates rising by almost 200 basis points in the last one year. At present only, regional rural banks or RRBs are suppliers of priority sector lending credit.

“We have had informal discussions with the Reserve Bank of India, and have made representation to the government as well,” said a bank executive, aware of the developments, adding that there was a need to broaden the priority sector.

At present lending towards eight sectors including agriculture, micro and small medium enterprises, export credit, housing, education, renewable energy and social infrastructure is considered eligible for priority sector loans. Commercial lenders have to mandatorily deploy 40% of their adjusted net bank credit (ANBC) towards these sectors, of which 18% is allocated towards agriculture.

The latest data from RBI indicates that overall priority sector lending for scheduled commercial banks stood at 40.54% in 2020-21 (as at the end of December 2020) even though there was a marginal shortfall for private sector and foreign banks.

“There are various subcategories within this structure and most banks are unable to meet these requirements and hence there is a need to identify new potential sectors,” the above quoted executive said adding that most big lenders resort to buying priority sector lending certificates (PSLCs) to meet their regulatory requirements. A bank running short of meeting targets can purchase priority sector lending certificates from a lender having surplus for a fee.

“Today, only regional rural banks (RRBs) are suppliers of PSLC and most sponsoring banks buy it from their RRBs,” he said, adding that non-banking finance companies or NBFCs also have underwriting limitations.

The total trading volume of PSLCs recorded a growth of 25.9% and stood at Rs 5.89 lakh crore in 2020-21 as compared with 43.1% growth a year ago.



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Imitating a fintech firm not the right business model: Former RBI Deputy Gov

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Banks should avoid ‘imitating’ fintech companies in their attempt to re-imagine themselves but should look for meaningful co-operation with such companies to enhance their business.

According to SS Mundra, Former Deputy Governor, Reserve Bank of India (RBI), the process of re-imagination of business models for banks has already started. However, increasingly a number of banks have been evolving like fintech companies.

“Banks have to realise that fintech companies are competitive and nimble. So a bank trying to imitate a fintech company in totality is not the right approach to my mind and it is not the right business model. I think what is beneficial for both of them is to have a meaningful co-operation,” he said at the 14th edition of the two-day Banking Colloquium organised by CII, held virtually on Tuesday.

Such co-operation would help them both leverage on their respective strengths, Mundra said. While fintech companies have the strength of being nimble, innovative and fast-footed banks have the advantage of having a good resource base, reach, faith and trust of people and these can be complementary.

Banks should further avoid the temptation of introducing too many products or too many processes at too short an interval as it tends to leave both their staff and customers confused.

Rationalise branches

“There has to be a well-designed and well-decided pace at which such changes are introduced. Otherwise we have seen in some cases it may lead to unforeseen problem or a regulatory displeasure so one has to be conscious,” he pointed out.

At a time when digital has become a way of life, it is very important to take a “hard look” at the traditional branch-led business model, he said, talking about the need to rationalise branches.

“I am not suggesting that branches should go away but there is a need to reimagine the business model. One has to see which are the branches that are loss-making, contributing positively, can be downsized and can be completely done away with, and where you can rely completely on technology and where you can rely on agency arrangement. For every bank, it is important to do a complete holistic assessment of their branch network and how to derive maximum value from this,” he said.

According to Mundra, corporate lending, which once constituted the biggest chunk in banks’ loan book, has shrunk, with corporates deleveraging and finding alternative methods of financing themselves.

It would no longer be profitable for a bank to sell only a product to a corporate, as most corporates are now expecting “solutions” from banking system. “You need to adopt a solution-based approach if you want to do corporate banking,” he said.

One of the sectors which banks could look to ramp up is the MSME portfolio as there is more availability of information, date and GST has changed the entire landscape of the sector, Mundra said. “But here again the gradual movement would have to be from product to solution. In the retail sector, banks should leverage on the co-origination model,” he added.

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Bank loans do not reflect credit risk adequately as RBI chases growth, BFSI News, ET BFSI

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The period of extended surplus liquidity is already witnessing fierce pricing wars across banks, some of which may not reflect credit risk adequately.

“However there is the risk of an Asset Liability mismatch if the liquidity is withdrawn quickly. As of now, the inflation numbers may not warrant such a decision from RBI, but if core inflation persists in the current range of 6% or above, that might act as a hindrance to continued liquidity abundance,” according to the State Bank of India’s economic research report Ecowrap.

The industry is replacing its long-term debts by very low-priced CP/working capital demand loan (ECDL) and this will obviously act as an enabler once the investment cycle revives

Margin pressure

Banks are now facing significant margin pressures despite surfeit of liquidity in the banking system, it said.

A back of envelope estimate suggests that the core funding cost of the banking system that includes cost of deposits, negative carry on Statutory Liquidity Ration (SLR) and Cash Reserve Ratio (CRR) and Return on Assets is currently at 6 per cent, while the reverse repo rate is at 3.35 per cent. Additionally, if the cost of provisions is added to the core funding cost, the total cost comes to around 12 per cent, the report said.

Credit risk

The report cited the example of 15 years loans, which are being priced at even lower than 6 per cent, linking with repo / treasury bill rates. It said that 10-year Government Security (G-Sec) is currently trading at 6.2 per cent and by the current pricing trends this could even gravitate towards 6 per cent again.

This anomaly not only negates the concept of tenor premium but may create a material risk with regard to sustainability of such rates in long term, on which borrowers and banks are basing their financial calculations, it said, adding that the only good thing is that such pricing war is mostly restricted to AAA borrowers.

According to the report, three year term loans are being quoted at close to 4 per cent repo rate and seven year term loans for borrowers below AAA are also quoting a risk premium of 15-20 basis points over the 10 year rates. Working Capital Loans (WCL) are currently being quoted at a notch above reverse repo rate at 3.35 per cent.

The report said that the concept of normally permitted lending limit (NPLL) for specified borrowers, meant to nudge them to move towards corporate bonds market, may lose its importance.

CP market

Ghosh observed that the commercial paper (CP) market is also witnessing significant churn with banks now almost absent.

Non-Banking participants like mutual funds who do not have access to RBI Reverse Repo window are creating pricing pressure in CP market as they are sometimes quoting below RBI reverse repo rate.

The CP market reflects the huge pricing gap between better and lower rated borrowers, it said.



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Depositors of scandal-hit PMC Bank, 20 others to get up to Rs 5 lakh within 90 days, BFSI News, ET BFSI

Banking & Finance

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The Deposit Insurance and Credit Guarantee Corp will pay depositors of 21 insured banks, which includes scandal-hit PMC Bank, the amount equivalent to the deposits, up to a maximum of Rs 5 lakh, within 90 days.

Necessary instructions have been issued to the banks to submit the claims within 45 days after obtaining the approval from depositors to claim deposit insurance. The verification and settlement of the claims should be done by November 29, 2021, DICGC said in a a release.

These banks shall submit a claim list by October 15 and update the position as on November 29, with principal and interest, in a final updated list, which will enable DICGC to discharge its insurance liability in full as per norms.

Unpaid or the difference in amount of deposits up to Rs 5 lakh, as per final updated list, will be paid within 30 days of receipt, that is by December 29.

The Parliament in August passed the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021, ensuring account holders get up to Rs 5 lakh within 90 days of the RBI imposing a moratorium on the banks.

In 2019, the Reserve Bank of India imposed restrictions on PMC bank after observing financial irregularities, including under-reporting of bad loans. From the findings of the probe, it was discovered that Rs 250 crore worth of fake deposits were shown in the system, and that the bank had manipulated its net time and deposits using HDIL and DHFL cheques.

Here’s the list of the 21 banks:

> Adoor Co-Operative Urban Bank, Kerala
> Bidar Mahila Urban Co-Op Bank, Karnataka
> City Co-Op Bank, Maharashtra
> Hindu Co-Op Bank, Punjab
> Kapol Co-Op Bank, Maharashtra
> Maratha Sahakari Bank, Maharashtra
> Millath Co-Op Bank, Karnataka
> Needs of Life Co-Op Bank, Maharashtra
> Padmashree Dr. Vithal Rao Vikhe Patil, Maharashtra
> People’s Co-Op Bank, Kanpur, Uttar Pradesh
> Punjab & Maharashtra Co-Op Bank (PMC Bank), Maharashtra
> Rupee Co-Operative Bank, Maharashtra
> Shri Anand Coop Bank, Pune, Maharashtra
> Sikar Urban Co-Op Bank, Rajasthan
> Sri Gururaghvendra Sahakara Bank Niyamitha, Karnataka
> The Mudhol Co-Operative Bank, Karnataka
> Mantha Urban Cooperative Bank, Maharashtra
> Sarjeraodada Naik Shirala Sahakari Bank, Maharashtra
> Independence Cooperative Bank, Nashik, Maharashttra
> Deccan Urban Co-Operative Bank, Vijaypur, Karnataka
> Garha Co-Operative Bank, Guna, Madhya Pradesh

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Credit card war hots up ahead of festive season; cos announce a slew of tie-ups, BFSI News, ET BFSI

Banking & Finance

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Consumers are set to get a flurry of new credit card offers as banks are stepping up on customer acquisitions. Banks are gearing up to grab a bigger share of the market which is set to grow as the economy opens up.

New card additions were the highest for ICICI at 655,000 during this fiscal while added 198,000 cards being the highest in the past 16 months.

HDFC Bank

HDFC Bank, on which RBI recently lifted a ban of issuing new credit cards, has announced a tie-up with leading payments company Paytm to start selling co-branded plastics before the onset of the festive season. The credit cards will be powered by Visa and will include offerings targeted at millennials, business owners and merchants, an official statement said.

Paytm has a reach of over 330 million consumers and 21 million merchants, while HDFC Bank has over 5 million debit, credit and prepaid cards, and serves 2 million merchants through its offerings.

HDFC Bank, the largest private-sector bank which also leads the credit card segment, was banned from issuing new credit cards for over eight months as a penalty for frequent outages. After the lifting of the ban, it outlined aggressive plans to regain lost market share in up to a year.

The bank had said that it will focus on distribution partnerships to achieve its target, under which it envisages ramping up new credit card sales to 5 lakh a month by end of the fiscal from 3 lakh in November 2021.

HDFC Bank and Paytm had last month announced a tie-up on the payments side. Paytm already has a tie-up with foreign lender Citi under which co-branded credit cards are issued. Citi is looking to exit retail banking activities in the country.

The launch of the HDFC Bank-Paytm co-branded cards is slated for next month, ahead of the festive season which typically sees a spurt in spends, the statement said, adding a full suite of products will be available by December.

Yes Bank ties up with Visa

Yes Bank has tied up with Visa to issue credit cards to its customers on the payment platform, which includes a suite of nine credit card variants. The Yes Bank card issuances were hit after RBI had banned Mastercard from issuing cards.

“The transition has been achieved within a record time of less than 60 days, ensuring ease for customers across segments,” the bank said.

Yes Bank and RBL Bank were hit the most by the Mastercard ban as their entire card network was on it. RBL Bank had announced a tie-up with Visa the day after the curbs on Mastercard were announced and resumed issuing cards from September 15. Yes Bank’s Visa credit cards, announced today, will service all segments–consumer cards, business cards, and corporate cards across YES First, YES Premia and YES Prosperity.

AU Small Finance Bank

AU Small Finance Bank (SFB) has issued over 40,000 credit cards since its launch a few months back, and more than half of them are first time users. The Jaipur based lender said it is the first SFB to enter semi-urban and rural areas with its own credit cards. It also offers a special Altura plus credit card to empower women to experience a limitless living.

In future, the bank is also working on bringing out its limited-edition cards, featuring the bank’s brand ambassadors Aamir Khan and Kiara Advani.

“The forthcoming festive season will lend further support to the picked-up momentum in the spends and new customers sourcing. However, a possible Covid 3.0 remains a key risk. We continue to believe that Citi Bank’s exit from the credit cards business along with the domestic corporate loan recovery cycle yet to pick up, provides good growth opportunities for the credit cards business, supported by improving macro-conditions,’ Axis Securities said in a note.



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