Tag: RBI

RBI to conduct G-SAP auctions on Sept 23

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The Reserve Bank of India (RBI) on Monday announced that it would conduct open market purchase of Government Securities (G-Secs) under its “G-Sec Acquisition Programme (G-SAP) 2.0” along with a simultaneous sale of G-Secs on September 23.

So far, under G-SAP, the RBI has only conducted standalone G-Sec purchases. But this time round, it is simultaneously conducting sale of G-Secs in view of ample liquidity in the banking system.

RBI will purchase three G-Secs of seven to 14 years tenor, aggregating ₹15,000 crore, under G-SAP 2.0 on September 23.

Simultaneously, the central bank will sell three short-term G-Sec, all maturing in 2022, aggregating ₹15,000 crore.

In the second quarter so far, the RBI has bought G-Secs aggregating ₹90,000 crore in four G-SAP auctions. After the September 23 G-SAP auction, it may conduct one more auction for ₹15,000 crore.

Marzban Irani, CIO-Fixed Income, LIC MF, said the simultaneous conduct of G-Sec purchase under G-SAP and sale of G-Sec will be liquidity neutral. However, it may push up short-term yields.

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To purchase and simultaneously sale G-Secs on Sept 23: RBI

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The Reserve Bank of India (RBI) on Monday announced that will conduct open market purchase of Government Securities (G-Secs) under its “G-Sec Acquisition Programme (G-SAP) 2.0” along with a simultaneous sale of G-Secs on September 23.

So far, under G-SAP, the RBI has only conducted standalone G-Sec purchases. But this time round, it is simultaneously conducting sale of G-Secs in view of ample liquidity in the banking system.

RBI will purchase three G-Secs of seven to 14 years tenor, aggregating ₹15,000 crore, under G-SAP 2.0 on September 23.

Simultaneously, the Central bank will sell three short-term G-Sec, all maturing in 2022, aggregating ₹15,000 crore.

In the second quarter so far, the RBI has bought G-Secs aggregating ₹90,000 crore in four G-SAP auctions. After the September 23rd G-SAP auction, it may conduct one more auction for ₹15,000 crore.

Marzban Irani, CIO-Fixed Income, LIC MF, said the simultaneous conduct of G-Sec purchase under G-SAP and sale of G-Sec will be liquidity neutral. However, it may push up short-term yields.

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RBI deputy governor stresses on need to mainstream green finance, BFSI News, ET BFSI

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There is a need to mainstream green finance and devise ways for incorporating environment impact into commercial lending decisions, RBI deputy governor M Rajeshwar Rao has said.

Addressing climate risk in the financial sector should be the joint responsibility of stakeholders as it would affect the resilience of the financial system in the long run, he said.

Rao made these comments while speaking at the CAFRAL Virtual Conference on Green and Sustainable Finance) recently.

“As the risks and opportunities and financial impact arising from climate change vary across jurisdictions, this poses unique considerations for emerging economies like India.

“The challenge before us is to mainstream green finance and think of ways to incorporate the environmental impact into commercial lending decisions while simultaneously balancing the needs of credit expansion, economic growth and social development,” Rao said.

He noted that the global understanding of systemic impact of climate change on the economy and the financial system as also its resultant impact on financial stability is evolving and, accordingly, the responses of central banks and supervisors around the world have also been developing.

“The private and the public sector need to build on our early progress, both by recognising what we do know and urgently filling in the gaps around what we do not,” Rao said.

He further said the impact of climate risk transcends across the national borders and continents.

“Let us be aware that even the countries which are not major contributors will also be equally impacted by these risks. We all are in it together,” he said.

Climate-related financial risk refers to the risk assessment based on analysis of the likelihoods, consequences and responses to the impact of climate change.

Thus, climate-related financial risks may arise not just from climate change but also from efforts to mitigate these changes, Rao said.

A report of the ministry of earth sciences, government of India released last year concluded that since the middle of the 20th century, India has witnessed a rise in average temperature, a decrease in monsoon precipitation, a rise in extreme temperature, droughts, and sea levels, as well as increase in the intensity and frequency of severe cyclones.



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Climate risks can impact the financial sector: RBI Deputy Governor

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Both climate change and the transition to a carbon-neutral economy have the potential to affect the economy and by extension, general welfare of the people, according to M Rajeshwar Rao, Deputy Governor, Reserve Bank of India (RBI).

Hence, there is a clear benefit to acting early and ensuring an orderly transition.

“While transition costs may be higher in the short term, they are likely to trend much lower in the long run when compared to the costs of unrestrained climate deterioration.

“It is thus, vital to make the financial system more resilient in the face of the potential costs of extreme weather events,” Rao said at a recent CAFRAL Virtual Conference on Green and Sustainable Finance.

Climate risks can impact the financial sector through two broad channels — physical and transition risks, he added.

Physical risks mean economic costs and financial losses resulting from the increasing severity and frequency of extreme weather events and long-term climate change.

Transition risks arise in the process of adjustment towards a low-carbon economy.

“It is, therefore, important to understand these risk drivers which are likely to affect the financial firms,” the Deputy Governor said.

Rao observed that the challenge before the RBI is to mainstream green finance and think of ways to incorporate the environmental impact into commercial lending decisions while simultaneously balancing the needs of credit expansion, economic growth and social development.

Recently, RBI set up a Sustainable Finance Group (SFG) within the Department of Regulation to spearhead its efforts and regulatory initiatives in the areas of sustainable finance and climate risk.

The Group will be advising regulated entities to have a strategy to address climate change risks and appropriate governance structures to effectively manage them from a micro-prudential perspective and exploring forward looking tools like climate scenario analysis and stress testing for assessing climate-related risks, among others.

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Credit card issuances, spends see sharp uptick as festive season nears, BFSI News, ET BFSI

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Credit card firms are witnessing a sharp rebound in new card issuances and spends as lockdowns and restrictions ease across geographies.

On a year to date basis, the credit card industry witnessed a sharp improvement in spends, albeit on a marginally lower base in July. New card sourcing picked up momentum, supporting Cards-in-Force (CIF) growth of 10% YoY. In July 2021, the business volumes grew by 38% year on year, which was aided by the increasing shift towards online spending. Spends grew a robust 78% YoY. The new customer additions have shown an improvement in MoM and are expected to improve further thus aiding CIF growth.

ICICI Bank

Amongst the private banks, ICICI Bank continued to remain a clear outperformer registering a growth of 23%/145% YoY in CIF/Spends on a YTD basis. This resulted in the market share improvement of 190/503bps YoY in CIF/Spends to 17.7%/18.4% respectively. New card additions were the highest for ICICI at 655,000 during this fiscal

SBI Cards

SBI Cards picked up momentum with new card additions of 198,000 being the highest in the past 16 months, resulting in a CIF growth of 14% YoY. During YTDFY22, spends grew by 68% YoY, supported by a lower base a year ago. July 21 business volumes are encouraging and with the COVID 2.0 impact waning, the growth momentum is likely to sustain. Business volumes remained strong growing at 40% YoY in July 2021 and 46% on a YTD basis.

HDFC Bank

While HDFC Bank remains the market leader with a 20%+ market share in CIF/spends each, it continued to underperform as the credit card vertical was impacted due to the RBI’s restrictions on new card sourcing. However, with the RBI permitting the issuance of new cards, the company is expected to improve its performance. On a YTD basis, the performance remained muted with CIF remaining flat YoY and spends registering a growth of 60%, favoured by a lower base. The bank’s customer base came down by 222,000 customers in YTDFY22.

AU Small Finance Bank

AU Small Finance Bank, a new entrant in the credit card space since November 2020 has witnessed a strong pick-up (albeit the low base) since the commencement of the business. While the bank holds a negligible market share in terms of CIF/Spends which currently stand at 0.04/0.02% respectively on a YTDFY22 basis, increasing traction in the credit cards vertical would aid revenue streams for the bank.

The outlook

“The relaxations in the Covid related lockdowns and a gradual pick-up in the economic activities have aided a strong revival in spends, new sourcing, and business volumes in July 21. 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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Non-industrial sectors dominate non-food credit growth since 2014

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The overall non-food credit growth during the period 2014-15 to 2020-21 was almost entirely driven by expansion of credit to non-industrial sectors, particularly lending to the retail segment in the form of personal loans, per an article in the Reserve Bank of India’s latest monthly bulletin.

Active participation of both the dominant-group (including six leading banks on the basis of their share in total non-food credit) and the other-group of banks (which includes the remaining 27 banks) is driving credit growth to the non-industrial sectors, according to an analysis of 33 select banks by RBI officials Pawan Kumar, Manjusha Senapati and Anand Prakash.

Impact of Covid

The authors observed that credit extended by the other-group to the industrial sector was affected significantly due to Covid-19 but the performance of this group is better than the dominant-group as far as credit to agriculture and services sectors is concerned.

They said that, “The sharp slowdown in industrial credit, especially by other-group of banks, warrants attention and steps to step up credit offtake commensurate with appropriate risk-taking, a number of which have already been taken by the Government and the Reserve Bank, could defreeze the credit market for the industrial sector and help in reviving the growth momentum derailed by the Covid-19 pandemic.”

After witnessing a significant slowdown in credit offtake during 2019-20 and 2020-21, there has been some uptick in credit growth in the recent months notwithstanding the second Covid wave, which augurs well for the economy, the authors said.

Credit boom period

According to the article, bank credit growth has witnessed significant fluctuations in the past one and half decades.

“The period between 2007-08 to 2013-14 could be characterised as bank credit boom period in the Indian economy, as non-food credit registered double digit growth, primarily driven by robust credit growth to the industrial sector,” the authors said.

Both dominant-group and other-group of banks lent aggressively to the industrial as well as other sectors.

Also see: E-mandate processing: Banks, payment aggregators rush to meet deadline for recurring online transactions

Within industries, infrastructure, and basic metal & metal product industries accounted for a major portion of credit offtake from both the bank groups during the credit boom period.

Credit cycle reversal

Thereafter, however, the credit cycle reversed along with a shift in the sectoral deployment of bank credit.

“During 2014-15 to 2020-21, overall credit growth decelerated, primarily driven down by reversal in credit growth to the industrial sector because of deleveraging by non-financial firms, increasing dependence on non-bank sources for financial resources, and some risk aversion on the part of banks, especially by the other-group of banks to lend to industries, which got further compounded after the outbreak of Covid-19 pandemic,” the authors said.

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Banks rush to implement ‘standing instructions’ system, but may still miss deadline, BFSI News, ET BFSI

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Banks and payment aggregators are rushing to meet the October 1 deadline for implementing a new system for standing instructions for recurring online transactions as the Reserve Bank of India is not likely to extend it. Banks are sending communications to customers saying that they will not process recurring payments, and customers will have to make payments directly to merchants.

“In compliance with the regulatory requirements, we are currently building a solution to seamlessly manage all your domestic standing instructions for recurring payments. This solution will be available soon for you. Starting October 1, any existing standing instruction for domestic and international recurring transactions on your card account will not be processed. We request you to make these payments directly to the service providers to avoid any interruptions,” American Express said in a recent message to customers.

How does the new system work?

Under the proposed system, as a risk mitigating and customer facilitation measure, the card-issuing bank will have to send a pre-transaction notification to the cardholder, at least 24 hours before the actual charge or debit to the card. While registering e-mandate on the card, the cardholder shall be given the facility to choose a mode among available options (SMS, email, etc.) for receiving the pre-transaction notification from the issuer. On receipt of the pre-transaction notification, the cardholder shall have the facility to opt-out of the particular transaction or the e-mandate. For transactions above Rs 5000, banks will also be required to send one time passwords to customers.

What is a standing instruction?

A standing instruction is a service offered to customers of a bank, wherein regular transactions that the customer wants to make are processed as a matter of course instead of initiating specific transactions each time.

This service relates to transactions like renewing subscription to over-the-top (OTT) platforms, newspapers and magazines, and utility bill payments.

The issue

Large lenders and payment entities including State Bank of India, Citi, HDFC, Axis, HSBC, Visa and Mastercard had asked the RBI to postpone the deadline for putting in place a new system to alert customers on ‘standing instruction’ transactions.

The banks were asked to set up the system by March 31, 2021.

The lenders also wanted RBI to exclude transactions against pre-existing standing instructions and those with international merchants from the new conditions for e-mandates on cards for recurring transactions.

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US trade official called India’s Mastercard ban ‘draconian’, BFSI News, ET BFSI

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A senior US trade official privately criticised India’s July decision to ban Mastercard Inc from issuing new cards, calling it a “draconian” move that caused “panic”, according to US government emails seen by Reuters.

The documents show frustration within the US government after India’s central bank banned new card issuance by American Express and Diners Club International in April, then took similar action against Mastercard in July.

The Reserve Bank of India accuses the companies of breaking local data-storage rules. The bans do not affect existing customers.

The ban on Mastercard – a top payment network in India alongside Visa – triggered a flurry of emails between U.S. officials in Washington and India as they discussed next steps with Mastercard, including approaching the RBI, the government emails show.

“We’ve started hearing from stakeholders about some pretty draconian measures that the RBI has taken over the past couple days,” Brendan A. Lynch, the deputy assistant US trade representative for South and Central Asia, wrote on July 16, two days after the Mastercard announcement.

The RBI said that the restrictions have been imposed as in spite of lapse of considerable time and adequate opportunities being given, the entity has been found to be non-compliant with the directions on storage of Payment System Data.

“It sounds like some others (Amex, Diners) may have been impacted by similar actions recently,” wrote Lynch, asking his colleagues in India to get in touch with their central bank contacts “to see what’s going on”.

Lynch, spokespeople for the Office of the U.S. Trade Representative and the U.S. Embassy in New Delhi did not respond to requests for comment. The U.S. government has not publicly commented on the Mastercard ban.

The RBI did not immediately respond.

A Mastercard spokesman told Reuters, “We’ve had very constructive engagements with the Indian and U.S. governments over the past few weeks and appreciate the support of both.” This includes discussions with the RBI, and Mastercard has “made good progress” as it looks to resolve the situation quickly, he said.

“PANIC”, “FULL COURT PRESS”
Mastercard counts India as a key growth market. In 2019 it said it was “bullish on India”, a country where it has made major investment bets and built research and technology centres.

The Mastercard ban rattled the company and upset India’s financial sector as Indian partner banks fear a hit to their income as they struggle to swiftly partner with new networks to offer cards.

The RBI acted against Mastercard because it was “found to be non-compliant” with the 2018 rules despite the “lapse of considerable time and adequate opportunities”.

The rules, requiring foreign card networks to store Indian payments data locally for “unfettered supervisory access”, were implemented after failed lobbying efforts of U.S. firms also soured trade ties between New Delhi and Washington.

Mastercard has said it was “disappointed” with the decision. The company has told Reuters it had submitted an additional audit report to the RBI before the ban took effect on July 22.

The US government emails show there was hope things could be sorted out before that.

In one, Lynch told colleagues the understanding was that “the RBI has info they need and are hopeful that they will respond appropriately.” But as the ban approached, “if the RBI doesn’t change course, I’m sure the panic will resume,” he wrote.

Days later, he wrote that Mastercard was continuing “to put on the full court press” in Washington.

While RBL Bank signed up with Visa as recently as last week, a Yes Bank spokesperson said the bank is evaluating migrating to other platforms. Both banks said they expect no disruption to their existing customers due to the RBI action.

Indian regulations require all foreign payment operators to store card and customer related data in servers physically located in the country.



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Bad Bank to solve Rs 2 lakh crore bad loans, take NPAs off banks’ books; here’s how it will work

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Finance Minister Nirmala Sitharaman on Thursday announced that the Union government will guarantee Rs 30,600 worth of security receipts issued by the National Asset Reconstruction Company.

The Bad Bank is finally here, after a decade of discourse. It aims to help clean up banks’ books by taking over Rs 2 lakh crore bad loans. If it works as intended, Bad Bank may help cut system-wide bank NPAs (non-performing assets) by over 1%, and help recover some of bad debts too, analysts say. The National Asset Reconstruction Company (NARCL), as it is officially named, will acquire banks’ bad debt to resolve or liquidate. It will buy these stressed assets for a mix of cash, and government-guaranteed security receipts.

Finance Minister Nirmala Sitharaman on Thursday announced that the Union government will guarantee Rs 30,600 worth of security receipts issued by the National Asset Reconstruction Company (NARCL). “NARCL will acquire stressed assets through 15% cash payment to banks based on valuation and the rest 85% will be given as security receipts,” Nirmala Sitharaman said. The government-backed security receipts can only be invoked on resolution or liquidation.

What is NARCL? Why is it needed?

The National Asset Reconstruction Company (NARCL) was proposed by the Finance Minister in her Union Budget speech. NARCL, popularly known as Bad Bank, will function as an asset reconstruction company set up by banks to resolve stressed assets for smoother functioning. Public sector banks will have 51% ownership in NARCL. The bad bank intends to resolve stressed loan assets above Rs 500 crore each.

How the Bad Bank will work

Bad loan transfer: NARCL will take over bad loans worth Rs 2 lakh crore from banks, of which Rs 90,000 crore will be taken over in the first phase. The Ministry of Finance said that NARCL will acquire bad loans from banks for a mutually agreed-upon value (understandably, a net value after a haircut). NARCL will pay 15% of the agreed net value of the bad debt upfront in cash and the remaining 85% in form of security receipts. The banks would use this 15% cash upfront to reverse the debt write down. As for the security receipts for the remaining 85%, the bank would redeem those when the bad bank resolves or liquidates the bad debt; or, the bank may also trade these securities for cash.

Provision write-back: “These loans are fully provided in the books of the bank. The upfront cash received, 15% of the written-down value, would be reversed while the provisions for the balance (value of security receipts) are unlikely to be reversed even if it is fully provided,” analysts at Kotak Securities wrote in a note. “The larger release of provisions, if any, would be made as and when the cash is received on sale of these receipts or redemption of security receipts. The government guarantee on SRs can enable trading of these securities,” Kotak Securities added.

Government guarantee: The security receipts issued by NARCL are backed by the Union government guarantee. The government guarantee will cover any shortfall between the face value of the receipts and the actual realisation value of the bad loan.

Resolution is key

“How efficiently the professionals are resolving the stressed assets is to be monitored. One can argue that bad bank is likely to become a warehouse for stressed loans without expected recovery as it will be difficult to find buyers for legacy assets,” ICICI Securities said in a note. The Resolution of the proposed Rs 2 lakh crore of legacy stressed assets will lower GNPLs (gross non performing loans) by more than 2%, the note said. The estimated realisable value of 18% will lead to provisioning write-back of Rs 36,000 crore. “Through successful execution of phase-1, one can expect near term NPA reduction of >1% and NPA recoveries equivalent to 10bps of system credit,” ICICI Securities said.

Why is government guarantee needed?

The government said that resolution mechanisms of dealing with a backlog of NPAs typically require a backstop from the Government. “This imparts credibility and provides for contingency buffers. Hence, a Government Guarantee of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL. The guarantee will be valid for 5 years. The condition precedent for invocation of guarantee would be resolution or liquidation,” the finance ministry said.

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What are NARCL and IDRCL? How do they work and what is the plan?, BFSI News, ET BFSI

Banking & Finance

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Finance Minister Nirmala Sitharaman on Thursday announced the formation of a government-backed bad bank, National Asset Reconstruction Company Ltd (NARCL). The Union Cabinet has approved up to Rs 30,600 crore of securities receipts.

What is NARCL?

The NARCL has been incorporated under the Companies Act and has applied to the Reserve Bank of India for license as an Asset Reconstruction Company (ARC). NARCL is basically a bad bank created by the government in the mould of an asset reconstruction company.

The NARCL will pick up bad loans above a certain threshold from banks and would aim to sell them to prospective buyers of distressed debt. The NARCL will also be responsible for valuing bad loans to determine at what price they would be sold. The bad bank would provide government receipts to banks as it takes on non-performing assets from their books.

State-owned banks will hold 51% stake, while FIs or debt management companies will hold 49%.

What is IDRCL?

Along with NARCL, the government will also set up the India Debt Resolution Company Ltd (IDRCL). The IDRCL is a service company or an operational entity, which will manage assets and loop in market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders.

Background

Last year, The Indian Banks’ Association had proposed to create a bad bank for swift resolution of non-performing assets (NPAs). Following this, the finance minister in the 2021-22 Union Budget proposed the setting up of an ARC, along with an Asset Management Company (AMC), to take over the stressed debt of banks.

During the Union Budget 2021-22, Sitharaman said the bad bank will manage and dispose the assets to alternate investment funds and other potential investors for eventual value realisation.

In August, IBA moved an application to the RBI seeking licence to set up the over Rs 6,000-crore bad bank. The NARCL was incorporated last month in Mumbai, following the registration with the Registrar of Companies.

Also read: Finance Minister Sitharaman announces bad bank, Cabinet approves backing of up to Rs 30,600 crore on securities receipts

The Plan

The government will not have any direct equity contribution to NARCL. It will guarantee securities receipts issued by NARCL, which will buy the bad loans from banks.

These receipts will be valid for five years, and condition precedent for invocation of guarantee will be resolution or liquidation.

NARCL is intended to resolve stressed loan assets above Rs 500 crore each, amounting to about Rs 2 lakh crore. In phase I, fully provisioned assets of about Rs 90,000 crore are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II.

As per industry practice, it will pay up to 15% of the agreed value for the loans in cash and the remaining 85% would be securities receipts.

The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, IDRCL will be looped in for management and value addition.

How is NARCL different from existing ARCs?

The proposed bad bank will have a public sector character and majority ownership is likely to rest with state-owned banks.

At present, ARCs typically seek a steep discount on loans. With the NARCL, the valuation issue is unlikely to come up since this is a government initiative.

The government-backed ARC will have deep pockets to buy out big accounts, and thereby free up banks from carrying these accounts on their books.

Watch: Bad bank can be only a warehouse of bad assets, says Siby Antony

What benefit do banks get from this new structure?

It will incentivize quicker action on resolving stressed assets, and help in better value realisation. This approach will also permit freeing up banks personnel to focus on increasing business and credit growth.

As holders of these stressed assets and securities receipts, banks will receive the gains. Further, it aims to bring improvement in banks’ valuations and enhance their ability to raise market capital.

Watch: Bad bank to preserve value, timely sale of stressed assets: IBA CEO



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