Tag: RBI

RBI keeps rates unchanged, stance accommodative, BFSI News, ET BFSI

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The Reserve Bank of India‘s Monetary Policy Committee has kept the repo rate at 4% and other rates unchanged. The RBI‘s Monetary Policy Committee also voted with a 5:1 majority to continue with an ‘accommodative’ stance as long as necessary to support growth.

Reverse repo rate remains at 3.35%, Marginal Standing Facility Rate and Bank Rate at 4.25% while the projection for India’s real Gross Domestic Product (GDP) is maintained at 9.5 per cent for FY22, RBI Governor Shaktikanta Das said while announcing the monetary policy review.

Inflation target raised

RBI has raised the CPI inflation estimate for FY22 to 5.7% from 5.1%.

“CPI inflation surprised on the upside in May; price momentum however moderated. Outlook for aggregate demand is improving but underlying conditions are still weak. More needs to be done to restore supply-demand balance in no. of sectors.

He said the recent inflationary pressures are evoking concerns but the current assessment is that these are transitory.

“We are in n a much better position as compared to June 2021. Need to remain vigilant on the possibility of a third wave,” he said.

Shaktikanta Das, Governor, Reserve Bank of India



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Will RBI take away the punch bowl from IPO financing party?, BFSI News, ET BFSI

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Ever thought why the initial public offerings of many companies receive bids that are over 100 times the offer. Apart from the investor appetite and retail frenzy the biggest factor in work is margin financing of IPOs by banks and NBFCs.

July saw several records being broken in the IPO market as a whopping Rs 8.86 lakh crore were bid for IPOs of Rs 18,400 crore on offer. About 98% of the money came from margin financing. Zomato, with an IPO size of Rs 9,375 crore, got bids for Rs 3.58-lakh crore, a subscription of nearly 39 times.

How does it work?

Unlike for retail investors, there is no limit on HNIs and institutions bids in an IPO. HNIs have to put only Rs 1 crore of their own for a bid worth Rs 100 crore while the NBFC funds the remaining 99 per cent. With the lenders charging 10-15%, the cost is just Rs 20 lakh towards interest for Rs 100 crore bid for 3-5 days. With all IPOs listing above the issue price, the leveraged investor can exit on the opening day. With a spectacular listing like the Zomato that gave 63% returns, more players are attracted to the market. The risk of the IPO collapsing in the initial days is virtually absent due to the heavy bidding and grey market premium.

With 15 per cent of an IPO reserved for HNIs and 50 per cent for institutions, their allotment is often enough to cover their interest cost as their bids are extremely high. Self-funding and other sources of borrowing would further increase the size of the IPO financing market.

The fund raise

Bajaj Finance had raised Rs 27,200 crore since June 10, while Infna Finance, Aditya Birla Finance and Tata Capital have collected Rs 13,225 crore, Rs 11,380

crore and Rs 9,625 crore, respectively. Two JM Financial firms have together raised Rs 16,300 crore, while IIFL Facilities Services and IIFL Finance have garnered about Rs 11,600 crore, according to reports. Most non-bank lenders raised funds by issuing commercial papers in the primary market. These papers have tenures of seven to 10 days and yield to maturity between 3.7% and 5.8%.

The risk

Financiers insist the risk is limited since there is a margin for the lender in terms of shares. Normally, higher the funding cost, lower the chances of making money on the IPO after all costs are factored in. Investors need to pay interest on the entire amount borrowed and not on the amount actually allotted. That is why higher oversubscription works against borrowers as they have to have more interest on idle funds.

RBI proposal

The euphoria due to excess funding is leading to artificial demand and distorting IPO prices in the short term. While the funded investors exit on listing, serious investors get low allotments.

In January this year, the Reserve Bank of India had proposed to cap IPO financing by NBFCs to up to Rs 1 crore per person, a move which may lead to a sharp drop in bidding by high net worth individuals (HNIs) and a drastic reduction in subscriptions of offers.

Banks have a Rs 10-lakh limit on IPO financing and there is no such cap for NBFCs. “IPO financing by NBFCs has come under close scrutiny, more for their abuse of the system,” the RBI said in a discussion paper. “Taking into account the unique business model of NBFCs, it is proposed to fix a ceiling of Rs 1 crore per individual for any NBFC,” the RBI said. Market players said that RBI’s proposed rule would surely bring a break to highly subscribed IPOs.



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RBI denies Rupee Bank, MSC Bank merger nod, BFSI News, ET BFSI

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Pune: The Reserve Bank of India (RBI) has denied the stressed Rupee Cooperative Bank permission to merge with the Maharashtra State Cooperative Bank (MSCB) in a culmination of a process that has taken nearly two years.

The order also disallowed the MSCB to take over the Mumbai-based City Cooperative Bank, stated a communication to both the banks and the MSCB from the Commissioner for Cooperation and Registrar, Cooperative Societies (CC&RCS). The communication has been accessed by the TOI.

Though neither the RBI and nor the CC&RCS communicated reasons for the denial of permission to the banks to merge, sources familiar with the matter said National Bank for Agriculture and Rural Development (Nabard) expressed reservations about the deal. A source said Nabard expressed concerns about agro-finance being used for retail banking, with the MSCB being primarily an agricultural bank. The source said RBI was concerned about the merger setting a precedent for cooperative banks across the country, which would bring about policy difficulties.

MSCB chairman Vidyadhar Anaskar said, “We had prepared and submitted the proposal nearly two years ago after RBI asked for a joint proposal with the Rupee Bank and getting approved at the annual general meeting. But during this time, we were asked no questionsabout the financial positions or feasibility. Nabard should not have had a say in this proposal, as they are a supervisory authority, with RBI being the sole licensing authority,”

Rupee Bank administrator Sudhir Pandit said, “The RBI’s decision is not totally unexpected. It is necessary to mention here that there are no shortcomings or lacunae in the merger proposal. Rupee Bank has good business potential. We will continue our efforts for its merger with other strong banks, or its conversion into a small finance bank or its revival.”



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How RBI’s CBDC will change the payments ecosystem

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The Central Bank Digital Currency (CBDC), currently being explored by the Reserve Bank of India (RBI) for retail and international trade payments, could have a much larger impact on the financial ecosystem, according to industry experts. It will be instrumental in promoting grassroots level financial inclusivity and modernising the banking sector apart from creating a cashless economy.

While many see CBDCs as a legalised replacement of private digital currencies or cryptocurrencies, in reality, CBDCs are just going to be a digital replica of the physical cash in circulation in the country. “RBI is creating a digital version of the fiat currency in circulation. Currently, the only alternative to physical currency is debit cards or credit cards, which are not accessible to all citizens,” Naveen Surya, Chairman, Fintech Conversion Council and Emeritus Chairman, Payments Council of India, told BusinessLine.

Also read: Why CBDC will not end bitcoin’s reign

“CBDC could be used directly through mobile phone. It can use blockchain technology but doesn’t necessarily need to be linked to a bank account to hold it. This will convert your mobile device into a wallet. In short, it will fast-track financial inclusivity while building a cashless economy,” Surya added.

India is in fact late to join the trend. Countries like Russia, Japan and China had started working on the same much earlier. According to a 2021 BIS survey, quoted in the RBI report, 86% of the central banks surveyed are actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. “It took 4-5 years of multiple pilots before China could look into introducing digital currency,” Surya said.

Need for CBDC

“Today though we are doing e-payments and money transfers thinking they happen in real-time, but at some point, this money still has to be physically moved between the banks, known as ‘inter-bank’ settlement. With CBDCs, there won’t be the need for inter-bank settlement, your digital payments will be the final transactions,” Sharan Nair, chief business officer, CoinSwitch told BusinessLine.

Cryptocurrency exchanges lauded the move, saying that a possible widespread usage of digital currency will only boost their business and familiarise the masses with the technology and its varied forms. Though cryptocurrency isn’t necessarily looking to become a currency used for making payments. “Private cryptocurrencies are primarily seen as tradable assets. Though some countries have allowed Bitcoins to be used a mode of payment, NFTs and other cryptocurrencies are mostly assets. They don’t have the characteristics of currency and neither do they want to be,” Surya said.

Financial Transparency

A major use case for CBDCs will likely be in the insurance and lending space and also for managing non-performing assets (NPA). Using digital currencies will enable more transparency and traceability across levels for the financial services sector. The RBI at present is pondering upon the underlying technology on whether it should use distributed ledger or a centralized ledger, and a possibility of using blockchain. “In the case of lending, say if a farmer wants to take a loan to buy fertilizers and farming-related activities, at present, it is difficult of the government to verify how it is used. But with digital currency the government will be able to programme it in a manner that it can be used only for the fertilizers and not a car,” Nair explained.

“In international trade too, for instance, if an importer wants to settle a payment in the US, due to the time zone difference that will delay the transaction and due to change in dollar to rupee value, prices would have changed. CBDC can settle this in real-time without needing further intervention,” he added.

“Challenges of different vendors working with different merchants will subside once CBDC come into play. Merchants would want to use this, as this would eliminate third party payment gateway involvement, bringing down the cost of transaction fees,” Sathvik Vishwanath, Co-founder and CEO, Unocoin told BusinessLine.

Complex process ahead

Converting a part of paper money into digital currencies will surely come with its complexities and confusion. “To implement this the government authorities and the RBI would have to work on digitising the entire currency circulation model. Further, several other fundamental issues and monetary policies will have to accordingly be taken into account, as with CBDC there will be more traceability and transparency of the currency on digital network,” Surya said.

Additionally, blockchain technology in its current state might not be the most efficient way forward.

Vishwanathan said, “It doesn’t look like the RBI is looking to involve any cryptocurrency-related technology like blockchain. It will be more of a centralised wallet service like Paytm. Blockchain is not capable of handling millions of transactions per hour. Currently, bitcoin blockchain supports up to seven transactions per second and then there are some others that let a few thousand transactions per second. For a country like India, blockchain technology won’t be able to manage such an enormous volume of data.”

“Given that it is only the Indian government sponsoring this technology for its citizens which makes it a single-party creator, using blockchain will be as good as creating a regular database,” he added.

Also, increased traceability might introduce new challenges around privacy. “With blockchain, they (government) can get a partial biography of every person using the digital currency and what all he uses it to pay. That will be quite intrusive,” Vishwanathan said.

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RBI may deploy LTRR to mop-up excess liquidity with banks

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The Reserve Bank of India (RBI) is understood to have broached the possibility of conducting Long Term Variable Rate Reverse Repo (LTRR) auctions with banks in the run-up to the normalisation of its ultra-accommodative policy.

The central bank is exploring LTRR as an instrument to absorb surplus liquidity for a longer duration from the banking system at a time when credit demand is muted, and retail inflation is sticky.

LTRR is one of the instruments to manage durable liquidity under the RBI’s revised Liquidity Management Framework. It has a tenor of over 14 days.

However, banks are wary of locking-up liquidity for longer tenors of, say, a month or two under LTRR because in case credit demand gains steam, they will have to tap funding options such as the central bank’s repo (repurchase agreement) window, certificate of deposits, among others, to meet their demand. They may even have to increase fixed deposit rates.

Banks have indicated to the RBI that they prefer investing in treasury bills of 91 days, 182 days and 364 days duration as the bills can be easily liquidated to fund future demand for loans. However, if they invest in LTRR, this flexibility will not be available.

Banks awash with liquidity

That banks are awash with liquidity is underscored by the fact that they collectively parked ₹6,53,431 crore with the RBI’s reverse repo window on August 4, 2021. Banks earn 3.35 per cent interest (reverse repo rate) on this amount.

Further, at the last 14-day Variable Rate Reverse Repo (VRRR) auction held on July 30, 2021, the RBI received bids to park surplus liquidity aggregating to ₹3,67,428 crore against the notified amount of ₹2 lakh crore.

The central bank accepted bids aggregating to ₹2,00,033 crore, with the weighted average interest rate that banks will receive working out to 3.43 per cent.

Radhika Rao, Senior Economist, DBS, observed that the RBI’s preference to gradually draw out excess liquidity might increase the sizes of variable reverse repo rate (VRRR) auctions while reaffirming support for the ongoing Government Securities Acquisition Program.

As per Rao’s assessment, the impact of a VRRR increase might be marginal given the scale of surplus liquidity (estimated at ₹7.5-8 lakh crore) – bank liquidity plus government cash balances.

Nonetheless, it affirms the central bank’s intent to mop-up liquidity at a calibrated pace before setting the stage for a reverse repo increase and change in policy stance around the end of 2021 or early 2022, she said.

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Raghuram Rajan, BFSI News, ET BFSI

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NEW DELHI: The term ‘Quantitative Easing’ became widely known in financial markets during the last Global Financial Crisis of 2008. Former RBI governor Raghuram Rajan, who famously predicted that particular collapse, has recently warned about the risks associated with excessive largesse from central banks.

In a recent article, Rajan flagged the potential pain that global financial markets might see when central banks turn off the easy money tap.

The world over, government debt is rising exponentially and more worryingly, an increasing amount of the debt maturity profile is skewed through issuance of longer-dated securities.

Political dispensations typically look past long-term debt, as the exigencies of democratic politics may ensure that a successive administration has to bear the burden of earlier borrowings.

“…What if interest rates start moving up as inflation takes hold? If government debt is around 125% of GDP, every percentage point increase in interest rates would translate into a 1.25 percentage point increase in the annual fiscal deficit as a share of GDP,” the RBI ex-governor wrote.

SHORT-TERM EXPOSURE
Rajan specifically warned about the risks that economies are exposing themselves to on account of the inevitability of interest rate hikes.

“When the central bank hoovers up five-year government debt from the market in its monthly bond-buying program, it finances those purchases by borrowing overnight reserves from commercial banks on which it pays interest… QE thus drives a continuous shortening of effective government debt maturity and a corresponding increase in (consolidated) government and central bank exposure to rising interest rates,” he wrote.

LESSON FOR INDIA?
India’s public debt profile worsened significantly well before the pandemic. Government debt, which till three years back used to be confined to Rs 6 lakh crore on a gross basis, has risen by around 80% over the last 2-3 years.

This financial year, the government has announced a gross borrowing programme of Rs 12.06 lakh crore. When interest rates rise, as they must at some point, the shock to banks’ profit margins could be huge after this degree of exposure.

In recent chats with ETMarkets.com, some leading economists have flagged the issues emanating from such elevated levels of public indebtedness.

“Scenarios where debt-to-GDP becomes a problem can always emerge, especially if nominal GDP growth is not close to double digits. However, as of now, our baseline view is that general government debt-to-GDP is close to 88-90%, but it is unlikely to become a concern for the rating agencies, because we expect a gradual downward trend after two to three years,” Standard Chartered Bank’s head of economic research Anubhuti Sahay said.

“… with public debt at close to 90% of GDP, fiscal headroom to deal with another wave is now further compromised. And then, there is not a whole lot that additional monetary accommodation can achieve,” ANZ Bank’s Chief Economist for South East Asia and India Sanjay Mathur said.

Raghuram Rajan perhaps reserved the most hard-hitting part of his recent note for the last paragraph.

“As for the US, not only is the outstanding government debt much shorter in maturity than that of the UK, the Fed already owns one-quarter of it,” he wrote.



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Cochin Chamber of Commerce and Industry seeks review of RBI circular on current accounts

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The Cochin Chamber of Commerce and Industry has requested the Reserve Bank of India (RBI) for a review of its circular of August 2020 restricting the use of current accounts with banks other than those with whom loan facilities are granted.

As per the RBI’s directive, no bank can open or allow operation of current accounts for customers who have availed credit facilities in the form of cash credit/ overdrafts in any other bank.

K. Harikumar, the Chamber President said that the accounts have been closed by the banks unilaterally even in the case of borrowers who maintained current account with different branches of the same bank from where the cash credit/ overdraft facility was availed.

Also read: RBI gives banks 3 more months to comply with new rules on opening current accounts

It explained that the loan facility may be granted from a bigger branch while the companies operated current accounts with the same bank nearer to the factories, which could be in different locations.

These current accounts were used for disbursements to local purchases, wages, salary etc. to prevent the risk of carrying cash. These current accounts which are maintained in the same bank could be monitored and ensured that no diversion of funds takes place. The closure of these current accounts has put the companies in a very tight situation.

Similarly, small traders whose collections from sales are mostly in cash remit the proceeds in current accounts with smaller banks and later transfer the same to the bank where the overdraft facilities are availed.

They are forced to resort to maintaining current accounts since new generation banks and big public sector banks either refuse to accept cash or charge hefty fee as cash counting charges. These traders are also totally at a loss.

The chamber has requested the RBI to permit the usage of current accounts and also requests that a detailed dialogue be entered into with the chambers/ trade associations and ensure that genuine business is not put to difficulty on account of this circular.

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ANZ Bank’s Mathur, BFSI News, ET BFSI

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NEW DELHI: The Governor of the Reserve Bank of India, Shaktikanta Das, said last year that the Covid-19 crisis is the sort of event that occurs once every 100 years. Policymakers from North Block to Mint Street have been attempting to find an adequate response to a crisis of this magnitude.

The Chief Economist, South East Asia and India at ANZ Bank, has a contrarian view.

In a chat with ETMarkets.com, Sanjay Mathur, a veteran economist, said the need of the hour is not capital spending that generates long-term gains. “Rather, what is important now and for years to come, is to lift people out of poverty, as that would have a larger impact on the economy,” he said.

“Let me take a controversial stand here. Our thinking on the fiscal has become somewhat stereotyped – capital spending is good and revenue spending is bad. And for FY22, the focus has been on capital spending. But the nature of the current crisis is different: it is a humanitarian crisis that calls for more massive welfare measures. A large section of our population has slipped into poverty, income and wealth disparities are rising,” Mathur said.

The government and RBI have unveiled various spending schemes since the pandemic struck last year; the flagship programme being the ‘Atmanirbhar Bharat’ scheme, which essentially prioritises import substitution.

However, out of the Rs 20 lakh crore announced by Prime Minister Narendra Modi, the actual fiscal outgo is very small. A bulk of the programmes are reflective of RBI’s liquidity infusion in the banking system, while the rest are mostly credit guarantees.

One cannot exactly blame the government, as its finances have been under strain since well before the pandemic.

In the last Budget, the government put aside the prescriptions of the Fiscal Responsibility and Budget Management Act and announced a fiscal deficit of 6.8 per cent of GDP for this financial year. The Centre had earlier set a target of 3.0 per cent fiscal deficit by 2017-18 (Apr-Mar).

However, it will not be accurate to say that the entire strain was on account of the pandemic. A year before Covid-19 wreaked havoc on the economy, the government had already skipped the targets it had set for itself under the FRBM Act, as tax collections fell short of targets.

Mathur said the government and the central bank together have done what they could within their constraints. “There was very little fiscal headroom to start with,” he said.

“So while I do acknowledge that asset creation has a larger multiplier on growth, this crisis is also unique and requires a different response,” he added.



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RBI extends current a/c freeze deadline, BFSI News, ET BFSI

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Mumbai: The RBI has given banks time until October 31 to comply with its circular on introducing discipline in the opening of current accounts.

The RBI has said that banks should escalate to the Indian Banks’ Association (IBA) any issues they face in implementing the directive, and if it still remains unresolved they should be forwarded to the RBI for regulatory consideration.

According to a PSU bank chief, the RBI in its meeting with public sector lenders made it clear that the circular needs to be implemented in spirit but if there are operational issues faced by customers, they should be resolved at the industry level.

In a fresh circular on the guidelines for current accounts, the RBI reiterated that it does not apply to borrowers who have not availed of cash credit (CC) or overdraft (OD) facility and the banking sectors exposure to them is below Rs 5 crore.

In the case of borrowers who have not availed of CC/OD facility from any bank and the exposure of the banking system is Rs 5 crore or more but less than Rs 50 crore, there is no restriction on lending banks to such borrowers from opening a current account. Even non-lending banks can open current accounts for such borrowers though only for collection purposes.

According to bankers, technically there is no reason for a borrower with CC/OD facility to undertake transactions through another account. Bankers said that the main reason why many borrowers sought to keep a separate current account was to control their collections. “Many customers choose to transfer funds from their other account to repay their loans as they fear that using their loan account for collections could lead to problems when they are short on funds,” said a banker.

However, several businessmen said that while they have old loans with public sector banks, they need the technology-based products of private banks particularly in the area of trade finance. The central bank’s circular comes at a time when some customers in Kerala initiated legal action to stall the implementation of the RBI directives.



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