Tag: RBI

Can banks weather the new second Covid wave?, BFSI News, ET BFSI

Banking & Finance

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Indian banks were gearing up for an upcoming credit boom in the second half, but they may have to look at the dire warning of RBI‘s fiscal stability report unveiled in January.

Most of the banks are set to report good fourth-quarter results, but the recovery may give way to despair in the coming months. An uncontrollable spike in Covid cases has raised the prospects of lockdowns and strict curbs being extended to May, at least. This may nip the nascent recovery and lead to the closure of many businesses, which are already reeling from revenue crunch. The lockdowns may also lead to unemployment, hit repayments and lead to defaults by companies and individuals out of job.

“In the first year we did not see any impact as 20% additional money was given. Guaranteed loans were given so no bank gave a second thought in giving the loans. In many cases, my customers went to other banks and got loans. Problems were not revealed on the first wave. In the second wave no such support is given so naturally, the impact of the second wave will be much larger on the bank,” a senior banker said on the condition of anonymity.

The unemployment rate in urban India is rising in the current months. From 7.21% on April 4, it jumped to 9.81% for the week ended April 11 and further to 10.72% for the week ended April 18, according to CMIE.

Early signs of rising stress are visible; HDFC Bank has reported a rise in cheque bounce cases in April. The rate is back to January level after improving in March.

Also, with lockdown in states like Maharashtra, which account for 24% of all loans, banks are in a double whammy. About 80 per cent of the new infections are being reported in six states which account for 45 per cent of banking sector loans.

Another banker said that credit growth is going to be muted. “Due to this unexpected wave, no investment is going to be placed right in any industry because of this uncertainty. Even though the government says there is not going to be a complete lockdown, like last time but still the impact can be easily known because of people’s fear,” the banker said.

“So those who want to invest, they’ll take a backseat that let’s wait and see. And the money circulation is going to be impacted. Moreover, the stay on NPA classification, which was lifted by Supreme Court, is going to add soon many NPAs to the banking sector. These things will definitely impact. Banks are kept out of the purview of this lockdown but people should come to banks you know and do their activity,” he added.

RBI stress test

Bank NPAs may rise to 13.5% under the baseline stress test scenario by September, the highest in more than 22 years, according to the RBI’ financial stability report in January this year.

The gross bad loan ratio of banks which stood at 7.5% as of 30 September, could almost double to 14.8% under a severe stress scenario, RBI warned. Under the severe stress scenario, RBI has assumed a 7.6% economic contraction in the six months to 31 March and a tepid 3.8% growth in the first half of the next fiscal. However, uncertainty over vaccines and the severity of the Covid wave hobbles the 3.8% growth projection.

The last time banks saw such stress was in 1996-97 when the bad loan ratio rose to 15.7%.

No cover this time

Banks, which got protection and support by a swift moratorium on loans when the pandemic first struck, have no such cover this time.

As the second wave intensifies, most of the relief measures and schemes announced by the government and Reserve Bank of India have expired. On top of it, the central bank is non-committal on moratoriums.

In today’s conditions, there is no need for a moratorium,” RBI governor Shaktikanta Das said after the central bank’s monetary policy review.

Also, a spike in overdue loans after the lifting of the moratorium has been worrying analysts.

“The level of loans in overdue categories has increased after the moratorium has been lifted and the impact on asset quality will be spread over FY2021 and FY2022 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks,” rating agency Icra had said in a report.

On top of it, banks may have to foot the bill for compound interest waiver relief to borrowers. HDFC Bank has already provisioned Rs 500 crore for the waiver.



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RBI sets up a six-member committee to review ARC regulations, BFSI News, ET BFSI

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The Reserve Bank of India announced formation of a committee to conduct a comprehensive review of the functioning of ARCs in the financial sector ecosystem and to recommend suitable measures for enabling such entities to meet the financial sector’s growing needs.

Committee will submit its report within three months from the date of its first meeting. The Reserve Bank of India’s Department of Regulation will provide the committee with the necessary secretarial support.

The committee is headed by Sudarshan Sen former RBI executive director and other members comprises Vishakha Mulye, executive director, ICICI Bank, P N Prasad, former deputy managing director of State Bank of India, Rohit Prasad, professor of economics, Management Development Institute, Gurugram, Abizer Diwanji, partner, Ernst and Young, and chartered accountant R Anand.

The committee will review business models of the ARCs, examine the current legal and regulatory system, and make recommendations on ways to enhance ARC efficacy. It will also examine their role in stressed asset resolution under the Insolvency and Bankruptcy Code (IBC) and make recommendations to enhance security receipt liquidity and trading.



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HDFC Bank’s third party IT audit in final stages

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The third party independent audit of HDFC Bank’s IT infrastructure is in the final stages. The last outage in its net and mobile banking services on March 30 was not a capacity issue.

The bank is also working with existing customers in the face of the temporary ban in issuance of credit cards.

“The audit by the independent third party is in the final stages, and we will update further as we get to know more from the regulators,” said Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank in an analyst call after its fourth quarter results of the lender on April 17.

HDFC Bank is working on building capabilities in the area of core systems and is also working on migration to cloud for resiliency.

“We are also building new muscle and infusing new talent to execute these strategies and establish a digital factory,” he further said.

On the recent outage in its net and mobile banking services, he said it was “an intermittent issue on net and mobile banking that occurred due to a server hardware component failure, and has no correlation to any capacity issues”.

The Reserve Bank of India (RBI) had in February this year appointed an external IT firm for carrying out a special audit of the IT infrastructure of HDFC Bank, which has faced a number of outages in its digital banking services.

Concerned by the outages, the RBI had on December 2 last year also directed the lender to temporarily halt sourcing of new credit card customers as well as launches of digital business generating activities planned under its proposed programme ‐Digital 2.0.

Credit cards

On the credit card business, Vaidyanathan said the bank is focussing on engaging with existing customers, whose cards are either dormant or inactive to “resuscitate” them.

“This way portfolio activations and card dynamics are up, improving portfolio quality and increasing downstream activity,” he said.

Despite the temporary halt, HDFC Bank’s credit card advances grew by 12.3 per cent to Rs 64,674 crore for the quarter ended March 31, 2021 as against Rs 57,575 crore in the fourth quarter of 2019-20.

The impact of the non-issuance of cards is on new employees in corporates, on boarding of new corporates, Vaidyanathan said, adding that this loss of new customers can normally be made up within a few quarters of stoppage being lifted. This is because the bank continues to source liability customers, who will be pre-approved. “About three-fourths of our sourcing comes from existing customers of the bank,” he said.

Interest on Interest provision

The lender has also kept aside Rs 500 crore for interest on interest provisions, which is being worked with Indian Banks’ Association to standardise the computation across the system.

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MFIN CEO, BFSI News, ET BFSI

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The microfinance sector is unlikely to face major challenges from the second wave of COVID-19 and is well prepared to face any disruption, Microfinance Institutions Network (MFIN) CEO Alok Misra said.

Over the past year, microfinance institutions (MFIs) have streamlined their processes, trained field staff on COVID-appropriate behaviour and in dealing with lockdowns, and focussed on digitisation, and these steps will help them in managing any kind of situation, he added.

“In the last one year, training, involvement of senior-level people at the ground level and digital content have ensured that the (MFI) sector is far better prepared (now) than when it (COVID-19) hit us last year,” Misra noted.

Till the time the pandemic continues, there will be local level lockdowns that would create medium to minor level disruptions to livelihoods, but the industry has learned to live with it, he said.

“I can’t say that it would be normal to pre-COVID days. Some impact would be there, but it would be minimal, which will not be debilitating on the industry,” Misra added.

MFIN is an RBI-recognized self-regulatory organisation (SRO) for the microfinance industry. It has 58 NBFC-MFIs and 39 associates, including banks, small finance banks (SFBs) and NBFCs as its members.

Misra said the MFI industry is adopting innovative methods to reach out to their clients, keep the connect going on and survive.

Rating agency Icra Ratings in a recent report said the overall long-term growth outlook for the domestic microfinance industry, including microfinance institutions (MFI) and micro finance-focused small finance banks (SFB)s, remains robust, even though the near-term outlook is clouded given the COVID-19 induced disruptions.

It, however, said the asset quality pressures for the MFI industry will continue in the near term and the same may get accentuated with the recent increase in COVID-19 infections and localised restrictions/lockdowns.

“Nevertheless, improving collection efficiency, good on-balance sheet liquidity and capitalisation should help most entities to withstand the stress,” the agency added.

MFIN releases performance numbers of MFIs every quarter. The fourth-quarter numbers are yet to be declared.

Misra said during the third quarter of FY21, the sector disbursed around Rs 60,000 crore, similar to the corresponding quarter of FY20.

“If I extrapolate that (Q3 FY21 trend) then the disbursement pattern in January-March, when the COVID-19 situation was better than Q3, would have been normal,” he said.

The collection efficiency of MFIs in the fourth quarter stood at close to 92 per cent, he added.



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How the RBI forced bond market to tango

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The ‘bond vigilantes’ who were warned by the RBI to stop demanding high yields in bond auctions do not seem to be in any mood to listen. The central bank is clearly livid, and this is apparent in the action that unfolded in the bond market on Friday.

Yields rise

The yield on 10-year bonds, which had moved lower to 6.01 per cent after the central bank unveiled the G-SAP 1.0 programme, spiked above 6.12 per cent after the first G-SAP auction on Thursday. The market was apparently not happy with the quantum of purchase in the 10-year bucket.

The bond market was on the edge through Friday, with 10-year yields trading at around 6.16 per cent, ahead of the weekly auction amounting to ₹26,000 crore in which 10-year securities accounted for ₹14,000 crore.

The auction results reveal that the RBI has not purchased any 10-year paper, though bids worth ₹28,000 crore were received for these securities. Ten-year bond yields plunged sharply after 3 pm, when auction results were announced, and are now trading at 6.08 per cent again. The RBI intended to offer bonds worth ₹25,000 crore in the first G-SAP auction. The response to the auction was robust, with offers worth ₹1,01,671 crore received.

The RBI accepted the entire ₹25,000 crore that it originally offered to purchase. The problem in the G-SAP auction, according to market sources, was that the ₹25,000 crore notified by the RBI was spread across maturities (see table). The amount intended for the 10-year bonds was only ₹7,500 crore. The bond market wanted higher purchases in this maturity because the government tends to borrow mainly in this bracket.

For instance, in the weekly auction scheduled for April 16, more than 50 per cent was ear-marked for 10-year securities. The level of nervousness among underwriters was obvious in the commission auctioned for 10-year bonds shooting up to 47.17 paisa on Friday.

 

Other reasons

The other reason why 10-year yields moved higher is because the cut-off yield for 6-year bonds bought in the G-SAP auction was 6.13 per cent.

While the RBI is trying to cool the yield in the 10-year bonds, the yields on 6, 7, 8 and 9 year bonds are higher than the 10-year, implying that the market does want the bond prices to trade lower across maturities, given the large supply scheduled to flood the market. The WPI inflation number released yesterday was yet another dampener for bonds.

“The expected trajectory of the WPI inflation, and its partial transmission into the CPI inflation, going ahead, supports our view that there is negligible space for rate cuts to support growth, in spite of the growing uncertainty related to the surge in Covid-19 cases, localised restrictions and emerging concerns regarding migrants returning to the hinterland. This is likely to keep a floor under the G-Sec yields,” says Aditi Nayar, Chief Economist, ICRA.

It’s clear that market forces dictate that 10-year yields have to move higher from here. It has to be seen how long the RBI can keep yields in check with these strong arm tactics and threats of ‘tandav’.

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Open banking may potentially pose significant risks: RBI Dy Guv Rao

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Open banking may potentially pose significant risks and concerns around financial privacy and data security, customer liability, cybersecurity and operational risks, among others, cautioned Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao.

Open banking is the sharing and leveraging of customer-permissioned data by banks with third-party developers and firms to build applications and services, including those that provide real-time payments, greater financial transparency options for account holders, marketing and cross-selling opportunities.

In open banking, there can be wide-ranging third-party arrangements such as fintech firms, intermediary firms engaged in data aggregation and other service providers which may not have a contractual agreement with the bank over which regulators can exercise jurisdiction, Rao said in a webinar on Open Banking organised by Tata Consultancy Services (TCS) in association with the Embassy of India in Brazil

Further, it may be possible that several of these firms may not fall under the regulatory purview of any financial sector regulator. In such situations, it may become difficult for regulators to set requirements, specifications, and exercise regulatory jurisprudence, he added.

Loss/theft of personal data

“In open banking frameworks, risks associated with the loss or theft of personal data on account of poor security, data protection violations, money laundering, and terrorist financing concerns cannot be ruled out.

“Therefore, large scale adoption of open banking frameworks should ideally be preceded by strong data protection and privacy laws,”the Deputy Governor said.

Rao emphasised that such laws should anchor the ownership rights and ensure control and consent-based use of the data. They should also establish the boundaries of rights and obligations of third-party use, down-streaming data to fourth parties and reselling it.

“India has already embarked upon the same and The Personal Data Protection Bill, 2019 has already been introduced. The Bill seeks to provide for the protection of personal data of individuals and establishes a Data Protection Authority for the same,” the Deputy Governor said.

Redressal of grievances

Rao noted that in the absence of explicit arrangements for redressal of customer grievances and limiting their liability in case of erroneous or fraudulent activity, the acceptability of open banking frameworks may remain limited.

Therefore, the jurisdictions should address customer liability for third party access of data through customer protection or indemnity laws.

In this regard, Rao underscored that RBI had issued Charter of Customer Rights in December 2014, which lists ‘right to privacy’ along with ‘right to grievance redress and compensation’ among others.

Increase in surface area for cyber frauds

Rao cautioned that open banking architectures, which are premised on the enhanced sharing of data, increase the surface area for cyber frauds.

As the open API (Application Programming Interface) provides uncluttered access to customer banking data such as transactions and balance stored within the infrastructure, it may also pose a severe cybersecurity risk, he added.

“Losses caused to customers on account of cyber events would require financial institutions to compensate customers for such losses.

“Institutions may also face a variety of potential operational and cyber security issues related to the use of APIs, including data breaches, misuse, falsification, denial of service attacks and infrastructure malfunction,” the Deputy Governor said.

Difficult to assign liability

Rao remarked that with more parties and intermediaries involved in providing financial services in an open banking model, it is more difficult to assign liability. Suppose the regulations governing customer grievance redressals are not updated to consider available banking business models. In that case, the national authorities may find it challenging to provide the customers with adequate levels of protection.

In India, RBI implemented a separate Ombudsman Scheme for Digital Transactions in January 2019. The number of complaints received under the Ombudsman Scheme for Digital Transactions (OSDT) has been consistently increasing reflecting increased digital modes of banking, he said.

Potential disruptor

“Open banking is a potential disruptor in the financial system and may change the way of doing banking for both- customers and banks.

“New pure tech-play entities have the potential to snatch market share from established but traditional financial institutions because they are technologically more advanced, digitally agile to cater to customer needs with higher efficiency, have better user interface, and are more competitive in pricing,” the Deputy Governor said.

At the same time, all stakeholders need to appreciate that while technological innovation is of paramount importance, customer privacy and data protection are non-negotiable, he added.

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RBI reveals names of applicants for universal bank, SFB licences

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The universal bank licensing guidelines state that resident individuals and professionals having 10 years of experience in banking and finance at a senior level are eligible to promote universal banks

The Reserve Bank of India (RBI) on Thursday announced names of applicants under its on-tap licensing window for universal banks and small finance banks (SFBs). The list includes a foreign exchange services provider, two cooperative banks and a former banker.

Applicants under guidelines for on-tap licensing of universal banks are UAE Exchange and Financial Services, The Repatriates Cooperative Finance and Development Bank (Repco Bank), Chaitanya India Fin Credit, and Pankaj Vaish and others. Applicants seeking licences for SFBs are VSoft Technologies, Calicut City Service Co-operative Bank, Akhil Kumar Gupta, and Dvara Kshetriya Gramin Financial Services.

Guidelines for on-tap licensing of universal banks and SFBs in the private sector were issued on August 1, 2016 and December 5, 2019, respectively. The constitution and composition of the standing external advisory committee for evaluating the applications received under the guidelines was announced on March 22, 2021.

The universal bank licensing guidelines state that resident individuals and professionals having 10 years of experience in banking and finance at a senior level are eligible to promote universal banks. Large industrial houses are excluded as eligible entities but are permitted to invest in the banks up to 10%. Non-operative financial holding company (NOFHC) has been made non-mandatory in case of promoters being individuals or standalone promoting/converting entities who/which do not have other group entities.

For SFBs, the minimum paid-up voting equity capital / net worth requirement shall be Rs 200 crore. For primary (urban) co-operative banks (UCBs) desirous of voluntarily transiting into SFBs, the initial net worth requirement shall be at Rs 100 crore, which will have to be increased to Rs 200 crore within five years from the date of commencement of business. The net worth of all SFBs currently in operation is in excess of Rs 200 crore.

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Personal hearing before NPA tag: RBI, lenders move SC

Personal Finance

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After identification of fraud, it is mandatory to immediately file a complaint with law enforcement agencies so that to avoid loss of relevant relied upon documents, non-availability of witnesses and absconding of borrowers and also money trail getting cold in addition to asset stripping by the fraudulent borrower, RBI stated.

The Reserve Bank of India and the SBI-led consortium of lenders on Thursday sought the Supreme Court’s view on whether an opportunity of personal hearing is required to be given by a lender to a borrower before classifying its account as fraudulent as per the Master Circular of July 1, 2016.

Both RBI and the lenders have challenged the Telangana High Court’s December 10 ruling that asked them to ensure that the clauses in the ‘Master Direction on Frauds – Classification and Reporting by Commercial banks and select FIs,’ issued by the banking regulator for detecting frauds in the banking sector, include the principles of natural justice in order to give an opportunity to the affected party/person to present their case, lest the circular be unconstitutional.

A bench led by Justice R F Nariman refused to stay the entire HC judgment, but stayed a part which dealt with granting of personal hearing to a borrower/account holder. It also sought response from Rajesh Agarwal of BS Company, who had moved in HC seeking to declare the RBI circular relating to fraud loan accounts as arbitrary as it violated the principle of natural justice in as much as there is no provision for opportunity of hearing before an account is classified and reported as fraud.

The apex court posted the matter for further hearing in July.
RBI and the lenders told the SC that the HC providing an opportunity of hearing to the borrower before classifying and reporting loan frauds may defeat the very purpose of the 2016 circular — early detection of fraud and prompt reporting of the same.

Stating that the reporting by a bank of an account as fraud is never arbitrary, solicitor general Tushar Mehta and senior counsel Rakesh Dwivedi, appearing for SBI and RBI, respectively, argued that the classification of fraud is for sharing the information with other banks, on a private and secure basis; the data on frauds is accessible to only the authorised officers of the banks to enable them to exercise due caution while dealing with such parties, RBI further said that once a fraud is reported by a bank, it is important that other banks are sensitised regarding the fraud.

After identification of fraud, it is mandatory to immediately file a complaint with law enforcement agencies so that to avoid loss of relevant relied upon documents, non-availability of witnesses and absconding of borrowers and also money trail getting cold in addition to asset stripping by the fraudulent borrower, RBI stated.

According to the petitions, “before reporting a fraud, banks rely on internal or/and external audits/examination, and fraud is classified and reported mainly based on the provisions of IPC. Banks would have to satisfy one or more of the provisions… There is also a criminal element in ‘frauds’ unlike in the case of ‘wilful default’. Such criminal element ascertained by banks leads to their decision on identifying the ‘fraud’ and immediate reference of case to police/investigation agencies.”

Senior counsel Mukul Rohatgi, appearing for Agrawal, opposed any stay, saying the HC judgment was based on the apex court’s ruling in case of Jha Developers which dealt with the wilful defaulters, which is a “milder declaration than being called a fraud.”

The BS Company’s account was declared as fraud on February 15, 2019 by the SBI-led consortium in tune with the RBI circular. The company took loans of `1,400 crore and defaulted on repayment. As the forensic audit of the company accounts revealed discrepancies, the SBI and other banks formed to a joint lenders’ forum (JLF) and initiated action against Agarwal’s bank account. The fraud identification committee (FIC) also recommended action against the account of Agarwal.

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RBI releases names of entities eyeing on-tap license for universal and small finance banks, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank of India has released the names of entities who have applied for universal bank license and small finance bank license under the on-tap licensing mechanism.

Applicants for Universal Banks

  • UAE Exchange and Financial Services Limited
  • The Repatriates Cooperative Finance and Development Bank Limited (REPCO Bank)
  • Chaitanya India Fin Credit Private Limited
  • Shri Pankaj Vaish and others

Applicants for Small Finance Banks

  • VSoft Technologies Private Limited
  • Calicut City Service Co-operative Bank Limited
  • Shri Akhil Kumar Gupta
  • Dvara Kshetriya Gramin Financial Services Private Limited

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RBI sets up RRA 2.0 to review regulatory functions and reduce compliance burden, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) announced that it has decided to set up a new Review Authority (RRA 2.0). Initially, Regulations Review Authority (RRA) was established on April 1, 1999, for the purpose of reviewing regulations, circulars, and reporting systems based on public, bank, and financial institution feedback. RRA’s recommendations resulted in the simplification of regulatory prescriptions, the issuance of a master circular, reduction in the reporting burden on regulated entities and streamlined and improved processes.

RBI said that considering the developments in regulatory functions of the Reserve Bank and the evolution of the regulatory perimeter over the last two decades, it has been decided to set up a new Regulations Review Authority (RRA 2.0) for a period of one year from the date of its establishment. The Deputy Governor, M. Rajeshwar Rao, has been appointed the Regulations Review Authority. The Authority will be in place for a year starting May 1, 2021, unless the Reserve Bank decides to prolong its term.

RRA 2.0 would concentrate on streamlining regulatory instructions, reducing the compliance burden of the regulated entities by simplifying processes, and reducing reporting requirements. The RRA will engage internally as well as externally with all regulated entities and other stakeholders to facilitate the process.

The terms of reference of RRA would include removing redundancies and duplications from regulatory and supervisory instructions, reducing compliance burden on regulatory agencies by streamlining the reporting process and, if necessary, revoking obsolete instructions, and avoiding paper-based submission of returns wherever possible.



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