Tag: RBI

‘Markets relying on RBI to support FY22 borrowing calendar’

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Amandeep Chopra, group president and head of fixed income, UTI AMC,

The rate cycle bottomed out last year but without the central bank changing its accommodative stance. This is the new normal. Amandeep Chopra, group president and head of fixed income, UTI AMC, in an interview with FE’s Urvashi Valecha and Malini Bhupta, explains why the higher-than-expected fiscal deficit has created concerns among market participants. Excerpts:

The government borrowing programme for the next fiscal at Rs 12 lakh crore is huge. Will the markets be able to absorb this?

The Budget has targeted growth with a strong fiscal stimulus. The fiscal deficit for FY21-22 (BE — 6.8%) is much higher than the market expectation of around 5.5%, which has created concerns among market participants. There doesn’t seem to be that level of demand among local investors. Presently, it’s unlikely that FPIs will create additional demand in FY22. This has already led to the yield curve shifting up. The market has been able to absorb gross borrowings of around `11.6 trillion so far in FY20-21 only with the help of RBI. Hence, the markets are relying on the central bank to support the borrowing calendar next year as well.

RBI’s decision to withdraw liquidity saw the yields spike. What is the yield curve suggesting? Will a calibrated withdrawal of liquidity work without a sharp reaction from the market?

The RBI has given a calibrated schedule to withdraw liquidity, which will align the short-term rates with the operative rate (reverse repo). The excess liquidity was leading to the 3-month rates trading at levels well below the reverse repo and creating an aberration in the short-term yield curve.

When do you see the rate cycle turn? Economists are suggesting that withdrawal of liquidity is a sign of rate cycle turning. Your view.

The global economic outlook has improved significantly over 2020 with most of the lead indicators rising. The benefits of a fast roll-out of vaccination have further improved this outlook and market sentiments. The combination of aggressive fiscal stimulus and central bank easing could lead to some inflationary fears as well. This has led to a generalised rise in global bond yields anticipating withdrawal of accommodation by the Fed and other central banks.

For India, we have been saying for some time now that do not expect further easing by the RBI and the rate cycle seems to have bottomed out. We have a few quarters before we see RBI starting to raise policy rates as normalcy returns to pre-pandemic levels across sectors. Given the current circumstances, how can bond investors play the debt markets?

I would not recommend the investors to play the markets during these evolving times. We recommend staying true to your asset-allocation for investing for long-term goals. The debt fund portfolios could be shuffled towards the shorter-duration funds if the investment horizon is less than three years.

From January 1, Sebi mandate on categorising the risks of MFs came into the picture. Has that had an impact on the flows into debt MFs, have retail inflows into debt funds become erratic?

Sebi reviewed the guidelines for product labels in MFs based on the recommendation of the Mutual Fund Advisory Committee (MFAC) and modified the ‘Risk-o-meter’ to depict six levels of risk.

With its implementation, each scheme was assigned a risk level and going forward the majority of the schemes are expected to settle down within one particular risk level, providing the investors with a relative framework on risk across schemes and categories.

Debt funds in January have seen outflows worth Rs 33,408.76 crore. Is this expected to continue?

The outflows in debt funds for January can primarily be attributed to outflows in the liquid fund categories to the tune of `45,315 crore. As a whole, debt funds have seen strong inflows to the tune of Rs 2,81,400 crore this financial year and I expect the trend to continue.

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PSB acquirer will have to meet ‘Fit and Proper’ criteria, says RBI

Banking & Finance

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Prospective owners wanting to take over public sector banks (PSBs) will have to meet the Reserve Bank of India’s (RBI) ‘fit and proper’ criteria and ensure that the banks, post- takeover, are well capitalised according to Governor Shaktikanta Das.

This observation comes in the backdrop of Finance Minister Nirmala Sitharaman’s announcement in the Budget that as part of the Government’s “strategic disinvestment and sale” programme it proposes to take up the privatisation of two PSBs.

“It (privatisation of PSBs) is a major reform which the government has embarked upon. So, as the owner of public sector banks, they will decide.

“But, nonetheless, I must add that there is a constant dialogue between the RBI and the Central government,” Das said in an interview to news channel CNBC TV18.

The Governor emphasised that in this privatisation exercise, RBI is directly concerned with two aspects — one is the ‘fit and proper’ criteria (the new owners should meet this requirement of RBI), and two, RBI would be very keen that the Bank, post takeover, is well capitalised.

And the promoter, who takes over the PSB, should have enough financial strength to capitalise the bank significantly, he added.

Talks with Centre

“Other than that, the approach, etc, these are constantly under discussion and the Government does consult us as and when required. The final call will be that of the government,” Das said.

He observed that amendment to the Bank Nationalisation Act will be required. And the Government is working on that.

As per the ‘Report of the Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks’, the Reserve Bank issued detailed guidelines in February 2005 on ownership and governance of private sector banks. The broad principles underlying the framework of this policy was to ensure that the ultimate ownership and control of private sector banks is well diversified.

While diversified ownership minimises the risk of misuse or imprudent use of leveraged funds, the fit and proper criteria, were viewed as over-riding consideration in the path of ensuring adequate investments, appropriate restructuring and consolidation in the banking sector.

Per the Report, globally, the regulators give approvals on a case-to-case basis subject to a number of considerations including the overall sectoral impact of the transaction and the satisfaction of ‘fit and proper’ principles by the person/s acquiring the stake, which may inter alia include reputation, financial soundness, credit standing etc.

In case of acquirers being non-individuals, the due diligence may extend even to the parent institution or major shareholders.

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Fino Payments Bank is now a scheduled bank, BFSI News, ET BFSI

Banking & Finance

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Reserve Bank of India on Tuesday notified that it has included Fino Payments Bank in the Second Schedule of the Reserve Bank of India Act, 1934.

“We advise that ‘Fino Payments Bank Limited’ has been included in the Second Schedule to the Reserve Bank of India Act, 1934 vide Notification DoR.NBD.No.2138/16.03.005/2020-21 dated January 01, 2021 and published in the Gazette of India (Part III – Section 4) dated February 13 – February 19, 2021,” notified RBI.

Benefits of being a scheduled bank under the Reserve Bank of India Act, 1934:

  • Becomes eligible for debts/loans at the bank rate from the RBI
  • Automatically acquires the membership of clearing house
  • Rediscount of first class exchange bills from the RBI

All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are Scheduled Banks. These banks comprise Scheduled Commercial Banks and Scheduled Co-operative Banks.Scheduled Commercial Banks in India are categorised into five different groups according to their ownership and / or nature of operation. These bank groups are:

  • State Bank of India and its Associates
  • Nationalised Banks
  • Regional Rural Banks
  • Foreign Banks
  • Other Indian Scheduled Commercial Banks (in the private sector)

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Nabard retired staff hold protests across country

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Even after 40 years after its inception, the employees of the National Agricultural Bank for Rural Development (Nabard) complain of a pension anomaly that puts them in a disadvantageous position when compared to their peers in the Reserve Bank of India.

They compare their salaries, benefits and pension with that of the peers in the RBI because a large portion of its employees (3,000) were hired from the apex bank when the Nabard was conceived in 1981.

The pensions are not being revised on the implementation of new pay scale for the regular employees, keeping the pension slabs very low.

The staff argue that increasing pensions would not cause any additional burden to the exchequer as the Nabard had a pension corpus of about ₹4,500 crore.

“While encouraging some of us to join the Nabard, we were given the assurance that we will be given salaries, perks and superannuation benefits on par with the RBI staff. But our hopes are dashed as we are saddled with a lower pension slab,” P Mohanaiah, who worked as a General Manager of Nabard (Andhra Pradesh), told BusinessLine.

On Monday, hundreds of serving and retired employees of the Nabard organised dharnas in different parts of the country, demanding revision of their pension on par with their peers in the RBI.

The Nabard was carved out of the RBI by an Act of Parliament, by replacing three of its departments – Agricultural Credit Department (ACD), Rural Planning and Credit Department (RPCD) and Agricultural Refinance and Development Department (ARDC) – to give a focussed approach to promote agriculture and rural development.

The protesting employees claimed that there was a huge disparity between the retired employees of Nabard and that of the RBI.

“The promises have not been kept and the provisions in Nabard Act have not been respected,” Mohanaiah said.

The Lucknow bench of Allahabad High Court had directed the Union Government in November 2019 to take a decision in four months.

“The government is yet to take a call. We are contemplating to move a contempt petition,” a senior functionary of the United Forum of Officers, Employees and Retirees of Nabard, said.

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Court issues notice to ministry, RBI, BFSI News, ET BFSI

Banking & Finance

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Issuing a notice to the ministry of urban affairs and RBI, a Delhi court has remarked that banks give loan without proper verification of the borrower, leading to a situation that has not only increased load of litigation but also malpractices when it comes to recovering it.

Additional district judge Ajay Goel came across five such pending cases that prompted him to suo motu discuss the issue at hand. He called the practices followed by banks and government authorities to be the cause of the prevalent situation.

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‘Barring payment aggregators & merchants from storing card data to impact card payments’, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) in March 2020 had put out Payment Aggregator and Payment guidelines that bars the merchants from storing card data of customers and disallows payment aggregators from storing customer card credentials within their database or the servers assessed by the merchant. PAs and merchants will have to most likely adhere to these guidelines by June 30, 2021

According to payment industry experts and executives that ETBFSI spoke to, this could potentially impact digital payments, particularly the card transactions. Further there are three key concerns viz. systemic risk due to technology build up, one size fits all approach, and customer inconvenience.

One-Size-Fits-All Approach
Globally, payment companies and merchants storing card data have to be compliant with Payment Card Industry Data Security Standard (PCI-DSS). PCI-DSS is a set of requirements for all companies who process, store or transmit credit card information having to maintain a secure environment.

In that context the RBI in the PAPG Guidelines holds payment aggregators responsible to check PCI-DSS compliance of the infrastructure of merchants onboarded but doesn’t allow the merchants to save customer card and related data.

Experts believe this is a one-size-fits-all approach and will impact customer inconvenience.

“It makes the card payment experience worse for customers and it’s a step not in the right direction. In India we should encourage as many instruments as possible as the digitisation journey has just started. Somebody preferring a credit card shall be offered the same level of experience as somebody using UPI. In this case cards would’ve a terrible experience than any other instrument,” said a CEO of a large Payment Aggregator, on condition of anonymity.

He added, “Even today, first time digital payment consumers still use debit cards, because UPI requires a bit of understanding, onboarding, etc. Making that experience patchy and bad might not be in the right direction to encourage digital payments, because we can’t expect the consumer to every time add the sixteen digits of the card number and other details especially for recurring transactions.”

While PCI-DSS is a recognised standard world over across different jurisdiction, experts suggest if the RBI’s intention is to prevent data breach and leakage of card data, the regulator can add more things like data localisation and other measures with audits but doing away with it and one-size-fits-all wouldn’t make sense.

Mandar Kagade, Founder & Principal at Black Dot Public Policy Advisors said, “The restriction is broad-based and makes no distinction as to the merchants that have invested in the relevant PCI – DSS standards and the ones that haven’t. It applies a one-size-fits-all constraint to all merchants regardless of whether they are compliant of PCI- DSS and is thus inconsistent with RBI’s recognition of it hitherto.”

Mandar added, “Consistency in the regulatory voice is critical for the growth of the payments sector because payments sector participants and FinTechs will invest in technology relying on that consistency.”

Mandar suggests that payments sector participants that are PCI- DSS compliant should be allowed to continue to store card data “in-situ” and others that are not compliant, may be given a time window to on- ramp and upgrade.

According to Ashish Agarwal, Senior Director and Head – Public Policy at NASSCOM, it’s also a case to look at the applicability of the guidelines on international transactions.

Ashish said, “While it is one thing to make the PAPG guidelines applicable in case of domestic transactions, mandating them on international transactions has left the industry a bit puzzled. How will this be mandated with foreign merchants and foreign acquiring banks is not clear. Already consumers can control use of their cards for international as well as e-commerce transactions. So we want RBI to evaluate the application of this on cross border transactions a bit more and clarify how this is planned to be implemented.”

The Case of Tokenisation
If the regulator doesn’t allow the merchants and payment aggregators to store the data on their server, tokenisation could be a way forward. Tokenisation is replacement of card details with an alternate code called “token” which is unique for a combination of card, token requestor and device. In a tokenised transaction the actual card details are not shared with the merchant during transaction processing and the transaction is processed based on the tokens.

Experts believe the industry isn’t ready to roll out full scale tokenisation as there are some limitations at ecosystem level. Currently the RBI has restricted the feature of tokenisation to mobile phones and tablets only.

The CEO of payments aggregator quoted above said, “Tokenisation is not adopted by the industry well, the purpose of tokenisation solves the purpose of not sending card details every-time to the network. But the issuing banks haven’t widely adopted so it’s not widely used.”

To increase the adoption of tokenisation the RBI will have to broaden the applicability to other devices like computer/laptop as well apart from mobile phone and tablets.

Ashish of NASSCOM added, “RBI will have to time the implementation of tokenisation to the ecosystem – we are talking about networks, banks, payment aggregators and merchants. Merchants can’t afford even a small window of disruption and they will be completely dependent on the payments infrastructure. As per our understanding, a minimum of six additional months are needed. The June deadline for PAP guidelines is not looking reasonable. Two things are needed – RBI needs to work with the industry for smooth roll out of tokenisation at scale and only after that the new PAPG should be enforced.”

Ashish also suggests that e-mandate on debit and credit cards, PAP guidelines and tokenisation are all deeply interconnected and without card on file at the end of merchants and PAs, e-mandates can be effectively implemented only through large scale tokenisation at the end of networks and banks, and with PAs maintaining the requisite infrastructure to connect all ecosystem players including merchants, banks and networks, in order to seamlessly transmit unique and merchant-specific tokens. Currently, however, PAs are not geared for that. RBI has set March 31 as the deadline for e-mandate and that needs to be tied into the overall tokenisation rollout plan.

Financial Fragility & Systemic Risk
The restriction on storage of customer cards and related data could make the payments ecosystem systemically fragile as merchants and PAs will be constrained to call the Application Programming Interface (API) of the bank to authenticate the consumer every time for execution of the transaction.

Mandar added, “Significant build- up of technology debt at any one of the banks thus exposes the payments ecosystem to significant systemic failure risk albeit at a low probability, the very definition of ‘grey swan/ black swan’. The concentrated nature of the bank market amplifies this “grey swan / black swan risk.”



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How good is G-Sec as an investment option

Personal Finance

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There has been much buzz around investing in Government securities (G-secs) ever since the RBI Governor proposed to allow retail investors to invest in them through the central bank . As of now, you can invest in G-secs via broking firms such as ICICI Securities, HDFC Securities and Zerodha and NSE’s goBID platform.

While direct investing may make it easier , this alone may not be enough to nudge retail investors to jump in.

Not completely risk-free

No risk of default by the Government makes G-secs immune to credit risk. But they are exposed to interest-rate risk, just like other tradeable bonds. When interest rates rise, or expected to rise (fall), G-sec prices can fall (rise) leading to a capital loss (gain).

You must be prepared to see the value of your investment in G-secs going down if interest rates start to pick up. This will, however, be only a mark-to-market loss (and will not be a realised loss) unless you sell the G-secs. So, if you hold them until maturity, you can avoid the capital loss, if any.

Understanding yield

The RBI conducts auctions of G-secs (Government-dated securities with original maturity of one year or more) where institutional investors can place competitive bids for them, and retail investors can apply for allotment. Retail investors must invest a minimum of ₹10,000 and are allotted G-secs at the weighted average price arrived at, in the competitive bidding process. G-secs pay half-yearly interest (coupon), calculated on face value.

Let’s take RBI’s auction conducted on February 18as an example. The ‘5.15% Government Stock 2025’ refers to a batch of G-secs paying 5.15 per cent coupon rate per annum (paid half-yearly) and maturing in 2025. The weighted average price for these G-secs arrived at the auction was ₹ 98.18. That is, the bond price is ₹981.8, and on maturity, the face value of ₹1,000 will be paid.

If an investor holds the bond till maturity, then his return will be indicated by the YTM (yield to maturity) which accounts for not only the coupon payments but also the purchase price of the bond. In our example, the YTM is around 5.59 per cent. Since the bond was issued at a discount to face value (₹981.8 versus ₹1,000), the YTM is higher than the coupon rate.

Another recently auctioned G-sec, ‘5.85% Government Stock 2030’ is offering a YTM of only around 6.06 per cent. Also, as with other bonds, once the G-secs get listed, then as their prices change, so will their YTMs (from what they were in the auction).

Not always attractive

Today, based on data from the RBI auctions (primary market) and the already listed Government bonds (trading in the secondary market), we can see that G-secs yields (YTMs) are quite low. There are other fixed-income options that can offer you a better deal.

For example, based on aggregated data from the secondary market, three-year G-secs are offering a yield of 4.88 per cent. Compared to this, public sector banks are offering 4.9 to 5.5 per cent per annum on their three-year fixed deposits. Private sector bank FDs too will fetch you better rates. Three-year post-office deposits, which carry no risk of default, are offering 5.5 per cent per annum.

Similarly, five-year G-secs are offering a yield of 5.69 per cent. The equally safe five-year post-office deposits and Senior Citizen Savings Scheme (the latter usually for those 60 and above) are offering a higher 6.7 per cent and 7.4 per cent, respectively.

Unlike G-secs, bank fixed deposits and small savings schemes (post-office time deposits and senior citizen savings scheme, to name a few) come with a few years’ minimum lock-in period. However, given the lack of liquidity in G-secs in the secondary market, the absence of a minimum lock-in period can hardly be considered an advantage. Also, interest (coupons) income from G-secs is taxed at an individual’s income tax slab rate as is the case with the interest income (paid out or accumulated) from the other options mentioned here.

Don’t lock into low yields

If one were to look at longer periods, here too, a yield of 6.67 per cent pre-tax (and lower once you apply the relevant tax slab rate) on 15-year G-secs is less attractive than the tax-free 7.1 per cent offered by Public Provident Fund (PPF). But you can invest only up to 1.5 lakh a year in PPF.

It is likewise for other G-secs too. For instance, the 6.52 per cent yield (January-end 2021) on 30-year G-secs is well below its 10-year average of 7.82 per cent. By investing in such long-term G-secs today and staying put until maturity, investors will lose out on a better long-term return, once rates start moving up. Hence, timing is important when you invest for holding until maturity.

“The government and the RBI need to create liquidity for retail investors to enable premature exit,” says Deepak Jasani, Head of Retail Research, HDFC Securities. According to him, this can be done by promoting market making in them, at least initially. Also, a window for premature encashment at the prevailing yields, subject to a maximum of the face value, can be offered.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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Deccan Urban Co-op Bank put under RBI ‘Directions’ as of Feb 19

Banking & Finance

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The Reserve Bank of India (RBI) has issued Directions to Deccan Urban Co-operative Bank (Vijayapur, Karnataka), whereby, as from the close of business on February 19, 2021, deposit withdrawals have been capped at ₹1,000 per depositor.

“Considering the bank’s present liquidity position, a sum not exceeding ₹1000 of the total balance across all savings bank or current accounts or any other account of a depositor, may be allowed to be withdrawn, but are allowed to set off loans against deposits subject to the conditions stated in the above RBI Directions.

Also read: Banks under Directions: Govt, RBI working on allowing depositors withdraw up to ₹5 lakh

“However, 99.58 per cent of the depositors are fully covered by the DICGC insurance scheme,” the central bank said in a statement.

According to the Directions, the chief executive officer of the bank shall not, without prior approval of RBI in writing grant or renew any loans and advances, make any investment, incur any liability including borrowal of funds and acceptance of fresh deposits, among others.

“The issue of the above Directions by the RBI should not per se be construed as cancellation of banking license by RBI.

“The bank will continue to undertake banking business with restrictions till its financial position improves. The Reserve Bank may consider modifications of these Directions depending upon circumstances,” the central bank said.

Besides Deccan Urban Co-operative Bank, RBI has imposed directions on two other urban co-operative banks — Sarjeraodada Naik Shirala Sahakari Bank (Shirala, Sangli District, Maharashtra) with effect from close of business on February 3, and Independence Co-operative Bank (Nashik, Maharashtra) with effect from close of business on February 10 — since the beginning of 2021. .

According to the RBI’s report on Trend and Progress of Banking in India 2019-20 (released on December 29, 2020), since April 1, 2015, 52 UCBs have been placed under All Inclusive Directions by the RBI.

Of the total claims settled by the Deposit Insurance and Credit Guarantee Corporation (DICGC) since inception, around 94.3 per cent of claims pertained to co-operative banks that were liquidated, amalgamated, or restructured.

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Deccan Urban Co-op Bank withdrawals capped at Rs 1000 per customer; RBI bars from lending, investing

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(Image- REUTERS)

The Reserve Bank of India (RBI) on Friday imposed a Rs 1,000 cap on withdrawals from all savings, current or any other accounts of Deccan Urban Cooperative Bank. The restrictions shall stay in force for a period of six months as RBI looks to improve the bank’s liquidity position, the central bank said in a statement late Friday. The curbs come into force from the close of business on Friday, February 19, 2021. The withdrawal limit imposed on the bank is similar to that imposed on PMC Bank, Lakshmi Vilas Bank, and Mantha Urban Cooperative Bank in the past.

Deccan Urban Co-operative Bank, a Karnataka-based lender, has also been barred from granting or renewing any loans and advances. It has also been barred from making any investment; incurring any liability including borrowal of funds and acceptance of fresh deposits; disbursing or agreeing to disburse any payment, whether in the discharge of its liabilities and obligations, or otherwise.

The move will also restrict Deccan Urban Co-operative Bank’s ability to enter into any compromise or arrangement and sell, transfer or otherwise dispose of any of its properties or assets except as notified in the RBI in its direction sent to the bank.

Although the withdrawal limit has been capped to just Rs 1,000 per account, RBI has said that depositors will be allowed to set off loans against deposits subject to some conditions. “The issue of the above Directions by the RBI should not per se be construed as a cancellation of the banking license by RBI. The bank will continue to undertake banking business with restrictions till its financial position improves,” the Reserve Bank of India said.

RBI had earlier in November last year imposed a penalty of Rs 1 lakh on Deccan Urban Co-operative Bank, for contravention of the directions issued by it on the prohibition of loans and advances to directors. The central bank has earlier placed similar restrictions on banks such as Yes Bank where the withdrawal limit was capped to Rs 50,000. Similarly, PMC Bank’s withdrawal limit was also capped to Rs 50,000 but was later revised t0 Rs 1 lakh. Lakshmi Vilas Bank was the latest in the line where the withdrawal limit was capped at Rs 25,000 per account.

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RBI puts Rs 1,000 withdrawal cap on Deccan Urban Co-op Bank; fresh loans, deposits restricted, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank on Friday said it has barred Karnataka-based Deccan Urban Co-operative Bank Ltd from granting fresh loans or accepting deposits and customers cannot withdraw more than Rs 1,000 from their savings account for a period of six months. The lender has also been asked not to make fresh investments or incur any liability without its prior permission.

The RBI said it issued the directions to chief executive officer of the bank on Thursday (February 18).

It has also asked the lender to desist from disbursing any payment whether in discharge of its liabilities or otherwise, or dispose of any of its assets except as notified in the RBI direction.

“Considering the bank’s present liquidity position, a sum not exceeding Rs 1000 only of the total balance across all savings bank or current accounts or any other account of a depositor, may be allowed to be withdrawn,” RBI said in a release on Friday.

It said customers can set off their loans against deposits subject to conditions.

“However, 99.58 per cent of the depositors are fully covered by the DICGC insurance scheme,” said the regulator.

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of RBI, provides insurance cover on bank deposits.

The RBI further said putting the bank under restrictions should not be construed as cancellation of its banking license.

The bank will continue to undertake banking business with restrictions till its financial position improves.

The Reserve Bank may consider modifications of the directions depending upon circumstances.

The directions are set to remain in force for six months from the close of business on February 19, 2021 and are subject to review, it added.



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