Tag: RBI

RBI introduces internal ombudsman mechanism for select NBFCs

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The Reserve Bank of India on Monday introduced the Internal Ombudsman mechanism for select non- banking finance companies.

“…the Reserve Bank…has directed Deposit-taking NBFCs (NBFCs-D) with 10 or more branches and non-deposit taking NBFCs (NBFCs-ND) with asset size of ₹ 5,000 crore and above having public customer interface to appoint Internal Ombudsman (IO) at the apex of their internal grievance redress mechanism within a period of six months from the date of issue of the direction…,” it said.

NBFCs including stand-alone primary dealer, NBFC-Infrastructure Finance Company, core investment company, Infrastructure Debt Fund – NBFC; NBFC – Account Aggregator; NBFCs under Corporate Insolvency Resolution Process; NBFCs in liquidation and NBFCs having only captive customers have been excluded from the directive.

“The IO shall deal only with the complaints that have already been examined by the NBFC but have been partly or wholly rejected by the NBFC. In other words, the IO shall not handle complaints received directly from the customers or members of the public,” the RBI said.

The central bank had in the Statement on Developmental and Regulatory Policies as part of the Monetary Policy Statement in October this year announced the move while noting that the increased significance, strength and reach of NBFCs across the country has necessitated having in place better customer experience including grievance redress practices.

“The implementation of the IO mechanism will be monitored by the NBFC’s internal audit system apart from regulatory oversight by RBI,” it further said.

The person appointed as the IO shall be either a retired or a serving officer, not below the rank of Deputy General Manager or equivalent in any financial sector regulatory body or any other NBFC, bank, with necessary skills and experience of minimum of seven years of working in areas such as non-banking finance, banking, financial sector regulation or supervision, or consumer protection, the RBI said.

Further, the person should not have worked or be working in the NBFC or companies in the Group to which the NBFC belongs and he or she should not be above the age of 70 years at any point of time during the tenure as IO.

The NBFC may appoint more than one IO depending on the number of complaints received per branch network. In such a case, the NBFC shall define the jurisdiction of each IO.

The NBFC shall put in place a system of periodic reporting of information to Reserve Bank on a quarterly and annual basis.

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The biggest mistake we made was we did not go to the bankers before going court: Hemant Kanoria

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“In hindsight, the biggest mistake we made was that we did not go to the bankers before going to the Court (National Company Law Tribunal/NCLT),” said Hemant Kanoria, former promoter of the Kolkata-based SREI Group. Kanoria was referring to an application filed last year by Srei Equipment Finance Limited (SEFL), a material wholly-owned subsidiary of Srei Infrastructure Finance Ltd (SIFL), for approval of a proposed Scheme of Arrangement with the creditors and SEFL for re-alignment of debts under Section 230(1) of the Companies Act, 2013. However, the Reserve Bank of India (RBI) superseded the Board of Directors of SIFL and SEFL on October 4, 2021, owing to governance concerns and defaults by these companies in meeting their various payment obligations and placed them under an Administrator (Rajneesh Sharma, Ex- Chief General Manager, Bank of Baroda). NCLT, Kolkata, accepted the central bank’s application on October 8, 2021, to initiate corporate insolvency resolution process (CIRP) against the aforementioned companies. In an interaction with BusinessLine, Kanoria observed that he will weigh, as erstwhile founder of the infrastructure finance company, if he can participate in the CIRP. He emphasised that SEFL had earlier received expression of interest from 11 investors and many of them would be interested to come back and make investment via CIRP. Excerpts:

Will you be able get back your company?

If we see someone (investor) coming and giving a very good value for the company and all the creditors are able to get their full payment, we’ll be very happy. But if people are trying to take the company for a ride and give a lower bid, we may have to come in and intervene…we are quite sure there are sufficient securities/ assets, arbitration awards, which may take a little time (to realise)…Unfortunately the infrastructure sector has been very badly impacted, because everything was derailed, and to bring things back on the rails takes time.

How did your group get into a spot?

Last year, when Covid happened and when the lockdowns began, most of our clients — construction companies and contractors, along with infrastructure companies, started facing problems. Their work came to a standstill. They were not able to get their money because government offices were closed. There were claims cases, which were in the courts, and all that came to a standstill. So, the whole cycle stopped.

RBI subsequently come out with guidelines for extending moratorium to our clients and offering them refinancing/ restructuring. That was a good move. If it had not been done, all of them would have defaulted. But, at the same time, this (moratorium) was not extended to NBFCs (who had taken loans from banks) because for the consumer-lending NBFCs it was not required as their average tenure of lending was short.

Given that we are an IFC, all of our lending was medium to long-term. Unfortunately, we being the only company in this particular (infrastructure) sector, the RBI could not have had a special dispensation/ guidelines for us.

Why did your attempt to realign debt fail?

Until and unless there was stress, we could not go in for a realignment of the debt. And that time there was no loan outstanding. So, the only alternative for us to deal with the loans from banks was to do a debt realignment under Section 230 of the Companies Act as that allowed us to do realignment in consultation with the creditors and with their consent.

We moved under Section 230 last year in October for making full payment along with interest to all the banks…and we said that the entire loan be converted into debentures and the whole payment can be made over a period of certain time along with interest.

And if this scheme was not acceptable to the bankers, they could have revised it. Unfortunately, the bankers did not like that we went to court because they thought going to the court was fighting against them. But actually it was not fighting. It was only facilitating so that repayments can take place in a structured manner and the company could continue in the proper manner without disruption being caused to the company due to either mismatch on the asset liability side or in any other matter.

And also our clients were not in a position to pay back timely because all their money was stuck up.

Were bankers uncomfortable with the idea of conversion of loans into debentures?

Anticipating all the aforementioned developments, we moved NCLT in October 2020. But in November, the bankers put a restraint on the operations of the company and also created a trust and retention account where all the cash flows were captured by them. In December last year, we had to move all the other creditors (secured debenture holders, unsecured debenture holders, secured ECB lenders, unsecured ECB lenders, PDI holders and individual debenture holders of SEFL) also for a realignment of the debt. However, at no particular time we had offered any haircut to the bankers. At no particular time we had asked for any sacrifice on the interest etc, it was full payment, because we were sure that we will be in a position to pay all the creditors in a structured, orderly fashion. And that was the reason why we moved the court and there was no other intention. But we found that this pre-emptive move was not taken very well by the bankers or by RBI.

The RBI flagged connected lending. What do you have to say on this?

The RBI raised certain issues about connected parties or related parties (lending) etc. It identified certain parties, being borrowers of SEFL, as probable connected/related companies. But there is a process which the company follows. We have a very strong board of directors and all the decisions are taken through committees etc. So, therefore, when any borrower is brought in by the team members, the appraisal is done on the basis of the project, cash flows, security, which the borrower offers, and after that, in the event that that particular borrower falls under related party or connected entity then there is a process again, which is followed through the compliance, legal and the Secretarial department to see whether it falls under related party or connected party under the Companies Act and Ind-AS. And if it does, then it is adequately reported to the audit committee of the board. If it does not, then it is not reported to the audit committee of the board. We have inspections going on by RBI, we have various other internal audits, statutory audit which keeps going on and this is not something which is new.

So, all of a sudden.. the RBI took exception to it…Borrowers which are there will be classified under the connected party…I’m only talking about the connected entities. But most of them are companies which are under the Alternative Investment Fund. Srei Infra has an investment in that AIF. They are only managers and this is third party money.

So, therefore, just to give you an example, suppose a Bank’s mutual fund arm has invested in the debt paper of an automobile company. The MF is only a manager, investing third party money in the debt paper. Now, if the bank gives a loan to this automobile company, will the company become a connected party for the bank? Under no stretch of imagination does it becomes a connected party. So, similarly, in the case of AIF and SREI that is the relationship which is there.

Because the RBI mentioned that these are probable connected parties, they were adequately reflected in the balance sheet of March 31…There is no distinction in the process which is being followed for any loan the company gives. All the borrowers assets are seen, securities are seen, cash flows are seen and proper evaluation is done. So, there has been no dilution in the processes which have been followed.

Why did you opt for debt realignment under Section 230 of the Companies Act?

We went under Section 230 so that the company does not end up being in default. Because we have so many lenders, both domestic and international, and bond holders (almost about 70,000-80,000 bond holders), going to everyone independently would have taken a lot of time and would have resulted in the company getting into a big problem.

But in hindsight, I think that the biggest mistake we made was that we did not go to the bankers before going to the court. We should have first gone to them, discussed with them, and then gone to the court… We thought if we go through the court route, we will be able to deal with many creditors on one platform and the scheme that we had given was very, very fair. There was no haircut to anyone at all. But by taking the company through CIRP, we do not know what the result will be. From our end, that is the reason we have reached out to the Administrator, the RBI and the creditors that whatever support or help that is required, we are very happy to provide that because we want the institution to get back on its feet as soon as possible. So that is our only intent — to see that all the creditors are paid off because there are sufficient assets in the company, there are claims (court), there are assets/ securities. So, that someone needs to very intensely follow up to find out solutions.

We have investors who are quite keen to come in and…about 11 Expression of Interest had already come in. Many of them would be interested to come back (via CIRP) and make investments.

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MNC banks to RBI, BFSI News, ET BFSI

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Large multinational banks have impressed upon the Reserve Bank of India (RBI) the need to open a ‘dollar placement window’ to absorb sudden foreign currency inflow, and extend forex trading hours with the T-plus-One (T+1) settlement in stock exchanges and the expected inclusion of GoI securities in global bond index next year.

These banks, which act as custodians for foreign portfolio investors (FPIs), fear a dollar pile-up could cause a breach of regulatory exposure limits if they are unable to convert the foreign currency that FPIs bring in. The matter was discussed between bankers and senior RBI officials in two meetings over the past few weeks, two persons familiar with the issue told ET.

Shortening the stock settlement cycles from T+2 to T+1 would require arranging funds a day earlier. It’s believed if the forex market issues are not addressed, India could become a pre-funded market, which would raise the cost for FPIs. After several representations, custodian banks and FPIs have managed to buy some time with stock exchanges deciding to introduce the new settlement cycle in a staggered way. FPIs, according to the rollout plan, will have to deal with the T+1 mechanism around mid next year.

  • IN FOREX: market, cash deals happen till 3/3:30 pm
  • CONVERTING $: From FPIs to INR is tough in the evening
  • SO BANKS WANT: RBI to offer a window to accept $ from banks
  • A WINDOW FROM RBI will also enable banks selling $ to meet CRR

A T+1 settlement would require conversion of dollars (from FPIs operating in different time zones) into rupees well after the normal market hours. While the forex market is open 24/7, custodian banks would find it difficult to sell the dollar (and generate rupees) in the evening when very few banks trade and liquidity dries up. Besides equities, there could be bouts of dollar inflows into debts once government debt papers are part of a global bond index and restrictions on foreign investments in sovereign securities are loosened.

Regulatory Cap on Exposure
Under T+1, the dollar would have to be converted into the local currency on the same day as trade confirmation and payment of margin or the full deal amount (an FPI buying equities must pay) has to be given to the clearing corporation by 7.30/8 pm. If the custodian bank can’t find a buyer for the dollar, it would park the dollar with its head office or an overseas branch. And this could raise its exposure beyond the regulatory limit.

Under the RBI rule that restricts a bank from taking an exposure of more than a quarter of its tier-1 capital (i.e, equity and free reserves) to a single counterparty, the India branch of a foreign bank and any of its overseas offices are considered as two distinct entities. So, the extra, unsold dollars a foreign bank’s Mumbai branch places with its London or New York office is counted as the local branch’s exposure to the overseas branch.

“Of course, the situation can change dramatically if US rate hikes result in large outflows. But as a medium term strategy, it could make sense for the central bank to offer a dollar window. It would also make the forward premia less volatile. A dollar deposit facility may require regulatory changes. As far as extending cash (forex) market timing goes, it’s up to the banks to decide. But there is a need for a more active market beyond regular hours,” said a senior banker.

“While the T+1 issue is some months away, banks have initiated discussion with RBI after realising that Sebi and the ministry want to go ahead with it. Today, cash forex trades (where the conversion happens the same day) take place till 3/3.30 pm. Even if you extend it and change the Dollar/INR clearing timings, banks have to meet the CRR (cash reserve ratio) requirement. So, it will be easier if a bank can sell the dollar to the central bank under a special window as well as give the extra cash to fulfil CRR requirement. Stock preferred by FPIs would come under T+1 only in the second half of next year. But before that, many in the market expect Gsecs to be included in the bond market,” said another person.



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How does RBI’s staff accountability framework on NPAs work?, BFSI News, ET BFSI

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Ahead of a big credit push, the government has moved to remove the bankers’ fears of vigilance in extending small loans with a staff accountability framework.

Bankers fear investigation, hurt to career prospects and retirement if a loan sanctioned by them turns sour. This has made them averse to giving loans, which has led to obstacles in the flow of credit to deserving individuals and firms. The banking system is flush with liquidity but one of the reasons for credit not percolating is the risk-averseness which the new staff accountability norms seek to remove.

Loans up to Rs 10 lakh

Staff accountability need not be examined in NPA accounts with outstanding up to Rs 10 lakh. Most loans up to Rs 10 lakh are “template-based” and do not constitute a major percentage of the NPA portfolio by amount. Such accounts can turn into NPA even due to a slight change in circumstances including a family health crisis or a shutdown, leading to disruption in cash flows.

The credit risk assessment in these kinds of loans is driven by digital algorithms/templates and pre-designed schemes with low human intervention. The borrower community under this tier neither has financial literacy nor credit history.

Loans between Rs 10 lakh and Rs 1 crore

For examining staff accountability, banks may decide on a threshold of Rs 10 lakh or Rs 20 lakh, depending on their business size. These loans are processed at centralised back offices and not specifically at branches. They use lending automation templates, built-in digital algorithms and information drawn from aggregators with low use of discretion.

They have support of empanelled advocates and valuers. The staff accountability is to be examined by a committee formed at regional/controlling offices. For preliminary examination, the controller will submit to the committee a brief report, covering details of the loan and observations in inspection/audit reports for the previous four years.

If the committee finds a case of staff accountability exists, this will be examined by a fact-finding officer. But inspection and audit department staff will not be involved in conducting staff accountability. While conducting staff accountability examination, they should follow RBI guidance/norms. Standard operating procedure is to be followed in carrying out the task. This process will reduce the number of NPAs needing staff accountability examination to a large extent.

Loans between Rs 1 crore and Rs 50 crore

Accounts in this range are mostly credit facilities sanctioned to business units warranting examination by a specialised unit within the banks. NPA accounts in this range should undergo a preliminary examination by a committee constituted at one level higher than the sanction level — an account sanctioned at the regional office will be taken up at the zonal level, those at the zonal level by the circle office or head office, and so on.

The committee should be headed by an official senior to the sanctioning authority. For preliminary examination by the committee, a detailed report should be submitted through the controller. If the committee finds material lapses in any of the processes, the account may be referred at the discretion of the committee to the controlling audit office for a detailed examination of staff accountability.

A detailed report on the account will be submitted to the committee covering the borrower profile with reasons leading to the account turning into NPA. The comments of the internal and external auditors of the last four years and compliance thereof will also be submitted to the committee. Preliminary examination by the committee will be based on all monitoring, follow up, compliance of observations of the auditors.

If the committee finds material lapses in the stages of sanction, disbursement, monitoring and follow up, the committee may at its discretion refer the NPA account to the controlling audit office/audit vertical for detailed staff accountability examination. The audit vertical will rely upon the observations/remarks of the external/internal auditors of the last four years and after the conclusion of analysis shall submit a report to the committee for taking a final view.

For loans above Rs 50 crore

In the large accounts, after examining staff accountability, the vigilance and non-vigilance angle is to be identified by the Internal Advisory Committee (IAC).

Recommendations of IAC, where staff accountability is established, will be referred to the chief vigilance officer (CVO) for vetting. For banks with business of up to Rs 10 lakh crore, the cases of Rs 10 crore and above are to be sent to CVO. Banks with business of between Rs 10 lakh crore and Rs 25 lakh crore can refer cases of Rs 30 crore and above. Banks with business of over Rs 25 lakh crore may refer cases of Rs 50 crore and above.

Banks will have to complete an accountability exercise within six months from the date an account is classified as NPA. Depending on the banks’ business size, the guidelines suggest threshold limits for scrutiny of the accountability by the chief vigilance officer. If NPA is caused by external factors — such as change in government policy, natural calamities, non-release of government subsidy/grant — it should not attract a staff accountability examination, according to the framework.



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RBI’s retail direct scheme clocks over 12,000 registrations

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The Reserve Bank of India (RBI) on Saturday said its Retail Direct Scheme (RDS) has received ‘encouraging response’, clocking over 12,000 registrations since its launch on November 12. The scheme is aimed at facilitating investment in Government Securities (G-Secs) by individual investors.

“Encouraging response to RBI Retail Direct Scheme; 12,000+ registrations as of 2.30 pm on November 13, 2021,” tweeted the central bank.

According to central bank sources, investors in Sovereign Gold Bonds (SGBs), currently estimated at around 4.50 lakh, are expected to actively invest in G-Secs via RBI-RDS, which is envisaged as a one-stop solution for retail investments in G-Secs.

New investment avenue

Retail investors can invest a minimum of ₹10,000 and in multiples thereof in Central Government Securities (CG), State Government Securities (SG) and Treasury Bills (T-Bills) using the online portal (https://rbiretaildirect.org.in) by opening a Retail Direct Gilt (RDG) account with RBI. In the case of Sovereign Gold Bond (SGB), the minimum investment unit is 1 gram. The maximum investment limit per bid specified by RBI is ₹2 crore for CG/T-Bill and 1 per cent for SG.

Raghvendra Nath, MD, Ladderup Wealth Management, said, “Indian fixed income markets have always been very shallow… From retail investors’ perspective, easy access to government securities was not available before. With the ability to buy the government securities through the RBI, retail investors shall now have the flexibility to invest from 1 year to 30-year periods in a completely risk-free environment.” Nath felt that the RBI should create a mechanism for buying back the G-Secs. If that happens, the portal will immediately attract a lot of interest.

Bond market players said Primary Dealers (PDs) are expected to provide buy-sell quotes so that retail investors can buy and sell G-Secs in the secondary market.

Madan Sabnavis, Chief Economist, CARE Ratings, emphasised the importance of creating awareness among retail investors. According to the scheme, no fee will be charged for opening and maintaining RDG account with the RBI. Payments for transactions can be made using saving bank account through internet-banking or Unified Payments Interface (UPI).

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Restrictions put on Laxmi Coop Bank, Solapur; Rs 1,000 cap on withdrawals, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) on Firday imposed several restrictions on Laxmi Cooperative Bank Ltd, Solapur, including Rs 1,000 cap on withdrawals for customers, due to deteroriation in its financial position.

The restrictions imposed under the Banking Regulation Act, 1949, shall remain in force for six months from the close of business on November 12, 2021, and are subject to review, the RBI said in a statement.

As per the directions, the bank shall not, without the prior approval of the RBI, grant or renew any loans and advances, make any investment, incur any liability, and disburse or agree to disburse any payment.

“In particular, a sum not exceeding Rs 1,000 of the total balance across all savings bank or current accounts or any other account of a depositor, may be allowed to be withdrawn,” the RBI said.

It further said the issue of the directions by the RBI should not per se be construed as cancellation of the banking licence.

“The bank will continue to undertake banking business with restrictions till its financial position improves,” the Reserve Bank of India said.

On Monday also, the RBI had imposed similar restrictions on Babaji Date Mahila Sahakari Bank, Yavatmal, Maharashtra.



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Retail investors can put money in govt securities, T-Bills, Sovereign Gold Bond

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Retail investors can invest a minimum of ₹10,000 and in multiples thereof in Central Government Securities (CG), State Government Securities (SG) and Treasury Bills (T-Bills) under the Reserve Bank of India’s ‘Retail Direct Scheme’, a web-based investment platform, which was launched on Friday.

In the case of Sovereign Gold Bond (SGB), the minimum investment unit is 1 gram.

The maximum limit per bid specified by RBI is ₹2 crore for CG/T-Bill and 1 percent for SG. The scheme to bring G-Secs within easy reach of the common man, allows one active bid per retail client in the non-competitive portion for respective Security.

Online platform

Under the Scheme, which was launched in virtual mode by Prime Minister Narendra Modi, retail individual investors can invest in G-Secs using the online portal (https://rbiretaildirect.org.in) by opening a Retail Direct Gilt (RDG) account with RBI.

Retail investors can make investments via two routes — primary issuance of G-Secs and secondary market.

Under primary issuance of G-Secs, investors can place bid as per the non-competitive scheme for participation in primary auction of G-Secs and procedural guidelines for Sovereign Gold Bond (SGB) issuance.

For secondary market investment, investors can buy and sell G-Secs on Negotiated Dealing System – Order Matching (‘Odd Lot’ and ‘Request for Quotes’ segments).

Primary dealers will be providing buy-sell quotes for investors wanting to buy or sell G-Secs. No fee will be charged for opening and maintaining RDG account with RBI. Further, no fee will be charged by the aggregator (Clearing Corporation of India Ltd) for submitting bids in the primary auctions. Fee for payment gateway etc., as applicable, will be borne by the registered investor.

Payments for transactions can be done using saving bank account through internet-banking or Unified Payments Interface (UPI).

Investor support

The RBI said investors can get help on the portal itself and also through a toll-free telephone number 1800–267-7955 (10am to 7pm) and email.

Investor services include provisions for transaction and balance statements, nomination facility, pledge or lien of securities and gift transactions. No fees will be charged for facilities provided under the scheme.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, observed that awareness needs to be created to attract retail investors into the G-Sec market. Retail investor should be well informed how the G-Sec market works.

Nitin Shanbhag, Senior Executive Group VP, Motilal Oswal Private Wealth, observed that the Government Securities (G-Sec) market is dominated by Institutional investors such as Banks, Insurance companies, Mutual Funds, etc. with lot sizes of ₹5 crore and higher.

Hence this segment was largely inaccessible to retail participants. G-Sec market records highest volumes within the fixed income market since they offer a risk-free rate, hence no credit risk.

Shanbhag said: “Retail investors could thus far participate in G-Secs only through Debt Mutual Funds, although with limited options. Further, in Debt funds, investors have to invest with a minimum 3-year investment horizon through the Growth option to qualify for long term capital gains at the rate of 20 per cent with indexation benefit.”

The RBI Retail Direct Scheme will enable retail investors to invest in G-Secs across various tenors with flexible investment horizons and with the ability to get regular cash flows through risk-free coupons, he added.

Bal Krishna Piparaiya, Principal Director, Brickwork Ratings, noted that the Retail Direct Scheme in G-Sec for individual buyers is a much-awaited positive reform and will forge a paradigm shift in the bond market, spiking up demand for government bonds and lowering the cost of the government borrowing (which has so far been higher than banks’ deposit rates), going forward.

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RBI asks lenders to clearly specify due date/repayment date for loans

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The Reserve Bank of India (RBI) has asked lenders to clearly specify the exact due dates for repayment of a loan, frequency of repayment, breakup between principal and interest, among others, in the loan agreement.

Further, they also have to give examples of special mention account (SMA) and non-performing account (NPA) classification dates.

The central bank said the borrower should be apprised of the aforementioned dates at the time of loan sanction and also at the time of subsequent changes, if any, to the sanction terms or loan agreement till full repayment of the loan.

In cases of loan facilities with moratorium on payment of principal and/or interest, RBI emphasised that the exact date of commencement of repayment should also be specified in the loan agreements.

Scope for different interpretations

The aforementioned instructions should be complied with at the earliest, but not later than December 31, 2021, in respect of fresh loans.

In case of existing loans, however, compliance to these instructions should necessarily be ensured as and when such loans become due for renewal/review.

Also see: FinMin frames guidelines for mechanism to disallow debit from electronic ledger for GST assessee

This RBI clarification comes as it has observed that due dates for repayments are sometimes not specifically mentioned in the loan agreements and instead a description of due dates is mentioned, leaving scope for different interpretations.

Consumer education

With a view to increasing awareness among the borrowers, lending institutions have been asked to place consumer education literature on their websites explaining with examples, the concepts of date of overdue, SMA and NPA classification and upgradation, with specific reference to day-end process.

RBI said lending institutions may also consider displaying such consumer education literature in their branches by means of posters and/or other appropriate media. Further, it shall also be ensured that their front-line officers educate borrowers about all these concepts with respect to loans availed by them at the time of sanction/disbursal/renewal of loans.

SMA classification

The basis for classification of Special Mention Accounts/SMA (which show incipient stress) in the case of loans other than revolving facilities will be: SMA-0 (when principal or interest payment or any other amount wholly or partly overdue up to 30 days); SMA-1 (more than 30 days and upto 60 days); and SMA-2 (more than 60 days and upto 90 days).

Also see: Interest rates: Greater synergy between RBI’s expectations and the market behaviour: Das

The basis for classification of SMA in the case of loans in the nature of revolving facilities like cash credit/overdraft will be: SMA-1 (when principal or interest payment or any other amount wholly or partly overdue for more than 30 days and upto 60 days); and SMA-2 (more than 60 days and upto 90 days).

In the above context, the RBI clarified that borrower accounts should be flagged as overdue by the lending institutions as part of their day-end processes for the due date, irrespective of the time of running such processes.

Day-end process

Similarly, classification of borrower accounts as SMA as well as NPA should be done as part of day-end process for the relevant date and the SMA or NPA classification date should be the calendar date for which the day end process is run. In other words, the date of SMA/NPA should reflect the asset classification status of an account at the day-end of that calendar date.

RBI said the instructions on SMA classification of borrower accounts are applicable to all loans2, including retail loans, irrespective of size of exposure of the lending institution.

Also see: Centre frames rules for release of 75% of funds in arbitration of construction projects

Cash credit/Overdraft (CC/OD) account will be treated as “out of order if the outstanding balance in the account remains continuously in excess of the sanctioned limit/drawing power for 90 days”.

Further, such an account will be treated as “out of order if the outstanding balance in the account is less than the sanctioned limit/ drawing power but there are no credits continuously for 90 days, or the outstanding balance in the account is less than the sanctioned limit/ drawing power but credits are not enough to cover the interest debited during the previous 90 days period”.

Term loans

In case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rests remains overdue for more than 90 days. RBI said these instructions shall be effective from March 31, 2022.

Upgradation of loan accounts

RBI said loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower.

The RBI issued the aforementioned directive as it has come across some lending institutions upgrading accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues, partial overdues, etc.

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RBI asks banks not to standardise bad loans on just getting interest payments, BFSI News, ET BFSI

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In a significant move, the Reserve Bank on Friday tightened the norms for recognition of dud assets and directed lenders not to standardise an NPA account after getting only interest payment as well as to mandatorily mention the due dates along with details of interest and principal amounts.

The monetary authority has from time to time been issuing new/revised norms on dud asset classification as system-wide NPAs began to balloon.

Issuing some clarifications to all the extant provisions and including the ones issued on October 1, 2021, on the prudential norms on income recognition, asset classification and provisioning pertaining to advances (IRACP), the RBI asked banks not to upgrade an NPA account after getting only interest dues paid.

It has been observed that some lending institutions upgrade accounts classified as NPAs to standard accounts on payment of only interest overdue, partial overdue, etc. To avoid any ambiguity in this regard, it is clarified that loan accounts classified as NPAs may be upgraded as a standard account only if the entire arrears of interest and principal are paid by the borrower, the apex bank said in the revised notification this evening.

Lenders have also been asked to specifically mention in the loan agreements the exact due date of a loan and the breakup of the principal and interest, among others, instead of giving a description of the due dates, which leaves scope for interpretation.

Henceforth, all lenders have to clearly mention the exact due dates for repayment, frequency of repayment, break up between the principal and interest, examples of SMA/NPA classification dates etc, it said.

All these should be clearly specified in the loan agreement and the borrower shall be apprised of the same at the time of loan sanction and also at the time of subsequent changes if any, and till full repayment of the loan is done, the RBI said, adding this will be applicable immediately for new loans or before December 31, 2021, and for the existing loan as and when changes occur.

In cases of a loan under moratorium, the exact date of commencement of repayment shall also be specified in the loan agreements, it added.

Sticking to its due by the end of the day/one-day default norms, which has given many large borrowers heartburns, RBI further clarified that an account shall be flagged as overdue as part of the lender’s day-end processes for the due date, irrespective of the time of running such processes, reiterating that all extant IRACP norms specify that an amount must be treated as overdue if it’s not paid on the due date fixed by the lender.

Similarly, classification of an account as SMA (special mention account) as well as NPA (non-performing assets) shall be done as part of the day-end process and the SMA/NPA classification date shall be the calendar date for which the day-end process is run. Stated differently, the date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date, the regulator stressed.

The monetary authority further said these changes are being made to ensure that the IRACP norms are uniformly implemented across all lending institutions and are applicable mutatis mutandis (making necessary changes on a case to case basis but not affecting the main points) to all lending institutions.

On NPA classification, it said the lender must recognise incipient stress in a borrower account, immediately on default, by classifying it as SMA. Without any ambiguity, it clarified that the intervals are intended to be continuous and accordingly, loans other than revolving facilities like cash credit/overdraft will become SMA if the principal or interest payment or any other amount wholly or partly become overdue or if the outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for 0-30 days as SMA, for 30-60 days as SMA-1 and over 60-90 days as SMA2/NPAs.

Stated differently, the date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date.

For instance, if the due date is March 31, and full dues are not received before the day-end process, the date of overdue shall be March 31.

If it continues to remain overdue, then this account shall get tagged as SMA-1 on running the day-end process on April 30, on completion of 30 days of being continuously overdue.

Accordingly, the date of SMA-1 classification for that account shall be April 30. Similarly, if the account continues to remain overdue, it shall get tagged as SMA2 on running day-end process on May 30 and if continued to remain overdue further, it shall get classified as NPA on running day-end process on June 29.

However, for NBFCs, 90-days for SMA-2/NPA classification may be read according to the applicable norms.

The central bank has clarified that the instructions on SMA classification are applicable to all loans, including retail loans (excluding the Agri loans governed by crop season-based asset classification norms), irrespective of the size of exposure of the lending institution.

The RBI said from March 31, 2022, in case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rests remains overdue for over 90 days. If a borrower account becomes overdue on or after March 31, 2022, its classification as NPA shall be based on the account being overdue for over 90 days.

On the upgrading of accounts classified as NPAs, it said a loan account classified as NPAs can be upgraded as standard only if the entire arrears of interest and principal are repaid. But those accounts classified as NPA due to restructuring, or non-achievement of the date of commencement of commercial operations, etc, extant provisions shall continue.



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MNC banks to RBI, BFSI News, ET BFSI

Banking & Finance

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Large multinational banks have impressed upon the Reserve Bank of India (RBI) the need to open a ‘dollar placement window’ to absorb sudden foreign currency inflow, and extend forex trading hours with the T-plus-One (T+1) settlement in stock exchanges and the expected inclusion of GoI securities in global bond index next year.

These banks, which act as custodians for foreign portfolio investors (FPIs), fear a dollar pile-up could cause a breach of regulatory exposure limits if they are unable to convert the foreign currency that FPIs bring in. The matter was discussed between bankers and senior RBI officials in two meetings over the past few weeks, two persons familiar with the issue told ET.

Shortening the stock settlement cycles from T+2 to T+1 would require arranging funds a day earlier. It’s believed if the forex market issues are not addressed, India could become a pre-funded market, which would raise the cost for FPIs. After several representations, custodian banks and FPIs have managed to buy some time with stock exchanges deciding to introduce the new settlement cycle in a staggered way. FPIs, according to the rollout plan, will have to deal with the T+1 mechanism around mid next year.

  • IN FOREX: market, cash deals happen till 3/3:30 pm
  • CONVERTING $: From FPIs to INR is tough in the evening
  • SO BANKS WANT: RBI to offer a window to accept $ from banks
  • A WINDOW FROM RBI will also enable banks selling $ to meet CRR

A T+1 settlement would require conversion of dollars (from FPIs operating in different time zones) into rupees well after the normal market hours. While the forex market is open 24/7, custodian banks would find it difficult to sell the dollar (and generate rupees) in the evening when very few banks trade and liquidity dries up. Besides equities, there could be bouts of dollar inflows into debts once government debt papers are part of a global bond index and restrictions on foreign investments in sovereign securities are loosened.

Regulatory Cap on Exposure
Under T+1, the dollar would have to be converted into the local currency on the same day as trade confirmation and payment of margin or the full deal amount (an FPI buying equities must pay) has to be given to the clearing corporation by 7.30/8 pm. If the custodian bank can’t find a buyer for the dollar, it would park the dollar with its head office or an overseas branch. And this could raise its exposure beyond the regulatory limit.

Under the RBI rule that restricts a bank from taking an exposure of more than a quarter of its tier-1 capital (i.e, equity and free reserves) to a single counterparty, the India branch of a foreign bank and any of its overseas offices are considered as two distinct entities. So, the extra, unsold dollars a foreign bank’s Mumbai branch places with its London or New York office is counted as the local branch’s exposure to the overseas branch.

“Of course, the situation can change dramatically if US rate hikes result in large outflows. But as a medium term strategy, it could make sense for the central bank to offer a dollar window. It would also make the forward premia less volatile. A dollar deposit facility may require regulatory changes. As far as extending cash (forex) market timing goes, it’s up to the banks to decide. But there is a need for a more active market beyond regular hours,” said a senior banker.

“While the T+1 issue is some months away, banks have initiated discussion with RBI after realising that Sebi and the ministry want to go ahead with it. Today, cash forex trades (where the conversion happens the same day) take place till 3/3.30 pm. Even if you extend it and change the Dollar/INR clearing timings, banks have to meet the CRR (cash reserve ratio) requirement. So, it will be easier if a bank can sell the dollar to the central bank under a special window as well as give the extra cash to fulfil CRR requirement. Stock preferred by FPIs would come under T+1 only in the second half of next year. But before that, many in the market expect Gsecs to be included in the bond market,” said another person.



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