Tag: reserve bank of india

Companies’ payments banks can’t turn into SFBs, BFSI News, ET BFSI

Banking & Finance

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MUMBAI: Payments banks promoted by corporates will not be eligible to seek a transition to a small finance bank with the Reserve Bank of India not accepting the internal working group proposal on bank licenses for corporates.

Of the payments banks that are already licensed, Airtel Payments Bank and Jio Payments Banks are promoted by corporates. These are the only two payments banks of the 11 that were granted approval that continue to function. Aditya Birla Payments Bank had surrendered its licence in 2019 others including Sun Pharma’s Dilip Shanghvi had dropped their plans earlier.

This would mean that small finance banks would have to come from the NBFC microfinance segment or cooperative banks that choose to convert themselves into small finance banks. Most of the small finance banks operating today were largely converted from microfinance companies or non-banking finance companies engaged in small loans.

Among the non-corporate promoted payments banks, Paytm PB and Fino PB have indicated that they would pursue an SFB licence if the opportunity arises.

RBI’s internal working group on bank ownership had said that small finance banks would be considered for transitioning into a universal bank provided they meet the minimum paid-up capital and net worth requirement applicable to universal banks.

SFBs are considered to have a better business model compared to payments banks as they can lend and issue credit cards. They also do not face any geographic or size restrictions, unlike cooperative banks. However, they do face restrictions in extending large loans to corporate houses.



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Study, BFSI News, ET BFSI

Banking & Finance

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The recent clarification by the Reserve Bank of India on non-performing advances (NPA) may increase non-banking financial companies’ (NBFC) bad loans by one-third, says a report.

Last month, the RBI had provided clarification on income recognition asset classification and provisioning (IRAC) norms for banks, NBFCs and All-India Financial Institutions.

The clarification included classification of special mention account (SMA) and NPA on a day-end position basis and upgrade from an NPA to standard category only after clearance of all outstanding overdues.

“The RBI’s clarification on non-performing advances (NPAs) accounting is likely to increase NPAs by around one-third for non-banking finance companies (NBFCs),” domestic rating agency India Ratings and Research said in a report on Friday.

However, the impact on provisioning could be modest, given NBFCs are using Indian Accounting Standards (IND-AS) and generally for higher rated NBFCs, provision policy is more conservative than IRAC requirements.

The report said the RBI circular also calls for daily stamping of accounts to count the number of days they are overdues instead of a monthly or quarterly stamping.

This again would result in an accelerated pace of NPA recognition for accounts, it said.

NBFC borrowers, typically where there is cash collection, pay their overdues generally with some delays. Accounts can get into NPA category just for a day’s delay in paying the instalments and once it gets categorised as NPA it will not be able to become standard unless all the arrears are cleared, the report said.

“So, in other words, accounts would get categorised as NPAs at a faster pace and would remain sticky in that category for a longer period of time. Both these accounting treatments would result in higher headline numbers for NBFCs,” it said.

It may so happen that NBFCs would disclose NPA numbers as per IRAC norms and stage 3 numbers as per Ind-As separately in their disclosures, the agency said.



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RBI moots easier rules for investing overseas, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) is batting for easier overseas investment norms for Indian tech entrepreneurs and angel investors, said people with direct knowledge of the matter. As per the current rules, if an Indian resident buys shares in an unlisted company abroad, the foreign company cannot create any more step-down subsidiaries. This has proved to be a hindrance for Indian entrepreneurs looking to invest in foreign startups since it restricts the scalability of such companies.
Now, the RBI has learnt to have given a recommendation to the finance ministry, saying if such step-down subsidiaries are being opened as part of genuine and ‘bona fide’ expansion plans of a company, the restriction should not be applied.

Consultations with Industry
Emails sent to the RBI and the finance ministry remained unanswered until press time.
“Indian tech entrepreneurs are constantly looking for acquisition opportunities especially in the other developing countries; however, current rules make it very difficult to make such investments,” said a person cited above. “These investments have potential to bring dollar money back into India if the business venture succeeds.”

The RBI has held extensive consultations with the industry and the recommendations are based on inputs so received, said people cited above. Overseas investments by Indian residents fall under the ambit of the Liberalised Remittance Scheme. “A natural outcome of growth is expansion and hence it is extremely important that the step-down subsidiaries restriction be reconsidered,” said Moin Ladha, partner, Khaitan & Co. “This will enable Indian investors to get the advantages associated with such diversification.”

Indian owns less than 10% equity in the company. Portfolio investments enjoy liberal rules since they are meant for investment purposes only.

Currently, if an Indian buys shares of an unlisted foreign company, the company is presumed to be a joint venture. For instance, say an Indian ‘A’ buys a few shares of ByteDance – the parent of TikTok and an unlisted startup. Indian regulators presume that ByteDance is a JV where ‘A’ exerts some sort of control. Accordingly, ‘A’ is required to meet the steep compliance norms under the RBI rules.

In contrast, if ‘A’ had invested in shares of a foreign listed company, say Microsoft, it would have been considered a portfolio investment and would have been exempt from the compliance norms.

“It is impractical for a minority shareholder to be able to procure information or influence decisions of an overseas entity where they hold investment,” said a person with direct knowledge of the matter. “However, the current regime treat seven a minority investment as setting up or acquiring a joint venture abroad.”

The industry is also learnt to have requested the RBI to reconsider several more regulations. Most important of them all was a request to increase the cap on the LRS route. Currently under LRS, an Indian can remit a maximum of $250,000per financial year. The industry suggested the same to be hiked to at least $350,000. However, the RBI has so far not actedon the input, people cited above said.

Until a few years ago, outward remittance rules used to be the policy domain of RBI under the Foreign Exchange and Management Act (Fema). In other words, RBI could tweak the rules on its own. However, in 2019 the Centre replaced the rules is in the hands of the finance ministry. The RBI has been assigned the role of administering the implementation of NDI rules.



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Experts, BFSI News, ET BFSI

Personal Finance

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Ahead of the government’s bill on cryptocurrency, there is no clarity on whether the government plans to ban cryptocurrencies or regulate them.

The bill intends to ban all private cryptocurrencies, with certain exceptions, to promote the use of the underlying technology of cryptocurrency. The much-awaited bill also aims to provide a framework for the creation of an official digital currency to be issued by the Reserve Bank of India. The government has already made it clear it has no plan to make cryptocurrency a legal tender.

What if govt bans cryptos

In the event government plans to ban cryptocurrencies, experts said any crypto ban could cause investors to move underground and obtain cryptos and trade in them illegally. Moreover, the P2P transactions do not fall under any legal ambit and hence, decentralised exchanges would continue to thrive regardless of the ban. Banning cryptos would not only prove a technological challenge for the government but also mean huge capital funds moving out of the country.

The Blockchain and Crypto Assets Council, the association of crypto exchanges in the country, released a statement reiterating the futility of the ban. A blanket ban on cryptocurrencies will encourage non-state players, thereby leading to more unlawful usage of such currencies, it said.

“The Council has always argued in favour of prohibiting the usage of private cryptocurrencies as a currency in India by law since usage as currency is likely to interfere with monetary policy and fiscal controls. On the other hand, the council has advocated their use only as an asset. The council believes that a smartly regulated crypto assets business will protect investors, help monitor Indian buyers and sellers, lead to better taxation of the industry, and limit illegal usage of cryptos,” BACC said in a statement.

Grey areas

Also, the government needs to define the scope and meaning of the term ‘private cryptocurrencies.’ Almost all the cryptocurrencies would be private except significant cryptocurrencies like Bitcoin and Ethereum that the miners collectively own, if the definition concerns ownership rights or anonymity of transactions.

However, except like Bitcoin, not all cryptocurrencies are store of value with there being utility tokens like Ethereum, Cardano.

Experts said the exchanges could be asked to follow stringent KYC/AML procedures to dissuade money laundering and terror financing activities.



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Cautious banks drastically cut education loans as income, job losses rise, BFSI News, ET BFSI

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The bank credit is ticking up for industry and allied sectors in line with the economic revival, but certain segments continue to stay in doldrums.

Credit to commercial real estate and education loans shrunk by 0.5% and 8.7% on year, respectively, in October.

According to RBI data on sectoral credit deployment, loans to the industry sector increased 4.1% on year to Rs 28,54,571 crore as on October 22. On the other hand, loans to commercial real estate fell 0.5% on year to Rs 2,53,582 crore while education loans credit deployment by banks by 8.7% to Rs 47,260 crore.

Experts say banks have sharply reduced exposure to unsecured credit and are focusing on secured home loans and working capital needs of high rated corporate borrowers. While they are focusing on growing the mortgage book, banks have reduced exposure to commercial real estate, given the uncertain times.

Education loan NPAs

Nearly 9.55% of education loans extended by PSU banks were labelled as non-performing assets (NPAs) as on December 31, 2020, with loans for engineering and nursing courses topping the chart.

Job and income loss and drop-out rates during the pandemic were key factors behind the surge in education loan NPAs.

Rising unemployment rate is posing major challenges to the banking system as the repayment ability of the borrowers are getting impacted accordingly.

About Rs 8,587 crore loans over 366,260 accounts have turned bad as of December 2020.

As on December 31, 2020, there are 24.84 lakh education loan accounts with an outstanding of Rs 89,883.57 crore across the country. Out of these, about 9.55% or 3.66 lakh accounts with an outstanding of Rs 8,587.10 crore have turned NPAs, the parliament was informed.

The highest defaults were in loans extended for engineering courses as Rs 4,041.68 crore spread over 176,256 accounts as on December 31, 2020.

COVID-led spike

Interestingly, the NPA rate has dropped to 7.61% in FY20 end from 8.11% in FY18. It stood at 8.29% in FY19. The category has witnessed higher NPAs than other categories of retail loans including housing, vehicle, that saw bad loans in the range of 1.52% and 6.91% in FY20 While NPAs in the housing, vehicle and other retail sector loans have remained below 2%, consumer durables NPAs have trebled to 6.91% as on March 2020 from 1.99% in March 2018.

Reserve Bank of India
Reserve Bank of India

Rising graph

Led by a rise in lending to micro and small, and medium industries, bank loans to the industry sector grew a 4.1% on year in October, sharply higher than 2.5% a month ago and contraction of 0.7% a year ago, according to the RBI data.

Loans to large corporates rose 0.5% (on a year-on-year basis) to Rs 22.7 lakh crore in October compared to a contraction of 1.8 % a year ago.

All major segments, except services including agriculture, industry and retail posted higher growth rates over the previous year. Overall bank credit rose 6.9% in October compared to 5.2% a year ago according to the latest data on sectoral deployment of bank credit released by the Reserve Bank of India.

Government schemes like emergency credit guarantee schemes targeted at such borrowers also seemed to have played a part in the pick-up in lending to these corporate borrowers during the festival season.

The 10.7% growth in gross capital formation in Q2’21-22 is driven primarily by public capital expenditure although there are also signs of a pickup in private capex in the current fiscal.



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Explainer: Neo-banks Vs traditional banking

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What are Neo-banks?

Neo-banks are online-only financial technology (fintech) companies that operate solely digitally or via mobile apps. Simply put, neo-banks are digital banks without any physical branches.

How are they different from the traditional banks?

Neo-banks are disrupting the traditional banking system by leveraging technology and artificial intelligence (AI) to offer a range of personalised services to customers. On the other hand, traditional banks follow an omni-channel approach i.e. having both physical (through branches and ATMs) and digital banking presence to offer a multitude of products and services.

Right from customer acquisition to traditional banking services such as remittances, money transfers, utility payments and personal finance, neo-banks offer a wide range of offerings to customers across retail and small-to-medium enterprise (SME) categories. Typically, neo-banks apply a design thinking approach to a particular banking area and tailor their products and services in a manner that makes banking simpler and convenient to the end consumers.

How are they evolving?

The term ‘Neo-bank’ started gaining prominence globally in 2017 as they emerged as a new challenger to the traditional banks in terms of customer engagement, connectivity and reach, and most importantly, the user experience. That is why neobanks are also called ‘challenger banks’. The market potential for neo-banks is driven by the rising penetration of the internet and smartphones across the globe.

Also read: Cryptos, far from the regulators’ glare

According to a report by KBV Research, the global neo-banking market size is expected to reach $333.4 billion by 2026, rising at a compounded annual growth rate (CAGR) of 47.1 per cent. Although neo-banks are relatively new concept in India, the concept has been gaining traction over the last few years. There are around a dozen neo-banks in India including Razorpay X, EpiFi, Open, NiYo, Jupiter among others. In recent times, some of these firms raised funding from marquee global investors, who are betting on India’s hugely underbanked market potential.

Can they replace traditional banks?

Not entirely. Neo-banks offer only a small range of products and services as compared to a whole gamut of services that traditional banks offer. Besides, since neo-banks are highly digital focused, they may not be able to cater to the banking needs of non-tech savvy consumers or people from the rural parts of the country, who believe in face-to-face interaction with their financial custodians. As of 2020, India had a smartphone penetration rate of just about 54 per cent.

What are the challenges that they face?

Numerous. First and foremost is building trust. Unlike traditional banks, neo-banks don’t have a physical presence, so customers cannot literally ‘bank upon’ them in case of any issues/challenges. Secondly, neo-banks are yet to be recognised by the Reserve Bank of India (RBI).

Also watch: Five ways digital lending apps can become safer for you

So, they have to engage with regulated banks and financial institutions to offer financial products and services. Due to the absence of enabling regulations, neo-banks cannot accept deposits or offer lending products on their own books. That is why some fintechs have a non-banking financial company (NBFC) as their parent to engage in lending activities while most others partner with banks and financial institutions.

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You can now buy sovereign gold on RBI Retail Direct Portal also, BFSI News, ET BFSI

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Mumbai, Dec 2, The sovereign gold bond can now also be subscribed on the newly launched RBI Retail Direct Portal. Subscription of the Sovereign Gold Bond Scheme 2021-22 – Series VIII is currently open.

“The Sovereign Gold Bond Scheme 2021-22 – Series VIII, which is open for subscription till December 3, 2021, is also available through RBI Retail Direct Portal at https://rbiretaildirect.org.in,” the central bank said on Thursday.

Till now, the bonds were sold through banks (except small finance banks and payment banks), Stock Holding Corporation of India Ltd (SHCIL), designated post offices, and recognised stock exchanges viz., National Stock Exchange of India Ltd and Bombay Stock Exchange Ltd.

Last month, Prime Minister Narendra Modi had launched the RBI Retail Direct Scheme, under which individuals can directly purchase treasury bills, dated securities, sovereign gold bonds (SGB) and state development loans (SDLs) from the primary as well as secondary market.

As per the scheme, retail investors (individuals) will have the facility to open an online Retail Direct Gilt Account (RDG Account) with the Reserve Bank of India (RBI). These accounts can be linked to their savings bank accounts.

The RDG Accounts of individuals can be used to participate in issuance of government securities and secondary market operations through the screen based NDS-OM.

NDS-OM, a screen based electronic anonymous order matching system for secondary market trading in government securities owned by the RBI, is currently open only to institutions like banks, primary dealers, insurance companies and mutual funds.



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SBI, Adani Capital enter co-lending agreement, to target farmer customers, BFSI News, ET BFSI

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State Bank of India has signed a co-lending agreement with Adani Capital Pvt Ltd to cater to their farmer customers and increase overall efficiency in farm operations, the bank said in a statement.

SBI and the non-bank lender arm of Adani Group will co-lend to farmers, so that it can help them purchase tractor and farm implements.

“We are pleased to associate with Adani Capital under the co-lending program. This partnership shall help SBI to expand its customer base as well as connect with the underserved farming segment of the country and further contribute towards the growth of India’s farm economy. We will continue to work with more NBFCs in order to reach out to maximum customers in far flung areas and provide last mile banking services,” said Dinesh Khara, chairman of SBI.

The Reserve Bank of India had issued guidelines on co-lending schemes for banks and non-bank lenders for priority sector lending to improve flow of credit to underserved sectors of the economy. The scheme aims to make funds available at affordable costs to borrowers.

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Private banks cut more rates than PSBs as overall rate transmission improves, BFSI News, ET BFSI

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Rate transmission, the pet peeve of the Reserve Bank of India has improved substantially following the introduction of external benchmarks with the private banks sniping more than public sector peers.

The overall lending rates have fallen as much as 100 basis points, with the weighted average lending rates for outstanding rupee loans of commercial banks fell 96 basis points between March 2020 and October 21, according to RBI data.

But these rates have fallen more sharply for private sector banks at 109 basis points compared to 85 bps dip for public sector banks and 187 bps for the foreign banks in the country.

The central bank has however cut its benchmark repo rate much higher by 115 bps during the period, and also introduced a number of measures to enhance liquidity of banks to deal with the pandemic induced crisis.

Policy transmission

Policy transmission has been at a much faster pace since the pandemic. In the 19-month period prior to the onset of the pandemic, the benchmark policy 135 bps. But the banks lowered their lending rates only by 15 basis points between March 2019 and March 2020.

A research paper by the Reserve Bank of India economist notes that the transmission of policy repo rate changes to deposit and lending rates of commercial banks (SCBs) has improved since the introduction of external benchmark-based pricing of loans.

The paper said that the transmission showed further improvement since March 2020 on account of sizeable policy rate cuts, and persisting surplus liquidity conditions resulting from various system level as well as targeted measures introduced by the Reserve Bank – cut in the cash reserve ratio (CRR)

requirements, long-term repo operations (LTROs), TLTROs, refinancing window for All India Financial Institutions (AIFIs), sector/segment specific liquidity measures (Mutual Funds, Small Finance Banks, Micro Finance Institutions/Non-Bank Financial Companies), special open market operations and regular OMOs.

External benchmarks

The share of external benchmark-linked loans in total outstanding floating rate loans increased from 2.4 per cent in September 2019 to 32 per cent in June 2021, contributing to a faster and fuller transmission.

There has been a concomitant fall in the share of MCLR-linked loans from 83.6 per cent to 60.2 per cent, over the same period, although these still have the largest share in outstanding floating rate loans.

As lending rates under the external benchmark regime undergo automatic adjustments with the changes in the benchmark rate, banks are incentivised to adjust their term as well as saving deposit rates to cushion their net interest margins and profitability, which then hastens the adjustment in banks’ marginal cost of funds, and MCLRs.

Earlier hurdles

While the Reserve Bank has periodically refined the process of interest rate setting by banks, transmission has hitherto been sluggish as banks relied on their own cost of funds, which is internal benchmarks.

“The systems were also characterised by opacity, especially regarding the interest rate resetting practices for existing borrowers,” the central bank said.

To address these rigidities, the RBI had decided to move to an external benchmark system – an interest rate outside the control of a bank and not necessarily linked to its internal costs – for select categories of loans (viz., all new floating rate personal or retail loans and floating rate loans to micro and small enterprises (MSEs) to the policy repo rate or 3-month or 6-month T-bill rate or other specified benchmarks effective October 1, 2019, and for medium enterprises effective April 1, 2020).



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Private sector banks lower lending rates more than PSU Banks during the pandemic, BFSI News, ET BFSI

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Private sector banks have been leading the way in reducing cost of funds in the past year of pandemic even as state-run banks are not far behind. While the overall lending rates have fallen as much as 100 basis points, for private banks it has been more.

Weighted average lending rates for outstanding rupee loans of commercial banks fell 96 basis points- bps (one basis point is 0.01 per cent) between March 2020 and October 21, data released by the RBI indicates.

But these rates have fallen more sharply for private sector banks at 109 basis points compared to 85 bps dip for public sector banks and 187 bps for the foreign banks in the country.

The central bank has however lowered its benchmark repo rate much higher by 115 bps during the period and also introduced a number of measures to enhance liquidity of banks to deal with the pandemic induced crisis.

Policy transmission has been much faster pace since the pandemic. In the 19 month period prior to the onset of the pandemic, the benchmark policy 135 bps. But the banks lowered their lending rates only by 15 basis points between March 2019 and March 20 as reflected in the weighted average lending rates on outstanding loans of commercial banks.

A research paper by the Reserve Bank of India economist notes that the transmission of policy repo rate changes to deposit and lending rates of commercial banks (SCBs) has improved since the introduction of external benchmark-based pricing of loans.

The paper also adds that the transmission showed further improvement since March 2020 on account of sizeable policy rate cuts, and persisting surplus liquidity conditions resulting from various system level as well as targeted measures introduced by the Reserve Bank – cut in the cash reserve ratio (CRR) requirements, long-term repo operations (LTROs), TLTROs, refinancing window for All India Financial Institutions (AIFIs), sector/segment specific liquidity measures (Mutual Funds, Small Finance Banks, Micro Finance Institutions/Non-Bank Financial Companies), special open market operations and regular OMOs.



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