The Reserve Bank of India (RBI) announced that it has decided to set up a new Review Authority (RRA 2.0). Initially, Regulations Review Authority (RRA) was established on April 1, 1999, for the purpose of reviewing regulations, circulars, and reporting systems based on public, bank, and financial institution feedback. RRA’s recommendations resulted in the simplification of regulatory prescriptions, the issuance of a master circular, reduction in the reporting burden on regulated entities and streamlined and improved processes.
RBI said that considering the developments in regulatory functions of the Reserve Bank and the evolution of the regulatory perimeter over the last two decades, it has been decided to set up a new Regulations Review Authority (RRA 2.0) for a period of one year from the date of its establishment. The Deputy Governor, M. Rajeshwar Rao, has been appointed the Regulations Review Authority. The Authority will be in place for a year starting May 1, 2021, unless the Reserve Bank decides to prolong its term.
RRA 2.0 would concentrate on streamlining regulatory instructions, reducing the compliance burden of the regulated entities by simplifying processes, and reducing reporting requirements. The RRA will engage internally as well as externally with all regulated entities and other stakeholders to facilitate the process.
The terms of reference of RRA would include removing redundancies and duplications from regulatory and supervisory instructions, reducing compliance burden on regulatory agencies by streamlining the reporting process and, if necessary, revoking obsolete instructions, and avoiding paper-based submission of returns wherever possible.
It’s a Catch-22 situation for wealthy Indians who bought Bitcoins from overseas markets and held them in offshore wallets as the fate of cryptos hangs in limbo in India. They are now in a quandary over how to account for, and whether to disclose, these ‘digital assets’.
If they hide these investments from the taxman, they may be pulled up later. But if they share the information while filing their annual income tax returns, they may be questioned on the legality of transactions they undertook. Some have acquired Bitcoins and other popular crypto currencies from international sellers by transferring funds from India under the Reserve Bank of India’s liberalised remittance scheme (LRS) which allows a resident to invest up to $250,000 a year abroad in stocks, bonds and properties among other things.
Others have purchased cryptos online from foreign sellers using their debit and credit cards. But there are question marks whether the LRS route and bank cards can be used to buy cryptos abroad. Bankers who remit LRS money say the facility cannot be used for direct purchase of Bitcoins from India as it does not figure in the permissible list of capital account transactions.
It’s one thing to subscribe to Coinbase IPO, but it’s another thing to buy Bitcoins directly. At least, that’s the impression they gather in their interactions with RBI.
But what if a person avails the LRS window to open a dollar or Euro account with a bank overseas and subsequently uses the money to buy Bitcoins abroad? Well, it’s none of our business, the bankers say. But is it beyond RBI’s jurisdiction as well? A RBI spokesman declined to comment on whether one can invest in cryptos under LRS. The use of debit or credit cards is done under the pretext that trades in cryptos are ‘current account’ (not capital account) transactions—a stand that can be challenged.
“While there is no specific provision dealing with purchase of Bitcoins under the LRS and while RBI has not specifically banned crypto currencies in India, there remains ambiguity whether individuals would be permitted to purchase the same. Further, in the absence of clarity on whether crypto currencies amount to “currencies” or merely a “contract / digital asset” in the hands of the recipient, it would be difficult to classify the same for reporting under the LRS since the fields provided for reporting under the form do not provide for such a disclosure,” said Tushar Ajinkya, founder and managing partner, ThinkLaw. However, according to Jaideep Reddy, leader (technology law) at Nishith Desai Associates, the RBI has not clarified the treatment of crypto-assets under FEMA but has stated that they do not amount to currency.
“They could hence be treated as intangible assets like intellectual property or software. Import of an intangible asset is permitted as a current account transaction. However, every transaction has to be analysed according to its specific facts and context,” said Reddy. Even as ambiguity prevails on the use of LRS, investors are now grappling with the dilemma over disclosure. Resident Indians are required to mention details of foreign bank accounts (including accounts in which they are signing authorities), immovable properties, or other assets located outside the country.
Here, the question that crops up is: should resident Indians disclose their overseas crypto holdings while filing returns for the assessment year 2021-22? A spokesperson for the direct tax body CBDT refused to comment while the professional accounting body ICAI had no views to share on the subject. Some of the tax professionals have told their clients to avoid cryptos while investing under LRS. “We believe RBI does not allow the use of LRS for purchase of crypto currencies as these are not in the list of permitted securities specified for purchase under LRS. However, no action has been taken by RBI till now as it may not have collected the data,” said Rajesh P Shah, who heads the research committee of The Chamber of tax Consultants.
New Delhi, Apr 14 () State Bank of India on Wednesday said the government has nominated Anil Kumar Sharma, the executive director of the RBI, on its board with immediate effect. Citing a Department of Financial Services (DFS) notification dated April 13, 2021, SBI said, “..the central government hereby nominates Anil Kumar Sharma, executive director, Reserve Bank of India as director on the central board of State Bank of India with immediate effect… until further orders, vice Chandan Sinha.”
SBI’s central board of directors comprises a total of 13 members, headed by its chairman Dinesh Kumar Khara, as per its website. KPM MKJ MKJ
Banks have sought an extension of one-time debt recast scheme as the curbs after fresh Covid wave are likely to increase defaults and affect asset quality.
The bank chiefs have petitioned RBI to extend the scheme introduced last year in a meeting with the governor earlier this week, according to reports. No relief measures
Banks, which got protection and support by a swift moratorium on loans when the pandemic first struck, have no such cover this time.
As the second wave intensifies, most of the relief measures and schemes announced by the government and Reserve Bank of India have expired. On top of it, the central bank is non-committal on moratoriums.
In today’s conditions, there is no need for a moratoriumRBI governor Shaktikanta Das
Also, a spike in overdue loans after the lifting of the moratorium has been worrying analysts.
“The level of loans in overdue categories has increased after the moratorium has been lifted and the impact on asset quality will be spread over FY2021 and FY2022 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks,” ratings agency Icra said in a report. What Fitch says
Banks want debt recast scheme back as Covid wave intensifies
India’s second wave of Covid infections poses increased risks for India’s fragile economic recovery and its banks, says Fitch Ratings. It already expects a moderately worse environment for the Indian banking sector in 2021, but headwinds would intensify should rising infections and follow-up measures to contain the virus further affect business and economic activity.
Fitch forecasts India’s real GDP growth at 12.8% for the financial year ending March 2022 (FY22). This incorporates expectations of a slowdown in 2Q21 due to the flareup in new coronavirus cases but the rising pace of infections poses renewed risks to the forecast. Over 80% of the new infections are in six prominent states, which combined account for roughly 45% of total banking sector loans. Any further disruption in economic activity in these states would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely. Challenging environment
The operating environment for banks will most likely remain challenging against this backdrop. This second wave could dent the sluggish recovery in consumer and corporate confidence, and further suppress banks’ prospects for new business (9MFY21 credit growth: +4.5% as per Fitch’s estimate), it said. There are also asset quality concerns since banks’ financial results are yet to fully factor in the first wave’s impact and the stringent 2020 lockdown due to the forbearances in place. We consider the micro, small and medium enterprises (MSME) and retail loans to be most at risk, the rating agency said.
Retail loans have been performing better than our expectations but might see increased stress if renewed restrictions impinge further on individual incomes and savings. MSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring.
Through the variable reverse repo, RBI will also manage the lower end of the curve suitably.
By KVS Manian
The Reserve Bank of India (RBI) has clearly kept its ears to the ground in framing the last monetary policy. The surge in Covid-19 cases, leading to a seemingly vicious second wave, has definitely pushed the recovery trajectory by a quarter, if not two.
The pace of the Covid-19 vaccination has been slower than anticipated, adding to the worries on the time frame to get a control over the pandemic. Just now, in the most optimistic scenario, this looks like a 9-10 month vaccination programme to reach the thresholds of comfort. I am sure the government is thinking about speeding up the delivery mechanisms, as also ensuring optimum supply of vaccines itself. So, over the next few months, selective lockdowns/locational disruptions and other constraints will continue. This will lead to some demand disruptions as well as supply disruptions.
All this is bound to have an adverse impact on the economy, with some downside risk to the growth projections we had expected, even a month ago.
In such a scenario, that the RBI stance will be more accommodative and supportive of growth follows quite naturally. As all the countries attempt to do this over the next 12 months, we will see significant difference in the quality of execution amongst them.
Hopefully, India will be one of the countries that will emerge from this year with a strong tailwind ready to launch into a strong positive growth cycle.
Like most other central banks across the world, RBI is also clearly prioritising growth over incipient inflation worries. However, this remains a risk over the period of this financial year. While the headline inflation looks to be under control, the saviour has been the inflation in food prices, and core inflation numbers are already flirting with 6%. The risk to inflation is coming in a complicated manner, both from supply-side constraints in some areas and from demand-side pressures in others. This balancing act between supporting growth and curbing inflation is going to be the key challenge of the central bank this year.
The bond markets were very pleased with the announcement of the Rs 1 lakh crore open market operation (OMO) programme (christened as G-SAP, or the G-Sec Acquisition Programme) for the first quarter of FY22. It was precisely what the doctor ordered. This has cooled the yields over the long end of the curve. Through the variable reverse repo, RBI will also manage the lower end of the curve suitably. This may lead to some increase in yields in the short end, flattening the yield curve. The liquidity in the system will continue to be good, and with the above developments, the expectations of rise in policy rates over this year have significantly receded till late this financial year.
It will be interesting to see how the rupee reacts in the coming months. Global liquidity leading to strong flows into the Indian equity markets has helped bolster the rupee until now. Purportedly, RBI’s announcement of bond purchases and unwinding of positions by traders, who were already nervous due to the emerging Covid-19 second wave data, led to a fall in the value of the rupee. However, in the medium term, signals from the US and European markets on economic recovery and interest rates will be a more important factor. Just now, the US Treasury as well as European central banks seem quite determined to keep liquidity high and bond yields low, almost challenging the bond dealers to trade against them. Given these, the flow into attractive emerging markets is likely to continue, keeping the rupee reasonably stable.
The not-so-great news in all this is that the likely economic disruptions, caused by the next wave of Covid-19, could mute credit growth at a juncture when it was just showing green shoots of recovery. Asset quality issues in the financial sector could re-emerge. Coordinated steps by both the government and RBI through the last year helped ensure flow of credit and financial support to the segments in the economy that were the most susceptible, such as the MSMEs and other Covid-19-impacted sectors, and helped these segments tide through the crisis. Going forward, RBI and the government have to work towards a calibrated and smooth exit from this situation.
Another important announcement from RBI was that of permitting fintech companies to join the digital payment systems of the central bank. This is a progressive step, and will speed up digital adoption in financial transactions. India’s progress in this direction has been particularly noteworthy, and this announcement has signalled RBI’s continued and proactive focus in this area.
Overall, the policy is in sync with the times and recognises the need to navigate this uncertain period with an open mind.
The author is whole-time director and member of Group Management Council at Kotak Mahindra Bank. Views are personal
Over the last six months, the gold price has corrected 10% on a 30-day rolling basis, although it has dropped double that amount on an absolute basis.
According to CRISIL Ratings, the recent drop in gold prices is unlikely to have a significant effect on the asset quality of non-banking financial companies (NBFCs) that lend against gold. However, Banks that disbursed gold loans aggressively during the previous fiscal year may see an impact on their asset quality.
In addition to receiving interest on a regular basis, NBFCs have ensured that the disbursement loan-to-value (LTV) is held below 75 percent over the past few fiscals. The average portfolio LTV for NBFCs was 63-67 percent as of December 31, 2020, while the average LTV on incremental disbursements in the October-December 2020 quarter was 70 percent. Interest receivables have remained at just 2-4 percent of the loan book over the last few years, demonstrating the LTV discipline.
Banks, on the other hand, had a higher incremental-disbursement LTV of 78-82 percent than NBFCs. Most of their book’s growth occurred in the third quarter of last fiscal year, when gold prices were soaring. In the 11 months through February 2021, Bank loans against gold increased by 70% to over Rs 56,000 crore. Announcement made by Reserve Bank of India (RBI), August 2020 that the LTV limit would be relaxed to 90% (only for banks), contributed to this growth.
Krishnan Sitaraman, Senior Director & Deputy Chief Ratings Officer, CRISIL Ratings, said, “Without periodic interest collections, banks’ books can be vulnerable to asset-quality issues to some degree, given that gold prices have fallen 18-20% from their August peaks on an absolute basis. However, with the LTV dispensation period ending in March 2021, incremental lending would have more LTV cushion.”
Cushion available with lenders in terms of the value of gold provided as collateral relative to the loan outstanding is influenced by LTV and timely interest collection. As a result, reliable risk management systems and timely auctions are critical for mitigating gold price fluctuations and eventual credit loss.
Ajit Velonie, Director, CRISIL Ratings, said, “While gross non-performing assets (GNPA) could rise, ultimate credit cost – a more appropriate indicator of asset quality for gold loans – is not expected to. Although NBFCs’ GNPAs had risen to as high as 7%, credit costs were still low at 10 to 80 basis points. This demonstrates sound business judgement and timely auctions. Given the rapid growth that banks have experienced, tracking LTV, and remaining agile is critical for avoiding possible asset-quality issues.”
Deputy Governors M K Jain, M Rajeswar Rao and a few other senior officials of RBI also attended the meetings.
RBI Governor Shaktikanta Das on Monday asked banks to remain watchful of the evolving situation and emphasised the importance of credit flow to sustain the nascent economic recovery amid rising coronavirus cases.
In his meeting with MD/CEOs of public sector banks and select private sector lenders, Das also highlighted the recent policy measures taken by RBI to further support the ongoing recovery while preserving financial stability, the central bank said in a statement.
Das touched upon the importance of credit flows in sustaining the nascent economic recovery and advised banks to remain watchful of the evolving situation and continue taking measures proactively for maintaining their business continuity, sharpening business strategies and raising adequate capital for strengthening balance sheets.
“He also emphasised the need for banks to maintain a close vigil on the payments and other IT systems operated by banks and fortifying those for enhanced efficiency and resilience so as to offer seamless and uninterrupted customer service,” RBI said.
Among other matters, progress in the implementation of COVID Resolution Framework, outlook on stresses assets and capital augmentation came up for discussion.
The liquidity scenario and monetary transmission, and credit flows to different sectors, including MSMEs, and retail, were also discussed during the meeting held through video-conferencing.
Deputy Governors M K Jain, M Rajeswar Rao and a few other senior officials of RBI also attended the meetings.
There are concerns that surging coronavirus cases and resulting localised restrictions might hamper cash flow and result in stressed assets.
According to the Reserve Bank of India (RBI) holiday calendar, banks will be closed in most parts of the country from tomorrow (13 April) to 16 April due to various festivals. These holidays are declared under Negotiable Instruments Act. Banking holidays depend on festivals observed in particular states and can vary from one state to another.
On 13 April, Banks in Belapur, Bengaluru, Chennai, Hyderabad, Imphal, Jammu, Mumbai, Nagpur, Panaji, and Srinagar will remain closed on account of Gudhi Padwa/Telugu New Year’s Day/Ugadi Festival/Sajibu Nongmapanba (Cheiraoba)/1st Navratra/Baisakhi.
On 14 April, Banks in Agartala, Ahmedabad, Belapur, Bengaluru, Bhubaneswar, Chandigarh, Chennai, Dehradun, Gangtok, Guwahati, Hyderabad, Imphal, Jaipur, Jammu, Kanpur, Kochi, Kolkata, Lucknow, Mumbai, Nagpur, New Delhi, Panaji, Patna, Ranchi, Srinagar, Thiruvananthapuram will remain closed on account of Dr Babasaheb Ambedkar Jayanti/Tamil New Year’s Day/Vishu/Biju Festival/Cheiraoba/Bohag Bihu.
On 15 April, Banks in Agartala, Guwahati, Kolkata, Ranchi, and Shimla will remain closed on account of Himachal Day/Bengali New Year’s Day/Bohag Bihu/Sarhul.
On 16 April, Banks in Guwahati will remain closed on account of Bohag Bihu.. Apart from these banks will remain closed on 21 April and 24 April on account of Ram Navmi and Second Saturday.
Banks, which got protection and support by a swift moratorium on loans when the pandemic first struck, have no such cover this time.
As the second wave intensifies, most of the relief measures and schemes announced by the government and Reserve Bank of India have expired. On top of it, the central bank is non-committal on moratoriums.
“In today’s conditions, there is no need for a moratorium”RBI governor Shaktikanta Das
Also, a spike in overdue loans after the lifting of the moratorium has been worrying analysts.“The level of loans in overdue categories has increased after the moratorium has been lifted and the impact on asset quality will be spread over FY2021 and FY2022 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks,” ratings agency Icra said in a report. No standstill
Banks enjoyed a standstill on classifying loans as non-performing last fiscal and also accounted for interest accrued despite not receiving payments during the quarter. Both these leeways will no longer be available after the final SC order in March.
As a result, bank NPAs are likely to spike and they may have to reverse some interest earned on loan accounts above Rs 2 crore as the SC order has directed banks to charge simple and not compound interest on loans between March and August 2020.
It is estimated that banks could face a hit of between Rs 7,000 crore to Rs 10,000 crore due to the reversal of interest as it is unclear whether the government will reimburse this waiver – as it earlier did for small-ticket advances.
Analysts will watch out whether banks will provide for the write-back on compounded interest as directed by the ape court or adjust it through their Covid 19 provisions already accounted for.
Fourth quarter
The banking sector had got back to some sense of normalcy in the fourth quarter as collection efficiency came close to or at pre-Covid levels and loan growth recovered.
However, a resurgence in Covid cases, leading to localised lockdowns in various states will force banks to look out for risk mitigation.
There is a likelihood of delayed recovery in credit offtake after the Covid spike. Analysts expect the banking sector loan growth to recover to 6% to 7% in the fiscal ending March 2021 mainly due to a growth in retail loans in the second half of the year. Large lenders with a wider network are expected to clock in a higher year on year increase with a double-digit increase in credit growth.
While banks may not have any impact on margins as they have not cut deposit or MCLR based rate, higher liquidity on the balance sheet could decline. Treasury income may also drop on sequential basis as 10-year Gsec has risen by about 28 basis points during the quarter.
The silver lining
The only respite for banks is their gross non-performing assets may not jump as estimated by RBI’s fiscal stability report.
Icra sees the NPA ratio at 9.5-9.7% as of March-end, lower than RBI’s estimate of 12.5% for the same period. The RBI’s Financial Stability Report (FSR) of December 2020 has stated that banks’ gross non-performing assets (GNPAs) may rise sharply to 13.5 per cent by September 2021, and escalate to 14.8 per cent, nearly double the 7.5 per cent in the same period of 2019-20, under the severe stress scenario.
The increasing number of service providers and tie-ups offering easy loans to individuals operating as retailers, small-scale traders, and others necessitated the presence of guidelines.
In the last two decades, the widespread use of technology in the financial services sector has encouraged numerous banks and Non-banking Financial Companies (NBFCs) to work with digital lending platforms, simultaneously allowing them to reach out to a larger consumer base and simplifying their operations. These platforms enable financial institutions to offer an array of hassle-free services, such as lending, account opening, and credit analysis. In the backdrop of these developments, the Reserve Bank of India’s (RBI) last year notification, instructing all institutes engaged in digital-based transactions to adhere to the Fair Practices Code, needs immediate attention.
The notification was issued in light of multiple incidents that revealed highly unethical practices followed by some financial firms. These included exorbitant interest rates on borrowings, non-transparent interest calculation, harsh practices to recover loans, and unauthorised usage of consumer data. The following instructions are a part of the Fair Practices Code by RBI which are binding for all digital lending institutions as well as organizations partnering with them to source borrowers and/or to recover dues:
Names of digital lending platforms engaged as agents shall be disclosed on the website of banks/ NBFCs.
Digital lending platforms engaged as agents shall be directed to disclose upfront to the customer, the name of the bank/ NBFC on whose behalf they are interacting with him/her.
Immediately after sanction, but before the execution of the loan agreement, the sanction letter shall be issued to the borrower on the letterhead of the bank/ NBFC concerned.
A copy of the loan agreement enclosed with the various components of the fee structure and/or enclosures quoted in the loan agreement shall be furnished to the borrowers at the time of their loan sanction/disbursement
Effective oversight and monitoring shall be ensured over the digital lending platforms engaged by the banks/ NBFCs.
Adequate efforts shall be made towards the creation of awareness about the grievance redressal mechanism
Protecting consumer interests has always been the primary motive of the nation’s regulatory bank. The increasing number of service providers and tie-ups offering easy loans to individuals operating as retailers, small-scale traders, and others necessitated the presence of guidelines that streamlines the entire procedure to curb all discrepancies. In addition, it was observed that several digital lending platforms were portraying themselves as lenders without disclosing the names of the bank or NBFC’s that they were partnered with, and such instances of non-disclosure brought to the purview of lending a tremendous amount of ambiguity. Further, it was also noted that customers faced immense trouble while trying to raise grievances due to the lack of a proper structure and transparent system.
In response to this mismanagement, the RBI issued the “Fair Practices Code “ and declared that outsourcing of any activity by banks or NBFCs does not free them from their obligations. Instead, the responsibility of complying with such regulations rests solely on them and they will be held accountable for any miscarriage of the same. Whether a bank or an NBFC (including those registered to operate on ‘digital-only or both digital and brick-mortar channels of credit delivery) utilises its lending platforms or an outsourced channel, they must adhere to the Fair Practices Code in letter and spirit. Any violation with regards to compliance with the set guidelines will undergo serious scrutiny and review. The RBI also marked the digital delivery in credit intermediation as a welcome development.
These guidelines and regulatory code of conduct will help create an environment reverberating with trust and transparency in the sphere of financial services via digital lending platforms. It will help eradicate digital lenders acting as agents for non-registered NBFCs. With the presence of an ethical structure, consumers can enjoy the benefits of hassle-free loan and interest facilities. Furthermore, these rules act as guardians of crucial customer information. By establishing a crystal clear communication channel, these guidelines help in weeding out all miscommunications between lenders and borrowers concerning the details of their loan, interests, and other additional charges. Apart from the removal of miscommunication, these channels provide a robust grievance resolution system to consumers, wherein they can find detailed solutions for all their problems and queries.
When it comes to borrowing and lending, it is critical that there is a clear, standard, and systematic process in place. In light of these guidelines, several financial service providers have taken the initiative to introduce their internal set of rules to further champion the cause of safeguarding the customer’s interests. For instance, the Fintech Association for Consumer Empowerment (FACE), a non-profit body established by a group of new-age fintech organisations, has its own set of code of conduct for digital lending platforms. The organisation aims to establish a safe ecosystem that entails regular dialogues with industry policymakers such as the RBI, Ministry of Finance, and other planning bodies like Niti Aayog. The growth of such institutions showcases how it is not just the RBI that wants a clean sector; rather, the entire industry is working in unison to make the sphere of tech-enabled financial services a safe and transparent one.
Ranvir Singh is the Co-Founder & MD of Kissht. Views expressed are the author’s own.
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