Tag: reserve bank

High forex reserves, liquidity steps may hit RBI’s surplus transfer to govt, BFSI News, ET BFSI

Banking & Finance

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At a time when public sector companies are giving huge dividends to the government, the Reserve bank of India may transfer a lower surplus to the government.

The Reserve Bank earned less on the record reserve pile up and also stares at lower interest income as banks parked surplus liquidity with it.

A nearly 25 percent jump in forex reserves has led to a fall in returns by nearly a fifth. Returns on reserves deployment were lower at $4.3 billion during April-December’20 compared with $5.2 billion in the same period a year ago, according to the latest data from the RBI.

Interest hit

The amount of interest it paid to keep the system in surplus liquidity could also hurt its returns as it paid interest for keeping funds with it.

Banks are estimated to have parked over Rs 5 lakh crore on an average during FY’21 on which the central bank has to pay them 3.35 per cent interest.

While RBI’s balance sheet has expanded since June 2020, yields on foreign currency investments have indeed reduced over the past year.

For the Accounting Year 2019-20 (July-June).the RBI transferred only 44 per cent of its surplus at Rs 57,128 crore to the government, which is the lowest in percentage terms in the last seven years.

How does RBI earn?

The RBI is a “full service” central bank, which is not only is it mandated to keep inflation or prices in check, but also has to manage the borrowings of the central and state governments supervise or regulate banks and non-banking finance companies and manage the currency and payment systems.

It makes profits while carrying out these operations. The central bank’s income comes from the returns it earns on its foreign currency assets, which could be in the form of bonds and treasury bills of other central banks or top-rated securities, and deposits with other central banks.

RBI also earns interest on its holdings of local rupee-denominated government bonds or securities, and on lending to banks for very short tenures, such as overnight. It makes a management commission on handling the government borrowings.

ts expenditure is mainly on the printing of currency notes and on staff, besides the commission it gives to banks for undertaking transactions on behalf of the government across the country, underwriting government borrowings.

Surplus transfer

The RBI isn’t a commercial organisation like the banks or other companies that are owned or controlled by the government and it does not, as such, pay a “dividend” out of the profits it generates.

The central bank transfer the “surplus” – that is, the excess of income over expenditure – to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934.

Excessive transfer

In August 2019, RBI’s central board gave its nod for transferring to the government a sum of Rs 1,76,051 crore comprising Rs 1,23,414 crore of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF).

The excess reserve transfer was in line with the recommendation of former RBI governor Bimal Jalan-led panel constituted to decide the size of capital reserves that the central bank should hold. The government was represented by the then Finance Secretary Rajiv Kumar in the panel which finalised its report on August 14, 2019 by consensus.

Since 2013-14, the RBI has been paying 99 per cent of its disposable income to the government, which is battling to rein in deficits.

The size of the Reserve Bank’s balance sheet, which is reflective of activities carried out by it in pursuance of currency issue function as well as monetary policy and reserve management objectives, has increased by 30.02 per cent in the year ended June 30, 2020,



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Govt unlikely to continue with zero-coupon bond route to recap PSU banks, BFSI News, ET BFSI

Banking & Finance

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The government is unlikely to take zero-coupon bond route to further recapitalise public sector banks after the Reserve Bank expressed some concerns in this regard, sources said. The government, they said, would resort back to recapitalisation bonds bearing a coupon rate for capital infusion in these banks.

To save the interest burden and ease the fiscal pressure, the government last year decided to issue zero-coupon bonds for meeting the capital needs of the banks.

The first test case of the new mechanism was a capital infusion of Rs 5,500 crore into Punjab and Sind Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with tenure of 10-15 years are non-interest bearing and valued at par.

However, the RBI raised some concerns with regard to calculation of an effective capital infusion made in any bank through this instrument issued at par, sources said.

Since such bonds usually are non-interest bearing but issued at a deep discount to the face value, it is difficult to ascertain net present value, they added.

As a result, sources said, it has been concluded to do away with zero-coupon bond for recapitalisation.

These special bonds are non-interest bearing and issued at par to a bank, they said adding that it would be an investment that would not earn any return and rather depreciate with each passing year.

This innovative mechanism was adopted to ease the financial burden as the government has already spent Rs 22,086.54 crore as interest payment towards the recapitalisation bonds for PSBs in the last two financial years.

During FY 2018-19, the government paid Rs 5,800.55 crore as interest on such bonds issued to public sector banks for pumping in the capital so that they could meet the regulatory norms under the Basel-III guidelines.

In the subsequent year, according to the official document, the interest payment by the government surged three times to Rs 16,285.99 crore to PSBs as they have been holding these papers.

For the current financial year, interest payment for recap bonds have been reduced to Rs 19,292.77 crore from Rs 25,239.4 crore pegged in the Budget estimate.

Under this mechanism, the government issues recapitalisation bonds to a public sector bank which needs capital. The said bank subscribes to the paper against which the government receives the money. Now, the money received goes as equity capital of the bank.

So the government doesn’t have to pay anything from its pocket. However, the money invested by banks in recapitalisation bonds is classified as an investment which earns them an interest.

In all, the government has issued about Rs 2.5 lakh crore recapitalisation in the last three financial years. In the first year, the government issued Rs 80,000 crore recapitalisation bonds, followed by Rs 1.06 lakh crore in 2018-19. During the last financial year, the capital infusion through bonds was Rs 65,443 crore.



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Banks to conduct special clearing operations for closure of government accounts on March 31, BFSI News, ET BFSI

Banking & Finance

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Banks will conduct special clearing operations for annual closure of government accounts on March 31, which is the last day of the current fiscal year, the RBI has said. The Reserve Bank has issued directions to the banks for smooth clearing operation and asked them to mandatorily participate in it.

With regard to annual closing of accounts related transactions of the central and state governments, special measures are put in place for 2020-21, the RBI has instructed all the member banks to maintain sufficient balance in their clearing settlement account.

Normal clearing timings as applicable to any working Wednesday shall be followed on March 31, 2021, the RBI said in a notification addressed to the member banks, urban and state cooperative banks, payments banks, small finance banks as well as the NPCI.

To facilitate accounting of all the government transactions for the current financial year 2020-21 by March 31, 2021, it has been decided to conduct special clearing exclusively for government cheques across the three CTS grids on March 31, 2021, the RBI said.

Under this, presentation clearing will take place between 1700 to 1730 hrs and return clearing will take place between 1900 and 1930 hrs at the three CTS (cheque truncation system) grids located in New Delhi, Chennai and Mumbai.

“It is mandatory for all banks to participate in the special clearing operations on March 31, 2021. All the member banks under the respective CTS grids are required to keep their inward clearing processing infrastructure open during the special clearing hours and maintain sufficient balance in their clearing settlement account to meet settlement obligations arising out of the special clearing,” said the regulator.

Besides, it has asked the banks under the respective CTS grids to adhere to the instructions issued to them by the President of the respective CTS grid.

Under the CTS system, there is no need to present a cheque physically for clearance, instead an electronic image is being transmitted to the paying branch through the clearing house, with the relevant data.

This eliminates the cost of movement of the physical cheques and reduces time for collection and clearance of cheques.

All government transactions done by agency banks for 2020-21 must be accounted for within the same financial year, the RBI said.

The central bank said all agency banks should keep their designated branches open for over the counter transactions related to government transactions up to the normal working hours on March 31, 2021.

“Transactions through National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) System will continue up to 2400 hours as hitherto on March 31, 2021.

“Special clearing will be conducted for collection of government cheques on March 31, 2021 for which the Department of Payment and Settlement Systems (DPSS), RBI will issue necessary instructions,” it said.

With regard to reporting of central and state government transactions to RBI, including uploading of GST/e-receipts luggage files, the reporting window of March 31, 2021 will be extended and kept open till 1200 hours on April 1, 2021, the RBI said.



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RBI Guv, BFSI News, ET BFSI

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The proposed asset reconstruction company (ARC) for management of non-performing assets (NPAs) announced in Budget 2021 will not ‘jeopardise’ the activities of existing players in the space, Reserve Bank Governor Shaktikanta Das said on Thursday. While presenting the Union Budget 2021, Finance Minister Nirmala Sitharaman proposed to set up an asset reconstruction company and asset management company to consolidate and take over existing stressed debts and manage them.

“(In) no way will it (proposed ARC) jeopardise the activities of the existing ARCs. I think there is scope to have one more strong ARC…,” the governor said at an event organised by the Bombay Chamber of Commerce.

There are close to 28 asset reconstruction companies operating in the country at present.

Das said the proposal for setting up an ARC was given by public sector lenders to the government, which accepted it and announced it in the Budget.

The proposed entity will take over stressed assets from the books of public sector banks, and try to resolve them like any other ARCs are doing, he noted.

Das also said strengthening of regulatory architecture for existing ARCs is very much on the central bank’s agenda.

“Refining and further upgrading the regulatory architecture in respect of ARCs to ensure that they have a skin in the game and they are very much in business, is one aspect which is receiving a lot of attention from us,” he said, adding last year he had interacted with a group of ARCs but COVID-19 slowed progress on that front.

Speaking about stressed assets, the governor said there is growing awareness and realisation among banks in dealing with NPAs.

Even during the period when the Supreme Court ordered an asset classification standstill, banks proactively provisioned for stressed assets, he said.

The governor said RBI has also sharpened and deepened its supervisory methods and is now going to deep dive into areas of banking that were unexplored earlier.

With the help of the Central Repository of Information on Large Credits (CRILC) data coming in from banks on a regular basis, RBI has an idea on the quantum of stressed assets in various default buckets, he said.

“We have a precise idea of the build up of stressed assets in banks and as soon as we see a sign of stress, we immediately enter into a discussion with banks and proactively deal with the problems,” he emphasised.

The governor said apart from RBI’s supervisory and regulatory initiatives, the key to all issues is improving the governance in both public and private sector banks.

One area which requires focus of the bank management is on improving their credit appraisal skills and taking measures to see whether evergreening of loans, which was happening at some point, is suitable or not, Das said.

He also said the country’s financial sector currently is in a much better place than it was earlier. HV ABM ABM



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RBI sets up panel to suggest steps for strengthening, consolidating urban co-operative banks, BFSI News, ET BFSI

Banking & Finance

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Mumbai: The Reserve Bank on Monday set up a committee to draw a vision document for strengthening urban co-operative banks (UCBs) and exploring the potential of consolidation in the sector. The committee, to be headed by former RBI Deputy Governor N S Vishwanathan, will suggest “effective measures for faster rehabilitation and resolution of Urban Cooperative Banks (UCBs) and also assess their potential for consolidation in the sector.”

The panel will “draw up a vision document for a vibrant and resilient urban co-operative banking sector having regards to the Principles of Cooperation as well as depositors’ interest and systemic issues,” said the terms of reference of the committee which will be required to submit its report to the RBI in three months.

The eight-member panel, including former chairman of Nabard Harsh Kumar Bhanwala, will also review the current regulatory and supervisory approach and recommend suitable measures to strengthen the sector, taking into account recent amendments to the Banking Regulation Act, 1949.

As per the terms of reference of the committee, it will “take stock of the regulatory measures taken by the Reserve Bank and other authorities in respect of UCBs and assess their impact over the last five years to identify key constraints and enablers, if any, in fulfilment of their socio-economic objective.”

Among other things, the committee will consider the need for differential regulations and examine prospects to allow more leeway in permissible activities for UCBs with a view to enhancing their resilience.

As part of the Statement on Developmental and Regulatory Policies released along with the Monetary Policy Statement on February 5, the Reserve Bank has announced setting up of an Expert Committee on UCBs to examine the issues and to provide a road map for strengthening the sector, leveraging on the recent amendments to Banking Regulation Act, 1949.

Following the amendment all urban cooperative banks and multi-state cooperative banks have come under the supervision of the Reserve Bank of India.

There are 1,482 urban cooperative banks and 58 multi-state cooperative banks having about 8.6 crore depositors with total savings deposit of about Rs 4.85 lakh crore.



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RBI, BFSI News, ET BFSI

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India’s GDP is within the striking distance of attaining positive growth, the Reserve Bank said observing that the letter “V” in the V-shaped recovery stands for vaccine. The Indian government launched the world’s biggest vaccination drive on January 16 to protect people from COVID-19.

“What will 2021 look like? The shape of the recovery will be V-shaped after all and the ‘V’ stands for vaccine,” said an article on the ‘state of economy’ in the RBI‘s January Bulletin.

India has launched the biggest vaccination drive in the world, backed by its comparative advantage of having the largest vaccine manufacturing capacity in the world and a rich experience of mass inoculation drives against polio and measles.

“If successful, it will tilt the balance of risks upwards,” said the authors who among others include RBI Deputy Governor Michael Debabrata Patra.

The RBI, however, said the views expressed in this article are those of the authors and do not necessarily represent the views of the central bank.

E-commerce and digital technologies will likely be the bright spots in India’s recovery in a world in which there will be rebounds for sure, but pre-pandemic levels of output and employment are a long way off, they said.

The article further said: “Recent shifts in the macroeconomic landscape have brightened the outlook, with GDP in striking distance of attaining positive territory and inflation easing closer to the target.”

India’s GDP is estimated to contract by a record 7.7 per cent during 2020-21 as the COVID-19 pandemic severely hit the key manufacturing and services segments, as per government projections released earlier this month.

The economy contracted by a massive 23.9 per cent in the first quarter and 7.5 per cent in the second quarter on account of the COVID-19 pandemic.

The article further said that in the first half of 2021-22, GDP growth will benefit from statistical support and is likely to be mostly consumption-driven.

With rabi sowing surpassing the normal acreage way before the end of the season, bumper agriculture production is expected in 2021.

“India being the global capital for vaccine manufacturing, pharmaceuticals exports are expected to receive a big impetus with the start of vaccination drives globally. Agricultural exports remain resilient and under the recent production linked (PLI) scheme, food processing industry has been accorded priority,” it said.

Harnessing the synergies by transforming low-value semi-processed agri products through food processing would not only improve productivity but also boost India’s competitiveness, it added.

The article notes that slippage ratios have been falling and loan recoveries are improving even as provisioning coverage ratios have risen above 70 per cent. Capital infusion and innovative ways of dealing with loan delinquencies will occupy policy attention in order to ensure that finance greases the wheels of growth on a durable basis before the demographic dividend slips away.

“It will take years for the economy to mend and heal, but innovative approaches can convert the pandemic into opportunities. Will the Union Budget 2021-22 be the game-changer?,” it said.

Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget in Lok Sabha on February 1.



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Digital payments soar in December 2020

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With the continued upturn in economic activities as well as year end spends, digital payments registered robust growth in December across all channels. Data released by the National Payments Corporation of India revealed that transactions on the UPI platform rose to ₹4.16-lakh crore in December with a total of 223.41 crore payments processed.

Transactions on the Immediate Payment Service (IMPS) rose to 35.56 crore amounting to ₹2.92 lakh crore in December. This was higher than the 33.91 crore payments worth ₹2.76 lakh crore processed on IMPS in November. Significantly, RBI also launched the Digital Payments Index (RBI-DPI), which aims to capture the extent of digitisation of payments across the country.

“The DPI for March 2019 and March 2020 work out to 153.47 and 207.84 respectively, indicating appreciable growth,” the RBI said in a statement.

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