Tag: treasury

Bitcoin ruling roils crypto world seeking regulatory clarity, BFSI News, ET BFSI

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By Vildana Hajric and Yakob Peterseil

International banking regulators’ decision to classify Bitcoin as the riskiest of assets dragged cryptocurrencies further into the mainstream financial world.

It also made it extremely costly for banks to hold digital tokens on their balance sheets, potentially delaying crypto’s wider adoption.

The Basel Committee on Banking Supervision proposed that a 1,250 per cent risk weight be applied to a bank’s exposure to Bitcoin and certain other cryptocurrencies. Bitcoin jumped on the announcement, then erased the gains. It was trading around $36,200 as of 10:30 a.m. in Hong Kong on Friday.

“The only consistency has been the volatility — it’s been big spikes, tons of enthusiasm, followed by big selloffs,” Ross Mayfield, investment strategy analyst at Robert W. Baird & Co., said of Bitcoin’s moves. “If you believe in it you’re probably to stomach the volatility, but if you’re just in it because it seems like the hot way to get a quick buck, that volatility is going to be hard to deal with.”

The ruling sparked a bevy of reactions across Wall Street and other financial centers worldwide. Here’s a sampling:

Luke Sully, CEO at treasury technology specialist Ledgermatic:
“It’s a piece of news that both advocates and critics of Bitcoin will declare as a win. It demonstrates that Bitcoin is now a recognized asset class with risk management parameters for the banks, but these same parameters could be a potential deterrent given the onerous capital requirements that may make it an unpalatable business,” he said. “There are a few underlying assumptions in this risk weighting, the most obvious being that the price may go to zero and investors could lose their full allocation. The capital requirements don’t protect the banks clients from transaction, settlement and FX volatility either.”

David Tawil, president of ProChain Capital, a crypto hedge fund:
To me, this whole thing, along with the IMF, is just a way for those entities to get involved in the conversation. In terms of putting these requirements it’s going to go ahead, and at least for now, take traditional banks that are traditional regulated by these regulatory entities essentially out of this game and that will allow for more and more alternative players, who are not regulated, to go ahead and to pull further ahead,” he said. “A regulator has very little upside and enormous downside — it’s like being a policeman. You want to protect people. So the furthest you can go in terms of lodging measures that stop activity, the better. And so, I think that they are for the first time inserting themselves. This certainly does not mean the end of cryptocurrency, the end of Bitcoin.”

Marc Chandler, chief market strategist at Bannockburn Global Forex:
“I don’t think these things are good or bad themselves — it depends on what the objective is,” he said. “It’s not decentralized, it’s highly concentrated. Crypto was born in an age in which we had very extreme disparities of wealth and income — how can it not reflect that? The bulk of Bitcoin that’s owned by wallets have more than 100 Bitcoins, that’s more than $300,000 — how many Americans have $300,000 to put into crypto as opposed to retirement money?”

Matt Maley, chief market strategist for Miller Tabak + Co.:
“Obviously tougher capital requirements cause banks to have more capital on hand — that can have an impact on their earnings. The committee is saying because of risks involved — cryptocurrencies are very volatile — you have to have more capital on hand to protect against declines,” he said. “If it’s going to cost banks more to hold these cryptocurrencies on their books, they’re theoretically going to be less likely to hold the same kind of size as they otherwise would.”

Wells Fargo analyst Mike Mayo said in a Bloomberg TV interview with Matt Miller:
“It is getting hammered, but you know what? It’s getting treated like any other higher-risk asset like subprime loans, or CDOs, or derivatives, or structured products. And it is a new product. It’s untested through economic cycles. It’s untested through liquidity.”



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Gold is good but Bitcoin’s better for $7.5 billion hedge fund, BFSI News, ET BFSI

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Gold will surge to fresh highs in the next year, but investors seeking currency alternatives as global debt balloons should look to Bitcoin, according to a $7.5 billion hedge fund.

Both are likely to rally even as the Federal Reserve moves to taper asset purchases, said Troy Gayeski, co-chief investment officer and senior portfolio manager at SkyBridge Capital. The two are frequently compared by investors, with former Treasury Secretary Lawrence Summers saying cryptocurrencies could stay a feature of global markets as something akin to digital gold.

“We’re going to stick to Bitcoin and crypto because we just think there’s more upside,” Gayeski said in a telephone interview last week. While there’s more volatility, “you’re going to capture a little bit more juice than you will in gold from that same phenomenon,” he added

Investors are tracking commentary by the U.S. central bank as inflation ticks higher and policy makers move closer to paring the huge asset purchases that rescued the economy from the turmoil caused by the pandemic. The monetary support has driven the Fed’s balance sheet to a record, while muscular fiscal spending has boosted government debt. Both may pose an eventual risk to the dollar’s value, potentially burnishing the appeal of alternatives.

“All fiat-currency alternatives — which have all gone through fairly recent substantial corrections — are in a much better place now to handle that eventual taper and gradual slowing of money-supply growth, than they were as they were making higher-highs after higher-highs,” Gayeski said.

Both Bitcoin and gold have seen substantial swings this year, which unfolded amid a debate about whether the cryptocurrency was drawing demand away from bullion. The digital token soared to a record near $65,000 in April, before plunging. It was last around $36,000. Gold, meanwhile, came close to sinking into a bear market in March, but reversed course to erase year-to-date losses.

Leading Wall Street banks are divided on the relative merits of the pair — Citigroup Inc. has said gold is “losing luster” to cryptocurrencies, while Goldman Sachs Group Inc. made the case that the two assets can coexist. Tesla Inc. boss Elon Musk, whose tweets have roiled Bitcoin prices this year, said in May he supports cryptocurrencies over fiat, or paper, currencies.

Bullion, which hit a record above $2,075 an ounce last year, has now established a floor, according to Gayeski. A lot of the taper talk concerns have been pulled out of the market, and even when it’s announced, the Fed is not going to start to reducing the pace of its purchases until 2022, he said.

“Going forward, the probability of gold continuing an uptrend is fairly high, making new highs over the next year,” he said.

Even as signs of recovery accumulate, the Fed is still buying $120 billion of Treasury and mortgage-backed securities a month, and its balance sheet has surged toward $8 trillion, about a third of gross domestic product. Talk on tapering that support — which carries the potential to boost Treasury yields and the dollar, tarnishing gold’s appeal — is moving closer.

SkyBridge, a fund-of-funds manager, has a small exposure to a gold miner that’s leveraged to a continued gold price rally. Its primary exposures are to U.S. cash-flow-generative strategies, backed by tangible assets, distressed corporate credit and convertible-bond arbitrage among others. The company’s Bitcoin fund is up 51.2% since its inception last December through to June 1.

SkyBridge founder Anthony Scaramucci has teamed up with First Trust Advisors on an exchange-traded fund that plans to buy and sell Bitcoin, and Gayeski expects the Securities and Exchange Commission to approve the product by the fourth quarter of 2021 or the first quarter of next year.

“The only reason we exist professionally is to find interesting ways to generate attractive non-correlated returns that also have an attractive risk-reward profile,” said Gayeski. “The mix of strategies in our broader portfolio is amplified by having a small-but-meaningful position in alternatives to fiat currencies like Bitcoin.”



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Why has the price of Bitcoin been falling?, BFSI News, ET BFSI

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Even by Bitcoin‘s standards, Wednesday was pretty wild.

The price of the famously volatile digital currency fell nearly 30% at one point after the China Banking Association warned member banks of the risks associated with digital currencies. The decline narrowed to below 10% in the afternoon, but Bitcoin had still lost about $70 billion in market value in 24 hours.

Bitcoin has lost about 38% of its value since April 13 when it hit a high of more than $64,600. The China warning was just the latest headwind: Before Wednesday, Tesla’s decision to not accept the digital currency as payment for cars – after it said it would – and murmurings in Washington about tighter regulation of digital currencies had put pressure on Bitcoin. The price is still up about 31% in 2021 and nearly 300% from a year ago.

Here’s a look at Bitcoin and digital currencies in general:

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HOW BITCOIN WORKS

Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange. The coins also can be bought and sold on exchanges with U.S. dollars and other currencies. Some businesses take Bitcoin as payment, and a number of financial institutions allow it in their clients’ portfolios, but overall mainstream acceptance is still limited.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with libertarians as well as tech enthusiasts, speculators – and criminals.

Bitcoins have to be stored in a digital wallet, either online through an exchange like Coinbase, or offline on a hard drive using specialized software. According to Coinbase, there are about 18.7 million Bitcoins in circulation and only 21 million will ever exist. The reason for that is unclear, and where all the Bitcoins are is anyone’s guess.

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WHAT HAPPENED TO THE PRICE?

On Wednesday, a statement posted on the Chinese Banking Association’s website said financial institutions should “resolutely refrain” from providing services using digital currencies because of their volatility.

Virtually every cryptocurrency fell after the industry group’s statement.

As of 4:15 p.m. eastern time Wednesday, Bitcoin was down more than 7% at around $40,310 per coin. Most cryptocurrencies lost between 7% and 22% of their value and shares of Coinbase dropped 5.4%.

It’s not unusual for the value of Bitcoin to change by thousands of dollars in a short time period, though swings totaling around $20,000 in one day are extreme. On the last trading day of 2020, Bitcoin closed just under $30,000. In mid-April, it flirted with $65,000.

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DOESN’T ELON MUSK HAVE A ROLE HERE?

Yes, and a fairly big one. Musk announced in February that his electric car company Tesla had invested $1.5 billion in Bitcoin. In March, Tesla began accepting Bitcoin as payment. Those actions contributed to the run-up in Bitcoin’s price, and Musk also promoted the digital currency Dogecoin, which also spiked in value.

However, Musk reversed course in just a short time, saying last week that Tesla would stop accepting Bitcoin because of the potential environmental damage that can result from Bitcoin mining. The announcement sent Bitcoin falling below $50,000 and set the tone for the big pullback recently in most cryptocurrencies.

A number of Bitcoin fans pushed back on Musk’s reasoning. Fellow billionaire Mark Cuban said that gold mining is much more damaging to the environment than the mining of Bitcoin.

A 2019 study by the Technical University of Munich and the Massachusetts Institute of Technology found that the Bitcoin network generates an amount of CO2 similar to a large Western city or an entire developing country like Sri Lanka. But a University of Cambridge study last year estimated that on average, 39% of “proof-of-work” crypto mining was powered by renewable energy, primarily hydroelectric energy.

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BUT SOME COMPANIES ARE USING BITCOIN?

The digital payment company Square and its CEO Jack Dorsey – also the CEO of Twitter – have been big proponents of Bitcoin. Overstock.com also accepts Bitcoin, and in February, BNY Mellon, the oldest bank in the U.S., said it would include digital currencies in the services it provides to clients. And Mastercard said it would start supporting “select crypto currencies” on its network.

Bitcoin has become popular enough that more than 300,000 transactions typically occur in an average day, according to Bitcoin wallet site blockchain.info. Still, its popularity is low compared with cash and credit cards.

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THERE IS SKEPTICISM AROUND BITCOIN?

Yes, plenty of it. Tracking Bitcoin’s price is obviously easier than trying to figure out its value, which is why so many institutions, experts and traders are skeptical about it and cryptocurrency in general. Digital currencies were seen as replacements for paper money, but that hasn’t happened so far. Federal Reserve Chair Jerome Powell has said the central bank prefers to call crypto coins “crypto assets,” because their volatility undermines their ability to store value, a basic function of a currency.

While some banks and financial services companies are getting in on it, others are staying away.

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COULD A DIGITAL CURRENCY SELL-OFF CAUSE WIDESPREAD DAMAGE?

Regulators aren’t very worried about a possible crash in digital currencies dragging down the rest of the financial system or economy.

Even with the recent sell-off, digital currencies have a market value of about $1.72 trillion, according to the website coinmarketcap.com. But that pales compared with the $46.9 trillion stock market, $41.3 trillion residential real estate market and nearly $21 trillion Treasury market at the start of the year.

The European Central Bank said Wednesday that the risk of cryptocurrencies affecting the financial system’s stability looks “limited at present.” In large part, that’s because they’re still not widely used for payments and institutions under its purview still have little exposure to crypto-linked instruments.

Earlier this month, the Federal Reserve said a survey of market contacts found roughly one in five cited cryptocurrencies as a potential shock to the system over the next 12 to 18 months. That’s a turnaround from the fall, when a similar survey found none mentioning cryptocurrencies.

HOW MUCH OVERSIGHT IS THERE?

Washington officials have been talking about regulating digital currencies more, and worries about a heavier hand have played a role in the recent swoon in prices.

Gary Gensler, who took over as chairman of the Securities and Exchange Commission last month, has said that cryptocurrency markets would benefit from more oversight to protect investors.

In a hearing before the House‘s financial services committee earlier this month, Gensler said neither the SEC nor the Commodity Futures Trading Commission, which he used to head, has a “regulatory framework” for trading on cryptocurrency exchanges yet. He said he thought Congress would ultimately have to address it because “there’s really not protection against fraud or manipulation.”

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HOW BITCOIN CAME TO BE

It’s a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Bitcoin was then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention. But proponents say that doesn’t matter: The currency obeys its own internal logic.

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Uday Kotak wants RBI to expand balance-sheet as Covid intensifies, BFSI News, ET BFSI

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Veteran banker Uday Kotak has called on the RBI to expand its balance sheet to mitigate the economic impact of the Covid wave.

Such an expansion is a serious option when the country is trying to save lives and livelihoods, said Kotak, the promoter and chief executive officer of Kotak Mahindra Bank.

“We have come to a time when we will have to be much more open to expand the balance sheet of the central bank and I think the RBI has given the signal through the G-SAP programme,” Kotak said,

The RBI had already lent its balance sheet by announcing a buy-back programme for government securities, however, more could be done given the circumstances.

He also asked companies to bear the cost of not sending employees out and said that there was a need to plan for a third wave.

“In spite of all efforts, the overall numbers continue to rise. The healthcare system and medical personnel are stretched to the limit and exhausted. Measures to break the chain of transmission are of paramount importance to mitigate human tragedy and loss of lives, alongside augmenting health infrastructure and medical supplies”, said Kotak.

The GSAP programme

Along with the OMOs and direct intervention in the secondary market, the government has announced G-SAP, a definite calendar for open market purchases of bonds. Under G-SAP, the RBI has committed to Rs 1 lakh crore bond buys this quarter and said it will buy more.

The RBI programme is a variant of the Quantitative Easing (QE) policy followed by central banks in advanced economies to tide over the global financial crisis of 2008.

Under QE, central banks conduct large-scale purchases of assets, including treasury bills and private sector bonds, to directly influence rates and risk premiums on private debt.

However, the RBI is committing to buy only government securities.

G-SAP provides certainty to bond investors that the RBI will step in to buy bonds, infuse liquidity and bring down yields.

Galvanising India Inc

Uday Kotak called on the industry to take voluntary measures to break the chain of transmission of the virus.

Reiterating ‘safeguarding lives’ as the highest collective national priority amidst the second wave of Covid that is ravaging India, Kotak urged the industry “to curtail all non-essential economic activity requiring physical presence of employees at the workplace, for the next two week.”

The industry should review operations and minimise the use of in-person manpower, limiting it to only critical operations or activities required by law, Kotak said.



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HDFC Bank rejigs management for next growth phase, BFSI News, ET BFSI

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HDFC Bank has unveiled organizational changes under its Project Future – Ready to power its next phase of growth.

The bank has reorganized itself into three key pillars – Business Verticals, Delivery Channels and Technology/Digital to build its execution muscle. The business vertical and delivery channels will enable it to capitalise on the opportunities across different segments.

The bank will double down its efforts in business verticals like Corporate banking, retail banking, private banking, government and institutional banking, retail assets and payments.

It is increasing its focus on Commercial Banking (MSME vertical), the backbone of Indian economy enabling the bank to bring its product and digital might to the entire Commercial Banking (MSME community) in a much more holistic and focused manner across Bharat & India.

The strategy is split into four broad delivery channels: Branch, Tele-services, sales channels with business verticals and digital marketing. All the businesses and delivery channels will be backed by Technology & Digital as the core backbone. The outlined its Technology transformation agenda and it will synergise and integrate its technology / Digital functions and invest aggressively to both Run and Build the Bank.

Sashi Jagdishan, MD, HDFC Bank said, “We are creating engines of growth with top tier talent backed by technology and digital transformation to capitalise on opportunities that will accrue in the coming time. They are in our mind Future – Ready teams. I am sure this structure will create the necessary strategic and execution agility that we need to serve our customers across India & Bharat, Retail, Commercial (MSME) and Corporate segments.”

Kaizad Bharucha, Executive Director, will continue to drive the Wholesale Bank including Corporate Banking Group, Capital and Commodities Markets group and Financial Institutions.

Rahul Shyam Shukla, Group Head, will now be responsible to drive the Commercial Banking (MSME) and rural vertical, a big future growth engine for both India and the Bank.

Smita Bhagat, Group Head – Government and Institutional Business (GIB) and Start-ups will continue to drive the Govt / Institutional Banking. She will also drive the expansion of our rural presence leveraging our partnership with CSC and also the start-up sector.

Arvind Kapil, Group Head – Retail Assets and SLI, will continue to drive the Retail Assets Portfolio. The growth potential, we believe, is immense in retail assets in the context of credit under penetration in the country.

Rakesh Singh, Group Head – Investment Banking and Private Banking will also be responsible for Marketing, Retail Liability Products and Managed Programmes.

Ravi Santhanam, CMO, will now be also responsible for driving Digital Marketing as a stand-alone delivery channel. He will also be additionally responsible for the Retail Liability Products and Managed Programmes.

Sampath Kumar, Group Head – NRI will now be in charge of all tele-service relationships, including VRM delivery channel of the Bank. The mandate is to combine the power of human touch and digital to deliver a differentiated customer experience.

Arvind Vohra, Group Head – Retail Branch Banking, Retail Trade & Forex will continue to drive the efforts to expand the Bank’s reach across India through branch banking.

Parag Rao, Group Head – Payments Business, will now drive the technology transformation and digital agenda. He will continue to be responsible for the Payments vertical. Mr Ramesh Lakshminarayanan, Chief Information Officer and Mr Anjani Rathor, Chief Digital Officer will report to Parag.

Ashish Parthasarathy- Group Head, Treasury and GIB would also provide the leadership for the tele-service / sales / relationship channel.

Bhavesh Zaveri, Group Head – Operations, will continue to handle the entire operations of the Bank. He will also be additionally responsible for the entire ATM channel operations across the country.

The bank said the role of credit, risk, control and enabling functions continue to be critical as it scales up further in size and reach to realise its vision of Project Future Ready.



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Coinbase hangover rattles crypto assets with bitcoin in free fall, BFSI News, ET BFSI

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The mania that drove crypto assets to records as Coinbase Global Inc. went public last week turned on itself on the weekend, sending Bitcoin tumbling the most since February.

The world’s biggest cryptocurrency plunged as much as 15% on Sunday, just days after reaching a record of $64,869. It subsequently pared some of the losses and was trading at about $56,440 at around 8:25 a.m. in Tokyo Monday.

Ether, the second-biggest token, dropped as much as 18% to below $2,000 before also paring losses. The volatility buffeted Binance Coin, XRP and Cardano too. Dogecoin — the token started as a joke — bucked the trend and is up 7% over 24 hours, according to CoinGecko.

The weekend carnage came after a heady period for the industry that saw the value of all coins surge past $2.25 trillion amid a frenzy of demand for all things crypto in the runup to Coinbase’s direct listing on Wednesday. The largest U.S. crypto exchange ended the week valued at $68 billion, more than the owner of the New York Stock Exchange.

“With hindsight it was inevitable,” Galaxy Digital founder Michael Novogratz said in a tweet Sunday. “Markets got too excited around $Coin direct listing. Basis blowing out, coins like $BSV, $XRP and $DOGE pumping. All were signs that the market got too one way.”

Dogecoin, which has limited use and no fundamentals, rallied last week to be worth about $50 billion at one point before stumbling Saturday. Demand was so brisk for the token that investors trying to trade it on Robinhood crashed the site a few times Friday, the online exchange said in a blog post.

There was also speculation Sunday in several online reports that the crypto plunge was related to concerns the U.S. Treasury may crack down on money laundering carried out through digital assets. The Treasury declined to comment, and its Financial Crimes Enforcement Network (FinCEN) said in an emailed response on Sunday that it “does not comment on potential investigations, including on whether or not one exists.”

‘Price to Pay’
“The crypto world is waking up with a bit of a sore head today,” said Antoni Trenchev, co-founder of crypto lender Nexo. “Dogecoin’s 100% Friday rally was ‘peak party,’ after the Bitcoin record and Coinbase listing earlier in the week. Euphoria was in the air. And usually in the crypto world, there’s a price to pay when that happens.”

Besides the “unsubstantiated” report of a U.S. Treasury crackdown, Trenchev said factors for the declines may have included “excess leverage, Coinbase insiders dumping equity after the direct listing and a mass outage in China’s Xinjiang province hitting Bitcoin miners.”

Growing mainstream acceptance of cryptocurrencies has spurred Bitcoin’s rally, as well as lifting other tokens to record highs. Bitcoin’s most ardent proponents see it as a modern-day store of value and inflation hedge, while others fear a speculative bubble is building.

Interest in crypto went on the rise again after companies from PayPal to Square started enabling transactions in Bitcoin on their systems, and Wall Street firms like Morgan Stanley moved toward providing access to the tokens to some of the wealthiest clients.

Volatility
That’s despite lingering concerns over their volatility and usefulness as a method of payment. Moreover, governments are inspecting risks around the sector more closely as the investor base widens.

Federal Reserve Chairman Jerome Powell last week said Bitcoin “is a little bit like gold” in that it’s more a vehicle for speculation than making payments. European Central Bank President Christine Lagarde in January took aim at Bitcoin’s role in facilitating criminal activity, saying the cryptocurrency has been enabling “funny business.”

Turkey’s central bank banned the use of cryptocurrencies as a form of payment from April 30, saying the level of anonymity behind the digital tokens brings the risk of “non-recoverable” losses.



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Banks are without a raft in Covid storm, BFSI News, ET BFSI

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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.

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

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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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US dollar rises as caution reigns ahead of key central bank meetings, BFSI News, ET BFSI

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NEW YORK: The dollar gained for a third straight session on Monday, as traders cut their bearish bets on the greenback to four-month lows amid the recent rise in US Treasury yields and grew cautious ahead of key global central bank meetings.

The Federal Reserve, Bank of England, and Bank of Japan are all set to meet this week and will likely set the tone as to where global rates are headed.

US Treasury yields, however, were lower on Monday in line with Europe, ahead of these central bank gatherings. Benchmark 10-year Treasury yields traded as high at 1.639% on Monday, close to Friday’s top of 1.6420%, a level last seen in February 2020.

Gains in the greenback were more pronounced against low-yielding currencies such as the euro and the British pound while high-yielding currencies like the Australian dollar fared relatively better.

“The US dollar has been one of the best-performing G10 currencies in recent weeks reflecting a shift in expectations regarding Fed interest rate policy,” said Jane Foley, senior FX strategist, at Rabobank in a research note.

“Since the reflation trade is centered around US fiscal policy and growth expectations, the US dollar could prove to be more resilient than the consensus had been expecting at the start of the year.”

Rising US yields have lifted the greenback 2% so far this year thanks to widening interest rate differentials relative to other major bond markets. The dollar declined more than 4% in the last quarter of 2020.

In mid-morning trading, the dollar index, which tracks the US currency against six major peers, was up 0.2% at 91.68 . It hit a late November 2020 high of 92.51 last week.

The US currency has been supported by declining bets for its decline, with speculators cutting net short positions to the lowest since mid-November in the week ended March 9.

Rising bond yields will continue to focus minds this week before a Fed meeting at which some analysts expect policymakers to strike an optimistic tone on the US economy.

While there are some expectations that the Fed might try to calm bond markets – yields have risen some 60 basis points since the last Fed meeting – the consensus view is Fed Chief Jerome Powell will not make changes to policy.

“The Fed is not expected to tinker with its monetary policy but instead communicate via forecasts that the situation is under control and that markets are running way ahead of themselves,” SEB analysts said in a note.

The greenback rose 0.2% against the yen to 109.19, after earlier climbing to 109.36 yen, the highest since June 2020.

The euro weakened 0.3% to $1.1920 after rising last week for the first time in three weeks as latest data showed hedge funds slashed their net euro positions.

The Australian dollar – viewed widely as a liquid proxy for risk appetite – fell 0.4% to US$0.7725, extending Friday’s Loss.

Bitcoin, meanwhile, weakened 3.3% after surging to a record high of $61,781.83 over the weekend.



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