RBI Archives

RBI removes lending curbs on UCO Bank

September 9, 2021 Pooja Sharma No Comments

The state-owned UCO Bank will no longer be subject to the Reserve Bank of India’s (RBI) harsh lending limitations. UCO Bank was under RBI’s prompt corrective action (PCA) restrictions, which were imposed in May 2017. The central bank announced on Wednesday that the lender is no longer under these restrictions.

Following the exit of UCO Bank, only two banks remain under PCA: Indian Overseas Bank and Central Bank of India. The PCA framework is used by the central bank to punish banks that have exceeded specific regulatory limits in terms of problematic loans and capital adequacy. Furthermore, PCA comprises limiting high-risk lending, increasing provisioning, and limiting management compensation.

How UCO Bank got out of the PCA restrictions?

According to the RBI, UCO Bank has given a written commitment to follow the minimum regulatory capital, net non-performing asset (NPA), as well as leverage ratio guidelines on an ongoing basis. The RBI also received information about the new structural and systemic adjustments implemented by the Kolkata-based lender; to meet its commitments.

“The Board for Financial Supervision assessed the performance of the UCO Bank; which is currently under the RBI’s fast corrective action framework. The bank is not in breach of the PCA standards, according to its disclosed results for the year ended 31 March 2021,” RBI said.

UCO Bank’s net nonperforming assets (NPA) ratio was 3.94 percent as of March 31; down 151 basis points (bps) from the same time last year. Under Basel III, its total capital adequacy ratio was 13.74 percent; up 204 basis points from the fourth quarter of FY20.

On August 6, RBI governor Shaktikanta Das stated that banks that pass the assessments are getting off from the restrictive framework.

“We’re still looking into that position. One public sector bank was recently got out from the PCA list. And if and when we receive the requests, we analyze them to see if they meet RBI’s regulatory criteria. And if we are certain that they are, the RBI will take action. As a result, we’ve been removing banks from PCA,” Das explained. For more such updates, keep watching this space!

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RBI relief for companies that opted for debt recast

August 7, 2021 Pooja Sharma No Comments

Covid-affected corporate borrowers whose debts were restructured under the first recast plan may have to wait another six months to meet the Reserve Bank of India’s (RBI) financial requirements, the central bank said on Friday.

As per the RBI’s circular of August 6, 2020, borrowers must fulfill sector-specific benchmarks in five financial metrics for resolution plans. Moreover, from the list of five metrics, four are in relation to the borrower’s operational performance.

The central bank announced these measures following the initial wave of covid-19 infections. Which disrupted borrowers’ revenue streams and hampered their capacity to repay loans. According to ICRA Ltd, a rating agency, banks have recast roughly 70,000 crores in corporate debt as part of this plan.

“Recognizing the negative impact of the second wave of covid-19 and the resulting difficulties on business revival and meeting operational parameters. Thus, the target date for meeting the specified thresholds in respect of the above four parameters has been deferred to 1 October 2022,” RBI governor Shaktikanta Das said on Friday.

What are these five financial indicators?

The RBI convened a five-member group, chaired by former ICICI Bank CEO K.V. Kamath. The committee had to put a recommendation on the eligibility criteria for restructuring stressed loans on August 7, 2020.

In its report, the five-member committee had identified five financial indicators for assessing the health of troubled sectors. The parameters given by the committee are:

Total outside liabilities to adjusted tangible net worth
Total debt to Ebitda (earnings before interest, taxes, depreciation and amortization)
Debt service coverage ratio (DSCR)
Current ratio
Average debt service coverage ratio (ADSCR).

The central bank mostly agreed with Kamath’s recommendations. The RBI later announced that borrowers from 26 different industries would be eligible for debt recasting.

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Total debt expected to rise to 61.7% of GDP in FY22: Finance Bhagwat Karad

August 4, 2021 Pooja Sharma No Comments

The government told Parliament on Tuesday that the overall debt as a proportion of GDP will rise to 61.7 percent (provisional) in 2021-22, up from 60.5 percent (provisional) the previous fiscal year. At the same time, the public debt will rise to 54.2 percent in the current fiscal year, from 52 percent in 2020-21.

Minister of State for Finance Pankaj Chaudhary said in a written reply to the Rajya Sabha that the government’s amendments of the FRBM Act will aim to put the country on a path of fiscal consolidation; with a fiscal deficit of less than 4.5 percent of GDP by 2025-26.

The government anticipates the fiscal deficit to fall to 6.8% in the current fiscal year, down from 9.3% in 2020-21.
He noted that any changes to the FRBM debt targets will be in line with the overall fiscal deficit trend.

RBI's circular on debt for Payment System Providers

In response to another question, the Minister of State for Finance Dr. Bhagwat Karad said the RBI issued a circular on “Storage of Payment System Data“; issued in 2018. The circular bounds, all system providers to ensure that all data relating to payment systems is stored solely in India. The storage data includes complete end-to-end transaction details collected, carried, and processed as part of the message/payment instruction.

System providers are also required to submit a compliance report to RBI. Along with, a board-approved System Audit Report (SAR) conducted by an impaneled auditor of CERT-In (Computer Emergency Response Team India).

In response to requests for clarifications on various issues from Payment System Operators (PSOs) on the above announcement. As well as for prompt compliance by all PSOs. He said the RBI published Frequently Asked Questions (FAQs) on the subject on June 26, 2019.

The RBI has notified that American Express Banking Corp (Amex), Diners Club International Ltd (Diners), and Mastercard Asia/Pacific Pte Ltd (Mastercard) failed to comply with the guidelines of the above circular.

Accordingly, RBI has barred Amex and Diners from onboarding new domestic consumers onto their card networks. Beginning from 01.05.2021, until full compliance with the circular’s provisions and the submission of satisfactory SAR. Moreover, a similar prohibition was introduced on Mastercard from July 22, 2021.

Domestic banks already operate a sizable credit card business in the country. They have no restrictions on doing so. For more such updates, keep watching this space!

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Rajya Sabha clears Factoring law to draw 9,000 NBFCs, boost MSME cash flow

July 30, 2021 Pooja Sharma No Comments

The Rajya Sabha gives its approval to the amendments to the factoring law, on Thursday. These amendments will enable as many as 9,000 non-banking financial companies (NBFCs) to participate in the factoring market, instead of just 7 now. The move will give a boost in cash flow to small businesses, said finance minister Nirmala Sitharaman.

Earlier, the Lok Sabha already cleared the Factoring Regulation (Amendment) Bill, 2020, on Monday. Speaking on the Bill in the Rajya Sabha, the finance minister said, “You can imagine the number of MSMEs that will directly benefit because of this.”

What does Factoring mean?

Essentially, factoring is a transaction where an entity (like MSME) sells its receivables (i.e., dues from a customer) to a third party (a ‘factor’ like a bank or NBFC) and collects immediate funds. It helps a firm to fulfill its working capital requirement. Many MSMEs, participate in the factoring business with receivables. It helps MSMEs whose payments against their supplies are stuck.

However, due to certain restrictive provisions in the extant law, necessary amendments were brought in to widen the participation of entities, in the factoring business. These entities, especially NBFCs will help in expanding the avenues of working capital credit to even small businesses. The Bill also empowers the central bank to monitor and create norms for better oversight of the $6-billion factoring market.

According to a report of the parliamentary standing committee on finance, which endorsed the Bill. Despite the growth in recent years, the factoring market accounts for only 0.2% of India’s GDP. The numbers are way behind the comparable developing economies such as Brazil (4.1%) and China (3.2%). Moreover, the factoring market worldwide will see a projection and reach $ 9.2 trillion by 2025.

The report submitted by the House panel in February stressed the need for the RBI to build sufficient regulatory resources to ensure effective supervision of factoring activities. This becomes more important than ever before, with the implementation of the new norms. Because, a large number of players may take part in such businesses now, after the amendments.

For more such updates, keep watching this space!

Daily News

Yes Bank, Indiabulls Housing Finance sign co-lending agreement

July 29, 2021 Pooja Sharma No Comments

Yes Bank and Indiabulls Housing Finance have entered into a co-lending agreement for home loans. The two finance giants, Yes Bank, and Indiabulls Housing Finance have come in a partnership to synergize capabilities and enhance retail experiences for home loan customers.

On Wednesday, the two finance giants said in a joint statement; the partnership aims at synergising capabilities to provide an efficient and seamless experience to retail home loan customers. The statement also adds that the Reserve Bank of India’s co-lending framework provides a collaboration tool for both banks and non-bank financiers. Which will provide a low-cost funding model of a bank and the cost-efficient sourcing and servicing capabilities of a non-bank.

In November 2020, the Reserve Bank of India came up with guidelines on co-origination of loans or co-lending of loans. Under this framework, banks and NBFCs (non-banking finance companies) can lend to priority sectors or economically weaker sections. The main idea behind the collaboration framework is to encourage credit flow to this segment.

What is the co-lending model (CLM)?

In the co-lending model (CLM), banks have the permission to co-lend with all registered NBFCs (including HFCs). However, the loan will be based on a prior agreement between the banks and NBFCs. Moreover, the co-lending banks will be taking their share of the individual loans on a back-to-back basis in their books.

How do the two financers approach this partnership?

According to Rajan Pental, Global Head, Retail Banking, Yes Bank, The partnership is in line with Yes Bank’s strategy of expanding its retail franchise through a mix of organic and partnership-led origination models. The bank is eyeing forward to further build a profitable and quality home loan portfolio through this partnership.

Gagan Banga, Vice Chairman and CEO, Indiabulls Housing Finance expressed his optimism for the partnership. According to him, they can now leverage Yes Bank’s deposit-led franchise and complement that with the technology-led distribution of Indiabulls. Thus, it will help in providing efficient solutions around home loans to a wide gamut of customers across geographies, ticket sizes and yield spectrum. The collaboration will provide balance-sheet light growth and profitability to the two firms.

How will borrowers benefit?

From the borrower’s point of view, the idea makes a lot of sense as it will make the process faster. NBFCs process loan applications much quicker than banks. Also, NBFCs have a better reach among borrowers than the banks in many geographies. NBFCs can get bigger and top-rated borrowers on their books through this arrangement. Whereas it wouldn’t have been possible otherwise, according to a former SBI senior executive.

For more such updates, keep watching this space!

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Bankers fear huge disruption from RBI ban on Mastercard

July 16, 2021 Pooja Sharma No Comments

Soon after the Reserve Bank of India (RBI) decision to bar global card network Mastercard from issuing new cards, Bankers fear that similar punitive actions on two other card networks will cause significant disruption in India’s evolving payments system.

Banks that are solely using Mastercard will take at least two months for improving their business to either Visa, the sole global survivor so far, or homegrown RuPay. RBI had on Wednesday applied its restriction on Mastercard from onboarding any new customers from 22 July. The restrictions came after the company’s failure to comply with its data localization norms.

At the centre of these restrictions is a regulation that came in April 2018 and made it mandatory to store all payments data from India, inside the country. This initially did not sit well with many companies, however, most companies eventually complied.

Experts' reaction on Mastercard ban

Institutions such as Visa and Mastercard oversee thousands of transactions and hence are systemically important to the country. According to one banker, a fine would have been more appropriate than a ban. As such sudden moves create a lot of disruption not only for banks but also for customers. Even better if RBI had given a warning six months in advance to stakeholders before any fine or ban.

According to a second banker, the banking regulator is sending out a bolder message. RBI is very clear in its message that everybody has to adhere to the local rules of the country. RBI was earlier more facilitative in its discussions and did not come across publicly as tough.

The central bank’s actions have come as a blessing for Visa and RuPay. Experts are speculating, Visa to be the sole gainer of market share in credit cards. Meanwhile, RuPay will strengthen its foothold in the debit card space.

According to Parijat Garg, a fintech expert, some clear trends are visible in the market. Visa will be the sole gainer in the credit card segment for the next few months. This prediction is quite easy to make, as banks have very little choice. RuPay will not find much benefit in credit cards. Since many global websites do not accept the card network, even today.

Which banks are facing the greater impact?

The restrictions on Mastercard will affect three credit card issuers the most. According to a report by brokerage Nomura, RBL Bank, Yes Bank, and Bajaj Finserv have their entire credit card scheme on Mastercard. RBL Bank expects to start the issuance of credit cards on the Visa payment network after the technology integration. This will take eight to 10 weeks approximately, as per the official statement from the bank.

The Nomura report said HDFC Bank has 60% of its card schemes tied to Mastercard, American Express, and Diners Club. Whereas, for Axis Bank and ICICI Bank, the same is at 35-36 percent. However, HDFC Bank is already under RBI curbs on credit card issuances since December. Thus, the bank may not be incrementally hurt by the ban.

Experts also said the ban on Mastercard could impact liability account acquisition as debit card issuances will be hit. “Large banks such as HDFC Bank and Axis Bank added close to 6.5-7 million liability accounts in FY21. While the exact proportion of Mastercard vs Visa vs RuPay debit cards is not available, most banks offer all variants. The ban could temporarily affect liability account acquisitions in our view,” said a Macquarie report.

For more such updates, keep watching this space!

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India’s bonds reflect nothing but the RBI’s desires

July 7, 2021 Pooja Sharma No Comments

India’s bonds reflect nothing but the RBI’s desires. It’s a common concept of finance, that the bond yields act as a gauge of the balance between growth and inflation by showing where interest rates should be. However, this concept is for normal times, whereas in the case of India this gauge is broken. And the bond yields, especially the benchmark 10-year, reflect nothing beyond the desires of the central bank.

The benchmark 10-year bond has been stuck at around 6% for more than a year despite the actual situation of the economy. The bond is not reflecting the reality of a pandemic triggering a recession and the subsequent economical recovery. The recent surge in inflation and the mammoth borrowing by the government is not really impacting the bond yield. As it all has whittled away under the relentless grip of the Reserve Bank of India’s (RBI) incessant bond purchases.

How the 10-year benchmark is far away from the economic reality of the country?

While the central bank could not take the supply off a fatigued market, it is resorting to talking down the yields. Even the way the auctions are conducted has also changed last week. Auctions for the tenures of two, three, five, ten, and 14-year will now be based on uniform pricing instead of multiple pricing methods. Meanwhile, there is no halt in bond purchases.

On Monday the RBI come up with an announcement that it will buy Rs20,000 crore worth of bonds under its G-SAP 2.0. G-SAP 2.0 is a government security acquisition program. The central bank’s balance sheet support was very crucial in FY21. With the given size of the government’s borrowing and the relative fatigue in the bond market. The borrowing had been very expensive if the central bank had not come up with an approximation of Rs3.2 trillion bond purchase. Because, in that case, the yields could have experienced a high surge in their value.

However, also the flipside of a deep central bank intervention can not be ignored. A distorted yield curve is only one of its respective consequences. Trading volumes have dropped significantly, making the market thin and susceptible to higher volatility. The 10-year benchmark bond has only a fraction of its stock available for trading. A large part of the outstanding stock is sitting on the RBI’s balance sheet. Therefore, it is easy to understand that the yield is hardly reflecting the economic realities.

It is clear, that the focus of RBI has been the 10-year benchmark yield. Under the G-SAP, two-fifth of the total Rs 1 trillion bought by the RBI has been of the 10-year bond.

What does the market think about it?

According to an anonymous bond trader, It is futile to look at the 10-year as the yield doesn’t reflect anything. But we can see the trends in the 5-year and 15-year bonds. They clearly show that inflationary concerns have taken hold. The 5-year bond yield has risen by 20 basis points in the past month after the surge in retail inflation in May, which is beyond 6%.

However, many analysts believe that yields will now inch up steadily to reflect the expected unwinding of the RBI’s policy accommodation. Even so, it would take a long time before the ten-year yield becomes more relevant to the market realities.

For more such updates, keep watching this space!

Daily News Finance

RBI Paves way for Punjab & Maharashtra Co-operative(PMC) Bank’s revival

June 19, 2021 Pooja Sharma No Comments

RBI is the bank for the banks. It operates the currency and credit system of the country. Banks need to maintain accounts with the reserve bank. RBI governor Shaktikant Das discussed Punjab and Maharashtra (PMC) Bank. He said that there are three investors so far who have proposed to help the bank reviving. Analysis of the proposal instills in the consideration process.

PMC Bank head AK Dikshit told last month only that three investors have given the time till 1st Feb 2021 to present the proposal. The investors will bring the capital to help the PMC Bank achieve at least minimum capital of 9%.
RBI told the media after the announcement of the financial scheme that he has been informed that the last three proposals are received. He was informed that the PMC Bank itself is working on the analysis of the proposal. And after the analysis RBI will arrange a meeting regarding this.

For more such updates, keep watching this space!

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RBI Aims to Tackle Microfinance Burden

June 15, 2021 Pooja Sharma No Comments

Reserve bank of India raised the lending cap for MFIs (Microfinance Institution) to Rs 1.25 lakh. RBI stated that the primary objective is to address the concerns related to the over-indebtedness of microfinance borrowers. The decision is to enable the market mechanism. It is considered to bring the interest rates downward in the microfinance sector. This is a framework that will regulate microfinance loans.

Microfinance Sector

It consists of more than 3000 microfinance companies MGIs, NGOs, and MFIs. These are financial companies that provide small loans to people who do not have any access to bank facilities. In India, all loans worth Rs 1 lack or below comes under microloans.

Moreover, the top microfinance companies in India are estimated to account for almost 74% of total loans outstanding. These are the bankers and leaders who provide microfinance services. These services can be deposits, loans, payment services, money transfers, and insurance.

It serves the needs of economically marginalized populations. Bandhan Financial services limited is the largest microfinance company based out of Kolkata. MFIs in India are of two kinds. Those regulated by the Reserve Bank of India are called Non-banking financing companies, or NBFC MFIs. And some are those which are run by non-profit trusts and societies.

Breaking Barriers defined in the decision

A common set of rules for microloans, irrespective of the lender
Microloans to cap at 50% of the household income to avoid indebtedness
Interest rate cap on MFIs to go, allowing multiple lending
All lenders have to spell minimum, average, and maximum rates

A common definition of microfinance loans for all regulated entities
No pre-payment penalty
no requirement of collateral
greater flexibility of repayment frequency

According to the RBI, there should not be any pre-payment penalty. There should not be any disclosure of pricing. The associated data needs to be an ordinary simplified sheet. However, should display a common interest charged on these loans.

For more such updates, keep watching this space!

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RBI Increases ATM Transaction Charges

June 14, 2021 Pooja Sharma No Comments

Reserve Bank of India changes rules and regulations from time to time regarding charges of ATMs. We will discuss these new changes in this article. How much of the charges increased and what are the interchange charges for ATMs. changes rules and regulations from time to time regarding charges of ATMs. We will discuss these new changes in this article. How much of the charges increased and what are the interchange charges for ATMs.

RBI has permitted banks to increase charges for cash and noncash ATM facilities. Free monthly transactions will remain the same as before. Bank customers will have to pay Rs. 21 per transaction instead of Rs. 20 w.e.f January 1, 2022.

To compensate the banks for the higher interchange fee. They are allowed to increase the customer charges to Rs 21 per transaction. RBI stated in the circular that it will benefit from 1 January 2022.

What is an interchange fee?

An interchange fee is an amount that a card-issuing bank pays to ATM operators in case its customers use an ATM that does not belong to it.

From August 1, 2021 banks are given a permit to increase the interchange fees per transaction from Rs. 15 to Rs 17 for financial transactions. For all non-financial transactions, it is Rs 5 to Rs 6 in all centers, the circular stated.

The interchange fee has been a bone of contention between banks and ATM deployment companies. Consequently, the charge is divided between the acquirer and the ATM companies. And this is the reason banks encourage the customers to use their own bank ATMs.

Committee

The revised charges are based on the report by a committee constituted by the RBI in 2019. The chairman of the committee is VG Kannan, the then chief executive of IBA (Indian Banks’ Association).

For more updates like this, keep watching this space!

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How UCO Bank got out of the PCA restrictions?

What are these five financial indicators?

RBI's circular on debt for Payment System Providers

What does Factoring mean?

What is the co-lending model (CLM)?

How do the two financers approach this partnership?

How will borrowers benefit?

Experts' reaction on Mastercard ban

Which banks are facing the greater impact?

How the 10-year benchmark is far away from the economic reality of the country?

What does the market think about it?

Microfinance Sector

Breaking Barriers defined in the decision

What is an interchange fee?

Committee

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