UPDATE ON BANKING-March - 2019

The Monetary Policy Committee of Reserve Bank of India decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 per cent to 6.25 per cent with immediate effect and consequently, the Bank Rate stands adjusted to 6.5 per cent.

The MPC also decided to change the monetary policy stance from calibrated tightening to neutral.

These decisions have been taken with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent (within a band of +/- 2 per cent), while supporting growth.

The MPC also noted that the growth outlook is likely to be influenced by aggregate bank credit and overall financial flows to the commercial sector which while continuing to be strong, are yet to get broad-based. Also, in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could prove a deterrent.. Considering the above factors, GDP growth for 2019-20 has been projected at 7.4 per cent. Assumptions include monsoon to be near normal and oil price to be steady. It is hoped, several proposals made in the union budget for 2019-20 would boost aggregate demand by raising disposable incomes, the full effect of some of the measures is likely to experienced over a period of time.

The MPC noted that the output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering supported mainly by public spending on infrastructure. The MPC talks of the need to strengthen private investment activity and buttress private consumption.

As a measure to give a push to agricultural sector, RBI decided to raise the limit for collateral free agricultural loans. In its circular dated 7Februay, it says:”Keeping in view the overall inflation and rise in agriculture input cost over the years since 2010, it has been decided to raise the limit for collateral free agricultural loans from the existing level of ₹1 lakh to ₹1.6 lakh. Accordingly, banks may waive margin requirements for agricultural loans upto ₹1.6 lakh.”

Till recently, no Foreign Portfolio Investor could have an exposure of more than 20% of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate). This restriction has been withdrawn with immediate effect.

An analysis of credit offtake by the regulator reveals that the credit to industry has gradually gained momentum in 2018-19 after a prolonged contraction. While the surge in retail lending appears modest at present the credit growth to industry has turned and a recovery is gaining traction. Within industries, credit offtake by the medium and large segments has returned to positive territory while credit flow to micro and small industries continues to be negligible

----------------------P S Narasimhan(jandsca@gmail.com)

UPDATE ON BANKING- January 2019

The Monetary Policy Committee of RBI noted that the benign outlook for headline inflation is driven mainly by the unexpected softening of food inflation and substantial fall in oil prices. In a scenario of escalating trade tensions , tightening of global financial conditions and slowing down of global demand pose some downside risks to the domestic economy. However, the decline in oil prices in recent weeks, if sustained, is expected to provide stability. The recent acceleration seen in investment activity augurs well for the medium-term growth potential of the economy. It is probably the most appropriate time to further strengthen domestic macroeconomic fundamentals and fiscal discipline becomes very critical . Against this backdrop, the MPC decided to keep the policy repo rate on hold and maintain the stance of calibrated tightening .

All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019 shall be benchmarked to one of the following - Reserve Bank of India policy repo rate, or Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or Government of India 182 days Treasury Bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL. The spread over the benchmark rate would be decided at banks’ discretion and would be maintained during the entire tenure of the loan unless there is a fall in ratings.

With a view to promoting greater credit discipline among working capital borrowers, it is proposed to stipulate a minimum level of 'loan component' in fund-based working capital finance for larger borrowers

In order to align the SLR with the LCR( Liquidity Coverage ratio) requirement, it is proposed to reduce the SLR by 25 basis points every calendar quarter until the SLR reaches 18 per cent of NDTL. The first reduction of 25 basis points will take effect in the quarter commencing January 2019

An Expert Committee will be constituted by the Reserve Bank of India to identify causes and propose long-term solutions for the economic and financial sustainability of the MSME sector

Internet and big data giants like Amazon and China’s Alipay may pose an existential threat to existing traditional banks. This is the view of Agustin Carstens, head of Bank for International Settlements. These entities gather huge data of their customers that they have a potential advantage over the established banks. They have better information on the customers’ life style and spending. Ultimately it is the exploitation of data and information that would provide the cutting edge and these entities may be able to leverage social media and shopping data to provide a better product range than the established banks. Of course, the possibility of the chances for risky lending and destabilization of financial stability would loom large as well.

Moody’s outlook for Indian banks in the next 12-15 months appears stable as the pace of bad asset accumulation has slowed down considerably. Based on an healthy economic growth albeit a weak but stable asset quality, the outlook is considered stable. Funding and liquidity profile of public sector banks remain resilient.

----------------------P S Narasimhan(jandsca@gmail.com)

UPDATE ON BANKING-December 2018

The Reserve Bank of India (RBI) is in the process of setting up a Public Credit Registry(PCR)—an information repository that would collate all loan information of individuals and corporate borrowers.

Such a registry is expected to help banks and financial institutions to distinguish between a bad and a good borrower and accordingly the lenders would also be able to price their products better.

Earlier, RBI had set up a committee under the leadership of Mr. Y.M. Deosthalee, to examine the possibility of establishing such a registry. The committee has since submitted its report and RBI is now in the process of setting up the Registry.

Such a credit repository is expected to address the information asymmetry, improve access to credit and strengthen the credit culture among consumers. The Registry is expected to bridge information gaps which a few borrowers exploited, accessing additional credit from multiple banks without disclosing their existing debt.

Certain to help in the ease of doing business, PCR would improve India’s rankings.

The registry will be set up in a “modular and phased manner”.

While initially it would be under the wings of RBI, in due course, the central bank may consider moving the registry to a separate non-profit entity. The registry is expected to cover all credit contracts, duly verified by reporting institutions, for all lendings in India and any lending by an Indian financial institution to “an Indian natural or legal person.”

With no monetary threshold placed, the registry is expected to capture all data including external commercial borrowings, market borrowings, and all contingent liabilities so as to provide a holistic picture about the borrower’s indebtedness. Both positive and negative features of all loans and borrowers would be captured and possibly borrowers would be able to access their own history.

Addressing privacy concerns, the data will be available to stakeholders like banks and financial institutions strictly on a need-to-know basis and privacy of data will be protected. The onus of data quality would be on the reporting entities and action would be taken against the institutions in case of any violations in rules. The Registry would be backed by an appropriate legal framework.

To ensure a comprehensive database, the Registry would include data from market regulators, SEBI, Ministry of Corporate Affairs, Goods and Service Tax Net Work, Insolvency and Bankruptcy Board of India (IBBI) etc., to enable the banks and financial institutions to get a complete profile of the existing and prospective borrowers on real-time basis.

As of now, RBI’s CRILC is a borrower level supervisory dataset supported by 4 privately sponsored Credit Information Companies covering aggregate exposure of Rs 5 cr and above..

It was in April 2011 that Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) , a central online security interest registry of India, was set up. It was primarily created to check frauds in lending against equitable mortgages, in which people would take multiple loans on the same asset from different banks. This was later followed up with the setting up of a Central Fraud Registry making it a searchable database for the lenders to be wary of the unscrupulous.

With the coming in of Public Credit Registry information flow is expected to enlarge in a big way and the number of willful defaulters is expected to reduce substantially bringing down the bad loans.

----------------------P S Narasimhan(jandsca@gmail.com)

UPDATE ON BANKING-November 2018

On Stressed Assets:

The underlying theme of the revised framework on stressed assets is to provide as much flexibility as possible to the lenders and the stressed borrowers but, at the same time ensure that the resolution plan is implemented within a timeframe and that the resolution plan is credible. If lenders and the large stressed borrowers are unable to put in place a credible resolution plan within the timelines, they would be required to go through the structured insolvency resolution process under the IBC.

The revised framework also attempts to instil the requisite discipline mechanism for a one-day default in the context of bank loans, akin to the market discipline to which the borrowers raising money through debt markets are subject to. With defaults being reported to a central database, which is accessible to all banks, the credit discipline is expected to improve significantly. Nevertheless, default in payment is a lagging indicator of financial stress of a borrower and therefore, lenders need to be proactive in credit monitoring to identify financial stress at an early stage rather than wait for a borrower to default. Early identification of stress would provide sufficient time for lenders to put in place the required resolution plan.

Another major change that has been introduced is that resolution plans can now be implemented individually or jointly by lenders. Complete discretion and flexibility has been given to the banks to formulate their own ground rules in dealing with the borrowers who have exposures with multiple banks. Under the revised framework, the lenders can implement differential resolution plans that are tailored to their internal policies and risk appetite. To ensure that only credible resolution plans are implemented, a framework of independent affirmation has been introduced through the requirement of independent credit opinions on the proposed plan by empaneled credit rating agencies.

Taken as a whole, the revised framework attempts to improve the credit culture in the country and the trust between counterparties in a transaction. This will be critical in ensuring sufficient incentives for the banks to effectively carry out their role as delegated monitors of loans.

On Prompt Corrective Action:

In the case of 12 banks( of which 11 are in public sector), RBI has initiated Prompt Corrective Action , so as to restore the financial health of banks that are at risk, by limiting deterioration in their health and preserving their capital levels. Under PCA, certain restrictions are placed on these banks so as to avoid excessive risks on their balance-sheets.

Under PCA, capital, asset quality and profitability continue to be the key areas for monitoring .Common equity Tier-1 (Common equity Tier 1 capital to risk-weighted Assets) ratio has been included to constitute an additional trigger along with monitoring of leverage. .

Mandatory actions under PCA include :

a) Restriction on dividend distribution/remittance of profits;

b) Requirement on promoters/owners to bring in more capital;

c) Restrictions on branch expansion;

d) Higher provisioning requirement; and,

e) Restrictions on management compensation.

While no restriction has been imposed on the retail deposit-taking activity of any bank till date, such banks have been advised to avoid altogether the high-cost bulk deposits and instead improve their Current Account and Saving Account (CASA) deposit levels.

Merging of weak banks with stronger ones has also been considered as a method to strengthen such weak banks.

--------------------P S Narasimhan(jandsca@gmail.com)

UPDATE ON BANKING-October 2018

RBI in its Annual Report for the fiscal year 2017-18 had this to say on various audits undertaken in banks.

“ Major fraud incidents reported by banks in the recent past have highlighted the need for improvement in the audit function and its governance. In addition, an increase in divergence in asset classification and provisioning as assessed by the Reserve Bank vis-à-vis the audited financial statements of SCBs has been seen as a concern.”

Coming to Concurrent Audits ,the Regulator expects exception reports, even of a routine nature, to be seen in detail on an ongoing basis. Further RBI expects audit trail to be checked for diversion of funds through round tripping and other means. Further, the Regulator wants the auditor to ensure that FEMA guidelines are complied with and KYC / AML directions are implemented properly.

The Report noted the quality of audit to suffer due to inadequate human resources, lack of desired skill-sets (particularly for specialised branches), non-adherence to stipulated timelines for compliance with audit findings, non-inclusion of some critical areas, etc., indicating inadequate attention to sustainable compliance with the findings of earlier reports. The Report bemoans instances of repetitive and similar audit findings over the years without the causative factors ever being eliminated.. Further ,the report noted that internal audit could not detect many frauds, which came to light after accounts turned NPA and wanted fraud detection and reporting, as well as preventive steps, to be more risk-focused so as to identify red flags at an incipient stage.

The Report flagged non-adherence to Income Recognition and Asset Classification (IRAC) norms by banks to be a major concern. In this respect, the audit function- the report lamented – is yet to provide desired level of assurance to all stakeholders, including the Reserve Bank. While it concedes that there may be instances of information asymmetry between the supervisor and other stakeholders, the report points out that NPA divergence should not arise from lack of adherence to regulatory guidelines.

RBI wants the Statutory auditors to undertake root cause analysis to identify deficiencies exposed by incidents of fraud, and divergences in asset classification and provisioning. The Report points out that Statutory auditors could identify issues faced by banks in implementing system-based identification of NPAs as well as utilise more effectively the central database in banks for their assignments. It also notes that the need for improvement in the inputs provided by statutory auditors through Long Form Audit Report as they provide useful inputs for risk based supervision of banks.

To enhance audit quality and to introduce a transparent mechanism to examine the accountability of SAs in a consistent manner, the report says that the regulator has decided to put in place a graded enforcement action framework to enable appropriate action on SAs for any lapses observed in conducting a bank’s statutory audit which would cover, inter alia, instances of divergence identified in asset classification and provisioning during the Reserve Bank’s inspection vis-à-vis the audited financial statements of banks above the threshold specified by the Reserve Bank in the circular issued on April 18, 2017.

---------P S Narasimhan-jandsca@gmail.com

UPDATE ON BANKING-September 2018

The recently met, the Monetary Policy Committee (MPC) of RBI decided to increase the repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5 per cent and consequently, the reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

The decision of the MPC was consistent with its objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. The decision was based on the following assessment. While the US economy rebounded strongly in Q 2, Euro area reported sluggish growth and major emerging market economies had slowed down considerably. The Chinese economy was grappling with efforts to contain debt which slowed down the pace of growth and except perhaps Russia, other countries had to deal with a host of issues like weak exports, high employment, muted industrial production, uncertainty on the Brexit issues and crude oil prices etc., Trade wars have not helped either..

. On the domestic front, south-west monsoon has been quite active and many of the reservoirs have got filled up which portends well for agriculture though flooding, inundation and rains without a break have caused large scale destruction and have impacted large tracts of cultivable lands

. Industrial growth, strengthened in April-May 2018 and was driven mainly by a significant turnaround in the production of capital goods and consumer durables. Growth in the infrastructure/construction sector accelerated sharply, , while the growth of consumer non-durables decelerated significantly. The output of eight core industries accelerated in June and capacity utilisation in the manufacturing sector remained robust.

An uptick in fuel and in items other than food impacted retail inflation..RBI’s survey of households indicate further uptick in inflation both in the near term and one-year ahead horizon. While export growth picked up, double-digit import growth pushed up the trade deficit. As to the coming days, several factors -the. MSP announced for kharif crops, monsoon, crude oil prices, reduction in GST over a wide range of products, are likely to influence the retail inflation..

However, while the robust corporate earnings indicate that economic activity has continued to be strong,, rising trade protectionism poses a grave risk to near-term and long-term global growth. The banking sector which is trying to shed the massive baggage of stressed assets is looking for an accelerated growth in the economy to help it perform better.

…..P S Narasimhan-jandsca@gmail.com

UPDATE ON BANKING - August 2018

------P S Narasimhan (jandsca@gmail.com)

Reserve Bank of India has come out recently with an Enforcement Action Framework targeting Statutory Auditors for lapses in the Statutory Audit of banks. It is formulated so as to evolve a transparent mechanism by which the accountability of Statutory Auditors would be examined in a consistent manner with an idea to improve audit quality.

The type of lapses that would be taken up for scrutiny under this framework would include misstatements in financial statements, wrong certifications, wrong information the Long Form Audit Report, lapses in adhering to RBI ‘s directions/guidelines and misconduct of the auditors when carrying out the audit assignments.

Fact of the lapse will be determined based on non-adherence to Statutory provisions/directives, variance between those reported and those determined by RBI after its annual inspection. . The next stage would be to determine the materiality of the lapse which will be based on the extent. frequency and impact of the violation/lapse. Repeated and persisting violations would also be taken in to account

RBI would provide a reasonable opportunity to the auditors to present their view points and enforcement action if taken would be communicated by way of a speaking order.

Statutory Auditors would be cautioned on lapses considered not material , through a cautionary advice. On the other hand, if the violations are considered material, enforcement action would be by way of not approving their appointments for undertaking statutory audits in commercial banks for a specified period. In the case of those auditors who have been debarred by other regulatory , government or law-enforcement agencies, RBI will not approve their appointments. In such of the pending cases, where public interest is involved and the case is of serious nature where the culpability of the firm is established, RBI would debar such audit firms.

All enforcement actions including issuance of cautionary notice will be placed in the public domain apart from being communicated to the Institute of Chartered accountants of India.

Regulator released the Financial Stability Report in June 2018.Some of the observations in the Financial Stability Report of the Regulator are given below.

The stress in the banking sector is likely to grow as gross non-performing advances (GNPA) ratio in the banking sector rises further.

In 2017-18, the Profitability of SCBs declined, partly due to increased provisioning. The impact on profitability has added pressure on SCBs’ regulatory capital ratios, while the provision coverage ratio has increased.

Interestingly ,Credit growth of SCBs picked up during 2017-18 notwithstanding sluggish deposit growth.

Macro-stress tests conducted indicate that the overall GNPA ratio may rise from 11.6 per cent in March 2018 to 12.2 per cent by March 2019 and the system-level capital to risk-weighted assets ratio (CRAR) may come down from 13.5 per cent to 12.8 per cent during the period. Banks under the prompt corrective action framework are likely to experience a worsening of their GNPA ratio from 21.0 per cent in March 2018 to 22.3 per cent, and six of them may end up experiencing capital shortfall relative to the required minimum CRAR of 9 per cent.

UPDATE ON BANKING - July 2018

------P S Narasimhan (jandsca@gmail.com)

The month of June saw a significant move by the Allahabad High Court towards the dues of the Power Sector to the Banks. The outstandings to banks from the Power Sector account for Rs 5.18 lakh crores as of April,2018. Of this Rs 70000 cr have turned out NPAs of which Rs 34600 cr is before the NCLTs.

Echoing the sentiments of the Parliamentary panel which had recognized that stress in the power sector is often caused by several factors including fuel shortage, sub-optimal loading, untied capacities, absence of fuel supply agreements and lack of power purchase agreements , which are beyond the control of these companies, the Court felt that to ask the banks to apply the RBI guidelines mechanically , would only push these plants further into trouble without any hope of recovery. The Power Ministry was not happy about the RBI’s mandate on arriving at a quick fix Resolution Plan and wanted atleast a year’s time in resolving the issues involved. The Court has asked the Finance Ministry to call for a meeting between all the stake holders by June end so as to arrive at a consensus.

The Finance Secretary is to hold the meeting with his counterparts in the power, petroleum and coal ministries as well as the representatives of the RBI and the Insolvency and Bankruptcy Board of India.

Units in the MSME sector had some respite from the prudential norms last fiscal. Now the Ministry has come out with an extended relaxation for these units in meeting their dues to the banking sector.

Past due criterion for these units will be fixed at 180 days , including those not registered under GST, and the asset classified as a ‘standard’ asset, subject to the certain conditions:

With a view to enhance credit discipline among large borrowers, the Reserve Bank of India proposes to have a loan system for delivery of bank credit which stipulate a minimum level of 'loan component' in fund based working capital finance and a mandatory Credit Conversion Factor (CCF) for the undrawn portion of cash credit/ overdraft limits availed. Cash Credit, the most popular mode of working capital financing, poses several regulatory challenges such as perpetual roll overs, transmission of liquidity management from the borrowers to banks/RBI, hampering smooth transmission of monetary policy. The proposed system is expected to answer them.

In the wake of increasing yields, RBI has decided to grant banks the option to spread provisioning for their mark to market (MTM) losses on all investments held in AFS and HFT for the quarter ending June 30, 2018 as well. The provisioning required may be spread equally over up to four quarters, commencing with the quarter ending June 30, 2018.

UPDATE ON BANKING AND INSURANCE – June 2018

------P S Narasimhan (jandsca@gmail.com)

The Regulator’s circular dated 12 Feb 2018 on restructuring had created a substantial buzz in banking circles. Deputy Governor of Reserve bank of India recently came out with a detailed explanation on the logic behind RBI’s decision.

Asset classification was to be based on the record of recovery in the books of the individual banks. When the banks reported the asset classification of the borrowers under CRILC, it made the regulator sit up. It noticed huge divergence between banks and this caused the RBI to attempt a AQR in 2015-16. The exercise did pile up the NPAs substantially.

While the CDR worked well initially, the regulator felt that in the later years, banks started using the scheme to postpone identifying non-performance.

RBI later introduced Strategic Debt Restructuring, flexible structuring of project loans and a scheme for Sustainable Structuring of stressed assets(S4A) to enable the banks to attempt adeep structure by way change in management, substantial hair cuts etc.,. so as to revive the industrial units.

It was noticed that in most of the SDR cases, change in management was never examined and the number of cases under S 4A were far and few to warrant a separate scheme.

With the coming in of IBC code, the regulator thought it proper to resolve borrower defaults through the collective decision making of the creditors.

It was therefore thought fit to aim at a seamless framework where out of court workouts are first attempted and where they fail, a statutory process under IBC would kick in.

Thus now within a specified time frame, flexibility is provided both to the lenders and the borrowers to arrive at a workable resolution.

More has been talked about on the resolution plans on one day overdues. In the bond market the same borrowers are seen to adhere strictly to the timelines for even a day’s delay they experience a market backlash by way of fall in ratings, escalation in finance costs, yields on bonds shoot up, legal action gets initiated and the impact is substantial. Debt contracts with banks do not receive the same respect. The sanctity of debt covenants are broken with impunity.It is deter the borrowers from adopting such an approach that the regulator has asked the banks to be ready with a resolution plan even for a day’s delay. While cash credits continue to have thirty day trigger , the one day default clause is to bring in the much needed financial discipline amongst the borrowers.

Another major change contemplated is that such a resolution plan can be implemented individually or jointly by the lenders. Earlier the decision of the Joint Lender’s Forum was binding on all the members and the small players felt marginalized ; now, they can also force the issue.

The new framework relies heavily on the contribution of the credit rating agencies whose reputation would be at stake if they palm off erroneous or questionable opinions

Though dispensations were available to stagger MTM depreciation and to provide for the enhanced gratuity, dividend paying banks were seen to provide for them as of march quarter so as to comply with Sec 15 of the banking Regulations Act, 1949.

UPDATE ON BANKING AND INSURANCE –May 2018

Banks are required to review their bond portfolio every quarter. If the value of securities is lower than the market price, banks will have to provide for depreciation. Bond valuation is actually the determination of its fair value. The theoretical fair value is arrived at by discounting the cash flows emanating from the bonds till their maturity, to their present value. The appropriate discount factor is largely determined by similar instruments in the market. Bond prices and yields move in opposite directions.

FIMMDA( Fixed Income Money Market and Derivatives association) was got up by an association of banks, Public Financial Institutions, Insurance Companies and Primary Dealers. FIMMDA ceased to publish price/yield data of government securities from 31 March 2018.

Financial Benchmark India Private Limited(FBIL) has now been entrusted with the task of valuation of Government Securities and State Development Loans . FBIL would also compute and disseminate the daily reference rates for US Dollar and other major currencies against the rupee , a job which was till recently handled by RBI.

FBIL, for the present would adopt the same methodology as was done by FIMMDA for valuations but is expected in due course to develop its own technology and methodology.

FIMMDA had lowered the price valuation of government bonds in December and for that quarter it was estimated that banks had to provide about Rs 15500 cr towards depreciation on these investments. The situation is similar for the March quarter and the Regulator ,in an effort to address the systemic impact of sharp increase in the yields, has given the option to banks to spread the provisioning losses of December and March quarter, by spreading them over four quarters, commencing with the quarter in which the loss is incurred.

Such of those banks which opt for spreading over the depreciation, are expected to make suitable disclosures in their notes to accounts/ quarterly results providing details of

(a) the provisions for depreciation of the investment portfolio for the quarters ended December 2017 and March 2018 made during the quarter/year and

(b) the balance required to be made in the remaining quarters.

With a view to enable the banks to build up adequate reserves to protect themselves against increase in yields in future, the Regulator has advised them to create an Investment Fluctuation Reserve (IFR) with effect from the year 2018-19, as under:

An amount not less than the lower of the following:

(a) net profit on sale of investments during the year

(b) net profit for the year less mandatory appropriations,

which shall be held under Investment Fluctuation Reserve(IFR) until it reaches a cap of at least 2 percent of the Held For Trading( HFT) and Available For Sale ( AFS) portfolio, on a continuing basis. A timeline of 3 years has been suggested for the same.

Regulator may allow drawdown from IFR if it is in excess of 2 percent of its HFT and AFS portfolio, for credit to the balance of profit/loss as disclosed in the profit and loss account at the end of any accounting year and in case the balance in the IFR is less than 2 percent of the HFT and AFS investment portfolio, a draw down may be permitted subject to the following conditions:

(a) The drawn down amount is used only for meeting the minimum CET1/Tier 1 capital requirements by way of appropriation to free reserves or reducing the balance of loss, and

(b) The amount drawn down is not more than the extent the MTM provisions made during the aforesaid year exceed the net profit on sale of investments during that year. Regulator intends considering IFR to be eligible for inclusion in Tier 2 capital. On accounts referred to NCLT under the IBC, banks are expected to provide 40% by March and the balance 10% originally envisaged, to be provided by the June quarter.

----- P S Narasimhan(jandsca@gmail.com)

UPDATE ON BANKING AND INSURANCE –April 2018

The implementation and refund delays under the new tax regime of GST seem to have led to working capital constraints especially in the case of exporters. Under GST ,exporters are required to pay up first and claim refunds. Delayed refunds had a substantial impact on their working capital needs. A study made by the regulator revealed this aspect which probably was the reason for the circular dated 7th February by the regulator wherein the 90 day prudential norm was extended to 180 days.

As a sequel to the LOU scam, the Regulator has asked banks not to extend Letters of Undertaking/Letters of comfort for trade credits for imports into India. Letters of Credit and guarantees for trade Credit for imports into India would however continue.

Banks have been asked to furnish details of LOUs issued by them in the recent years. Additional details sought include amount outstanding, margin held and information as to whether they fall under the pre-approved credit limits.

Banks have also been asked to complete the linking of SWIFT inter bank messaging system to Core Banking Solutions by April 30 this year. In recent times, frauds have been linked mainly to trade credit with forex transactions involving advance remittances being the preferred route Passport details of borrowers taking loans of Rs 50 cr and more have been made compulsory to ensure that economic offenders do not flee the country that easily. Cabinet has also approved Fugitive Economic Offenders Bill which aims to impound and sell assets of such of those economic offenders to quickly recover their dues and would apply to defaulters who have an outstanding of Rs 100 cr and more. The Regulator has asked the banks to flag loans of Rs 250 cr and more where loan covenants have not been complied with.

Of the twelve major cases referred to NCLT, Resolution Plans for two are almost complete and six are said to be in final stages. In the case of the balance four, proceedings are yet to gain momentum.

THE Finance Ministry has written to State-run banks to take Board approvals for publication of photographs of defaulters in an effort to” name and shame” willful defaulters.

On the Insurance front , Delhi High Court came up with an interesting verdict wherein it came down heavily on the health insurer’s practice of disallowing coverage of genetic disorders. The Court ruled against general exclusion based on the broad label of genetic disorders. IRDA is yet to define what it means by genetic disorders. The judgment finds the term too imprecise and goes onto say that “….the broad exclusion of genetic disorders from Insurance Contracts/claims is illegal and unconstitutional “. The judgment further argues that Insurance Contracts “ have to be based on empirical testing and data and cannot be simply on the basis of subjective or vague factors “.

UPDATE ON BANKING AND INSURANCE –March 2018

RBI announced a relief for MSME borrowers from the 90 day delinquency norms to 180 days under certain conditions. These borrowers should be registered under GST and should have been standard assets as of 31st August 2017.Amounts overdue as on 1st September 2017 and all those falling due between 1st September 2017 and 31st January 2018 will be extended a 180 day time period under IRAC norms before their performing status is downgraded. The benefit has been extended only on Asset Classification and Income Recognition would be only on realization of interest debited.

The wordings of the circular seems to cover only term loans (“repayment obligations”) and operative accounts like Cash Credit and Overdraft seem to be left out in the limbo. But since the benefit is being given due to adverse impact on the cash flows, it only stands to reason that the benefit of asset classification is available to these facilities too.

The very next day after the issue of the circular relating to MSMEs, RBI came out with a surprise circular on big ticket loans. It did away with Resolution Plans(RP) like Corporate Debt Restructuring, Strategic Debt Restructuring, Scheme for Sustainable Structuring of Stressed Assets etc.,. Here after, the RPs should be approved by all the banks and could include regularization of accounts, restructure etc.,. secondly, a rating agency should give it an investment grade if the loan is above Rs.100 cr(if the loan is above Rs 500 cr, two such agencies should approve); on restructuring the loan would become NPA and for it to become standard, the borrower should show satisfactory performance during the specified period and should have also paid up 20% of the amount so restructured. Loans of Rs 2000 cr and above, currently under implementation under SDR/CDR/S4A schemes will have to be resolved within a time frame of 6 months or go to the bankruptcy courts.

Banks will have to report defaults in excess of Rs 5 cr on a weekly basis to the centralized data base of the Reserve bank of India.

The Regulator has also identified certain signs of stress and a non-exhaustive listing covering them has been spelt out. The list includes non-maintenance of stipulated margins, delay in meeting commitments, excessive leverage, failure to meet statutory obligations, delays in project implementation, elongation of working capital cycle, fall in ratings, inability to meet financial covenants etc.,.

In the short run, slippages are likely to mount, provisioning requirement would go up and top line is likely to remain muted. In the long run, banking system is expected to become stronger. The new norms are expected to spur both the borrower and the lender in to action within 30 days of default so that problems do not get deferred.

------P S Narasimhan (jandsca@gmail.com)

Professional Updates- January 2018

The Basel Committee on Banking Supervision , released in August a consultative document on the implications of use of technology in the financial sector and the impact it would have on the supervisory system.

They examined the industry based on three broad scenarios namely focus on technology developments (big data, distributed ledger technology, and cloud computing) and considered three business models (innovative payment services, lending platforms and neo-banks).

The reach of technology has been so significant that emergence of new business models pose an increasing challenge to incumbent banks in almost all the scenarios considered.

Regulators are aware that Banking standards and supervisory expectations should be adaptive to new innovations, while maintaining appropriate prudential standards. Against this background, the Basel Committee has identified 10 key observations and related recommendations on the following supervisory issues for consideration by banks and bank supervisors:

The Government of India which was talking of recapitalizing the public sector banks through budget allocation or through bond issues by way of possible “bail outs”, has come out with a draft Financial Resolution and Deposit Insurance Bill 2017 which talks of “bail ins” for the first time.

The measures under ‘bail ins’ would include converting an existing liability into a security ( for example a bank deposit into a preference share), cancellation of a liability etc.,. Sovereign guarantee seems to be no longer considered.

Though the idea is to seek merger of bigger PSBs with smaller PSBs, aspects covering deposits have sent a chill down the spine. The Finance Minister has played down the whole thing saying that it was to elicit the views of the public and to examine various options before the government , to strengthen the banking system. Depositors who are not stakeholders protest that they should not be made part of the bail in and rightly so. If anything the deposit insurance cover threshold should be expanded . With the government keen on increasing banking foot prints, introduction of such a bill is sure to work the other way. However, In a tweet the Finance Minister said ”The objective of the government is to fully protect the interests of the financial institutions and depositors “. The Bill stands as of now, deferred till the budget session.

------P S Narasimhan (jandsca@gmail.com)