Southern India Regional Council of
The Institute of Chartered Accountants Of India
(Setup by an Act of Parliament)

Professional Updates- September 2017

 

Banking and Insurance

One of the measures contemplated to counter the menace of mounting NPAs is the setting up of a Public Credit Registry. A suggestion to this effect has come from Dr Viral.V.Acharya, Deputy Governor ,RBI. A Public Credit Registry (PCR) is an extensive database of credit information that would be accessible to all stakeholders and managed by a public authority like the central bank. The idea is to capture all relevant information in one large database on the borrower. At present, several Indian banks burdened with NPAs are looking for a service provider who can give them objective data for making credit decisions and enable them to defend their actions with market evidence when subjected to scrutiny

A PCR, is expected to help in a) Credit assessment and pricing by banks; b) Risk-based, dynamic and countercyclical provisioning at banks; c) Supervision and early intervention by regulators; d) assist in effective transmission of monetary policy; and, e) help in strategic restructuring of stressed bank credits...

A central repository would capture details of collaterals and can prevent over-pledging of collateral by a borrower. In absence of such information, the lender charges a high cost on the loan or asks for more collateral than necessary to prevent being diluted by other lenders. Also, in the absence of a PCR, the ‘good’ borrowers are disadvantaged in not being to demonstrate their credit worthiness..

Currently, the private Credit Bureaus (CBs) operating in India are regulated by RBI and each one of them focuses on data analytics to provide credit scores, and allied reports and services. These analytics are useful for the member banks for issuing credit cards as well as for taking decisions (primarily on retail loans) as of now.

RBI’s CRILC set up in 2014-15, is now one of the most important databases for offsite supervision, Scheduled Commercial Banks (SCBs) report credit information of their large borrowers, i.e., those having aggregate fund-based and non-fund based exposure of INR 50 million and above. It covers around sixty per cent of the loan portfolio and around eighty per cent of the non-performing loans of SCBs. It captures only limited details which are shared with the reporting banks but is not open to the Credit Bureaus, larger lender community, or researchers .Also, they are not available in real time to take credit decisions at the micro level and do not capture fully the credit data .. .

Small and marginal aspirants, are disadvantaged against large borrowers as they lack many of the desired qualifications for credit. Transparency of credit information would serve as a “reputational collateral” for such borrowers. Even transactional data of potential borrowers including payments to utilities like power and telecom would help the small players. Regularity in making payments to utilities and trade creditors provides an indication of the credit quality.. In turn, credit from the formal sector can flow to them, boosting financial inclusion. As a side benefit, the extent of financial inclusion will likely become more precisely measurable for policy makers..

PCRs can help in enhancing efficiency of the credit market, increase financial inclusion, improve ease of doing business, and help control delinquencies. Incorporating unique linkages (Aadhar for individuals and CIN for companies), Reserve Bank’s datasets can quickly be converted into a useful PCR covering customers of SCBs to start with. It can then be expanded to cover other financial institutions in India. A comprehensive PCR down the road will be even more effective. It’s time India goes to make the establishment of a PCR a reality !

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


Professional Updates- August 2017

Banking and Insurance

The Regulator has come out with guidelines for Small Finance banks(SFBs). These banks are intended to serve the unserved and underserved sections of the population. They would extend credit to small business units, small and marginal farmers, micro and small industries and to the organized sector. These banks in the private sector are expected to be high on technology and low on operational costs. SFBs would have 25% of their branches in unbanked rural centres.

These banks are expected to lend 75% of their Adjusted Net Bank Credit to Priority Sector. Of this 75%, 18% would be to agriculture( within which 8% would be to the benefit of Small and Marginal Farmers), 7.5% to Micro Enterprises and 10% to weaker sections of the society.

Credit to Agriculture would cover Farm Credit- which would include lending of long, medium and short term loans for cultivation, for agriculture infrastructure and for ancillary activities. Farm Credit would include allied activities such as dairy, fishery, animal husbandry, poultry, sericulture etc.,. Purchase of agricultural machinery and implements, spraying, weeding, transportation etc. would also get covered under this farm credit. Borrowers could also include corporates up to an aggregate limit of Rs 2 cr.

Agriculture infrastructure would include market yards, warehouses, godowns and silos., soil conservation and watershed development, tissue culture and aspects like agri bio-technology, seed production, bio-pesticides etc.,. Corporates can be borrowers too with the upper limit going up to Rs 100 cr.

Ancillary activities would cover agri-clinics, agro-business centres, food-agro processing, maintenance of fleet of tractors, bulldozers, well-boring equipment, threshers, combines etc.,.

Marginal farmers are those with holdings of less than 1 hectare and small farmers would be those who have 1 to 2 hectares. Similarly limits have been prescribed to identify Micro, Small and medium enterprises as well. Services sector are identified with reference to the cost of equipment they hold. These banks will also cover sectors like housing, renewable energy, education and social infra for their lending..Rate of Interest charged will be as per DBR Master Directions.

It is learnt that the government is keen on coming out with a simpler bankruptcy code to cover defaulters in the non-corporate world which would include small and medium enterprises managed by partnership firms and proprietary units. Since these organizations have unlimited liability, people involved have no protection for their personal assets.. Once a unit is into the Bankruptcy code the stake sale would fall short of the market value. Such issues will have to be addressed before the code is put in place. The Code is expected to cover personal bankruptcy of individuals who hold business interests.

Of course, the problem of chronic NPAs will not get solved in a jiffy but the process is on.

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


Professional Updates- July 2017

Banking and Insurance

The stressed asset pile in the Indian banking System is estimated to be around Rs 10 trillion.Of this, assets labeled Non Performing, account for about Rs 7.7 trillion and the balance ,held under restructured category. RBI’s internal panel had identified accounts with outstandings in excess of Rs 5000 cr ( 60% of which was already classified as Non Performing) for bankruptcy proceedings. In May this year, through an Ordinance amending Banking Regulation Act, RBI has been empowered to ask banks to initiate proceedings against defaulters.

The Internal Advisory Committee of the Regulator,( which has independent board members of the Central Bank as its members) identified accounts to be referred to.. The panel seems to have sieved through top 500 stressed accounts for being referred for resolution under the Insolvency and Bankruptcy Code, 2016(IBC).

RBI has for a start ,zeroed on 12 accounts representing about 25% of gross NPAs in the banking system and these accounts would be referred for bankruptcy proceedings.

It appears that National Company Law Tribunal(NCLT) which is the arbitration authority under the Bankruptcy Law would take up these cases on priority. Banks have been asked to file for insolvency proceedings under IBC with NCLT. NCLT already handles 81 cases of NPAs. Creditors seem to have initiated Insolvency proceedings in 18 cases.

For those accounts which do not immediately meet the criteria for reference, the advisory panel has suggested the concerned banks to come up with a resolution plan within six months. Where no viable plan emerge, such cases too are likely to be taken up under IBC.

The relevant press release reads as follows:
“As regards the other non-performing accounts which do not qualify under the above criteria, the IAC recommended that banks should finalise a resolution plan within six months. In cases where a viable resolution plan is not agreed upon within six months, banks should be required to file for insolvency proceedings under the IBC.

The Reserve Bank, based on the recommendations of the IAC, will accordingly be issuing directions to banks to file for insolvency proceedings under the IBC in respect of the identified accounts. Such cases will be accorded priority by the National Company Law Tribunal (NCLT).

The details of the resolution framework in regard to the other non-performing accounts will be released in the coming days.

The circular on revised provisioning norms for cases accepted for resolution under the IBC is being issued separately.”

On the provisioning front, on such of these accounts which have suffered no loan loss provisioning so far, bankers seem to prefer to spread them over a few quarters so that the impact is softened on the financials.

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


Professional Updates- June 2017

Banking and Insurance

In a recent Circular the Regulator stressed the need for the participants of a Joint Lenders Forum to conform to the timelines set under a Corrective Action Plan( CAP). In its circular dated 5th May, the Regulator has this to say:

“In order to ensure that the CAP is finalised and formulated in an expeditious manner, the Framework specifies various timelines within which lenders have to decide and implement the CAP. The Framework also contains disincentives, in the form of asset classification and accelerated provisioning where lenders fail to adhere to the provisions of the Framework. Despite this, delays have been observed in finalising and implementation of the CAP, leading to delays in resolution of stressed assets in the banking system.

It is hereby clarified that the CAP can also include resolution by way of Flexible Structuring of Project Loans, Change in Ownership under Strategic Debt Restructuring, Scheme for Sustainable Structuring of Stressed Assets (S4A), etc.

In this context, it is reiterated that lenders must scrupulously adhere to the timelines prescribed in the Framework for finalising and implementing the CAP. To facilitate timely decision making, it has been decided that, henceforth, the decisions agreed upon by a minimum of 60 percent of creditors by value and 50 percent of creditors by number in the JLF would be considered as the basis for deciding the CAP, and will be binding on all lenders, subject to the exit (by substitution) option available in the Framework. Lenders shall ensure that their representatives in the JLF are equipped with appropriate mandates, and that decisions taken at the JLF are implemented by the lenders within the timelines.

. It shall be noted that

  • (i) the stand of the participating banks while voting on the final proposal before the JLF shall be unambiguous and unconditional;
  • (ii) any bank which does not support the majority decision on the CAP may exit subject to substitution within the stipulated time line, failing which it shall abide the decision of the JLF;
  • (iii) the bank shall implement the JLF decision without any additional conditionalities; and
  • (iv) the Boards shall empower their executives to implement the JLF decision without requiring further approval from the Board.

Any non-adherence to these instructions and timelines specified under the Framework shall attract monetary penalties on the concerned banks under the provisions of the Banking Regulation Act 1949”

The urgency that comes out is very palpable.
Global Financial Stability Report of the International Monetary Fund (IMF) points out two important points: that Indian industrial sector is now among the most heavily indebted in the world in terms of the ability of its cash flows to meet its bank loan repayments; and, -secondly, Indian banking sector has set aside very little bank capital to cover provision for loan losses on loans made essentially to the industrial sector.

Dr Viral V.Acharya, Deputy Governor suggests a five-pronged remedy which include Private capital raising, Asset sale including disposal of non- core assets and healthy loan portfolios, Mergers, Divestment by Government increasing direct public participation, and tough corrective action.

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


Professional Updates- May 2017

Banking and Insurance

UPDATES ON THE BANKING FRONT- MAY 2017

Central Government is in the process of setting up a Information Utility(IU) known as Credit Registry which would provide data on borrowing, default, security cover available on the lending and borrowing transactions extended by banks and financial institutions ,on advances which have ended up as stressed assets. Authorised users would be able to know the current status of such borrowers.

The Regulator is concerned that some of the Overseas Direct Investments under FDI schemes are posing major problems like round tripping, tax evasion, money laundering etc.. RBI is exploring ways and means to curb this menace.

March 17th was fixed as the date for share swap with regard to the merger of the 5 associates with State bank of India which came into effect on the first of April. The Minority shareholders who got identified on this day (Mar17) in the case of SBBJ, SBM, and SBT, are entitled to receive Equity Shares in SBI of Face Value of Re 1 each at the agreed swap ratio.

Credit growth has fallen below 5 % belying the expectations of quicker recovery in factory output. The data put out by the Regulator showed that bank loans grew by 4.88% year-on-year compared to 11.2 % , a year ago. This is by far the slowest fortnightly growth since 2006. Low consumer spending which has led to lower capacity utilization is said to be the main cause for the lackadaisical credit growth.

All Savings Bank accounts may soon become internet-enabled. Increased digital banking is expected to make more and more account holders to turn to operating their accounts through the net. . Internet users are expected to cross 450 to 465 million by June this year from 432 million last December. Of these 432 million, 269 million were in urban areas.

Credit Information Company TransUnion CIBIL has come out with a credit risk ranking for MSME units. The exposure of the banking industry to this sector is around Rs 12 lakh crore. Using the algorithms based on the credit history data, the CIBIL MSME Rank(CMR) is expected to forecast default probability in the next 12 months.

S&P Global Ratings opined that the profitability of banks in India would improve next fiscal but warned that unless large scale capital infusion is made, the banks would continue to be vulnerable. Banks in a bid to keep in line with the emerging financial ecosystem , are looking to adopt different pattern of financing – aggregation financing, supply-chain financing, Internet based financing are seen as the latest corporate trends in this regard.

The players in the virtual currency market like Zebpay,Unocoin, Coinsecure and Searchtrade have constituted Digital Asset and Blockchain Foundation of India( Dabfi) which is expected to provide an orderly and transparent growth of the virtual currency market. This body is expected to function as a self-regulatory Organisation(SRO). An International law firm has been entrusted with the task of framing self-regulation norms.

In the meanwhile, Deputy Governor of RBI, raised concerns over virtual currencies since according to the Regulator, they pose potential financial, legal, customer protection and securityrelated risks.
------P.S.Narasimhan(jandsca@gmail.com)


Professional Updates- April 2017

Banking and Insurance

Central Government is in the process of setting up a Information Utility(IU) known as Credit Registry which would provide data on borrowing, default, security cover available on the lending and borrowing transactions extended by banks and financial institutions ,on advances which have ended up as stressed assets. Authorised users would be able to know the current status of such borrowers.

The Regulator is concerned that some of the Overseas Direct Investments under FDI schemes are posing major problems like round tripping, tax evasion, money laundering etc.. RBI is exploring ways and means to curb this menace.

March 17th has been fixed as the date for share swap with regard to the merger of the 5 associates with State bank of India which is expected to come into effect on the first of April. The Minority shareholders would get identified on this day (Mar17) in the case of SBBJ, SBM, and SBT, who would be entitled to receive Equity Shares in SBI of Face Value of Re 1 each at the agreed swap ratio.

World bank’s Chief Executive, Kristalina Georgieva batted for ban of high-value bank notes saying that the move would have a profound and positive impact on the economy.. OECD Secretary-General Angel Gurria said that ban of high value notes would help the nation to move towards a less-cash society and will add greater financial penetration and would lead to better consumer protection.

Credit growth has fallen below 5 % belying the expectations of quicker recovery in factory output. The data put out by the Regulator showed that bank loans grew by 4.88% year-on-year compared to 11.2 % , a year ago. This is by far the slowest fortnightly growth since 2006. Low consumer spending which has led to lower capacity utilization is said to be the main cause for the lackadaisical credit growth.

All Savings Bank accounts may soon become internet-enabled. Increased digital banking is expected to make more and more account holders to turn to operating their accounts through the net. . Internet users are expected to cross 450 to 465 million by June this year from 432 million last December. Of these 432 million, 269 million were in urban areas.

Banks in a bid to keep in line with the emerging financial eco-system , are looking to adopt different pattern of financing – aggregation financing, supply-chain financing, Internet based financing are seen as the latest corporate trends in this regard.

Credit Information Company TransUnion CIBIL has come out with a credit risk ranking for MSME units. The exposure of the banking industry to this sector is around Rs 12 lakh crore. Using the algorithms based on the credit history data, the CIBIL MSME Rank(CMR) is expected to forecast default probability in the next 12 months.

S&P Global Ratings opined that the profitability of banks in India would improve next fiscal but warned that unless large scale capital infusion is made, the banks would continue to be vulnerable

The players in the virtual currency market like Zebpay,Unocoin, Coinsecure and Searchtrade have constituted Digital Asset and Blockchain Foundation of India( Dabfi) which is expected to provide an orderly and transparent growth of the virtual currency market. This body is expected to function as a self-regulatory Organisation(SRO). An International law firm has been entrusted with the task of framing self-regulation norms.

In the meanwhile, Deputy Governor of RBI, raised concerns over virtual currencies since according to the Regulator, they pose potential financial, legal, customer protection and security-related risks.

RBI has given its preliminary views on the demonetization and opines its impact on the real economy, to be transient. The banking sector benefited thro’ increase in CASA (which surged by 4.1%). The increase in Net Interest Income is expected to absorb the cost of managing the process of currency exchange. The impact of demonetization in certain segments like exports especially of readymade garments, gems and jewellery was said to be significant.

On the ways and means to decisively resolve the problem of stressed assets, Sri.Viral.v.Acharya Deputy Governor, RBI suggests two models-one through Private Asset Management Companies and two, National asset Management Companies. He is however clear that these entities should be engaged only in resolving the stressed asset problems and not get in to regular banking. In his words ,” It would be better to limit the objective of these asset management companies to orderly resolution of stressed assets with graceful exit thereafter; in other words, no mission creep over time to do anything else such as raise deposits, start a new lending portfolio, or help deliver social programs. It is essential to keep the business model of these entities simple to make them attractive for private investors with expertise for the main task on hand – asset restructuring.”


Professional Updates- March 2017

Banking and Insurance

Can banks effect payments out of Statutory Reserves without the Regulator’s nod? Normally, it is never done but now in the case of such of those banks trying to meet the Coupons issued by them towards Perpetual Debt Instruments (meant for the purpose of mobilizing Additional Tier I capital under Basel III), RBI has come out with certain clarifications. The banks which plan issue of such PDIs should ensure first and also specifically spell out that that they have full discretion at all times to cancel distributions / payments, for them to be eligible to make such an issue.

Secondly, before effecting payments towards such coupons out of reserves, banks have to ensure that they meet the minimum regulatory requirements for CET1, Tier 1 and Total Capital ratios including the additional capital requirements for Domestic Systemically Important Banks at all times, subject to the restrictions under the capital buffer frameworks

Thirdly, banks should, out of current year’s profits, profits brought forward and revenue reserves (excluding reserves such as Statutory Reserves, Share Premium, revaluation reserve, foreign currency translation reserve, and Investment Reserve) net off losses and Deferred Revenue Expenditure if any and if the resultant balance is inadequate to meet the bond payments, then they can use the Statutory Reserve. In such a case, the banks need not seek prior permission from the regulator but should however keep the regulator informed after meeting the obligations within the time span specified.

On the aspect of its continued concern for cyber security, the Regulator intends constituting a Standing Committee, which will be cross functional, and would include industry experts as well as the government representatives.

Regarding the asset quality that exists in the banking system, the Regulator is of the opinion, based on the results received from banks on Q3 and on the basis of provisional data available, while there appears some elevation in gross NPA ratio in the banking system across the categories, for the first time in few quarters this time it is seen that in few banks the ratio has come down vis-à-vis the preceding quarter. Similarly, there is also a dip in respect of net NPA ratio, indicating that the level of provisioning to be quite adequate. There also appears to be a reduction in the percentage of restructured assets as well. Overall, the system reflects some improvement in operating profit but provisioning pressures on net profit are likely to continue. One should also keep in mind the beneficial circular issued on asset classification and income recognition which was necessitated due to re-monetization of certain specified currencies, while evaluating the asset quality of this quarter. On capital adequacy, while most of the banks are well-placed to meet the regulatory norms, going forward quite a few banks would be required to raise additional capital to meet the requirements, opines the regulator. Banks would require Rs 91000 cry by March 2019 by way of additional capital funds even assuming an average growth of 8 to 9%...Of this additional tier I capital would be Rs 50000 cr. According to Sri Vend Ray, Chief of BBB, Rs 10000 cry earmarked for 2017-18 towards capitalization would be adequate supplemented with Rights Issue where considered necessary for the time being. Banks led by SBI have sought a longer term for amortizing loan losses- that is over several quarters- which may arise due to deep restructuring of loans.

Professional forecasters on Macro Economic Indicators felt that bank credit is likely to grow by 11.9% in 2017-18. Consumer Confidence Survey indicated a lower level of optimism for a period covering one year forward considering economic conditions, income, spending, employment and price level.

Government of India intends pumping in Rs 500 cry in to India Post Payments Bank so that 650 branches get set up by September 2017. Of this, Rs.123 cry would be by way of capital infusion and Rs 375 cry would be through grants-in-aid.

The much awaited merger of Subsidiaries with SBI has been deferred to a date post-March.
Banks registered a sharp decline in FCNR-B deposits in the quarter ending December 2016- from USD 44.11 billion USD in September to 20.85 billion USD by December.

Banks have been asked by RBI to create a pool of forensic audit firms in view of the growing advance related frauds. Such frauds, it is said, constituted 92% of total frauds in 2016.