Tag: banking sector

Backing RBI on NPAs, Arun Jaitley says minimising bad loans alone will ensure credit flow

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Finance Minister Arun Jaitley on Sunday said minimising bad loans alone can ensure adequate credit flow to small businesses and the troubled NBFCs and also help take care of the liquidity concerns in the market, signalling a thaw in its fraught ties with the Reserve Bank.

Interestingly, the latest statement from the finance minister is in fact aligns with the RBI’s resolve on the issue which has been doggedly pressing for action on high non- performing assets (NPAs).

The apex bank has also been averse to government demand for special dispensations for SMEs, NBFCs and the power sector to help boost growth ahead of the April-May hustings.

“To maintain the strength of our banking system and to enable it to help the economy grow, we need to minimise our NPAs,” Jaitley said, speaking at the 100th foundation day of the state-run Union Bank of India here Sunday evening through a video link.

“It is only a strong banking system that will be able to improve credit in those sectors which really need credit.

The MSME (micro, small and medium enterprises) sector needs credit, several other players in the market need credit. NBFCs today need credit because a large part of lending is done by them,” he added.

It can be noted that as of the March quarter, the system wide bad loans ratio had sniffed at 12 per cent, while for some state-run lenders like IDBI Bank, which has been taken over by LIC, had nearly 28 per cent of its loans as dud
assets as of the June quarter.

Following a massive spike in the bad loans, which got speeded up after the note-ban and the hasty implementation of the GST, the RBI had in September 2016 brought as many as 11 state-run banks under the prompt corrective action plan framework to bring down NPAs.

This has led to credit crunch in the economy as these banks collectively control one-fifth of the system level credit and deposits, and the crisis was felt the most by small business units.

The banking system needs to be strengthened so that it can lend to NBFCs, which will ensure that “liquidity in the markets is maintained”, the minister said.

NBFCs controlled more than 13 per cent of system wide credit market as of March 2018.

“We have to target ourselves and our policies; the whole system has to target itself to the direction where we improve the lending ability of our banks and we improve the liquidity available as far as our markets are concerned,”
Jaitley said.

According to reports, the government-appointed non- official director on the central board of the RBI, S Gurumurthy, had been asking for forbearance for MSMEs along with increased credit flow to other critical sectors.

Also, other reports said government wants the RBI to open a special refinance window for NBFCs, mutual funds and housing finance companies which have been under strain since the defaults at the infra lender IL&FS.

Jaitley, however, did not touch upon other contentious points like passing of RBI’s surplus capital to government or diluting the prompt corrective action (PCA) framework for some sector like power which is partly linked to NPAs or lowering banks’ capital buffers.

According to sources, the three letters that government sent to RBI on October 10, under the never-before used Section 7 of the RBI Act, the finance ministry had listed out as many as a dozen demands. Some other demands include more active board by whittling down the powers of the management committee of the central board, which is peopled by the governor and his four deputies and some EDs.

Jaitley limited his remarks on the NPAs and the role it can play in ensuring credit flow.

“The future of our economy and its growth depends on this lending capacity,” he said, adding the “immediate target” should be to strengthen the banking system that is mired with over Rs 10.5 lakh crore in NPAs which is close to 12 per cent of the overall banking assets.

Jaitley said multiple options have been exercised, not many yielded results and the “experiments” being carried out now are delivering results now. “Early harvest” of the IBC is also showing positive results, he said.

The minister reiterated his comments on the excessive lending between 2008 and 2014 as the reason for the high NPAs now and termed their concealment as a “fatal” error, but spared a direct mention of the RBI this time.

Ahead of an FSDC meeting last month, Jaitley had blamed the RBI for “looking the other way” when banks were lending indiscriminately during 2008-14.

On Sunday, Jaitley also complemented the Monetary Policy Committee (MPC) for the good work being done by it and hoped that it will continue to better on it in the future.

Relations between the RBI and the Finance Ministry have soured in the last month, after the North Block started consultations under the never-used Section 7 of the RBI Act which provides for the government directing the central bank to undertake certain measures in public interest.

According to sources, government has sent three letters to the RBI with nearly a dozen demands, which were replied to in a week.

The poll-bound government primarily wants the RBI to help the struggling non-bank lenders get some liquidity support, liberalise the PCA norms and undertake other measures which will help push growth, while the RBI is said to be taking a conservative view and avoiding any bad precedents.

The RBI’s perceived excess capital has also become into a contentious issue, with one report saying government is eyeing one-third of its–Rs 3.6 trillion.

Economic affairs secretary S C Garg had last week denied the amount, but said there is a discussion on “appropriate economic capital framework” for RBI underway.

The central bank took its reservations on various issues public in a speech by deputy governor Viral Acharya on October 26, wherein he warned of investors’ wrath if the RBI autonomy is compromised.

After reports of action under Section 7 came up, the government had tried to ease tensions by stating that autonomy is “essential” and an accepted governance requirement.

However, Garg had also mocked the “wrath of markets” remark by Acharya, pointing out to improvement in financial markets since the speech.

The RBI board is scheduled to meet again on November 19, in what many earlier expected to be a stormy meeting.

At a time when the resilient retail segment has been a focus, the finance minister exhorted state-run lenders to look at the needs of all sections of the economy including in creating infrastructure, helping industry and the
entrepreneurs.

“As a public sector bank, you cannot rely on retail alone, you have an onerous responsibility,” he said, adding government is now targeting to ensure a banking service outlet is available to every citizen within a 5 km radius.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Best time to buy stocks is when there is extreme pessimism, says Mihir Vora of Max Life

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Mihir Vora, director and CIO of Max Life Insurance, spoke to CNBC-TV18 about the current trends in stocks market and his views on NBFCs.

“The relative valuation trend has been going around for quite some time. Even in this correction, from 11,500 to 10,200 odd, we did see that the private sector corporate banks especially did manage to outperform. Of course, it was partly because of the fact that we had some leadership changes expectations which we have met and the uncertainties regarding top management were taken care of but having said that, we did start with very low valuations even at the index levels of 11,500 and during this entire correction, we have seen these stocks on the private sector corporate banking side hold on quite nicely. On the other side, we are also seeing a bit of a shift from the retail oriented private banks to the corporate oriented private banks because overall investors and institutions were quite underweight on the corporate banks,” he said.

Speaking about the non-banking financial companies (NBFCs), Vora said, “As far as valuations are concerned, we have seen the markets discount pretty much a bad scenario for many of these players. So the question is who comes out of this unscathed and we have seen the studies of the CP maturities in the refinancing requirements which are likely to peak in the month of November. So I think the next three-four weeks are very crucial. We would rather wait and watch and see how the situation pans out but I don’t think valuations are an issue at all anymore. It is just a question of who comes out of this with the minimum injuries.”

“Given the shock that we saw in the NBFCs space, we might get disappointed in some of the segments like housing loan growth, overall NBFC loan growth and the associated sectors which they were lending to like personal spending, consumer discretionary and autos. Early indications are that Dussehra season has not gone very well for the auto segment. So to that extent, the hopes of a reasonably good recovery in the December quarter probably maybe toned down a little. So to that extent, the markets having corrected so much, we are in a zone where we should wait and watch,” said Vora.

“The midcap and small cap stocks have seen the maximum amount of correction in the last six months anywhere between 30 percent and 40 percent on the indices and of course much more probably at the stock level. So the time to buy is obviously when nobody else is looking at it when there is extreme pessimism,” he said.

Have you signed up for Primo, our daily newsletter? It has all the stories and data on the market, business, economy and tech that you need to know. 

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Government likely to hold talks with RBI to leave more capital with banks, says report

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

The government will hold talks with the Reserve Bank of India (RBI) on relaxing capital norms for banks, reported The Economic Times.

The authorities will ask the central bank to relax capital norms for banks and bringing them in line with less stringent Basel III guidelines,  the report said citing an unidentified senior government official.

The move will reportedly free up an estimated Rs 60,000 crore of capital at state-owned lenders, allowing them to step up lending to fuel the reviving economy, according to the report.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Crisis of confidence in banking system provides an opportunity to unleash reforms

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

India’s banking sector has been hogging the headlines for all the wrong reasons. It started with the mounting problem of non-performing assets (NPAs) across banks; then came a revelation of systemic fraud in the second-largest state-owned bank; and most recently, topping it all off are damning allegations of irregularities against the head of one of the largest private-sector banks.

All of these issues point towards a pandemic problem ailing the Indian banking sector, which cannot be resolved with quick-fix solutions.

The government’s response to the issue of bad loans has been to bail out the errant banks with taxpayer’s money. A massive re-capitalisation plan of Rs 1.35 trillion was announced last year, bringing the total capital infusion into banks over the past decade to an astounding Rs 2.65 trillion. Clearly, such hand-outs only amount to value destruction on a colossal scale and go nowhere close to resolving the underlying problem that gives rise to the very problem of bad lending practices.

Meanwhile, the case of fraud at Punjab National Bank of Rs 110 billion, which involved the connivance of at least 54 employees over a period of time, is experiencing no headway either. The main perpetrator of the crime, Nirav Modi, has long fled the country. No penalty has been imposed on the bank yet and there has been no management shake-up as well. Eventually, it will be the taxpayers who will bear the cost of it all.

Finally, the latest case of alleged malpractice arising out of ICICI Bank involves a quid pro quo between its former MD and CEO, Chanda Kochhar, and one of its borrowers, the Videocon Group, that has dealings with a firm promoted by Kochhar’s husband. A detailed investigation will bring more clarity, but there are obvious grounds for conflict of interests as Chanda Kochhar herself sat on the committee that sanctioned loans to Videocon.

When the problems were just limited to bad loans and even the PNB fraud, most of the guns were trained at the inefficient working of the public-sector banks. But after the ICICI case, it is evident that private sector banks fare no better. This is even more problematic because public sector banks have an implicit assurance of having the government’s backing in times of uncertainty. In case of private banks, even a small problem can trigger a panic as depositors begin to flee to government banks for safety. The banking system runs on people’s trust and if that is affected in any way, the repercussions will be costly.

So, it has become all the more important to address the core issue ailing Indian banks. All of these three instances are nothing more than a failure of governance on the part of the banks and their top management.

A major problem in Indian financial institutions is the lack of effectiveness in supervisory oversight. The Board of Directors are usually meant to conduct supervisory duties in any corporate set-up, including banking, but in India they are hardly held accountable for it.

In the United States, for instance, the central bank holds the power to dismiss a member of a bank board in case of misconduct, negligence or corruption. The boards of Indian companies similarly need to be held accountable for their role in times when the top management is found to be engaged in dubious activities.

Historically, India has not held the boards to as much media and public scrutiny as it has done for the CEOs of any company. This is especially true for the independent directors on the board. Independent board members by definition need to stay independent of the influence of the CEO and be the de facto torchbearers of corporate governance. A mechanism needs to be set up to make the board more accountable in case of any wrongdoing by the top management.

On a related note, if the 2008 banking crisis taught us anything it is that a defined regulatory framework and swift corrective measures are extremely crucial. For instance, the United Kingdom has a separate regulatory authority, the Financial Conduct Authority, to oversee the behaviour of financial entities in the country. In May, the CEO of Barclays was fined a heavy sum by the body for trying to establish the identity of the whistleblower who had complained against him. Such sound regulation can strengthen the trust in the system and improve its resilience to momentary shocks.

India is undergoing a crisis of confidence in its banking system. In these bleak times lies an opportunity to unleash reforms and strengthen governance. The government must refrain from temporary fixes like throwing more and more money at lenders. Such solutions only amount to kicking the can down the road. The real problem lies elsewhere.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

SBI chief Rajnish Kumar says more mergers not advisable as the bank is already big

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

It is not advisable for State Bank of India to take part in further merger process as it is already big, Rajnish Kumar, chairman of the bank, told The Indian Express.

Kumar, while speaking to Express, said that further mergers will not be good from the risk management perspective.

“SBI has already become big. My view is that from a systemic risk point of view, it won’t be advisable that SBI grows through merger or acquisition. Our normal growth and maintaining of market share is a different matter. You can’t have a banking institution, which already has over 20 per cent market share (go for more mergers) … from the risk management perspective also, it’s not good,” Kumar was quoted saying in the report.

The bank had recently seen two mergers- Bharatiya Mahila Bank in last year and that of its Associate banks earlier.

As per the report, many mergers in the banking sector have been forced ones. Many see SBI as the best candidate for these mergers, given its size and strength.

However, with officials speaking about the need for consolidation in India’s banking sector, speculations had emerged of further mergers to SBI, said the report.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Free banking services not liable to GST, mutual fund exit load to attract levy

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Free services, like ATM withdrawals, provided by banks to customers will not attract GST, but late payment charges on outstanding credit card bills and purchase of insurance policies by NRIs will attract the levy.

In a set of FAQs on applicability of Goods and Services Tax on banking, insurance and stock brokers sectors, the revenue department has clarified that transactions relating to securitisation, derivatives, future and forward contracts are exempt.

The clarification by the department keeping free banking services like cheque book issuance and ATM withdrawals outside the ambit of GST has put to rest the confusion prevailing over the issue.

Last month, the Department of Financial Services had approached the revenue department seeking exemption of these transactions from GST after the banks received service tax notice for free services offered to their clients.

Clarifying whether, services supplied without consideration to a recipient other than ‘related party’ / ‘distinct person’ taxable, the FAQ said Section 7 of the CGST Act, 2017 provides that services supplied without consideration to related persons or distinct persons only would qualify as ‘supply’.

“Therefore, where the services are supplied by a supplier without consideration to an unrelated recipient or a person other than a related or distinct person, the same would not amount to supply and not liable to GST,” it said.

On the levy of GST on insurance policies purchased by non-resident Indians (NRIs), it said the amounts from Non-Resident External Accounts are paid in Indian Rupees and are not received in convertible foreign exchange.

“Therefore, the conditions for export of services as provided under section 2(6) of IGST Act, 2017 are not satisfied. Life Insurance services in such cases would be treated as inter-State supplies and subject to GST,” it said.

On whether GST will be levied on the exit-load of mutual funds, the department said exit load in the form of a fee (whether or not as a fixed percentage of the investment) is liable to GST.

“Even if the exit load is in the form of units in the fund, it may be concluded that the consideration received in money was later converted to NAV units,” the FAQ said.

Besides, late payment of dues on credit card outstanding as well as interest on a finance lease transaction are taxable under GST.

The FAQ (frequently asked question) explained finance lease as a method of borrowing against the asset. The interest represents the time value of the money expended by the bank in financing the asset.

PwC Partner & Leader, Indirect Tax, Pratik Jain said the FAQs are very significant as globally the financial service sector is considered as most complex from GST standpoint.

“Transactions relating to securitisation, derivatives, future and forward contracts have been clarified to be exempt from GST, which have been debated since introduction of GST. While few aspects such as taxability of transactions between Indian and overseas offices of same bank still need some more clarity, industry would welcome the government’s initiative,” Jain said.

Clarifications around services provided by multiple branches and to multiple locations of customers would provide much needed certainty to the industry and reduce possibility of litigation, he said.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Private sector bank slippages outrun PSU banks

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Slippages remain elevated for Indian banking sector.

Contradictory to the past, private banks have shown a rise of 147% while PSU banks’ slippages grew 84% in Q4FY18.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

The Insolvency Code is stuffed with severe flaws and will not achieve its purpose

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Joseph-Ignace Guillotine was against the death penalty and urged the French National Assembly in 1789 to adopt “a fair and simple mechanism” to make the punishment more humane. He petitioned King Louis XVI. Guillotine hoped that making the death penalty humane would be the first step to its abolition.

The Insolvency and Bankruptcy Code, 2016 (IBC), was introduced as a law that would provide a new, fair, efficient and simple mechanism for resolving NPAs. The problem with over-simplification, irrespective of good intentions, is that at times they result in larger unintended problems.

If not immediately reviewed and rectified, the IBC is well on its way to lead to suspension of lending activity, stalled projects, erosion of value of Indian enterprises, faster growth of unemployment, increased costs of lending, and vesting of assets developed through public sector debt financing (read taxpayers money) with non-resident vulture funds. Parallel with the IBC is the RBI’s recently announced “Revised Framework” for “stressed assets” issued on February 12, directing lenders to classify loan accounts as “stressed” immediately on default and as a NPA in case of “any restructuring” of the loan.

Huge Toll on the Judiciary

The term “loan” has been defined very broadly to include “any concession” granted by the lender to the borrower for economic or legal reasons related to the “borrower’s financial difficulty”. The RBI’s mandate to lenders will place an unnatural load on the judiciary dealing with corporate insolvency, much like immediately expecting a hippopotamus to run a mile in seven minutes.

The main problem with the IBC is that, apart from having been a result of a cut-paste effort of adapting from English law, its framework is not a load bearing structure particularly for the volume that would be generated after RBI’s “new framework”. Also, its one-size-fits all prescription has the ability of being abused as a contract enforcement mechanism, or a debt recovery mechanism, which require fundamentally different approaches that can address the specific merits of the dispute.

Further, the process under the IBC does not provide for due classification based on the specific requirements of each sector or industry and the how that may be addressed. There is no provision preventing otherwise healthy companies that are not defaulting on loans to lenders being taken through the IBC by the so-called “operational creditors”.

Added to this, the recent insistence that promoters should not participate in the resolution process defies reason. Apart from negating the basic principles of corporate law (where companies are separate legal entities, and the “corporate veil” is lifted only in identified extreme circumstances), the exclusion of promoters is confounding if the intention is to get the best deal for the lenders and other stakeholders. Prohibiting promoters from participating in the resolution process also begs the question of what will happen if larger public sector undertakings start being put through the IBC process.

For example, what will happen if GAIL, which has entered into financial obligations estimated to total $30 billion under long-term LNG purchase contracts with US companies at prices which the Indian market cannot absorb, defaults on its take or pay obligations and the US entity files as an operational creditor seeking GAIL to be put through the IBC process for recovering the ship or pay amounts due?

Needed: A Serious Review

The flaw in the approach of the IBC, coupled with the RBI directions, is that they are seeking to resolve economic issues and banking sector regulatory issues through the tool of the insolvency process, which is simply not capable of addressing the underlying concerns. The IBC clearly needs a rethink and more importantly needs to be amended to prevent large-scale unintended consequences. Unfortunately, the recently released Report of The Insolvency Law Committee has failed to address the core issues that lie in the structure of the IBC and instead has only made recommendations addressing only a few issues that have arisen in the first few months of implementation of the IBC.

Interestingly, the report itself recommends creating special treatment for promoters of MSMEs and home buyers in real estate sector, but fails to follow through on the underlying issue that IBC will eventually need to recognise that each type of industry and infrastructure sector will need special treatment and that there is a need to change the basic structure of IBC itself.

The Guillotine was used 16,594 times between June 1793 and July 1794 including on the king who had approved it, which of course was not its intended consequence. Guillotine spent the rest of his days unsuccessfully petitioning that his name not be associated with the machine. One can only hope that the IBC does not suffer a similar fate.

Piyush Joshi heads the Projects and Project Finance unit at Clarus Law Associates.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow