Financial Awareness-October(21-31) 2016

1. Finance Ministry to hold meeting with top management of banks tomorrow on NPAs (Source: BS)
 Finance Ministry has called a meeting of senior management of banks to discuss the bad loans issue in specific sectors, including steel. The meeting would focus on NPAs in sectors like steel, power, and infrastructure. These three sectors account for the bulk of gross NPAs which surged to 9.32% (Rs 4.76 lakh crore) in 2015-16.

 The meeting would be attended by CEO and Executive Directors of various public sector banks. Senior officials from the steel, power and road transport ministries would also be present there.
 In the last two years, the RBI has taken measures to clean up balance sheet of banks and the target set for the same is March 2017. Earlier this week, Finance Minister had said banks should enforce their right and recover dues in the larger interest of the economy. Banks now have to enforce their right in the larger interest of the economy because if money keeps lying and blocked with one particular section, then your capacity to lend to others itself is adversely impacted, Jaitley said.
 Finance Ministry has called a meeting of senior management of banks to discuss the bad loans issue in specific sectors, including steel. The meeting would focus on NPAs in sectors like steel, power, and infrastructure. These three sectors account for the bulk of gross NPAs which surged to 9.32% (Rs 4.76 lakh crore) in 2015-16.
 The meeting would be attended by CEO and Executive Directors of various public sector banks. Senior officials from the steel, power and road transport ministries would also be present there.
 In the last two years, the RBI has taken measures to clean up balance sheet of banks and the target set for the same is March 2017. Earlier this week, Finance Minister had said banks should enforce their right and recover dues in the larger interest of the economy. Banks now have to enforce their right in the larger interest of the economy because if money keeps lying and blocked with one particular section, then your capacity to lend to others itself is adversely impacted, Jaitley said.
2. Banks eye ‘resolution’ of Rs1.5 trillion worth of stressed assets. (Source: Mint)
 Enthused by speedy recovery of loans worth $2.5 billion by three lenders including ICICI Bank within days of mega $13-billion Essar deal, banks are now looking at resolution of stressed assets totaling Rs 1.25-1.50 lakh crore (nearly $20 billion) in coming months.
 Having broadly completed the first two stages of ‘recognising’ the stressed assets and of ‘reserving’ or provisioning for such loans in their accounts, the banks are now betting big on ‘resolution’ part of what is being billed by some top bankers as ‘3Rs’ formula to recover their dues.
 With the Essar deal coming in as a major catalyst, the banks are prioritising the resolution process by focusing on helping in sale of businesses by corporate borrowers and by converting debt into equity at operating profit-generating companies, according to some top bankers. Without naming the companies where such deals are in the advanced stages, the bankers said those involved in manufacturing sector stand a good chance of attracting suitors—mostly from abroad and some cashrich enterprises from within the country with strategic interest in the respective business areas.
 The ‘resolution’ process has got a major boost after three top lenders—ICICI Bank, Axis Bank and StanChart—got back an estimated $2.5 billion as part of the first payment for their debt exposure to the Ruia-led Essar Group. The two Indian lenders—which together had an exposure of $1.5 billion—will get back nearly half of their money or about $770 million in cash, while further $750 million of debt will get transferred to Rosneft-led consortium and to Essar’s ports and other businesses, as per the terms agreed upon by them.
 Out of the total cash component, nearly $350 million was paid in cash to the two Indian banks, which together with interest payout of about $100 million, takes their total collection from Essar to about $450 million. ICICI Bank’s share in the total payout is three-fourth, while the remainder is of Axis.
3. RBI decides to allow FDI up to 100% in other financial services (Source: BS)
 RBI decided to allow foreign investment up to 100% under the automatic route in ‘other financial services’. RBI, however, said foreign investment in an activity that is regulated by an Act will be restricted to foreign direct investment (FDI) limits. Hence, sectors such as insurance, which already have pre-defined FDI limit (49 per cent in insurance), will continue to follow that.  RBI said such FDI shall be subject to conditionalities, including minimum capitalisation norms as specified by the concerned regulator or government agency. In the financial services activities that are not regulated or are partly regulated by any financial sector regulator or where there is a lack of clarity regarding regulatory oversight, FDI will be allowed up to 100 per cent under the government approval route.  Other financial services’ will include activities which are regulated by any financial sector regulator, including the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority, National Housing Bank. 
4. India moves up a notch in World Bank ease of business ranking (Source: BL)
 India continues to rank low at 130th position in terms of ease of doing business, with the country seeing little or no improvement in dealing with construction permits, getting credit and other parameters. The last year’s ranking has been now revised to 131 from which the country has improved its place by one spot.
 The government has been making efforts to further improve the ease of doing business and aims to bring the country in the top 50. Expressing disappointment over no change in India’s ranking in the World Bank’s index on ease of doing business, Indian government regretted that the report did not take into consideration 12 key reforms undertaken by the government.
 When it comes to ‘distance to frontier’ — a measurement of the gap between an economy’s performance and the best practice score of 100 — India’s score has improved to 55.27 this year from 53.93 last year. India is the only country for which the report has a box dedicated to its ongoing economic reforms.
 The list of countries in the Doing Business 2017 is topped by New Zealand while Singapore is ranked second. It is followed by Denmark, Hong Kong, South Korea, Norway, the UK, the US, Sweden and former Yugoslav Republic of Macedonia. 
5. RBI probably cannot bring down inflation to 4% sustainably (Source: FE)
 The Reserve Bank may be going all-out to bring down inflation to 4 per cent, but it probably “cannot do so sustainably” as health and education prices will keep the consumer price index (CPI) above the targetted level, says a report.
 According to global financial services major HSBC, even if food inflation settles at a lowly 4 per cent, it will not be enough to take headline inflation all the way down to 4 per cent.
 On RBI’s policy stance, the report is clear that “if only RBI is convinced that inflation continues to fall gradually, it will find space to cut rates”.
 Three government decisions over the next few weeks — the GST rate, Seventh Pay Commission housing allowance and the fiscal trajectory — progress on food reforms and the pace of recovery will determine if “the direction is comforting”, the report said.
 For now, HSBC expects RBI to deliver a 25-bps rate cut at its December meeting on the back of growing comfort that 5 per cent by March, the intermediate inflation target, is likely to be met.
6. Banking Round Table highlights: GDP is fine, trajectory upwards, says HDFC Bank’s Puri (Source: BS)
Highlights of what the top banking honchos said in the Business Standard Banking Round Table, 2016:
a) The one thing striking about the banking side in concentration of assets and liabilities, said IDFC Bank MD & CEO Rajiv Lall
b) IDFC Bank’s Rajiv Lall said that 45 per cent of all outstanding advances were made to only 300 corporates.
c) Rajiv Lall pointed out that 60 per cent of India’s household savings were still outside the financial system.
d) Union Bank of India CMD Arun Tiwari said that there is a perception advantage in terms of which bank is a retail bank and which is involved in corporate lending.
e) Axis Bank MD & CEO Shikha Sharma said that credit growth to the corporate sector was relatively weak and that working capital demand has also been depressed.
f) Shikha Sharma added that there have been no new projects in the last 18 months and working capital demand has also been depressed.
g) Axis Bank’s Sharma pointed out that the retail and small and medium-sized enterprises sectors were showing demand. However, she cautioned that there was worry over whether that is the next bubble.
h) Chandra Kochchar, the head of ICICI Bank highlighted that it’s imperative for banks to become agile and active to keep evolving their business models. A cause of concern is that loan against property and unsecured loans appears to be growing at a fast pace, she added. Kocchar also said the next round of credit growth will come from the secondary impact of all the government spends.
i) Aditya Puri of HDFC Bank pointed out that the government, banks and the Reserve Bank of India are very clear that they’re not in the business of charity. If money has been borrowed, it must be given back, he said.
j) Pramit Jhaveri of Citibank thinks technology is going to be the biggest driver for banking.”India is among most attractive destinative as far as financial services industry is concerned,” said Jhaveri.
k) Chanda Kocchar of ICICI Bank said infra projects will be funded partly by banks and partly by other means such as bonds. This means that project finance will get more structured before money is committed towards a particular project.
l) She also said robotics have reduced the bank’s error rates and response time to consumers 
7. Merger of associate banks may be costlier for SBI than expected, says Credit Suisse (Source: ET)
 What was once thought to be an exercise to strengthen State Bank of India, the merger of its associate banks may turn out to be an expensive affair.
 The cost of merging the associates would outweigh the benefits in the short term as the bad loans mount at units, Credit Suisse Securities (India) Private Ltd said in a report.
 SBI was expected to bear Rs 3500 crore on account of harmonisation of employee pension plans when it merges the associate banks with it.
 Credit Suisse said that the pension obligations may be higher than earlier estimates while the doubling of NPA ratios in associate banks over the last few quarters would add further strain on the parent after merger with poorer asset quality.
 Gross NPAs at SBI’s subsidiaries have more than doubled to 13.2% as on September end from 6% in March, as associates have been aligning their bad loan recognition norms in line with the parent. This translates to a 23% rise in SBI’s consolidated NPAs just from the associates.
 “We therefore continue to believe that the initial financial impact of the merger will be negative on SBI and material synergy benefits may only accrue over long term,” Credit Suisse said.
8. Govt may ease rules on retail trading and more to boost FDI inflows (Source: FE)
 The government is weighing easing Foreign Direct Investment (FDI) rules further in areas, including retail trading, to make it even easier for foreign companies to invest in India, a senior government official said on Friday.
 FDI in legal and some financial services, and information and broadcasting are also being looked into for further relaxation, the official confirmed to FE. The government is also seriously considering allowing the FDI in non-litigious areas of law — especially transactional legal services and international arbitration.
 In retail, however, the relaxation in FDI could be more in the form of procedural changes initially rather than any drastic step on further liberalisation. Although the government has said 100% FDI will be permitted in trading — including through e-commerce — of food products produced or manufactured in India, critics have pointed out that no supermarket can attract massive footfall and be profitable with just food items on its shelves.
 The Narendra Modi government has already announced two big rounds of relaxations in the FDI regime, first in November 2015 and then in June this year, easing rules in over a dozen sectors ranging from real estate, pharmaceuticals, food marketing, aviation, defence to e-commerce and banking. 

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