Financial Awareness-February(1-10) 2017

  1. Budget 2017: State-run banks gain 4% on Rs10,000 crore infusion announcement (Source: MINT)
  • Shares of public sector banks on February 1st rose by as much as 4% as the government announced infusion of Rs10,000 crore in public sector banks in the next fiscal year.
  • Union Bank of India closed up 5.64%, Bank of Baroda rose 4.88%, State Bank of India went up 3.96% and Punjab National Bank gained 3.24% on the BSE in the closing hours.
  • “As per the Indradhanush plan, the public sector banks will be provided with Rs10,000 crore in the next fiscal. Additional allocation would be made if required,” said FM.

2. Banks can encash SR issued by ARC and raise capital (Source: ET)

  • With the announcement by FM Arun Jaitley in the Union Budget to allow listing of Security Receipts (SR) at the stock exchanges, Banks are about to get an option to exit the unsold portion of the bad loans that are held as SR on their books.
  • When banks sell bad loans to asset reconstruction companies (ARC), a part of the loan is sold for cash and for remaining part of bad loans, the ARCs issue SR which are similar to bonds which would be redeemed over five to seven years. Thus in a way, the bad loans sold to ARCs continue to be in the books of banks in form on investments.
  • The move will create secondary market for bad loans as it will enable banks to exit. Those who have appetite for distress assets can buy these SRs. As of now, there are close to Rs 65000 crore outstanding SRs issued by ARCs

3. RBI says it hasn’t authorised use of Bitcoins, flags risks (Source: MINT)

  • The Reserve Bank of India (RBI) clarified in a statement that it has not authorised dealings in or use of virtual currencies, and cautioned those investing in the instruments like Bitcoins.
  • Those investing in such virtual currencies are exposing themselves to potential financial, operational, legal, customer protection and security related risks, it warned.

4. Borrowing costs likely to fall for housing companies (Source: ET)

  • Union Budget for 2017-18 has focussed more on housing, a key need for millions of poor Indians living in smaller towns and villages. The big push has come from the Finance Minister’s announcement marking affordable housing with “infrastructure” tag.
  • Housing company borrowing costs are likely to come down as the affordable housing segment gets infrastructure status. It has been largely a demand from the industry.

5. Centre raises Credit Linked Subsidy Scheme loan tenure to 20 years (Source: FE)

  • The Central Government approved extension of tenure of loans under Credit Linked Subsidy Scheme (CLSS) of Pradhan Mantri Awas Yojana (PMAY) to 20 years from 15 years and introduction of a new CLSS for middle income group with a provision of Rs 1,000 crore in 2017-18.
  • According to an official statement, the scheme will be renamed as CLSS for EWS/LIG — for economically weaker sections (EWS) of society/Lower Income Group (LIG). Besides, the Cabinet approved the introduction of a new Credit-Linked Subsidy Scheme for the Middle Income Group (MIG). The government has proposed to construct 1 crore houses for the homeless by 2019. The PM Awas Yojana allocation has been raised to Rs 23,000 crore, from Rs 15,000 crore.

6. RBI issues draft guidelines on interest rate risk on banking book (Source: MINT)

  • Reserve Bank of India (RBI) released draft guidelines on interest rate risk on banking book (IRRBB), seeking public comments on the same, by 3 March.
  • IRRBB refers to the current or prospective risk to a bank’s capital and earnings arising from adverse movements in interest rates that affect banking book positions.
  • When interest rates change, the present value and timing of future cash flows change. This in turn changes the underlying value of a bank’s assets, liabilities and off-balance sheet items and hence its economic value.
  • As a part of Basel-III capital regulations, banks are required to identify the risks associated with the changing interest rates on its balance sheet and off-balance sheet exposures in the banking book from both, short- term and long-term perspective.
  • Banks can also decide, with the approval of the board, on the appropriate level of interest rate risk in the banking book, which they would like to carry keeping in view their capital level, interest rate management skills and the ability to re-balance the banking book portfolios quickly in case of adverse movement in the interest rates.
  • As part of the draft guidelines, RBI said that banks where the economic value of equity is equal to or higher than 15% of their respective Tier-I capitals in stress scenarios, will be considered to be having materially high IRRBB and RBI may ask these banks to either reduce their exposure to IRRBB or enhance their capital base.

7. RBI steps in prevent loss making banks from defaulting on interest payment on bonds (Source: ET)

  • The Reserve Bank of India has stepped in to prevent loss making banks from defaulting on bonds that were raised to boost their capital adequacy ratio- the minimum capital that banks keep as a cushion against defaults on loans.
  • RBI permitted banks to use statutory reserves to for the payment of interest on AT1 bonds if free reserves are not sufficient. As on date, 14 banks have Rs 22,600 crore of AT1 bonds outstanding.
  • According to a research report by broking firm Religare, “This relaxation will help other large size banks (especially private sector banks) to improve their AT1 bonds ratings. This is likely to bring down their cost of borrowings for AT1 bonds.” However, RBI has stipulated that banks are allowed to use statutory reserves if they meet all other capital adequacy requirements (CET1, tier 1 and total capital adequacy).

8. Norms on commercial paper issuance eased (Source: BS)

  • The Reserve Bank of India proposed to ease rules around issuance of commercial papers (CP), and allowed buybacks of these papers even as the central bank lowered the rating requirement of firms issuing these papers by one notch from A2 to A3.
  • Besides, RBI also widened the gamut of issuers who can issue the paper. Earlier, corporates, primary dealers (PDs) and the AllIndia Financial Institutions (FIs) were eligible to issue CP. The revised draft said apart from the above, any institution that has a minimum networth of Rs 100 crore or higher can issue these papers, too.
  • According to the draft guidelines, the commercial papers have to be issued for a minimum value of Rs 5 lakh and multiples of Rs 1 lakh thereof. However, the extant rule is that the minimum value of issuances should be Rs 5 lakh and multiples of Rs 5 lakh thereof.

9. Public Sector banks at a higher threat of cyber attack than private banks, says RBI DG (Source: ET)

  • S. S. Mundra, deputy governor at the RBI said that Indian banks are being lax in reporting cyber attacks to the regulator exposing the financial system and that state run banks are at a higher risk of such crimes than their private peers.

This warrants immediate and continued attention of the Board and the senior management of the banks,” Mundra said.

10. Mastercard, CAIT plan campaign to promote digital payments among traders (Source: BL)

  • Global technology company Mastercard and traders’ body CAIT have launched a new campaign titled Digital Apnao Vyapar Badhao (Adopt Digital and Build Business) to accelerate adoption of digital payments among traders and to help them grow their businesses.
  • As part of the campaign, 500 camps will be organised to on-board five lakh merchants and traders by bringing together financial institutions and other payment facilitators under one roof.

11. New RBI norms on AT-1 bond a huge capital respite for PSBs: rating agency Icra (Source: ET)

  • The new Reserve Bank guidelines on Basel III-compliant additional tier-1 (AT-1) bonds have partially reduced the default risks for many state-run banks like Central Bank, IOB and United Bank, who had negative distributable reserves under the earlier guidelines. This will have positive reserves under the new norms, says a report by rating agency Icra.
  • While three of the 21 state-run banks — Central Bank of India, Indian Overseas Bank and United Bank of India — had negative distributable reserves as percentage of their risk weighted assets at -0.69, -1.63 as per the earlier guidelines, respectively, but under the new guidelines the same will turn positive at 0.39, 0.66 and 2.72, respectively, notes Icra.
  • This can help ensure that these three banks can avoid the imminent risk of default on the coupon payments. As of September 2016, the statutory distributable reserves of 21 state-run banks, excluding the five SBI associates, stood at around Rs 1.28 lakh crore

12. Air India may be listed on exchanges with banks holding strategic stake (Source: MINT)

  • The government is considering inducting banks as strategic investors in Air India, followed by a listing of the national airline.
  • The plan is part of another attempt to turn around the airline. In the first step, the government will continue efforts to recast Rs28,000 crore of working capital debt that Air India owes a consortium of 19 banks led by State Bank of India (SBI). The lenders are being asked to convert this debt into equity.
  • In the second stage, the government plans to induct professionals with proven financial and strategic management skills into the airline. In the third stage, the government will consider listing the airline.

13. RBI cites inflation concerns, signals end to rate cut cycle (Source: MINT)

  • RBI’s monetary policy committee (MPC), headed by governor Urjit Patel, decided unanimously to shift the policy stance from “accommodative” to “neutral” and left the repo rate at 6.25% in 6th Bimonthly Monetary Policy.
  • RBI hit the pause button after cutting the repo rate, at which it infuses liquidity into the banking system, by 175 basis points (bps) since the start of 2015—150 bps of it.
  • The MPC said it was still assessing the transitory effects of demonetisation on inflation, and the output gap. It also cited significant upside risks to inflation, such as rising crude prices and exchange rate volatility. Retail inflation decelerated to a two-year low of 3.41% in December, but RBI seems more focused on non-food, non-fuel inflation.
  • Rising commodity prices, strengthening of the dollar, and the effects of the house rent allowance increase in the Seventh Pay Commission award were the other reasons which made the central bank pause.
  • At the same time, the central bank is expecting a bounceback in growth in the coming financial year up to 7.4% in 2017-18. RBI said that growth will accelerate as discretionary consumer demand, held back by demonetisation, picks up, cash-intensive sectors such as retail trade and hospitality rebound, and consumption and investment demand recover.

14. RBI says open to bad bank option for NPAs (Source: MINT)

  • The Reserve Bank of India (RBI) will look at all options, including setting up a so-called bad bank, for resolving the banking industry’s bad loans, Viral Acharya, deputy governor in charge of monetary policy, said.
  • Acharya’s comments come in the wake of the Economic Survey’s suggestion for setting up a bad bank, or public sector asset rehabilitation agency, to be funded by government securities, equity infusion from the private sector, or by using RBI’s excess capital to tackle the Rs6.7 trillion of bad loans choking the banking system.

15. RBI to set up panel on strengthening cyber security (Source: MINT)

  • In its 6th monetary policy announcement, the Reserve Bank of India (RBI) announced a directive for banks and financial services companies struggling with cyber security concerns.
  • The central bank said it will form an inter-disciplinary standing committee on cyber security. It will review threats inherent in existing and emerging technology, study adoption of various security standards and protocols, interface with stakeholders and suggest appropriate policy interventions to strengthen cyber security and resilience.
  • RBI also said that it will form an enforcement department as part of its financial sector oversight mechanism, which will be functional from 1 April.

16. Govt sets record disinvestment target of Rs72,500 crore for FY18 (Source: MINT)

  • Government has set disinvestment target for FY’18 at Rs. 72,500 crore. Government could not achieve its target of disinvestment in last sixteen years (except three years). Barring 2012-13 and 2009-10, the gap between budget targets and actual collections has been as high as Rs 20,000 crore.
  • “The disinvestment and strategic divestment target of Rs72,500 crore for FY2018, which is equivalent to 0.4% of GDP, appears somewhat optimistic at this juncture. The ability to meet this target would depend on the timing of the divestment as well as market appetite. The extent of funds raised through divestment would critically impact the government’s ability to achieve its fiscal consolidation plan,” said Aditi Nayar from ICRA.
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