Financial Awareness-November(21-30) 2016

  1. Lenders allowed more time to classify defaults as NPAs (Source: MINT)
  • The Reserve Bank of India (RBI) on November 21st said it would allow lenders more time to classify defaults as sub-standard owing to the government’s decision to scrap high-value banknotes.
  • Scheduled commercial banks, state cooperative banks, district central cooperative banks, non-banking financial companies (NBFCs) and microfinance companies will get an additional 60-day window for classifying stressed standard accounts as nonperforming assets (NPAs), if the payments are due between 1 November and 31 December.
  • “The additional time given shall only apply to defer the classification of an existing standard asset as substandard and not for delaying the migration of an account across sub-categories of NPA,” the statement said.
  • In its statement, RBI said the exemptions will be available to any running working capital limits available with banks where the sanctioned limit is Rs1 crore or less. Term loans of up to Rs. 1 crore, whether business or personal, secured or otherwise, on the books of any bank or any NBFC, including microfinance companies, would be covered under by this one-time scheme. This would also be applicable on home loans and agriculture loans up to that limit.
  • The move by RBI is likely to help over a third of the banking system loans. According to RBI data, 35% of the banking system’s loans were given to customers where the individual outstanding loan is Rs1 crore or below.
  • In its guidelines, the regulator said that this is a short-term deferment and will not count as restructuring. Typically, when an account goes from standard to NPA in a bank’s book, the lender has to set aside up to 15% of the outstanding amount as a provision.

2. Sharia banking: RBI proposes ‘Islamic window’ in banks (Source: BS)

  • The Reserve Bank of India (RBI) has proposed the opening of “Islamic window” in conventional banks for “gradual” introduction of Sharia-compliant or interest-free banking in the country.
  • Both the Centre and RBI are exploring the possibility of the introduction of Islamic banking for long to ensure financial inclusion of those sections of the society that remain excluded due to religious reasons.
  • Given the complexities of Islamic finance and various regulatory and supervisory challenges involved in the matter and also due to the fact that Indian banks have no experience in this field, Islamic banking may be introduced in India in a gradual manner.
  • Initially, a few simple products which are similar to conventional banking products may be considered for introduction through Islamic window of the conventional banks after necessary notification by the government.
  • “Introduction of full-fledged Islamic banking with profit-loss sharing complex products may be considered at a later stage on the basis of experience gained in course of time,” the RBI has told.
  • Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam.

3. FPI outflows hit $3bn in Nov on cash crisis, US rate hike fears (Source: BL)

  • Foreign investors have pulled out close to USD 3 billion from the Indian capital market this month so far on lingering concerns over the government’s demonetisation decision and fears of a rate hike by the US Federal Reserve.
  • According to data, net withdrawal by FPIs from equities stood at Rs. 9,841 crore during November 1-18 while the same from the debt market was Rs. 9,720 crore during the period under review, translating into a total outflow of Rs. 19,561 crore (USD 2.89 billion).
  • The foreign portfolio investor (FPI) outflow comes following net withdrawal of more than Rs. 10,306 crore from the capital markets (equity and debt) last month. Prior to that, the equity market had witnessed an inflow of over Rs. 20,000 crore.
  • So far this year, FPIs have invested a net sum of Rs. 37,146 crore in stocks while they have pulled out Rs. 13,278 crore from the debt market, resulting in a combined net inflow of Rs. 23,868 crore.
  • Sentiment remained distinctly weak due to the cash crunch because of the government’s move to withdraw Rs. 500 and Rs. 1,000 notes to flush out black money amid concerns about its impact on small and medium-sized businesses that largely run on cash transactions, experts said.
  • US Federal Reserve chief Janet Yellen reiterated that the central bank may hike interest rates “relatively soon”, which made investors more anxious. “The signals from the US Fed on December rate hike have inflicted more pain on equities, which were already reeling under demonetisation,” said Vinod Nair, Head of Research, Geojit BNP Paribas Financial Services.

4. Fitch says note ban impact to be mixed, retains ‘negative’ outlook for banking sector (Source: BS)

  • Fitch re-affirmed its “negative” outlook for India’s banking sector, saying the financial standing remained “fragile” without bigger capital injections and that the government’s action on banknotes could end up having a mixed impact.
  • Fitch Ratings said the government’s move to remove higher-value banknotes from circulation would lead to a surge in deposits, allowing lenders to eventually lower lending rates and lower costs to service the sector’s debt.
  • But it also noted that the overall impact on the banking sector remained uncertain, given borrowers in sectors that rely on cash could struggle to service their loans, while deposits could eventually be withdrawn again, among other factors.
  • Given the mixed impact, India’s banking sector could remain constrained by the “under-capitalisation” of state-owned banks and weak investment demand.
  • The agency, which had previously estimated Indian banks would need about $90 billion in total capital by March 2019 to meet global Basel III banking rules, said 80 per cent of those capital requirements would arise in the next two financial years.
  • The ratings agency expects additions to bad loans to slow, although high loan-loss provisions for both new and old nonperforming loans would keep profits under pressure.

5. NBFCs, MFIs credit profiles face liquidity test: Report (Source: ET)

  • Asset quality of non-banking finance companies and micro finance institutions may worsen if the disruption prolongs beyond 2 months, but if normalcy is restored over the next few weeks, they would be able to absorb the disruption, a report said.
  • However, the impact of demonitisation on NBFCs and MFIs would depend on the extent of exposure to cash transactions.
  • “In the near term, financial sector companies operating in cash-intensive businesses, such as microfinance institutions (MFIs) and non-banking finance companies (NBFCs), may stave off liquidity pressures because of undrawn lines of credit from banks and liquid assets,” said Crisil in a report. “If normalcy is restored over the next few weeks, NBFCs would be able to absorb the disruption.”
  • The Reserve Bank of India has relaxed the prudential norms on asset classification by an additional 60 days for lenders applicable for dues payable between November 1, 2016 and December 31, 2016. This is expected to provide some respite to the non-banks in managing asset quality in the interim period. “However, if the disruption prolongs beyond 2 months, asset quality pressures could manifest, the report said.

6. Banks integrating systems with RBI, GSTN to collect GST: Arun Jaitley (Source: MINT)

  • Banks are integrating their information technology system with Reserve Bank of India (RBI) and goods and services tax ( GSTN) network as they prepare to handle tax deposits under the new indirect tax regime, finance minister Arun Jaitley said on November 22nd.
  • Detailed protocols for integration of the banks’ IT system with RBI and GST portal of Goods and Services Tax Network have been prepared and finalised by RBI and the GSTN, respectively, in consultation with the Government of India, he said.
  • The banks are developing and making necessary changes in their information technology system for integration with RBI and GSTN portal, he added.
  • Under the GST regime, individuals and entities can pay taxes online using debit or credit cards or any electronic, mode of payment, including NEFT, RTGS.
  • A new and simpler portal that will enable easy filing of returns and tax payments has already gone live. A provisional identification number called GSTIN is being generated for the existing excise and sales tax assessees.

7. Airtel launches India’s first payments bank (Source: MINT)

  • Airtel Payments Bank Ltd on November 23rd became the first payments bank to start operations, offering services in Rajasthan in a limited scale.
  • The payments bank is testing systems and processes ahead of a full scale, pan-Indian launch, the company said
  • Customers will be offered an interest rate of 7.25% on deposits in savings account, higher than the 4-6% commercial banks are offering, it said.
  • The pilot will run at 10,000 Airtel retail outlets where basic banking services will be provided. Airtel Payments Bank is planning to expand its merchant network in Rajasthan to 100,000 by the end of the year, the statement said.
  • Bank accounts can be opened by customers without documents using Aadhaar based e-KYC. The subscriber’s mobile number would function as a bank account number and transfer from Airtel to Airtel phone numbers would be free.
  • The bank is not offering any debit card facility right now, it said. The bank was the first applicant to receive the final licence from the Reserve Bank of India (RBI) in April. Kotak Mahindra Bank holds 19.9% in the Airtel Payments Bank.
  • The retail outlets, which will act as banking points, will offer account opening services, cash deposit and withdrawal facilities. As a payments bank it cannot perform lending activities, except while giving loans to its employees on approval of the board. The bank can, however, accept deposits of as much as Rs1 lakh.

8. P-Note investments fall to 30-month low of 2 lakh cr in Oct (Source: BL)

  • Investments in domestic capital markets through participatory notes (P-Notes) fell to its lowest level in two-and-half years to Rs. 2 lakh crore at October-end.
  • P-Notes are typical instruments issued by registered foreign portfolio investors (FPIs) to overseas investors who wish to participate in Indian markets without registering themselves directly in the country to save time. But they still need to go through a proper due diligence process.
  • According to data available with SEBI, the total value of P-Note investments in Indian markets — equity, debt and derivatives — fell to Rs. 1,99,987 crore at October-end from Rs. 2,12,509 crore at the end of September.
  • This was the lowest level since April 2014 when the cumulative value of such investments stood at Rs. 1,87,486 crore.
  • Investments through the route stood at Rs. 2,16,232 crore and Rs. 2,12,179 crore at the end of August and July, respectively.
  • In June, P-Note investments plunged to Rs. 2.10 lakh crore, which was the lowest in nearly two years owing to a tight vigil on funds coming through this route.
  • The quantum of FPI investments via P-Notes decreased to 7.8 per cent in September from 8.3 per cent in the preceding month.
  • The share of P-Notes has been falling over the years as SEBI tightened the disclosure norms and other related regulations.
  • In absolute terms, the value of P-Note investments rose to a record Rs. 4.5 lakh crore in October 2007, but dropped to Rs. 3.22 lakh crore in February 2008 and Rs. 60,948 crore in February 2009.

9. Moving towards cashless economy: New vehicles to have digital tag for toll payments (Source: FE)

  • Government has asked automobile manufacturers to provide a digital identity tag in all new vehicles, including cars, to enable electronic payment at all toll plazas and ensure seamless movement at check posts.
  • Moving towards a cashless digital economy was one of the objectives behind Prime Minister Narenda Modi’s surprise announcement earlier this month to ban old 500 and 1000 rupee notes, sweeping away 86 per cent of total currency in circulation.
  • “So, as far as toll plazas are concerned, the Ministry of Road, Transport and Highways is advising vehicle manufacturers that in all new vehicles, the manufacturers must provide Radio-Frequency Identification (RFID) facility,” Economic Affairs Secretary Shaktikanta Das told.
  • He said the provision of Electronics Product Code Global Incorporated (EPCG)-compliant RFID facility in all new vehicles will ensure payment of toll digitally and also avoid the waiting time, and the vehicles will move seamlessly without having to wait at check posts.

10. Govt eases norms to boost cashless transactions (Source: MINT)

  • To promote cashless transactions after shrinking the cash economy through the demonetization of high-value notes, the government announced a slew of measures, including waiving of services charges on online purchases and recapitalization of district central cooperative banks (DCCBs), for providing winter crop loans to small and marginal farmers.
  • The Reserve Bank of India (RBI) had on 23.11.2016 barred the use of demonetized Rs500 and Rs1,000 currency notes in small savings schemes such as Public Provident Fund, Post Office Savings Schemes, National Savings Certificates, Senior Citizen Savings Scheme accounts and Kisan Vikas Patra. However, the finance ministry announced that old notes can be deposited in post office accounts.
  • The government announced that the National Bank for Agriculture and Rural Development (Nabard) has provided Rs21,000 crore to DCCBs through state cooperative banks to provide loans to farmers to meet their credit requirements during the winter crop season.
  • RBI had prohibited DCCBs from dealing in old currencies after the demonetization was announced.
  • National Payments Corp. of India (NPCI) has already waived switching charges for RuPay cards.
  • To promote greater usage of payments through e-wallets, RBI has decided to increase monthly transaction limit for individuals from Rs10,000 to Rs20,000.
  • The finance ministry has also advised all government organizations and public sector undertakings to use only digital payment methods such as internet banking, unified payment interface, cards, Aadhaar-enabled payment system, etc., to make payments to all stakeholders and employees.

11. Core committee formed to promote cashless transactions in rural areas (Source: BL)

  • A high-level committee has been set up to facilitate creation of necessary infrastructure for implementation of cashless economy. This follows a directive from the Prime Minister’s Office (PMO) to Ravi Shankar Prasad, Minister of Electronics and Information Technology (MeitY) and Piyush Goyal, Minister of State (Independent Charge) for Power, Coal, New and Renewable Energy and Mines, to work on measures that would reduce the impact of demonetisation, particularly in rural India.
  • The purpose of the committee is to expedite ‘National strategy to transfer India into a cashless economy’ and the committee includes Secretary,MeitY, Disinvestment Secretary and Chief Executive of NITI Aayog. According to the strategy, the members are asked to see how to create necessary infrastructure across the country and who all (which departments) can be involved in the programme.

12. CRR hike necessary to manage excess liquidity: Shaktikanta Das, DEA Secretary (Source: ET)

  • Finance Ministry said RBI’s raising CRR became necessary due to increase in liquidity in the system as large sums of money in the form of scrapped Rs 500/1000 notes is being deposited by the public in banks.
  • The Reserve Bank on 26.11.2016 asked lenders to temporarily maintain an incremental cash reserve ratio (CRR) of 100 per cent to absorb excess liquidity from the system. CRR is the portion of the deposits which banks are required to park with RBI. The actual current rate of CRR is 4 per cent.
  • “Increase in CRR is a part of the liquidity management strategy used by the RBI. Perhaps it has become necessary in the context of excess liquidity in the system. As you know excess liquidity adds to the volatility in the currency market,” Economic Affairs Secretary Shaktikanta Das said. He said RBI has already given a proposal for increasing the Market Stabilisation Scheme (MSS) limit and “it is under the consideration of the government”. MSS, a tool to manage liquidity, has been fixed at Rs 30,000 crore for the current fiscal.

13. ICICI Bank to help 100 villages go digital (Source: BL)

  • Inspired by the immense success of India’s first digital village, created by ICICI Bank at Akodara in Sabarkantha district of Gujarat, ICICI Bank will now convert 100 villages across the country into ‘Digital Villages’.
  • The Digital Village programme encompasses digitisation of transactions & commercial activities, vocational training and credit facility to help villagers earn a sustainable livelihood. It will provide vocational training to 10,000 villagers in first 100 days and offer them credit linkages so that the villagers can start their own business ventures.
  • These villages, which will be spread across the length and breadth of the country, will enable villagers to use digital channels for banking and payments transactions.
  • Under this initiative, villagers will be able to open bank accounts using Aadhar-based e-KYC and make cashless payments to retail stores through a SMS/USSD-based mobile solution.

14. New income declaration scheme explained (Source: BS)

  • Concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 (the Act) can possibly be used for concealing black money. The Taxation Laws (Second Amendment) Bill, 2016 (‘the Bill’) has been introduced in the Parliament to amend the provisions of the Act to ensure that defaulting assessees are subjected to tax at a higher rate and stringent penalty provision.
  • Further, in the wake of declaring specified bank notes “as not legal tender”, there have been suggestions from experts that instead of allowing people to find illegal ways of converting their black money into black again, the Government should give them an opportunity to pay taxes with heavy penalty and allow them to come clean so that not only the Government gets additional revenue for undertaking activities for the welfare of the poor but also the remaining part of the declared income legitimately comes into the formal economy.
  • In this backdrop, an alternative Scheme namely, ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY) has been proposed in the Bill. The declarant under this regime shall be required to pay tax @ 30% of the undisclosed income, and penalty @10% of the undisclosed income. Further, a surcharge to be called ‘Pradhan Mantri Garib Kalyan Cess’ @33% of tax is also proposed to be levied. In addition to tax, surcharge and penalty (totaling to approximately 50%), the declarant shall have to deposit 25% of undisclosed income in a Deposit Scheme to be notified by the RBI under the ‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’ for four years. This amount is proposed to be utilised for the schemes of irrigation, housing, toilets, infrastructure, primary education, primary health, livelihood, etc., so that there is justice and equality.



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