Financial Awareness-October(1-10) 2016

  1. RBI issues circular on Aadhaar usage in banks (Source: MINT)
  • In an attempt to encourage the use of Aadhaar, the Reserve Bank of India (RBI) said that all the banks should ensure that all new card acceptance infrastructure, deployed with effect from 1 January 2017, are also enabled for processing payment transactions using Aadhaar-based biometric authentication.
  • In 2013, the RBI had advised banks that card infrastructure has to be enabled for both EMV Chip (chip-enabled card acceptance) and PIN (personal identification number) and Aadhaar acceptance. This decision came after the recommendation of a working group established by the central bank, favouring Aadhaar as an effective alternative for additional factor of authentication for domestic transactions, subject to fulfilment of certain conditions.

2. RBI increased the investment limits of FPI in G Sec (Source: BS)

  • Reserve Bank increased the investment limits for foreign portfolio investors in government securities by Rs 100 billion to Rs 2,100 billion and also upped the limits in state government securities. “As announced in the medium term framework, the limits for investment by FPIs in Central Government securities for the next half year are proposed to be increased in two tranches, each of Rs 100 billion from October 3, 2016 and January 2, 2017 respectively,” it said in a notification.
  • Accordingly, the total limit for FPIs will go up to Rs 2,100 billion (including Rs 1,480 billion for all FPIs and an additional of Rs 620 billion for those investing for long term) from October 3. The same will move up to Rs 2,200 billion from January 2, 2017 and shall include Rs 1,520 billion for all FPIs and an additional of Rs 680 billion for those investing for long term, it said.
  • The limits on State Development Loans (SDLs) are proposed to be increased in two tranches, each of Rs 35 billion, from October 3, 2016 and January 2, 2017 respectively, it said. The limits of SDLs will go up to Rs 175 billion from the present Rs 140 billion starting October 3, and will be hiked to Rs 210 billion from January 2, 2017, it said.

3. Forex reserves rise $1.2 b to $371 billion (Source: FE)

  • The country’s foreign exchange reserves rose by $1.17 billion to reach $370.77 billion during the week ended September 23, aided by a rise in foreign currency assets, according to Reserve Bank of India. Forex reserves had dropped by $1.68 billion to $369.60 billion in the previous week ended September 16.
  • Foreign currency assets (FCAs), which constitute a significant chunk of the overall forex reserves, rose $1.17 billion to $345.24 billion during the reporting week, data from the RBI showed. FCAs, expressed in dollar terms, account for fluctuations in non-US currencies such as the euro, the pound and the yen, which are held in the reserves.

4. Govt names members of bankruptcy board (Source: MINT)

  • After appointing M.S. Sahoo as chairperson of the Insolvency and Bankruptcy Board of India, the government has finalized the names of four members to the board in order to make it functional. They are: Ajay Tyagi, additional secretary, department of economic affairs; Amardeep Singh Bhatia, joint secretary, ministry of corporate affairs; G.S. Yadav, joint secretary, department of legal affairs, and Unnikrishnan, legal adviser, Reserve Bank of India (RBI).
  • According to the Bankruptcy and Insolvency Code passed by the Parliament, apart from a chairperson, the board will have three members from among the officers of the central government not below the rank of joint secretary or equivalent, representing the ministries of finance, corporate affairs and law. Another member will be nominated by RBI while five other members will be nominated by the central government, including three whole-time members.
  • The Insolvency and Bankruptcy Code, 2016, was enacted in May, paving the way for a new bankruptcy law that will ensure a time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of serial defaulters.

5. SBI, PNB may pick stake in Rs500-crore credit enhancement fund (Source: MINT)

  • Government is considering roping in two-three banks, including State Bank of India (SBI) and Punjab National bank (PNB), to pick up stake in India Infrastructure Finance Company Limited (IIFCL)-anchored Rs.500-crore credit enhancement fund announced by finance minister Arun Jaitley in the budget this year.
  • Besides, the finance ministry has requested insurance regulator Irdai to provide an exemption to allow Life Insurance Corporation (LIC) to hold beyond 15% stake in the proposed venture, which is expected to be registered as the alternate investment fund (AIF). The exemption has been sought because Irdai guidelines allow an insurer not to have more than 15% stake in any company as it leads to conflict of interest.
  • The move assumes significance as infrastructure firms find it difficult to raise adequate funds at competitive rates which are needed for projects with long gestation. Companies issued Rs.4.13 lakh crore of bonds in 2014-15, according to a report by the Reserve Bank. The central bank is in favour of a separate regulatory framework for providing credit enhancement by non-banking finance companies to bolster bond ratings.

6. Corporate debt downgrades decline to 5-year low (Source: ET)

  • The amount of corporate debt downgraded has fallen to a five-year low indicating an improvement in credit quality of companies amid stabilisation of metal prices and government support for stressed sectors like steel through anti-dumping duties, rating agency Crisil said in a report on October 3, 2016.
  • However, sustaining this improvement could be a challenge because of continued pressure on investment-linked sectors like construction and metals.
  • Crisil’s debt-weighted credit which is the amount of debt upgraded in corporate balance sheets in relation to the amount of debt downgraded, surged to a five-year high of two times in the first six months of the current fiscal compared to 0.2 times in the second half of the last fiscal.
  • The ratio of upgrades to downgrades improved to 1.2 times compared to 0.8 times as Crisil upgraded 646 ratings and downgraded 553 in the first half of the current fiscal. The significant change this time was the decline in the value of debt downgraded. At around Rs. 40,000 crore in the first half of this fiscal, it is the lowest and only a fourth of the Rs 1.4 lakh crore average of the past 10 semi-annual periods.
  • Ninety percent of the debt downgraded last year was linked to commodity prices like metals which have stabilised this year, helping in reducing the downgrades, Crisil said.
  • The value of debt downgraded in the first half of the fiscal was Rs 38,000 crore, down from half of the fiscal was Rs 38,000 crore, down from Rs 2.4 lakh crore in the same period last year and Rs 2.7 lakh crore in the second half of fiscal 2016.
  • The value of upgraded debt remained stable at Rs 72,000 crore in the first half of FY17 compared to Rs 65,000 crore in the same period last year. An evenly spread monsoon will boost consumption and aid India’s GDP , Crisil said, even as PMI data released on October 3rd shows manufacturing sector is shrugging its slack with signs of pick up.

7. RBI plans rework of bank branch norms (Source: MINT)

  • The Reserve Bank of India (RBI) has proposed widening the definition of a branch to make it easier for banks to meet the norm of opening 25% banking outlets in unbanked rural centres. An internal working group report released on October 6th said that banks would be allowed to treat so-called banking outlets on par with branches.
  • A banking outlet has been defined as a manned service delivery point which is open for at least four hours a day for at least five days a week. It should also provide the whole range of services that a regular branch offers, such as deposits, encashing cheques, cash withdrawal and lending. Bankers welcomed the RBI move.
  • The RBI working group has also proposed that banking outlets opened in the north-eastern states, Sikkim and in left-wing extremism-affected districts would count towards the 25% norm. Separately, the working group said that any banking outlet opened by the small finance banks either by converting existing outlets or opening new ones should comply with the 25% norm within one year of commencement of business.
  • “With technology coming up, full fledged branches just escalate costs for the banks. From the cost of delivery perspective, it is a good move,” said Abizer Diwanji, partner and head of financial services at consulting firm EY.

8. New format banks need higher capital buffers: RBI (Source: MINT)

  • The Reserve Bank of India (RBI) said that payments banks and small finance banks would be required to maintain higher capital buffers than scheduled commercial banks.
  • These new format banks should maintain a capital adequacy ratio of 15% when starting operations, RBI said in operational guidelines issued on October 6th.
  • Both tier-I capital, or core capital, and tier-II capital will have to be 7.5% each. In comparison, under Basel III norms, fullfledged commercial banks have been asked to maintain a capital adequacy ratio of 10.25% by March 2017 and 11.5% by March 2019.
  • Capital adequacy is a measure of a bank’s financial strength, expressed as a ratio of capital to risk-weighted assets.
  • Payments banks and small finance banks would not be required to maintain any capital conservation buffers and countercyclical buffers. Universal banks are currently required to maintain a capital conservation buffer of 1.25% by March 2017 and 2.5% in the following two years.

9. RBI approves restructuring of Rs30,000 crore in food credit to Punjab (Source: MINT)

  • Reserve Bank of India (RBI) has approved a proposal to restructure around Rs 30,000 crore of food credit given to Punjab state agencies. The Rs 30,000-crore amount is the mismatch between food stocks available in Punjab warehouses and loans granted over the past decade.
  • According to the proposal, a State Bank of India-led (SBI-led) consortium of 68 banks will convert the cash credit limit worth Rs30,000 crore into a 20-year term loan at a lower interest rate of 8.25%. Cash credit is a short-term cash loan to a company and typically attracts higher interest rates.
  • However, the central bank has not yet agreed to the banks’ request to write back provisions made against their exposure to the Punjab state procurement agencies.
  • “Restructuring loans given to Punjab procurements is positive for the banking system as they will start accruing income on these loans. But such dispensations should not set a precedent for other states in future,” said Karthik Srinivasan, Senior Vice-President and Co-Head of Financial Sector Ratings, ICRA Ltd.

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