Financial Awareness-October(11-20) 2016

  1. Exchanges ready for GIFT city but unclear rules pose hurdle (Source: MINT)
  • Stock and commodity exchanges have been signing up to start operations at the Ahmedabad-based Gujarat International Finance Technical (GIFT) city, but a launch is still far away due to unclear regulations.
  • GIFT is pegged to be an international financial center on the lines of London and Singapore.
  • Currently, the Reserve Bank of India and the Securities and Exchange Board of India (Sebi) have cleared a so-called enabling framework for market participants willing to set up operations. But that is just a starting point and there are no clear guidelines, said senior exchange officials.
  • National Stock Exchange of India Ltd (NSE), BSE Ltd and Multi Commodity Exchange (MCX) have all expressed interest to start operations at GIFT. Regulators also need to have guidelines in place for prevention of money laundering, know your client and the extent of foreign investor participation.

2. Bank of Baroda signs brand endorsement with Sindhu, Srikanth (Source: BL)

  • Public lender Bank of Baroda today sealed a principal sponsorship contract with badminton Olympians P V Sindhu and K Srikanth.
  • Bank of Baroda logo will now appear on the centre chest of the two athletes’ playing jerseys in international and domestic tournaments under the aegis of Badminton World Federation Events (BWF) and Badminton Association of India-sanctioned events, respectively.

3. Asset backed retail loans’ quality to improve in 2 years: Moody’s (Source: ET)

  • Moody’s Investors Service today said the asset quality of retail loans backing Indian asset-backed securities (ABS) will improve over the next two years, despite an expected uptick in non-performing loans.
  • It expected the performance of loans backing commercial vehicles and construction equipment to improve owing to favourable operating conditions and increased efforts by originators to prevent delinquent loans from progressing into NPLs.
  • “Although retail loans originated by NBFCs account for the bulk of assets backing Indian ABS, we expect improving macroeconomic conditions and more rigorous collection processes by originators will boost their underlying performance,” Moody’s Analyst Vincent Tordo said.
  • The underlying performance and asset quality of retail loans backing Indian asset-backed securities (ABS) will improve over the next two years due to tightened recognition criteria, Moody’s said. The new NPL criteria require NBFCs to recognise loans that are 150 days or more in arrears as NPLs, compared to 180 days previously. The standard will further tighten to 120 days from March 2017 and 90 days from March 2018.
  • Moody’s report also highlights that Indian ABS are largely immune from the run-up in NPLs in the Indian banking sector, because Indian ABS are exclusively backed by loans originated by NBFCs and not by banks.
  • Moody’s further notes that the categorisation of delinquent loans as NPLs at an earlier stage will bring the Indian market more in line with global practices, thereby allowing a better comparison of the performance of Indian ABS with those in other markets.

4. RBI chief Urjit Patel warns of risks from Brexit, US elections (Source: MINT)

  • India and fellow BRICS countries need to be prepared to confront potential “political risk” events such as Britain’s exit from the European Union and the US presidential elections, Reserve Bank of India governor Urjit Patel warned on October 13th .
  • Patel also cited other challenges such as a soft commodity cycle facing the global economy and the BRICS countries, composed of Brazil, Russia, India, China, and South Africa.
  • The RBI governor urged BRICS countries to respond by shoring up their domestic economies by making themselves attractive investment destinations.
  • The warning against spillovers from global events was similar to the ones made by his predecessor Raghuram Rajan, a former chief economist for the International Monetary Fund widely respected by global investors. Patel said India had already moved to improve its defences, through “measurable progress” in “price stability, fiscal rectitude, and sustainable current accounts”.

5. Small finance banks eye priority sector lending certificates to boost fee income (Source: MINT)

  • As small finance banks gear up to start operations over the next few months, they are eyeing priority sector lending certificates (PSLC) as a key business opportunity to boost their fee income.
  • PSLC is a short-term accounting instrument used by banks to cover shortfalls in meeting priority sector lending norms. The buyer pays a fee to the seller for the certificates, which will have a standard lot size of Rs25 lakh and can be purchased in multiples thereof.
  • According to banking experts, 80-90% of the loan books at small finance banks are made up of priority sector loans. This means these banks will be able to create a buoyant market for PSLCs, which other established banks can buy to achieve their own priority sector lending targets.
  • Equitas Small Finance Bank, which started banking operations a month back, earned Rs6 crore as fee income by way of selling PSLCs for an undisclosed portfolio. The fees for PSLCs are decided by the demand-supply gap.
  • Priority sector lending certificates were introduced by the central bank in April this year to enable banks which have fallen short of fulfilling their priority sector loan targets can buy the certificates from those banks which have fulfilled their targets. The banks can sell these certificates over and above their fulfilled priority sector targets.

6. Bond selloff spreads on inflation concern, global stocks fall (Source: BL)

  • Government bonds retreated in Europe and Asia after comments by Federal Reserve chair Janet Yellen fueled concern that policy makers will tolerate faster inflation. Global shares declined.
  • Benchmark bond yields in Germany climbed to the highest since June after Yellen on October 14th put forward an argument for Fed policy to be tightened slowly. UK gilts were hardest hit, with losses accentuated by the turmoil arising from the nation’s vote to exit the European Union. South Korea’s won led emerging-market currencies lower. The Stoxx Europe 600 Index fell for the fourth time in five days and equity gauges slid across most of Asia, while oil traded around $50 a barrel after erasing a drop.
  • Even as the outlook for inflation picks up, central bank policy makers have reiterated commitments to keep stoking prices to spur economic growth.
  • Benchmark German 10-year bund yields rose two basis points to 0.07% as of 1:44 pm in London, and earlier touched 0.103%. The yield on similar-maturity notes in Australia rose by five basis points to 2.30%.
  • UK 10-year yields jumped five basis points to 1.15%, after touching 1.22%, the highest since the 23 June referendum, amid speculation the weaker pound is already pushing up prices for consumers. Sterling fell 0.4%.
  • Gilt yields have been climbing for the past three weeks as sterling’s 18% slide since the vote to leave the EU drove a market gauge of inflation expectations to the highest in 2 1/2 years. Faster inflation erodes the fixed payments on bonds, while also making it less likely the BOE will be able to cut interest rates and extend its asset purchases.
  • The difference between yields on regular Treasuries and inflation-protected debt, a measure of the outlook for consumer prices known as the break-even rate, closed at the highest since May on October 14th .
  • The yen advanced 0.2% to 104.01 per dollar, following declines in each of the last three weeks. The yuan fell to a six-year low in Shanghai, while Taiwan’s dollar dropped to levels last seen in August.
  • Oil was little changed at $50.41, after earlier falling following data showing US producers ramped up drilling even as crude inventories remained at the highest seasonal level in at least three decades.
  • Gold advanced after posting a three-week slide as investors weighed the outlook for U.S. interest rates against signs of robust demand. Bullion for immediate delivery climbed 0.2% to $1,253.52 an ounce.

7. Why has Rosneft paid a packet for Essar Oil? (Source: MINT)

  • The Essar Group may have been in a debt trap, but there are no signs of distress in the Essar Oil Ltd sale to PJSC Rosneft Oil Co and a consortium led by commodities trader Trafigura and private investment group United Capital Partners. Essar said it has sold a 98% stake in the oil company at an enterprise valuation (EV) of $10.9 billion or Rs72,800 crore.
  • This works out to around 12.5 times Ebitda (earnings before interest, tax, depreciation and amortization). Most analysts value Reliance Industries Ltd’s refining business at an EV/Ebitda multiple of around seven times at best. Prima facie, Essar has got itself a good deal.
  • The Essar asset offers decent growth opportunities. The company has had plans to double capacity at the existing plant, but couldn’t do so because of financial constraints. The buyers should be able to follow through on these expansion plans and drive growth.
  • Besides, Essar Oil’s refinery is in close proximity to the deep draft Vadinar port, which lends greater efficiency to the operations. The port has been acquired in a separate transaction at a valuation of $2 billion. Essar Oil also operates a network of 2,700 retail outlets. They may not have added much to overall profits until now, but their prospects have improved because of increased deregulation of prices of petroleum products. Rosneft can drive synergies by shipping relatively cheap crude oil from Venezuela and the Trafigura connect will help in selling oil products to Asia-Pacific markets.

8. Security breach: SBI blocks over 6L debit cards

  • In one of the biggest card replacements in Indian banking, SBI said that it will re-issue around six lakh debit cards to customers, which have been blocked following a malware-related security breach in a non-SBI ATM network. “It’s a security breach, but not in our banks’ systems. Many other banks also have this breach — right now and since a long time,” Shiv Kumar Bhasin, SBI’s chief technology officer (CTO), told TOI, adding that customers who used their cards only at SBI-run ATMs have not been affected by this. “A few ATMs have been affected by a malware. When people use their card on infected switches or ATMs, there is a high probability that their data will be compromised,” Bhasin said.
  • Several customers of the bank have found their ATM cards to be blocked. SBI has informed branches about the cards being blocked and fresh cards would be issued to customers. “Customers need not panic. They can either approach their branch, call up phone banking or use the internet for’re-carding’. They can also set their PINs from their homes using internet banking,” Bhasin said.
  • Last month, Yes Bank had confirmed that its ATM network manager Hitachi Payments was reviewing its network to rule out any compromise. Hitachi had initiated a detailed audit of their systems through a certified agency SISA. “Preliminary reports of the audit conducted have been submitted… and the report does not establish any system-level breach at Hitachi Payment Services,” the bank said.
  • At present, the RBI does not require banks to report to the public any security breach in their network. “Banks whose ATMs have been infected must come forward and declare those infected ATMs. The onus is on them to stop this,” Bhasin said, without naming the banks. He added that until the problem is addressed customers who use their cards in the ATMs of affected banks will continue to be at risk.

9. Banks exhaust all means of recovering money from Vijay Mallya (Source: BS)

  • The auction of former liquor baron Vijay Mallya’s Kingfisher Villa in Goa has failed to attract any buyers. The auction was held for an hour on October 19 with a reserve price of Rs 85.29 crore.
  • The failure to attract any bidders for Mallya’s prized property located at Candolim in Goa is yet another setback for the 17 bank consortium led by State Bank of India (SBI).
  • The consortium is owed Rs 6,963 crore by Mallya’s now defunct Kingfisher Airlines. With accumulated interest and other charges from 2014, the total amount owed by Kingfisher Airlines to banks is almost Rs 9,000 crore.
  • SBI said that atleast half a dozen buyers had turned for inspection of the property a few weeks before the auction. But despite that, nobody turned up on the actual auction day.
  • On August 4, 2016 banks had put up the Kingfisher House, measuring almost 1600 square meters, in Mumbai’s Ville Parle for auction at a reserve price of Rs 135 crore. This too had failed to attract buyers. The banks attempts to auction off Kingfisher’s trademarks at a reserve price of Rs 330 crore was also a failure. With the Kingfisher brand associated with negative perceptions, the trademarks were reduced to junk. Bank sources revealed that independent valuations had pegged the value of all the nine trademarks of Kingfisher at Rs 6 crore in 2015.

10. Govt to come out with new steel policy (Source: ET)

  • The government is working on a new steel policy in a bid to steer the over USD 100 billion industry out of the rut and ensure that the growth is evenly spread across all the related sectors.
  • Government’s think-tank Niti Aayog too has pitched for “new and dynamic steel policy” to bring the industry back on track as well as meet the target of 300 million tonnes (MT) capacity by 2025.
  • The country’s premier policy maker feels that mere changes in the National Steel Policy, 2012, will not help the sector as in the last few years the domestic market has been flooded with cheap imports from China, Korea and Japan, impacting its sales and profits, which has negatively influenced its capacity to repay debts.
  • “There is need for a new and dynamic steel policy. Seeing the current situation of the steel sector, it may be unlikely to achieve the targets envisaged in National Steel Policy 2012 i.e. a capacity of 300 MT and production of 275 MT by 2025,” the Aayog said in a Working Paper on the sector. It further said, “To bring steel sector back on track, mere tinkering in the present policy would not bring out a transformational change that is required.”
  • The Aayog feels that there is a need to examine the entire value chain associated with the industry, from raw materials to production of finished products, to discover the bottlenecks in the sector. The working paper, prepared by Niti Aayog Member V K Saraswat and Niti Aayog professional Ripunjaya Bansal, said that an ecosystem has to be created that will ensure profitability of the associated industry be it mining, pet coke, pellet, sponge iron, etc.

11. Reserve Bank of India to cut rates in early 2017, aided by tame inflation (Source: FE)

  • The Reserve Bank of India is expected to take advantage of expectations that inflation will remain low in the near-term and cut interest rates again early next year with an aim to boost already-solid growth a little bit more, a Reuters poll found.
  • New RBI Governor Urjit Patel and his six-member Monetary Policy Committee used the same rationale for their surprise 25 basis point (bps) cut to 6.25 percent earlier this month, the lowest since November 2010.
  • Inflation cooled to a 13-month low of 4.31 percent in September and the latest Reuters poll of economists expect it to average 4.8 percent in the January-March quarter of 2017, just under the RBI’s near-term target.
  • Since the start of 2015, the RBI has chopped 175 bps from its key repo rate. But after the next expected cut to 6.0 percent, the central bank is forecast to hold rates steady for the rest of the 12-month survey horizon.
  • A further rate cut would help the Indian government in its efforts to boost economic growth to above 8 percent. It was last measured at 7.1 percent in the March-June quarter, one of the strongest rates in the world but still not fast enough to create enough new jobs to absorb all the one million people who join the workforce every month.
  • The poll forecast gross domestic product would grow 7.7 percent in the fiscal year to end-March 2017 and 7.8 percent in the following year, slightly more than the International Monetary Fund’s latest projection of 7.6 percent for both years.

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