Financial Awareness-September(1-10) 2016

  1. Non-food credit growth marginally falls to 9.72 (Source: Financial Express)credit
  • The growth rate of Non-Food Credit of banks slightly declined to 9.72% (Y-o-Y) during the fortnight ended August 19, compared with 9.92% in the previous fortnight, Reserve Bank of India (RBI) data released.
  •  The outstanding non-food credit in the banking system stood at Rs 71.72 lakh crore as on August 19, compared with Rs. 65.63 lakh crore in the same fortnight last year — a rise of Rs 6.09 lakh crore.
  • On the other hand, the rate of growth in deposits improved slightly to 9.19% (Y-o-Y) compared to 8.71% in the previous fortnight.
  • With hardly any growth in project loan sanctions, the credit growth of 9.72% was most likely a function of demand from the retail segment, something which the managements of several large banks have lately spoken about as their focus areas.
  • Another relatively bright spot for loan growth in recent months was the demand for working capital loans.
  • Companies have been moving their borrowings to the corporate bond market due to lower interest rates. In the first quarter of the current fiscal, firms mopped up over Rs 1.3 lakh crore through the corporate bond market, as against Rs 4.6 lakh crore raised in FY16, indicating a shift from bank borrowing.

2. Relief for banks, as FinMin relaxes ‘FATCA’ compliance norm. (Source: Business Line)

  • Banks and financial institutions in India have got some breather as regards compliance under the US-enacted Foreign Account Tax Compliance Act (FATCA). The Finance Ministry said that banks and financial institutions need not enforce “closure” of accounts by August 31, 2016, in respect of those cases where “self-certification” had not been obtained and due-diligence not completed.
  • The revised timeline for completing due diligence in respect of such accounts would be notified in due course, an official release said. The inter-governmental agreement (IGA) with USA for implementation of FATCA entered into force on August 31, 2015. The IGA was signed to implement FATCA with a view to promoting transparency between the two countries on tax matters. This was seen as an important step on the part of India and the US to tackle offshore tax evasion and avoidance.
  • As per the IGA, Financial institutions in India will be required to report tax-related information relating to U.S. account holders directly to the Indian Government, which will, in turn, relay that information to the USA.
  • Under the alternative procedure prescribed in the Indian income tax rules, banks and financial institutions needed to obtain self-certification in respect of all individual and entity accounts opened from July 1, 2014, to August 31, 2015.

3. RBI allows banks to sell stressed assets to NBFCs, other lenders. (Source:Mint)

  • Banks can now sell their stressed assets to other lenders, non-banking financial companies and financial institutions in addition to distressed-asset buyers, a move the banking regulator said will speed up the resolution of bank bad loans.
  • RBI in guidelines asked local banks to frame clear policies for stressed-asset sales so that they quickly clean up their balance sheets that collectively hold Rs.6.3 trillion in NPAs.
  • RBI also asked the top management of banks to review and identify assets for sale at the beginning of the year. Early identification, the central bank said, will help banks in getting better prices.
  • Allowing a wider range of buyers for stressed assets apart from ARCs or securitization companies (SCs) will also help in better price discovery, said the central bank.

4. RBI tells CICs: Give credit report free to individuals once a year. (Source: Business Line)

  • Given the importance of the credit report in an individual’s financial matters, the RBI directed credit information companies (CICs) to provide access to one free full credit report (FFCR), including credit score, once a year (January-December) to individuals whose credit history is available with the companies.
  • The credit report, which will be in electronic format, will be provided upon request and after due authentication of the requester.
  • The contents of the FFCR will be the same as appearing in the most detailed version of the reports on the individual provided to credit institutions, including the credit score, the RBI said in a notification.
  • “Further, the objective of providing the free credit report would not be fully met unless this report includes details that figure in the full credit report that is accessed by the credit institutions while considering the request for fresh credit facilities,” the RBI said.
  • The report should also provide an opportunity to the borrower to have the errors, if any, in her/his credit history rectified.

5. Foreign investors get 20-yr residency status. (Source: Business Line)

  • After a major overhaul of FDI rules in June, the government took a cue from Singapore and Hon Kong to offer permanent residency status to overseas investors bringing in at least Rs 10 crore. The move is seen as a boost to facilitating foreign fund flows amidst subdued domestic private investment.
  • Under the scheme approved by the Union cabinet, the investors would get multiple entry visas, permission to buy houses and relaxed employment visa for their spouse and dependents.
  • The cabinet, headed by prime minister approved a proposal to allow foreigners get 10-year residency permits if they invest Rs 10 crore over 18 months or Rs 25 crore over three years, according to an official release. The residency status can be extended by another 10 years. However, the foreign investment should result in generating employment to at least 20 resident Indians every financial year. At present, investors get business visas lasting up to five year

6. RBI releases final guidelines on account aggregators (Source: MINT)

  • Reserve Bank of India (RBI) on September 2, 2016 released final guidelines around setting up a category of non-banking financial companies (NBFCs) called account aggregators.
  • According to the definition provided by the central bank, account aggregators are companies that will collect and provide information on a customer’s financial assets, in a consolidated, organised and retrievable manner to the customer or any other person as per the instructions of the customer.
  • This follows a set of draft guidelines that the regulator had released on the matter in March.
  • Only NBFCs that have registered with RBI will be allowed to undertake account aggregation. These NBFCs will first receive in principle approvals from the regulator and will have 12 months to put in place the necessary technology and tie-ups required for the aggregation business. After the NBFCs have achieved this, they can apply for a final licence.
  • Companies that aggregate accounts of only a particular financial sector governed by other regulators can be exempted from seeking RBI approval, the central bank said.
  • Such NBFCs should have minimum net-owned funds of Rs.2 crore and cannot provide any services other than account aggregation, the central bank said, adding that the account aggregator cannot support transactions in financial assets.
  • Companies that do not fulfil the minimum Rs.2 crore net-owned funds limit will have 12 months after the in-principle approval to raise money.

7. Equitas Holdings, Suryoday Micro Finance receive final small finance bank licence (Source: MINT)

  • Chennai-based Equitas Holdings Ltd and Mumbai-based Suryoday Micro Finance Ltd received the final licence from Reserve Bank of India (RBI) to set up small finance banks.
  • In a notification on September 2nd to BSE, Equitas said that it would start small finance bank operations on 5 September. It is the first of the 10 small finance bank licensees to list on the market, raising Rs.2,176 crore from investors.
  • Suryoday will start operations by this year’s end.
  • Jalandhar-based Capital Small Finance Bank (formerly known as Capital Local Area Bank) is the only one to start operations so far. It did so in April this year. Strategic Management & Economic Advisory Division

8. HDFC raises ₹ 1,000 cr via masala bonds (Source: Business Line)

  • Mortgage lender HDFC said it has raised ₹ 1,000 crores through rupee-denominated bonds from overseas investors.
  • This is the third issue of rupee-denominated bonds to overseas investors, HDFC said in a regulatory filing to stock exchanges.
  • The company has raised ₹ 1,000 crores through bonds which carry a coupon rate of 7.50 per cent payable semi-annually, it said, adding the bonds matures in 2020.

9. Low inflation key to India’s rating profile, says Fitch Ratings (Source: MINT)

  • If India can maintain structurally low inflation under the new monetary policy framework, it can positively impact the sovereign rating profile of the country as it will improve the investment climate and contribute to sustainable growth, Fitch Ratings said.
  • Fitch has retained India’s sovereign rating at the lowest investment grade of BBB-, with a stable outlook.
  • Thomas Rookmaaker, director at Asia-Pacific Sovereigns Group of Fitch Ratings, in a statement said while the inflation target range is rather broad (in the sense that 2% seems quite low and 6% quite high) for an emerging economy like India, it seems to make sense to have a rather broad range around the 4% mid-point as food and oil price movements can have a large impact on headline inflation.
  • “The MPC (monetary policy committee) would theoretically target the range around the mid-point and not one of the outer points specifically, but it is too early to tell if inflation will in practice be skewed to one side of the range,” he said.

10. US banks need better defences against rates shock, regulators warn (Source: Financial Express)

  • Years of stubbornly low interest rates and expectations they will remain low for years to come have prompted U.S. banks to shift their balance sheets in ways that put them at risk if rates suddenly spike, regulators are warning.
  • Banks have been stocking up on long-term loans, often tied to real estate and property development that promise higher yields than the minuscule returns on short-term debt.
  • However, the widening gap between long-term loans and mostly short-term funding means higher interest rates could trap banks in a corner: forcing them to pay more to cover their immediate financing needs than they earn on their loans.
  • Banks are broadly positioned according to the signals the Federal Reserve has been sending – that it will lift rates only gradually and spread the increases over a long period.
  • Regulators point out, though, that central banks can move quickly too, even if that now appears unlikely. Short-term rates could also climb in a weakening economy, they say.
  • The Office of Financial Research, an independent watchdog within the Treasury Department, says banks could be tested by a surprise upheaval like the recent Brexit vote.
  • The Office of the Comptroller of the Currency also counts interest rate risk among market perils. This week, Boston Fed president Eric Rosengren warned that banks might already be too exposed to long-term, commercial real estate that could sour and hit the broader economy.
  • Most recently, banks got a glimpse of the risks of rate swings in June 2013 when then-Fed Chairman Ben Bernanke suggested that the central bank could start scaling back its government debt purchases. As bond yields whipsawed in response, banks saw their long-term assets briefly lose billions of dollars in value.
  • FDIC data shows roughly a quarter of the loans on bank balance sheets will not mature for at least five years – a record level – and many lenders remain comfortable offering long-term loans to bolster earnings. Regulators do not require banks to set aside capital for potential losses if interest rates rise and let them use their own models to calculate risks, so approaches vary across the industry.

11. CAG to audit banks getting money under recap scheme (Source: Business Line)

  • With the belief that “every penny counts, especially if it is public money”, government auditor Comptroller & Auditor General (CAG) is set to start scrutinising the public sector banks that have received financial aid from the government.
  • “The audit will essentially look at whether the money given by the government (Finance Ministry) to these banks as part of recapitalization has been utilised correctly. Since it is government money, the CAG is within its rights to audit it. Besides, it also forms part of auditing the Finance Ministry’s accounts,” a senior government official told Business Line.

NPA burden

  • One of the major challenges before Finance Minister Arun Jaitley and his team has been to improve the overall performance of public sector banks, which have suffered mainly due to the sharp rise in bad loan provisioning.
  • In the last five years, the Finance Ministry has infused over Rs. 85,000 crores (2011-16) in PSU banks.
  • An official in the know said the government auditor is at present working on internal guidelines to decide on the term of the audit, the process to be followed etc.
  • The CAG proposes to complete the audit and submits its report during the 2017 Monsoon Session of Parliament.
  • While it is true that the Centre has been committing funds to ensure that PSBs are sufficiently capitalised to meet Basel III norms, it is also a fact that in the last two years banks appear to have used the money mostly to absorb losses on account of the steep rise in bad-loan provisioning.
  • The Finance Ministry has been annually altering the criteria for deciding on the capital infusion into various banks, making it difficult to assess how effectively banks have deployed the capital.
  • For instance, this year it has decided to base it on the compound annual growth rate (CAGR) of credit for the last five years and banks’ own projections of credit growth as well as growth potential.

12. Raghuram Rajan has a new warning for the world (Source: MINT)

  • Three years before the 2008 global financial crisis, an Indian economist named Raghuram Rajan presciently warned a sceptical audience of top economic thinkers that excessive risk threatened the entire global financial system.
  • As Rajan stepped down as governor of the Reserve Bank of India, he offered a new warning: Low-interest rates globally could distort markets and will be difficult to abandon.
  • Central banks around the world, including in the US and Europe, have kept interest rates low as a way to encourage growth. But countries could become “trapped” by the fear that when they eventually raised rates, they “would see growth slow down,” he said.
  • Low-interest rates should not be a substitute for “other instruments of policy” and “various kinds of reforms” that are needed to encourage growth, Rajan said.
  • His warning comes at a time when central banks appear to be at a loss about how to get global growth moving again. A growing number of voices say that low rates are not doing the job and that governments must take other, more politically difficult steps to reinvigorate growth.

13. SBI to raise $1 billion through AT1 bonds (Source: MINT)

  • State Bank of India (SBI) will raise $1 billion through a sale of dollar-denominated perpetual bonds to foreign investors, becoming the first Indian lender to sell such securities overseas.
  • Technically called AT1, or additional tier-I bonds, the sale of the fixed income securities, which carry no maturity date, will help bolster SBI’s capital adequacy and help prepare the bank for a credit growth lift-off, whenever it happens.
  • These bonds will be issued with a 5-year call option. The bank is yet to tie up with any individual investor for this issue.
  • Perpetual bonds pay a coupon rate to investors for life. A call option allows the issuer (SBI in this case) to buy back its bonds after a lock-in period.
  • The bonds will be issued in at least two lots, with the first aimed at raising at least $500 million. The timing is key in the market. Yields have come off a bit, while spreads are at the lowest level for Indian paper. SBI will be able to raise funds at a lower cost.
  • This bond sale will bolster SBI’s capital adequacy at a time when it is preparing for a merger with its associate banks—State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Mysore, State Bank of Patiala and State Bank of Hyderabad—and Bharatiya Mahila Bank.

14. Fintech firm Trupay starts mobile payment service under UPI (Source: MINT)

  • Fintech start-up Trupay has started offering mobile payment services under the Unified Payment Interface (UPI). “It is among the first private sector companies in the country, apart from banks, to offer a mobile payment application based on UPI,” the company said in a release.
  • Trupay enables users to send and receive money from their bank accounts with only a phone number. Currently, customers of 21 banks will be able to make payments on Trupay. They will need to create a UPI payment ID on Trupay to make transactions. Users will just need to select a mobile number on Trupay, add amount and pay, it said.
  • The UPI-based mechanism removes intermediaries in a payment process and payments are direct bank to bank and instant.

15. Robots to perform a fifth of internal jobs at ICICI Bank (Source: Business Standard)

  • ICICI Bank — the country’s largest private sector lender — is employing robots to perform tasks like generating customer IDs, updating addresses and mobile numbers, resolving ATM-related queries, etc.
  • Claiming to be the first Indian bank to use software robotics, ICICI Bank said the technology has helped them in reducing response time by up to 60 per cent.
  • Currently, about 10 per cent of our internal transactions are being carried out via the software robots and by the end of this year, we believe, this will go up to 20 per cent of our transactions. This has helped us in improving productivity and efficiency and will help us in handling larger volumes as we continue to grow.



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