Financial Awareness-September(11-20) 2016

  1. RBI asks banks to accept Income Declaration Scheme tax payments in cash (Source: ET)
  • The Reserve Bank of India has issued a circular asking banks to accept in cash tax payment under the Income Declaration Scheme (IDS) that closes on September 30.
  • “We advise that banks must invariably accept cash, irrespective of amount, over the counters from all declarants who desire to deposit cash at the counters, including deposits under the above Scheme through challan ITNS- 286,” the central bank has told banks while admitting to some reluctance on the part of banks.
  • RBI has in its circular issued on September 8 also pointed to an August 2008 communication to the banks that asks them not to incorporate clauses in the terms and conditions which restricts deposit of cash over the counters. Banks will, however, have to comply with the appropriate Know Your Customer (KYC) requirements for customers and walk-in customers.

2. Huge NPA provisioning by banks limits credit growth: President (Source: Business Line)

  • Huge provisions made for NPAs banks constrained the credit disbursement, which is essential to support economic growth, pointed out President Pranab Mukherjee.
  • Though Indian banking sector stood solidly despite global economic crisis and challenges, a major area of concern for the sector is the huge NPAs. Elaborating on the NPAs, he said the aggregate provisions made by all scheduled commercial banks increased significantly to Rs 170,630 crore for the year ending March 2016 from Rs 73,887 crore for the year March 2015. Provisions for NPAs swelled due to increase in stressed assets.
  • Stressed advances to gross advances of scheduled commercial banks increased from 10.90% in March 2015 to 11.40% in March 2016. As a result, resources available for credit disbursement by commercial banks have been affected and this is not in a desirable situation. There is a need for credit expansion in a growing economy like India. Overall, the Indian banking sector has done well. However, they must remain prudent about the situation of NPAs, he added.
  • President also applauded the role of the former RBI governor for putting appropriate system to move the banking system in the right direction.

3. New lending norms may nudge banks towards retail loans: Arundhati Bhattacharya (Source: MINT)

  • Stringent RBI norms proposed for corporate lending are expected to nudge banks towards consumer loans, SBI chairperson Arundhati Bhattacharya has said while reiterating that there is no bubble in the retail segment.
  • The RBI had last month come out with draft guidelines on credit to large corporate borrowers asking banks to make additional provisions if the loan amount crosses the prescribed limit.
  • “The latest norms regarding lending to large corporates make corporate lending more costly both for banks as well as the borrowing companies,” Bhattacharya told PTI in an interview.
  • “So, the Reserve Bank itself is nudging us towards a model that is more retail,” she added. She was quick to add, however, that State Bank of India has not seen any stress and only RBI would know about the system as a whole. RBI had on 25 August issued new guidelines on capping lending to large corporate/related parties.
  • With a view to reducing risks in the system, RBI proposed to limit exposure of a bank to a business group to up to 25% of its capital, down from the existing 55%.
  • “The large exposure limit in respect of each counter-party and group of connected counter-parties, under normal circumstances, will be capped at 20% and 25%, respectively of the eligible capital base,” RBI has said.

4. Fall in bond yields helping banks ring in higher treasury gains’ (Source: Business Line)

  • With falling bond yields, the Available-for-Sale (AFS) book of public-sector banks has seen quite a good run over the past few months. Banks are now making hefty treasury gains from the rise in the bond prices.
  • Speaking to BTVi, Federal Bank Executive Director and Chief Financial Officer Ashutosh Khajuria says the movement of yield for the 10-year benchmark alone has been more than 50 basis points, which effectively means a gain of Rs 3-3.50 for every Rs 100 on bond price. This will definitely help banks clean up their balance sheets on the backdrop of the credit quality concerns, he said.
  • The size of the book for any bank would be a function of how much extra one keeps because most of the banks try to keep the SLR requirement to that extent in the HTM (held-to-maturity) book.
  • And as per the provisions in the beginning of the year, banks can shift securities from HTM to AFS or AFS to HTM only once a year. So, depending upon the liquidity requirements or the shuffling of the securities, the decision is taken.

5. Increased capital requirements under Basel III to add to risk on bank books: Fitch (Source: Mint)

  • RBI’s increased capital requirements under Basel III are likely to put nearly half of Indian banks in danger of breaching capital triggers, international rating agency Fitch Ratings said.
  • Government-owned public sector banks are the most at risk, given their poor existing capital buffers and weak prospects for raising capital through market channels.
  • “Our analysis of 27 Indian banks with outstanding hybrid capital instruments indicates that at end-June 2016 the total CAR for 11 banks was at or lower than the minimum of 11.5% required by end-March 2019 (FYE19),”.
  • Of the 11, six did not have enough capital to meet the minimum required 10.25% by 31 March 2017.
  • For Basel III perpetual instruments, coupon deferral is also linked to banks meeting both minimum regulatory common equity tier 1 (CET1) ratio and Tier 1 ratio. More than half of the banks currently have a CET1 ratio that is below the required 8% minimum that will be applied from FYE19, the rating agency said.
  • Fitch estimates that Indian banks will require around $90 billion in new capital by FY19 to meet Basel III standards, with the state banks accounting for about 80% of the total.

6. RBI study optimistic on investment demand. (Source: Mint)

  • RBI’s annual study on private corporate investment sounds optimistic about a revival in capital spending.
  • It lists the government’s ease of doing business initiatives, progress in unclogging stalled projects, liberalization of foreign direct investment rules, government employees’ pay revision and good monsoons that will boost consumption as “factors that may help in turning around the investment outlook in the near future”.
  • The key to this reviving capital expenditure, however, will be new investment intentions that companies announce this year. That’s because sanctions for institutionally assisted projects carried forward into the current fiscal amount to just Rs 67,400 crore.
  • Since total capital spending by this set of companies amounted to Rs1.5 trillion in 2015-16, Rs83,800 crore will have to come from new investment intentions this fiscal year to maintain the level of aggregate capital expenditure. The pipeline of existing sanctions has come down simply because fewer projects were kicked off in the preceding years. A number of projects are also stalled, abandoned or scaled downwards because of the economic slowdown. 

7. Slower inflation, contraction in IIP spur rate cut hopes. (Source: Hindu)

  • India’s industrial output slowed drastically led by a decline in manufacturing and an almost 30% contraction in capital goods production, signaling a slump in investments. Retail inflation on the other hand slowed significantly, spurring expectations that the RBI would likely reduce interest rates later this year to support economic growth. The IIP contracted 2.4% in July, compared with a growth of 2% in June, mainly on account of weakness in manufacturing, which contracted 3.4%. Inflation based on the CPI was 5.05% in August, slower than 6.07% in July
  • Within the CPI, the food category witnessed an inflation rate of 5.8% in August, down from the blistering 8% seen in July. Inflation eased in the fuel and light segment as well, coming in at 2.5% in August compared with 2.75% in July. Inflation in the housing segment also eased marginally to 5.3% from 5.4% over the same period.
  • Manufacturing sector has contracted by 3.4% in July. The electricity sector grew 1.6% in July, lower than 8.3% in June, while the mining sector grew 0.8%, down from 5.3%.
  • By usage, the consumer durables category grew 5.9 per cent in July, from 5.6 per cent in the previous month.
  • The slowdown in industrial activity comes at a time when the April-June GDP growth rate eased to a 15-month low. Economists expect that the decelerating inflation and weak industrial growth, if sustained, increase the likelihood of an interest rate cut by the central bank this year.

8. China’s economy perks up in August, thanks to housing boom, government spending (Source: Mint)

  • China’s factory output and retail sales grew faster than expected in August as a strong housing market and a government infrastructure spending spree underpinned growth in the world’s second-largest economy.
  • Industrial output grew the fastest in five months as demand for products from coal to cars rebounded, though analysts warned the outlook is clouded by weakness in manufacturing investment and a lack of spending by private firms.
  • “It is very clear that the data is improving because of the property market. This is not sustainable,” Commerzbank economist Zhou Hao said.
  • Improvements in August, while modest, suggest China’s third-quarter growth is holding up better than expected just a few months ago and likely remains within the government’s 2016 target range of 6.5-7%, despite the alarming drop in private investment which has left the economy more dependent on government spending.
  • Industrial output rose 6.3% in August from a year earlier. Highlighting Beijing’s increasing reliance on government spending to drive the economy, investment by state firms surged 21.4% in the first eight months of the year. China’s financial spending rose 12.7%.

9. Lenders to gauge borrowers intent to pay, not just ability to pay loans. (Source: ET)

  • Borrowers may no longer judged solely on the ability to repay the loan, intent to repay too may become a critical parameter to avail loan. A number of finance companies have tied up with consulting firm Index Advisory which specialises in psychometric testing in lending that gauges the borrower’s creditworthiness on the basis of their intent to pay, instead of their ability to pay.
  • The test assesses various parameters like intention, stability, integrity, business acumen and risk taking ability of the borrower.
  • The technique operates according to a system where they take 2-3 months to design an appropriate questionnaire for the targeted group of borrowers. The questions that can be taken with pen-paper or digitally are suitably modified and reflect the needs and challenges of the sector that the borrower belongs to.

10. Banks in a bind over RBI norms (Source: Business Line)

  • RBI’s new norms asking banks to cap their collective exposure to a single large corporate borrower at Rs 10,000 crore, by April 1, 2019, has left the lenders between a rock and a hard place. Banks fear that stressed corporate borrowers may not be able to raise resources from the bond market — as the RBI has suggested — to repay their loans.
  • The lenders believe that the ratings on bonds issued by such corporates, especially in the steel, infrastructure, textile and construction sectors, may not inspire confidence among investors. As such, the banking system may not be in a position to follow the central bank’s guidelines. Hence, the bond market route could prove to be a tall order for corporates facing a downturn and looking to raise funds.
  • Take banks that have a loan exposure of Rs 36,000 crore to Essar Steel, for instance. Bringing this debt pile down to Rs 10,000 crore by FY20 may prove a Herculean task. Lenders now want promoters to bring in fresh capital into the company by inducting new investors.
  • If the banks do not meet the cap on aggregate exposure, they will have to bear the brunt of additional provisioning and higher risk weights on their excess exposure to a corporate. This could impact their bottom lines.

11. Rupee should weaken, but may not help exports: Experts (Source: Business Standard)

  • Amid the debate about whether the rupee should be depreciated sharply to benefit exporters, currency market participants are not sure it will boost India’s prospects of cornering a larger slice of the global market.
  • However, the underlying message to the Reserve Bank of India (RBI) could be to lower rates. A low interest rate makes the country less attractive for foreign investors, which exerts further pressure on the rupee to depreciate.
  • Going by the real effective exchange rate (REER), which measures the rupee’s strength against a currency basket of India’s trading partners, the rupee is overvalued.
  • According to the Reserve Bank of India (RBI), the rupee’s REER value in a 36-currency export and trade basket was 115.43 at the end of the August. This means the rupee was overvalued by 15.43 per cent that month. In July the REER was 115.35, while in August 2015 the value was 114.81. In a six major currency basket, the rupee’s REER was 125.79, but to gauge export competitiveness, the 36-currency basket is the more apt. The rupee has always remained overvalued and the central bank is rarely seen allowing the REER value to cross 110. Whenever this level is crossed, the RBI has intervened to make the rupee stronger as that brings down import costs. And India always has been a net importer. However, now that import costs are low, thanks to cheap oil, there could be a case for bringing down the rupee’s value to aid exporters.
  • Indian exporters need the rupee to weaken to compete against Bangladesh and some other Southeast and East Asian nations that keep depreciating their currencies. But to do that, no outside mechanism is needed. In the face of increased inflows, which averaged about $1.5 billion a month in the last six months, the rupee will have to depreciate anyway

12. Make banking services available to small farmers, unorganised sector: RBI (Source: Business Line)

  • Reserve Bank of India wants financial intermediaries such as banks and non-banking finance companies to focus on a ‘3x3x3’ matrix so that small and marginal farmers, micro and small institutions, and low-income earners in the unorganised sector are financially included.
  • S S Mundra, Deputy Governor, said the credit absorption capacity of small and marginal farmers needs to be enhanced. Since micro and small enterprises (MSE) have little or no credit history, financial intermediaries have to make efforts to initiate people into the formal credit system, said Mundra. When it comes to low salary earners in the unorganised sector, the Deputy Governor felt that their skills need to be scaled up so that their earning capacity increases.

13. Bank for International Settlements warns China banks risk crisis within 3 years (Source: Financial Express)

  • Excessive credit growth in China is signalling an increasing risk of a banking crisis in the next three years, a report from the Bank for International Settlements (BIS) says.
  • An early warning of financial overheating – the credit-to-GDP gap – hit 30.1 in China in the first quarter of this year. Any level above 10 signals a crisis “occurs in any of the three years ahead,” the BIS said. China’s indicator is way above the second highest level of 12.1 for Canada and the highest of the countries assessed by the BIS.
  • Debt has played a key role in shoring up China’s economic growth following the global financial crisis. Outstanding debt reached 255 percent of GDP in 2015, fuelled in large part by a surge in corporate borrowing, up from 220 percent just two years earlier.
  • China’s bank lending in August more than doubled from the previous month, with much of the gain down to strong mortgage demand. Indeed, China’s top banks are lending more to homebuyers and developers. The BIS also said the estimated debt service ratio – which measures principal and interest payments relative to income is at 5.4, which is a “potential concern.” This underlines the default risk as borrowers struggle to repay loans.
  • Despite the concerns surrounding China’s debt, UBS analysts said in a report earlier this year that they do not expect an imminent banking crisis. A high domestic savings rate, underdeveloped capital markets, a relatively closed capital account and government ownership of banks and many large borrowers mean no one can easily “pull the plug” on its credit cycle, they said. Debt-to-GDP could reach 300 percent before 2020, UBS said.

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