Financial Awareness-September(21-30) 2016

  1. RBI plans fund to push card swipe machines (Source: ET)
  • Concerned over low use of debit cards in electronic payments, the Reserve Bank of India wants banks that are not installing card accepting machines to contribute to a fund that will subsidise installation of point of sales (PoS) terminals.
  • There are over 68-crore debit cards in India. Over a third of these have been added in the last two years following the implementation of the Jan-Dhan Yojana. But the number of PoS terminals (credit card accepting machines) has gone up marginally from 12 lakh to 14 lakh. The average debit card holder in India uses his/her card only once at a PoS machine for every 10 transactions in an ATM.
  • The proposal envisages creation of an ‘acceptance development fund’ which will subsidize installation of PoS machines with smaller merchants and in small towns and villages. The RBI has come out in support of a fund rather than mandating installation of PoS terminals for banks as some lenders are not interested in the business. Today, four lenders dominate the merchant acquisition business -State Bank of India, HDFC Bank, ICICI Bank and Axis Bank.

2. External debt grows 2% in March; short-term debt falls (Source: Business Standard)

  • India’s external debt stood at $485.6 billion as of March 2016, up 2.2 per cent year-on-year due to a rise in long-term debt, particularly non-resident Indian (NRI) deposits
  • However, short-term external debt declined 2.5 per cent, mainly on the back of trade credits, implying less risks from these borrowings. Short-term external debt was $83.4 billion at end-March 2016, from $84.7 billion a year ago. The share of short-term external debt in external debt declined from 18.0 percent as of March 2015 to 17.2 percent as of March 2016.
  • At March-end 2016, long-term external debt was $402.2 billion, up 3.3 per cent over the year-ago period. Long-term external debt accounted for 82.8 per cent of total external debt in the period against 82 per cent at end-March 2015, according to the 22nd issue of the annual India’s External Debt: A Status Report 2015-16.
  • “The rise in external debt was due to the rise in long-term debt, particularly NRI deposits,” said the report prepared by the Department of Economic Affairs. “India’s external debt has remained within manageable limits in 2015-16, as indicated by an increase in foreign exchange reserves to debt ratio to 74.2 per cent, the external debt-GDP ratio of 23.7 per cent, and a fall in short-term debt to 17.2 per cent.”
  • External debt of the country continues to be dominated by long-term borrowings. A cross-country comparison based on International Debt Statistics 2016 of the World Bank, which presents the debt data for 2014, showed that “India continues to be among the less vulnerable countries with its external debt indicators comparing well with other indebted developing countries”.

3.  How fixed assets of many PSBs doubled in FY16 (Source: Business Line)

  • Considering that India Inc is yet to press the pedal on fresh capital expenditure, the sharp jump in banks’ fixed assets in 2015-16 appears heartening.
  • Surprisingly, many public sector banks (PSBs) have seen their fixed assets double in FY16. IDBI Bank, Bank of Baroda, UCO Bank, Allahabad Bank, Vijaya Bank and Corporation Bank saw their fixed assets grow by more than 100 per cent last fiscal. The sudden bump up in fixed assets, it appears, has primarily been on account of banks revaluing their fixed assets.
  • This has helped banks prop up their Tier-I capital, thanks to RBI’s tweaks to revaluation reserves earlier this year. In March this year, the RBI came forward to offer some respite to banks with low capital. It allowed some of the currently nonrecognisable capital on banks’ balance sheets to count as capital as per Basel norms. One of the moves was to allow banks to include revaluation reserves as part of their Tier-I capital, instead of Tier-II.
  • Many of these banks have revalued their assets up. The resulting appreciation in value has been credited to the revaluation reserves, inclusion of which (at a 55 per cent discount as per RBI’s norms) in Tier-I capital has helped banks shore up their capital. Some of these banks saw notable improvement in their Tier-I capital in 2015-16 also due to the Centre infusing capital into them.

4. Credit demand: Banks almost compelled to invest in NBFC CPs; here’s why (Source: Financial Express)

  • Non-banking financial companies (NBFCs) seem to be making the most of their status as major borrowers from banks. With demand for credit from the industry being lacklustre, not only are they literally forcing banks to invest in their commercial papers (CPs), but are also issuing them at record amounts, an FE analysis of Reserve Bank of India (RBI) and Prime Database data reveals.
  • While July was the fourth successive month when banks’ lending to the industry grew at less than 1% year-on-year, the month also witnessed the growth rate of their lending to NBFCs hitting a two-year high of over 15.5% (y-o-y).
  • While NBFCs have issued CPs worth over R1.91 lakh crore so far in FY17, accounting for 49.4% of all CP issuances, banks’ investments in CPs have never been higher.
  • According to data released by the RBI, banks’ investments in CPs hit an all-time high of R1.07 lakh crore in the fortnight ended September 2 and accounted for well over a quarter of the total CP market.

5. Moody’s unlikely to upgrade India’s sovereign rating (Source: MINT)

  • Moody’s Investor Service indicated it is unlikely to upgrade India’s sovereign credit rating anytime soon.
  • It said the credit implications of reform measures such as the goods and services tax (GST) and a bankruptcy law will only become apparent in the medium term while weak private investments, slower fiscal consolidation and a high-level of bad loans in the banking sector constrain India’s sovereign rating.
  • Moody’s currently has assigned the lowest investment grade (Baa3) for India with a positive outlook. Though there is progress in the implementation of reforms, what the rating agency didn’t anticipate is the weakness in private investment.
  • Moody’s pointed out that some measures, if effectively implemented, will bolster India’s growth potential. These include easing of restrictions on foreign direct investment that could foster productivity growth in some sectors. “The bankruptcy law, which, if credible, would enhance investor confidence, improved access to bank accounts and measures aimed at easing business starts,” Moody’s said.

6. Bank of Japan keeps monetary policy intact, negative interest rate at minus 0.1% (Source: Financial Express)

  • The Bank of Japan decided to adopt a target for long-term interest rates in an overhaul of its massive stimulus programme.
  • The BOJ maintained the 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.
  • But it abandoned its base money target and instead set a “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields around current levels of zero percent.
  • The BOJ said it would continue to buy long-term government bonds at a pace so that the balance of its holdings increases by 80 trillion yen ($781 billion) per year. ($1 = 102.4100 yen).

7. Now, open a Kotak Bank account via mobile (Source: Business Line)

  • Kotak Mahindra Bank announced the launch of ‘Kotak Now’ — a digital account opening process on the mobile. This is said to be the first end-to-end digital process where verification of customer documents and signature is done via a video call with the bank.
  • While customer convenience and improving their experience have guided the initiative, there is also a considerable cost saving for the bank. Currently, the account opening process can cost ₹2,500-3,000 per customer. This includes the cost of the welcome kit plus various apportioned administrative costs. This will now be halved with the digital solution
  • Customers are increasingly getting more comfortable with operating only through their mobile. The number of customers logging in through the mobile had in two years reached the same level as customers that the Net took 13 years to reach.

8. Mergers no quick fix for banking sector issues: Assocham (Source: India Express)

  • Government should focus on making the banking system stronger and give them independence to find their own solutions instead of stressing on mergers, industry body Assocham said in a report.
  • “Mergers or consolidation of the public sector banks is certainly no answer to the present crisis, which can only be resolved by professionalising these banks with the government keeping an arm’s length,” Assocham President Sunil Kanoria said while presenting the report.
  • The body has brought out the paper on ‘Convergence, Not Consolidation Answer for Public Sector Banks’ which suggests that there are no quick fixes for grave problems in the public sector banking.
  • “Overall the economy is doing good, government has done a lot in the last two years, but investment specially in the private sector is not picking up. The solution to the problem lies differently. Instead of merging of the PSBs, the focus should be to make them stronger and larger,” Kanoria said.
  • The report says that the government should at the present juncture look at strengthening the banking system.

9. Government appoints 3 members to interest-rate setting panel. (Source: Indian Express)

  • Government appointed three members on the MPC, who along with RBI nominees are likely to set the benchmark interest rate in the upcoming monetary policy review with a view to contain retail inflation at the targeted level of 4 per cent.
  • The government nominees on MPC headed by RBI Governor Urjit Patel are Chetan Ghate, professor at the Indian Statistical Institute; Pami Dua, Director Delhi School of Economics and Ravindra H Dholakia, professor at IIM-Ahmedabad.
  • The Appointments Committee of the Cabinet (ACC) cleared the three eminent experts as members on the MPC for a period of four years, a government notice said.
  • RBI nominees are governor, a deputy governor and one more representative from the central bank.
  • Ghate was part of a five-member technical advisory committee that provided advice on interest rates to the RBI Governor ahead of each policy review.
  • RBI’s fourth bi-monthly monetary policy review for 2016-17 is scheduled on October 4, and interest rate decision is expected to be taken by the panel instead of the current practice of RBI Governor alone.

10. Digital finance to add $700 billion to India’s GDP, create 21 million jobs by 2025: McKinsey (Source: MINT)

  • Digital finance could boost India’s gross domestic product (GDP) by $700 billion by 2025 and create 21 million new jobs across sectors, the latest McKinsey Global Institute (MGI) report said.
  • The report, titled ‘Digital finance for all: Powering Inclusive Growth in Emerging Economies’, which is the first to comprehensively quantify the full economic impact of digital finance, estimates that digital finance is expected to boost the GDP of all emerging economies by as much as $3.7 trillion by 2025, an increase of 6% from current levels.
  • Digital finance, delivered through mobile phones, internet or cards linked to a digital payment system, will benefit individuals, businesses and governments across the developing world, boosting GDP and widening financial inclusion, the MGI report said.
  • For India, the report said, nearly two-thirds of the GDP increase will come from improved productivity of businesses and governments as a result of digital payments and one-third from the additional investment that broader financial inclusion of people and micro, small and medium-sized businesses will bring. The balance comes from the time saved by individuals which enables additional hours to be spent on work.
  • MGI estimates that Indians lose more than $2 billion a year in forgone income simply because of the time it takes travelling to and from a bank.
  • Faster adoption of digital services means banking services will be available to an additional 1.6 billion people across the emerging world, more than half of them women and many in the middle class. In India, 344 million people could gain access to financial services. For everyone, convenience, cost and the range of financial products available will improve.
  • The economic gains from digital finance, in fact, could exceed the report’s estimates, as the analysis does not quantify many long-term benefits, including the formalization of informal economies that tends to boost productivity, and the fact that women with access to finance are more likely to spend household income on food, education and healthcare, building the human capital of the future.

11. BRICS countries plan to set up new credit rating agency (Source: MINT)

  • The BRICS grouping of the five largest emerging economies—Brazil, Russia, India, China and South Africa—is planning to challenge the existing credit rating system through a new credit rating agency where it is the prospective investor that will pay for the rating of an issuer of a debt instrument.
  • Under the present pricing model of rating agencies, the company or institution issuing bonds pays the rating agency to be rated, known as issuer-pays model. Under the new BRICS rating agency, it is the investor who is planning to invest in the company that will pay for the rating of the company—an investor-pays model.
  • Just as the BRICS New Development Bank (NDB) contributes new financing to existing financing available through other multilateral institutions, the new rating agency will also contribute to existing knowledge of rating systems.

12. Corporate bonds: RBI deputy governor R Gandhi cautions against ignoring bank funding (Source: ET)

  • Even as the government and the Reserve Bank are working in concert to deepen the corporate bond markets, deputy governor R Gandhi said we must be “realistic” in our goals and not squeeze out the bank financing in the process. More importantly, we must not be blinkered in squeezing bank finance to forcibly take up corporate bond market.
  • Noting that we are not alone in this aspect of reliance on bank finances, Gandhi said even the developed world countries like Germany and Japan have been bank finance-led stories.
  • In the comments, which come within a month of the RBI coming out with a slew of measures on deepening the corporate bond market, Gandhi also stressed on the need to create a new category of investors to tide over the challenges of finding takers for low-rated bonds.
  • Gandhi said only 14 per cent of the investments in the domestic corporate bond market are in BBB or lower rated paper, while the AAA- and above paper dominates with a 80 per cent share. Stating that it is “unrealistic” to expect the secondary market in corporate bonds to be as liquid as the government bonds, Gandhi said there is a need to deepen the activity. For this, transparency including the level of defaults will be very important, he said, adding that a bulk 95 per cent of the bond raising is through private placements.

13. Bond market expects heavy RBI buying (Source: BS)

  • Even as it may look that a correction in bond market is imminent, considering the recent bull run and some nervousness globally about a possible bubble in bonds, the domestic traders are confident that the domestic bonds will continue to perform well considering Reserve Bank of India’s (RBI) promise to keep banking sector liquidity comfortable even in stress scenarios.
  • To keep the liquidity in a neutral zone, the central bank of the country has to purchase huge amount of bonds from the secondary market and that will push up prices of bonds and artificially keep bond yields low. Such secondary market bond purchase is done under the central bank’s open market operation (OMO) and the traders expect the central bank to start doing aggressive OMO purchases in the coming days. Estimates for the OMO vary between Rs 50,000 crore to Rs 1,50,000 crore.
  • So far the central bank has already done OMO purchase of Rs 1 lakh crore. The need for increased OMO purchase has arisen mainly because of the spike in currency in circulation, which grew 17.4 per cent in a year to more than Rs 2.6 lakh crore. A year ago, the growth was at 11.6 per cent, which is normal.
  • Reasons for why such huge cash is floating in public is a matter of conjecture, as economists point out reasons like elections to festive season and even rise in rural demand (which is largely a cash economy), but the huge cash in the system is a leak from the banking system. And to plug this loophole, the central bank has to infuse more permanent liquidity in the system by purchasing dated bonds.

14. SEBI allows options trading in commodities (Source: MINT)

  • Capital markets regulator Securities and Exchange Board of India (SEBI) on 28.09.2016 allowed commodity derivative exchanges to launch options contracts for trading with the aim of increasing liquidity and attracting more investors to the commodities market.
  • SEBI said commodity options will facilitate hedging by market participants and help deepen the commodity derivatives market. At present, only futures contracts based on individual commodities are traded on commodity bourses.
  • Every exchange will need prior approval from SEBI for launching options trading for which detailed norms will be released later, according to the circular. The move comes exactly a year after the erstwhile commodity markets regulator,the Forward Markets Commission, was merged with SEBI.

15. Government panel proposes Resolution Corporation for banks, financial firms (Source: FE)

  • A Finance Ministry-appointed committee proposed to set up a Resolution Corporation to expeditiously deal with issues concerning insolvency of financial institutions, including banks and insurers.
  • The suggestion to set up a Resolution Corporation, which will also be responsible for providing deposit insurance, was made by Finance Ministry’s committee set up to draft a Code on Resolution of Financial Firms.
  • The draft code proposes to consolidate the existing laws relating to resolution of certain categories of financial institutions, including banks, insurance companies, financial market infrastructures, payment systems, and other financial service providers into a single legislation, and provide for additional tools of resolution to enable the Resolution Corporation to maintain the systemic stability in the country.
  • While the Insolvency and Bankruptcy Code enacted by Parliament in 2016 provides for resolution and liquidation of nonfinancial firms, the proposed code aims to deal with insolvency issues of financial firms in line with international best practices, the committee said.
  • The proposed Resolution Corporation will contribute to the stability and resilience of the financial system by carrying out the speedy and efficient resolution of financial firms in distress, providing deposit insurance to consumers of certain categories of financial services and monitoring the systemically important financial institutions.

16. RBI to rely more on liquidity than rates (Source: BS)

  • With Consumer Price Index (CPI)-based inflation dropping to 5.1 per cent in August, the clamour for policy rate cuts has again increased. After witnessing inadequate transmission through the banking sector, the RBI is relying more on liquidity management than rate cuts for its policy transmission.
  • It has purchased government bonds worth Rs 1 lakh crore so far in 2016-17, through its open-market operations, effecting a sharp decline in rates on various financial instruments. On an average, the weighted average call money rate stayed 13 to 14 basis points below the repo rate during the first half of 2016-17. There has been a significant decline in commercial paper rates and corporate bond yields that encouraged companies to raise more funds from financial markets than the banking sector.
  • Growing asset quality stresses have made banks increasingly more risk-averse towards the manufacturing sector. While banks’ incremental credit flows have remained positive for retail, agriculture and services sectors, they are still negative for manufacturing sector in the current financial year.
  • According to a Credit Suisse report, banks saw no respite in stress addition in the first quarter, and the bulk of their nonperforming assets during this quarter originated not from known sources like restructured loans or leveraged groups but from small and medium-sized enterprises, and midsized companies. Their core profitability (especially for public sector banks) has come under severe pressure, with pre-provisioning profits declining by seven percent in the first quarter. With growing constraints on profitability and capital, we cannot expect banks to lower lending rates aggressively, even if the RBI undertakes significant policy rate cuts.
  • Also, everything is not very rosy on the monsoon front. In terms of distribution, this year’s rainfall still lags behind the normal monsoon years of 2011 and 2013. While major food bowl states like Punjab, Uttar Pradesh and Odisha have seen a decline in Kharif sowing year-on-year, five states, including Gujarat, are suffering from a huge rainfall deficit. So, there is a possibility that inflation will come back to the target band slightly later than assessed earlier because of uncertainties over agriculture.
  • The RBI will remain vigilant about the impact on CPI, of Pay Commission’s recommendations and elevated services inflation, if the goods and services tax gets implemented from April 1, 2017. Other events that will keep the RBI cautious are the volatility associated with the foreign currency non-resident (bank) redemption and forward guidance coming from global central banks.
  • The RBI certainly needs some policy space at this juncture and expect it to stay on hold at least until December. However, as in the past, it would ensure liquidity conditions remain conducive to economic recovery.

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