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Banking News 20.07.2017

‘To resolve top 50 stressed assets,

banks need Rs 2.4 lakh crore haircut’


The Indian Express

Published on July 20, 2017



Mumbai, July 19: Banks are likely to take a haircut of 60 per cent, worth Rs 2,40,000 crore, to settle 50 large stressed assets with debt of Rs 4,00,000 crore, rating agency Crisil has said. These 50 companies are from the metals (30 per cent of total debt), construction (25 per cent) and power (15 per cent) sectors, and account for half of the Rs 8 lakh crore non-performing assets (NPAs) in the banking system as on March 31, 2017.


In banking parlance, haircut is the difference between the market value of an asset used as loan collateral and the amount of the loan. The amount of the haircut reflects the lender’s perceived risk of loss from the asset falling in value or being sold in a fire sale. Banks have already provisioned for 40 per cent of this exposure. “We used the economic value approach to assess the haircuts,” said Pawan Agrawal, chief analytical officer, Crisil Ratings. “This is a combination of market value multiples and cash flow estimation. The final haircut, however, will also be influenced by the expectation of lenders, valuation of subsidiaries, and the price outlook for commodity-linked sectors.”


It has classified the haircuts into four categories — marginal (less than 25 per cent), moderate (25-50 per cent), aggressive (50-75 per cent), and deep (greater than 75 per cent). A quarter of the debt analysed needs marginal or moderate haircuts, while a third needs aggressive, and nearly 40 per cent deep haircuts. “Companies from the power sector would require moderate haircuts, while those from the metals and construction sectors would need aggressive ones,” Agrawal said.


In the metals sector, the aggressive haircut would be Rs 1,13,000 crore and deep haircut Rs 12,000 crore. In the power sector, marginal/ moderate haircut would be Rs 37,000 crore, aggressive Rs 19,000 crore and deep haircut Rs 12,000 crore. For construction, deep haircut would be Rs 78,000 crore, moderate haircut of Rs 23,000 crore and aggressive Rs 5,000 crore.


The sources of stress are policy or demand (power plants), lower capacity utilisation (steel plants), and over-leveraged balance sheets (construction companies). The restructuring tools facilitated by the Reserve Bank of India (RBI) that the indebted companies had availed of earlier did not help because of very high debt levels that underscore the magnitude of stress, it said.


The government recently promulgated an ordinance empowering the RBI to issue directives for faster and optimum resolution of stressed assets so that they become viable. Majority of the debt requiring deep haircuts belong to companies with unsustainable businesses so asset sales are necessary to recover monies. Ramesh Karunakaran, director, Crisil Ratings said, “Some of these assets offer M&A opportunities for companies with strong credit profiles. Also, potential synergies could allow for a significant reduction in haircut – an aspect that has not been considered in our analysis.”


It would be in the larger interest of the economy to pop the bitter pill of haircut than kick the can down the road, it said.


Given the issues faced by many of the companies, the haircut required may be on the aggressive side. The haircut levels may be further impacted by the fact that a large number of stressed assets may be put on the block by lenders, making it effectively a buyer’s market.



From E-Group, Banking-News



Finance Ministry working on Capital

Infusion; to be announced soon


The Press Trust of India

Published on July 19, 2017



New Delhi, July 19 (PTI): The finance ministry is working on the capital infusion strategy for public sector banks and an announcement to this effect will come soon, a senior finance ministry official said on Wednesday.


The funds infusion matrix as per the Indradhanush scheme, the bank capitalisation programme of the government, is being given a final shape on the basis of representations from various banks for their capital needs, the official said.


Although the Indradhanush scheme has assigned Rs 10,000 crore for the current fiscal, it may prove insufficient due to high provisioning requirement for bad loan resolution through various processes, including insolvency and bankruptcy proceedings.


Last month, Reserve Bank of India (RBI) Deputy Governor SS Mundra had said public banks may require more than the budgeted Rs 10,000 crore capital infusion from the government in the current financial year on account of higher provisioning for bad loans and haircut on stressed assets.


The processes of non-performing asset (NPA) resolution and capitalisation are closely associated, Mundra said, adding that it appears banks may need additional capitalisation post the exercise.


The list of beneficiary will be announced soon and the capital infusion in the banks will take place in tranches as it happened last fiscal, the official who did not wish to be identified said.


Last year, the ministry provided capital to banks in two tranches. As many as 13 public sector banks together got Rs 22,915 crore in the first tranche announced in July 2016.In the Budget speech on February 1, Finance Minister Arun Jaitley announced capital infusion of Rs 10,000 crore for the current fiscal.


“In line with the Indradhanush road map, I have provided Rs 10,000 crore for recapitalisation of banks in 2017-18. Additional allocation will beprovided, as may be required,” Jaitley had said.


As per the scheme, public sector banks need to raise Rs 1.10 lakh crore from markets, including follow-on public offer, to meet Basel III requirements, which kick in from March 2019.


This will be over and above the Rs 70,000 crore that banks will get as capital support from the government. Of this, the government has already infused Rs 50,000 crore in the past two fiscals and the remaining will be pumped in by the end of 2018-19.



From E-Group, Banking-News



Text messages from SBI

trigger confusion on Aadhaar


Rachel Chitra

The Times of India

Published on July 20, 2017



Chennai, July 19: Confusion reigned among State Bank of India account holders as text messages from the bank warned of accounts being blocked if not seeded with Aadhaar by end-July 2017.


Bank officials however said that there was no such July deadline and reiterated that “the last day for seeding was December 31, 2017."


State Bank of India customer Saravana Prabhu was shocked on Monday when he was informed that he should link his Aadhaar card to his branch account by the end of the month or risk getting the account blocked.


Prabhu, 32, received this message from SBI. "Kindly furnish your Aadhaar no along with copy of the Aadahar card to seed to your SBI account. Please ensure seeding before 31.07.2017. In case of non-compliance, your account is liable to be blocked. Ignore if already seeded."


Activists saw this message as an attempt by banks to get customers to seed with Aadhaar before the Supreme Court ruling in this regard.


"I don't understand this almighty hurry to make Aadhaar compulsory when it has been less than a week since the SC bench in this regard has been formed. For all we know by December, the SC might rule that Aadhaar need not be linked to bank accounts. This seems an attempt on the part of banks to get a majority of their customers 'voluntarily' on Aadhaar - so that they can have a more convincing argument before the SC," said Gopal Krishnan, activist and lawyer, Citizens' Forum for Civil Liberties, New Delhi.


"Even the law does not make Aadhaar mandatory under the Aadhaar Act. One can check paragraph 90, 91, page 105, 106 of July 9, 2017 Supreme Court ruling, where they have clearly stated that Aadhaar is not mandatory for an Indian citizen," said Krishnan.


Tax consultants and lawyers feel it is the finance ministry's push that is forcing financial institutions to create a lot of myths and distortions in an effort to get more people on board the Aadhaar platform. "As per the Income Tax Act, one can file taxes even without a PAN card," said Pankar Dharamraj, chartered account, Bengaluru.


Likewise, when another customer received a message to please link "Aadhaar to bank account before April 30, 2017," the person complained.


Pointing out that the deadline-- as they stated it was long gone-- the customer complained to the Gopalapuram, Chennai, bank manager. Following, which the customer received another message asking to "link Aadhaar to bank account" but without mentioning any deadline.


Emails sent to SBI in this regard have not received a response.



From E-Group, Banking-News



Digital transactions declining since March


The Economic Times

Published on July 20, 2017



New Delhi, July 19 (PTI): The number of digital transactions, which grew significantly in the aftermath of demonetisation last year, has started showing a declining trend since March 2017, according to official data.


The number of digital transactions has come down from 119.07 crore in March 2017 to 118.01 crore in April and further to 111.45 crore in May, P P Chaudhary, Minister of State for Electronics and IT, said in a written reply in the Lok Sabha.


The number of digital transactions was only at 71.27 crore in October 2016. It went up to 83.48 crore in November 2016 and shot up to 123.46 crore in December 2016.


The increase in digital transactions was witnessed after demonetisation of Rs 500 and Rs 1,000 currency notes on November 8, 2016. These transactions numbered 114.96 crore in January 2017, and about 101.18 crore in February 2017.


To another query whether commission is charged on cash transactions under digital economy, Chaudhary said scheduled commercial banks have the freedom to levy charges for various services, as per a Reserve Bank of India circular dated July, 2014.



From E-Group, Banking-News



The Rs 2000 question:

Where have the pink notes gone?


Pratik Bhakta

The Economic Times

Published on July 20, 2017



Mumbai, July 19: A shortage of Rs 2,000 notes in recent weeks and months has stumped bankers and ATM operators who are already grappling with cash shortage in some parts of the country due to heavy usage and hoarding.


Bankers and ATM service providers say that there has been a sharp drop in the number of Rs 2,000 notes in circulation. Supply of new notes from the central bank has plummeted in recent weeks leading to speculation that it could be a deliberate strategy to restrict the flow of high-value notes in the economy.


"Presently we are receiving currency notes from the Reserve Bank in the denomination of Rs 500 in high-value currency,” said Neeraj Vyas, chief operating officer of State Bank of India. "The 2,000 denomination notes are coming over the counters by way of recirculation."


There are around 58,000 ATMs of SBI out of the 2.2 lakh deployed in the country. The country’s biggest bank has also moved a step ahead of its peers to recalibrate the Rs 2,000 currency cassettes in a few of its ATMs to Rs 500 currency ones so that more cash can be stuffed inside the machines.


An email sent to RBI seeking comments was not answered.


But the central bank continues to pump in Rs 500 currency notes ensuring that there is no overall cash crunch which was seen during demonetisation last year.


Bankers say that this could be part of the strategy of the RBI to keep a leash on the total amount of high-value currency in circulation.


 "While there is a definite shortfall in the supply of Rs 2,000 denomination notes, overall supply is fine as banks are giving out sufficient Rs 500 notes which is convenient for the consumer as they can get change easily for smaller currency notes," said Ravi Goyal, managing director of AGS Transact Technologies which manages around 60,000 ATMs in the country on behalf of banks.


The RBI rushed to print Rs 2,000 notes immediately after demonetisation was announced in November last year and that supply may have reached a level that the central bank is not comfortable with now, bankers said. This may be a conscious strategy to curb the new supply of high-value notes and print more low-value notes like Rs 500 or even Rs 200 which may be introduced soon.


"A new phenomenon that is now happening in the market is that Rs 2,000 notes are not coming in for deployment at ATMs and along with this, we see a 12% increase in the average ticket size of ATM cash withdrawals post demonetisation," said Loney Antony, managing director of Hitachi Payment Services which manages more than 50,000 ATMs in the country.


Higher number of Rs 2,000 notes?


Based on RBI data, Hitachi has calculated that notes in circulation with a value of Rs 100 and lower crossed Rs 4 lakh crore in May from around 2.5 lakh crore before demonetisation.


The Rs 500 denomination went down to Rs 4.1 lakh crore from Rs 8.1 lakh crore in November. The Rs 2,000 denomination dipped to Rs 5.5 lakh crore in May from the Rs 1,000 denomination notes of Rs 6.4 lakh crore in November.


If this calculation is correct, it clearly shows a higher number of Rs 2,000 notes in circulation compared with Rs 500 notes. "The relevant currency which has come back to be stuffed into cash dispensing machines is still less by around 25%," said Antony. "There are still problems of cash hoarding in certain regions of the country."


Antony was alluding to the fact that the currency in circulation has still not reached pre-demonetisation levels.


Latest RBI data shows that the currency with the public is at Rs 14.5 lakh crore as of June 23, six months after demonetisation.


This is against Rs 17 lakh crore just before the notes were recalled.


Industry executives who manage ATM networks say they can stuff around Rs 25 lakh in 500 notes in a machine and another Rs 2 lakh in 100 denomination notes, which usually lasts for three to four days depending on the location of the machine


While that would help make up for some of the Rs 2,000 note shortage, it may not help in cases where cash runs out very fast due to high usage or hoarding. Vyas said that they are finding shortage of cash in cities such as Patna, Kolkata and across the AndhraTelangana region.



From E-Group, Banking-News



RBI to submit a new proposal

for Liquidity Management Tool


Siddhartha Singh & Subhadip Sircar

The BloombergQuint

Published on July 20, 2017



Mumbai, July 19 (Bloomberg): India’s central bank will submit a fresh proposal to the government for introducing a new liquidity management tool as it grapples with strong foreign inflows, people familiar with the matter said.


The decision to reconsider the so-called Standing Deposit Facility, or SDF, was taken at a meeting between the new Economic Affairs Secretary Subhash Chandra Garg and Reserve Bank of India Deputy Governor Viral Acharya on Monday, the people said, asking not to be identified as they aren’t authorized to speak publicly.


After a change of guard at the finance ministry with Garg taking charge from Shaktikanta Das, the government has eased its opposition to the new liquidity tool as absorbing flows with the existing set of instruments becomes challenging. The ministry had earlier opposed a proposal to introduce the tool on the grounds that it gave the central bank the discretion to set interest rates outside the purview of the monetary policy panel.


The central bank will submit details of how its proposes to implement the tool, the people said. The SDF doesn’t require the central bank to give any collateral to lenders when it mops up cash.


Flows has picked up pace as emerging markets continue to benefit from the U.S. Federal Reserve’s paced interest-rate increases. Overseas investors have bought 1.3 trillion rupees ($20.2 billion) worth of local bonds so far in 2017, according to depository data. Stocks have seen $8.5 billion worth of inflows. The central bank has been regularly intervening in the forex market to mop up inflows, according to Mumbai-based traders.


Finance Ministry spokesman D.S. Malik couldn’t be immediately reached for comment. A spokeswoman for the RBI didn’t immediately respond to an e-mail seeking comment.


Earlier this month, the RBI resumed the open market sale of bonds for the first time since October as it seeks to manage the excess banking liquidity. Liquidity has seen a large surplus since Prime Minister Narendra Modi’s surprise note ban in November, and though the excess has come off, it still remains far from RBI’s target of neutral cash in the system.



From E-Group, Banking-News



Merger of big banks may not wipe out

weakness in banks: Bank Union


Beena Parmar

The MoneyControl News

Published on July 19, 2017



Government is looking at merging some of the 21 public sector banks to create 10-12 banks in the medium term. As part of a three-tier structure, it plans to build at least 3-4 banks of the size of SBI.


Mumbai, July 19: Following the successful State Bank of India merger, the government is working on creating a handful of big global banks -- a leaner, more efficient banking universe consisting of only 3 or 4 entities. However, bank unions feel this may not necessarily help strengthen the balance sheets of the beleagured public sector banks.


According to CH Venkatachalam, General Secretary of All India Bank Employees' Association (AIBEA), “What purpose will it serve? What kind of banks are being looked at for the merger? There are many questions. The weakness in the banks is due to bad loans. The solution is by resolving those and getting recovery."


Reports suggest that the government is looking at merging some of the 21 public sector banks into 10-12 banks in the medium term. As part of a three-tier structure, it plans to build at least 3-4 banks of the size of State Bank of India, the country's largest lender, which is among the top 50 in the global bank list.


One of the possibilities is that large public sector banks (PSBs) such as Punjab National Bank, Bank of Baroda, Canara Bank and Bank of India could absorb other smaller banks. One of the major reasons for the consolidation is the growing number of weak banks.


Nine of the 21 public sector banks, including IDBI Bank and Indian Overseas Bank, reported losses during 2016-17, as per information shared in the Parliament. This number was 13 in the previous year ending March 2016.


Venkatachalam says mergers will not at all make them stronger. “SBI is bigger today and still their NPAs are huge. How is it making them more efficient?”


This year, SBI’s five associate banks and Bharatiya Mahila Bank (BMB) got merged from April 1.


Venkatachalam said that India needs banks which can touch the common people. “The bigger the bank grows, the less accessible it becomes for people. Big banks will naturally give big-ticket loans with higher risks. We have seen Lehman crisis, it (Lehman Brothers in 2008-09) was a too big to fail bank in the USA and it collapsed.”


He also suggested that we can think of creating specialised or expertised banks. “We can maybe have a foreign exchange bank, agriculture bank, small industries bank or housing bank. Today, a bank manager is handling everything from gold loan, home loan, industrial loan, education loan, etc. How to make a bank more beneficial and accessible is more important. It must be restructured but it should aid recovery.”


In the upcoming consolidation drive, factors like regional balance, geographical reach, financial burden and smooth human resource transition will have to be looked at while taking a merger decision, said a government official, adding that a very weak bank should not be merged with a strong one "as it could pull the latter down".


Some region-centric banks like Punjab and Sind Bank and Andhra Bank will continue as independent entities, while some mid-size lenders would also co-exist, the official told PTI news agency.


Last month, Finance Minister Arun Jaitley had said the government is "actively working" towards consolidation of PSBs but declined to provide details, saying this was a price-sensitive information.


Given the smooth transition and success of SBI merger, the Finance Ministry is considering clearing another such proposal by this fiscal if the bad-loan situation comes under control.


The government along with the Reserve Bank of India are working towards resolution of non-performing assets (NPAs) by sending top large defaulters to insolvency courts on a priority basis.



From E-Group, Banking-News



CBDT: GST not to be added for TDS computation


The Times of India

Published on July 20, 2017



Mumbai, July 19: The Central Board of Direct Taxes (CBDT) has clarified that, where the recipient of a service is required to deduct tax at source (TDS) when making a payment to the supplier, the amount of TDS shall be computed without grossing up for the goods and service tax (GST) component, which is also part of the bill.


To enable TDS to be computed exclusive of the GST component, it is vital that the GST component is indicated separately, adds the CBDT in its circular issued on Wednesday. The CBDT is continuing with the stand adopted by it earlier in case of service tax, where the amount payable was not grossed up with the service tax component for determining TDS.


There are several payments, such as works contracts which attract GST (at 18%) and which also attract TDS (at 10% on fees for technical services) under the Income Tax (I-T) Act. Agreements in the construction sector are prime examples of works contracts, which entail both a supply of goods and services.


To illustrate, if the payment under a works contract is Rs 10 lakh, GST will be Rs 1.8 lakh. The issue posed to the CBDT was whether the TDS would be on Rs 11.8 lakh or Rs 10 lakh. If the GST component is indicated separately, CBDT clarifies that TDS will be against Rs 10 lakh which is the income of the service provider. In other words, Rs 1 lakh will be the TDS component. The CBDT has clarified that this circular will also apply to existing contracts entered into before July 1, when GST was introduced.



From E-Group, Banking-News



Who cares about monetary policy?


A Vasudevan, The Mint

Published on July 20, 2017



If monetary policy does not provide relief in terms of a rate cut

for some reason, fiscal discipline will have to be given up


The Reserve Bank of India (RBI) will announce monetary policy in less than two weeks’ time. There is already speculation about the official rate of interest, essentially based on information about softening of the inflation rate. Movements in both the Consumer Price Index for all items (CPI) and Whole Price Index (WPI) show declines much below the average inflation target of 4%.


In the circumstances, it is no wonder the chief economic adviser to the ministry of finance (MoF), Arvind Subramanian, has strongly pitched for a rate cut. Bank of America-Merrill Lynch strongly favours rate cuts. A number of other commentators have taken the same position. However, the amount of rate cut is not under any serious discussion at this point in time.


Do money and asset markets care for monetary policy announcements now? Don’t they have solutions, digital or otherwise, to counter the different scenarios of rate cut and constancy of the rate?


If markets anticipate policies correctly, then the RBI will not have a cause to pat itself on the back. Those who closely studied the atmospherics before the policy announcements in the last 20 years or so would have noticed an element that is not openly spoken about. All governors during this period, notwithstanding their protestations to the contrary, seem to experience an impulse, human as it is, to go down in “history” as having followed a uniquely individual style of policy pursuit. They often tend to infuse a “surprise” element where possible or to give a nuanced interpretation of the data to defend the policies they intend to pursue.


It is only recently, perhaps two to three years, the MoF’s activism in matters that belong to the jurisdiction of the RBI, has tended to throw cold water on the central banker’s impulse, giving rise, in the process, to the debate on central bank independence.


Does the RBI have information sets that are vastly different from those of the markets and of fiscal policy analysts? If there is “private” information with the RBI, how authentic is it? Could it be verified? If this is not a good enough defence of the impulse of creating “surprise”, should one believe that the RBI has a model that gives results much different from those of the markets and researchers at the time of the meetings of the monetary policy committee (MPC)? Pray, what could it be? If there exists such a model, one would believe that members of the MPC will be privy to it. Will the RBI release the background technical papers prepared for each of the MPC meetings?


These questions are not easy to answer. One thing, however, is certain. Low inflation with uncertainty about major output gains over the average growth rate in recent quarters will give relatively low nominal gross domestic product. This could result in lower tax revenues unless one expects sharp growth in the tax base to compensate for the revenue shortfall. If tax revenues indeed fall, expenditure commitments on account of growing security challenges and new pay commission disbursements, to name just two, may not be met. Should the fiscal discipline then be so strictly observed that the deficit targets cannot be compromised?


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