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Banking News 25.02.16



Banking News: February 25, 2016


Here is an endeavour to bring you in one folder all banking related unedited news/columns/articles/opinions/analysis etc appearing in major business dailies The compiler assumes no responsibility for the authenticity and reliability of the news. Readers are requested to go through the official instructions before acting upon any news articles and views appearing herein.


Compiled by: Anup Sen

 Salt Lake City, Kolkata 700 064


 From E-Group, Banking-News



Cabinet clicks on incentives for card, online payments

Service levy, surcharge waiver approved


The Business Standard

Published on February 25, 2016



New Delhi, February 24: Service charge, user charge and convenience fee paid by gateways and vendors on online or card payments would be waived once steps approved by the Cabinet on Wednesday come into effect. 


Also, above a threshold, one has to make payment online or through cards. The move would discourage cash payment and help tax authorities get leads on evasion. The Cabinet approved various steps in this regard to be taken in a year to two years to boost these payments.


Service charge is currently levied by payment gateways and paid to the government.


The vendor using a payment gateway also pays a convenience charge. On credit cards, it is 1-2.5 per cent. The move will help the government in carrying out its financial inclusion programmes digitally. “It will help reduce transaction cost and encourage electronic mode of payment, facilitating the financial inclusion agenda of the government,” said Kalpesh Mehta, partner, Deloitte Haskins & Sells.


The official statement explained the promotion of payments through cards and digital means will be instrumental in reducing tax avoidance, migration of government payments and collections to a cashless mode. To give a perspective, 569 million transactions were made till December of the current financial year, with payments worth Rs 67.75 lakh crore. 


Cabinet clicks on incentives for card, online payments The largest e-commerce site, Indian Railway Catering and Tourism Corporation, earned Rs 1,100 crore in 2014-15, of which Rs 350 crore was from e-ticketing. A daily 5,50,000 tickets were booked on the site.


Other steps approved by the Cabinet include rationalisation of telecom service charges for digital financial transactions and promotion of mobile banking.


The move primarily discourages transactions in cash by providing access to financial payment services through cards and digital means, went the statement. Creation of assurance mechanisms for quick resolution of fraudulent transactions and reviewing the payments system in the country have also been approved.


The infrastructure of card and digital payments is growing but remains modest in comparison to cash payments.


For card and digital payments to increase, these should be easy to use, readily available and accepted, should not impose any undue financial burden on the merchant and user, and should offer an appropriate level of security.


The evidence indicates penetration and success of card and digital payment products and services is concentrated to a large extent in tier-l and tier-ll locations, mostly to citizens with access to the formal banking channels.


Introduction of the Payment and Settlement Systems Act, 2007,s resulted in deeper acceptance and penetration of modern card and digital payment systems. An Aadhaar Enabled Payment Systems has been brought to leverage upon biometric verification and a domestic card network, RuPay.


The Reserve Bank of India recently approved licences for setting up of payments banks, with the objective of greater financial inclusion to migrant labour, low income households, small businesses and other unorganised sector entities. This would help card and online payment to spread among the poorer strata.



From E-Group, Banking-News



A carrot for the honest


Krishnan Dharmarajan, The Hindu

Published on February 25, 2016



Incentivising electronic transactions with income tax rebates instead of sales tax rebates will push India more towards a cashless economy.


The government is in discussions with the Reserve Bank of India (RBI) to allow more free ATM transactions, so we hear. The thought does have merit, since withdrawing money from an ATM costs banks less than encashment at the bank branch. But it is about time a real comparison was made of debit card usage at ATMs and in electronic transactions and direct policy moves suitably.


In other words, would it not be more cost-effective if the same card is used to go cashless? You’ll find that the gains go beyond saving the mere Rs. 20 it costs the bank when you draw money from an ATM. In real terms, this would help reduce the flow of cash into the economy. For, quite possibly, stacks and stacks of those currency notes that today constitute black money may well have originated from perfectly legitimate transactions made by honest taxpayers themselves! If only these payments were made in cashless form, they would have been automatically accounted for and would have also beefed up the government coffers in multiple ways — with additional sales tax, service tax and other forms of tax collections.


Incentivising cashless transactions


Now, how do you nudge the honest taxpayer into putting his debit card to effective use for the larger good? And what about the trader who sells grocery and other products — will he play along?


Under the current scheme of things, the seller of goods obviously has a lot to lose by accepting the debit card. For one, he stands to pay a merchant discount rate (varying from 0.75 per cent to 1 per cent), and this eats directly into his margin. More importantly, he also knows every such transaction is accounted for and, therefore, liable to be taxed. Suppose a sales tax concession is offered for such point-of-sale payments to go electronic as has been suggested in some quarters. Even then the shopkeeper would not be motivated — he’d much rather save the entire tax than claim a small indirect tax rebate for supporting the cashless drive.


What, then, is the answer? Perhaps it lies in giving a small incentive to the taxpayer to use his card or mobile. A carrot to the honest. For example, the government could grant a 5 per cent income tax rebate for taxpayers who make more than 85 per cent of their payments in cashless mode. The required percentage of cashless transactions for rebate eligibility could be even higher for very high income groups. A routine bank statement/certificate stating percentage of cash debits separately should suffice to claim the rebate. Personal banking statements are already being used to show interest income accrued and tax payable/deducted, so administering such incentive would involve no extra burden either on the banks or the taxpayer.


On balance, a net gain


That brings us to the question of loss to the exchequer. Let’s do the maths. As per Department of Revenue’s website, Rs. 1.71 lakh crore was collected as personal income tax in 2011-12, registering an average compound annual growth rate of 14.81 per cent for the period between 2006-07 and 2011-12. Applying the same growth rate, the estimated collection in 2015-16 would be Rs. 2.96 lakh crore. Assuming that the government chooses to pay 5 per cent rebate and 25 per cent of taxpayers qualify, the payout is still only Rs. 3,700 crore. Based on published studies and reports, the total cost for ATM operations is roughly around Rs. 18,000 crore. Even if this shift to cashless transactions were to reduce ATM transactions by just 25 per cent, it would still save the banking sector around Rs. 4,500 crore in ATM costs alone. And if we were to top up these savings with a hugely conservative estimate of 1 per cent resultant increase in sales tax/value-added tax revenues across States, that would be another Rs. 4,400-plus crore. Need there be a more compelling pitch for the tax rebate?


Revenue-wary policymakers can fine-tune eligibility percentages and the percentage of rebates to play it really safe. Since the rebate has to be earned over a year, the human tendency would be for taxpayers to switch to cashless transactions as a matter of habit. And merchants who hesitate to honour a card will find themselves being pushed to do so.


Hopefully, savings in ATM subsidies for the relatively affluent could get suitably channelled to give adequate incentives for establishing an operating infrastructure in rural areas for accepting electronic payments and providing cash-out facilities. Virtually all households have a bank account, and a big chunk of them have a RuPay card too. What is the whole point of pumping out direct benefits to the newly opened bank accounts if it can’t be converted into purchasing power in the hands of the poor?


Income tax rebate for cashless transactions could well trigger a series of coordinated policy tweaks that could help boost revenues for the government, productivity for the economy and an effective infrastructure for direct benefit transfers and financial inclusion.


Krishnan Dharmarajan is Executive Director, Centre for Digital Financial Inclusion at the Institute for Financial Management and Research.


From E-Group, Banking-News



SBI's Rs 11,705 crore locked as

bad loans with wilful defaulters


The Press Trust of India

Published on February 24, 2016



The bank had identified 1,164 cases of wilful default with

 outstanding  of Rs 11,705 crore, as on September 2015


Mumbai, February 24 (PTI): Loans worth Rs 11,700 crore given by State Bank of India have been locked up as non-performing assets as nearly 1,160 defaulters have wilfully decided not to repay.


The bank had identified 1,164 cases of wilful default with outstanding loan amount of Rs 11,705 crore, as on September 2015, according to data collated by the finance ministry. Besides, the bank has declared beleaguered Kingfisher Airlines and its guarantors UB Holdings and Vijay Mallya as wilful defaulters in November. Kingfisher Airlines owes Rs 1,600 crore to SBI. The bank has filed FIR in 13 cases against wilful defaulters amounting to Rs 13.10 crore, it said.


Among its five associates, State Bank of Hyderabad has the highest number, with 197 wilful defaulters as on September 2015, with an outstanding loan of Rs 2,088 crore. It is followed by State Bank of Patiala with 124 wilful defaulters owing Rs 1,328 crore. Its biggest subsidiary State Bank of Bikaner and Jaipur is struggling with bad loans of Rs 829 crore given to 43 wilful defaulters. State Bank of Mysore and State Bank of Travancore have 66 and 65 wilful defaulters in their list, respectively. In absolute amount terms, it is Rs 974 crore and Rs 839 crore, respectively.


SBI's gross NPAs or bad loans soared to Rs 72,791.73 crore at the end of the December quarter as against Rs 61,991.45 crore a year earlier. The mounting pressure due to bad loans hit profitability of SBI as its consolidated profit plunged 67 per cent to Rs 1,259.49 crore for the quarter on account of higher provisioning for bad loans. Faced with huge NPAs, SBI Chairman Arundhati Bhattacharya had said bad loans are expected to surge in the coming quarter, which may hit its profitability.



 From E-Group, Banking-News



An old solution to bank capital woes


Aarati Krishnan

The Business Line

Published on February 25, 2016



The Centre can Borrow through Recapitalisation Bonds to

Infuse Equity into Public Sector Banks, like it did in the 1990s


Desperate times call for desperate measures. And it is clear that the capital adequacy problems dogging public sector banks are beginning to cry out for some desperate measures.


Today, estimates of capital requirements for the beleaguered public sector banks to meet Basel III norms range upwards of Rs. 2.4 lakh crore over the next three years. The Centre is hard-pressed to meet this requirement.


After providing under Rs. 8,000 crore towards bank recapitalisation in the previous budget and getting a lot of flak for it, it has since raised this commitment to a mammoth Rs. 70,000 crore.


But sector watchers have been pointing out that even this is woefully inadequate. Given the string of quarterly losses being posted by the state-owned banks of late, the Centre cannot be seen dragging its feet on the issue, as that would be toying with public confidence in the banking system itself.


The nineties solution


One (desperate) solution, if the FM is willing to a leaf out of the history books, lies in a bit of financial engineering employed by the government (of the day) in the nineties.


It goes like this. In the early nineties, nationalised banks in India saw a severe erosion in their profitability and capital base after their untrammelled lending to the priority sector in the preceding decade. This prompted the cash-strapped government to come up with a novel strategy to shore up the banks’ capital without an immediate demand on its budgetary resources.


It simply borrowed from the banks themselves to meet their capital requirements! To do this, it issued several tranches of special non-marketable securities called “Recapitalisation bonds” to the nationalised banks. The banks subscribed to these bonds in the normal course of their business.


The cash thus raised was used by the government to infuse fresh ‘equity’ into the beleaguered banks. Initially issued for a specified period, these bonds were later converted into marketable securities or into perpetual bonds, by mutual agreement between the banks and the Centre.


According to one estimate, as much as Rs. 20,000 crore was infused into public sector banks through this method between 1985 and 1995.


While the government was merely postponing its obligations through these bonds, this move did not result in undue fiscal burden over the long term, as the Centre earned both dividends and market returns on bank shares.


The pluses


The advantages of a bailout using such recapitalisation bonds are many. One, the government need not raise immediate tax revenues to fund the mammoth bill on bank recapitalisation, which means less burden on the taxpayer.


Two, by borrowing directly from the banking system instead of the markets, the Centre can avoid crowding out private borrowings or distorting market yields.


The fact that there is no such crowding out can justify keeping them out of fiscal deficit measurements too. (To make this effective, banks need to hold these bonds for the long-term and not liquidate them in the markets). Three, as the Centre can borrow at far cheaper rates than the distressed banks, this would be an economical way to raise funds.


From the banks’ point of view, subscribing to the Recapitalisation Bonds does not really strain their finances, because lending to the Centre is about the safest thing they can do with their loan funds. In any case, public sector banks tend to invest well in excess of their Statutory Liquidity Ratio requirements in government securities.


As long as interest rates on these bonds are transparently pegged to prevailing market yields, banks will not suffer any opportunity loss on income either. Getting go-aheads for the bond issue from RBI and SEBI would take care of the regulatory aspects.


Financial engineering?


But is such a solution really above-board? Isn’t it financial engineering? No doubt it is, but it can be considered in the interests of the economy, if it is transparently done. Whether the Centre borrows from the market or does so from banks themselves, this move will bloat its borrowings quite significantly. This will escalate the nation’s debt-to-GDP ratio and will cause rating agencies to look askance at it.


But the negative impact can be mitigated to some extent, if the entire process is managed transparently, and the financial impact disclosed upfront.


Given that global central banks have resorted to quite a large number of creative instruments in recent years to bail out their banks, the rating agencies will find it difficult to view this very negatively.


The other big risk to this idea is obviously that the government would be borrowing money to invest in equities (bank shares), something that no conservative financial adviser would recommend.


But, in the stock market, it is commonplace for private sector promoters to step in to acquire their company’s shares to signal confidence, if they believe the stock to be unfairly valued. As the promoter of state-owned banks, the government is entitled to do the same. Given the huge discounts to their book value at which some of these shares trade currently, this is also a bet that could pay off for the exchequer over the long term.


However, there is one very important caveat to be made on this idea. Using recapitalisation bonds can only act as a short-term, fire-fighting solution to the crisis afflicting Indian public sector banks today.


Measures like this will not do anything to address the structural rot in the banking system that has created the bad loan menace in the first place — poor governance systems, badly judged lending decisions in good times, and the repeated white-washing of doubtful accounts in bad ones.


These problems need to be addressed separately through wide-ranging reform of bank ownership and governance structures by the RBI and the Centre. Else, the easy expedient of recap bonds, used for a second time, will certainly create a moral hazard for all future times to come.



From E-Group, Banking-News



House panel raps RBI over NPAs

Moily-led panel says RBI should not be a passive regulator


The Business Standard

Published on February 25, 2016



New Delhi, February 24: A parliamentary panel has expressed reservations over the way the Reserve Bank of India (RBI) and banks were handling the issue of bad loans.


It said high bad debts have raised serious questions over the credibility of the mechanism to deal with an issue that is threatening the stability of the banking system. The parliamentary standing committee on finance said it was not happy with the way the issue was being tackled.


In a report tabled in the Lok Sabha on Wednesday, the panel said RBI should not be a passive regulator but should exercise powers of punitive action against banks in case of defaults. The report said the panel was "constrained" to observe that the "RBI does not seem to have quite succeeded, as a regulator" in implementing and enforcing in letter and spirit its own guidelines on stressed loans.


"Mere issuing of guidelines by RBI does not seem to have yielded the desired results.... As the committee would not like the RBI to be a passive regulator when major lapses occur in banks, it would be in the fitness of things if RBI exercises its regulatory powers vis a vis banks to take punitive action in cases of default and to enforce their guidelines," the panel, headed by Congress member of Parliament M Veerappa Moily, said. Former prime minister Manmohan Singh is also on the panel.


The committee said RBI as a regulator should have its regulatory role well delineated and thus not have its director in the board(s) of the banks as part of their management, "as conflict of interest may lead to avoidable laxity".


As of September 2015, the net non-performing assets (NPAs) of public sector banks stood at Rs 2,05,024 crore, while the gross NPAs were Rs 3,69,990 crore, the committee pointed out. "Such high incidence of NPAs obviously raises serious questions on the credibility of the mechanisms to deal with NPAs and stressed loans as such, even as certain estimates indicate that gross NPAs may touch Rs 4 lakh crore by the end of this fiscal year," said the report.


What The Panel Said

v          Early and timely intervention and remedial measures necessary to stem rising NPAs

v          Stressed assets ratio for the system as a whole exceeded 11% at 
the end March 2015, against 10% in March last year

v          NPAs expected to be higher this financial year

v          Specially empowered committees should be set up to continuously monitor the status of large loan portfolios

v          Accountability of nominee directors of RBI & ministry on bank boards 
as well as CMDs, MDs of banks should also be fixed in the matter

v          Forensic audit should be made mandatory for specific class of borrowers

v          A change in management must be made mandatory in cases of wilful default


The data cited by the report seemed to be older. According to rating agency ICRA, public sector banks reported a rise in gross non-performing assets from 5.6 per cent of gross advances as on September 2015 to 7.1 per cent as on December 2015. Public sector banks' gross NPAs were expected to worsen in the last quarter of FY16 on account of an asset quality review exercise, ICRA said.


RBI had issued a fiat for accelerated recognition and provisioning for weak assets. In fact, the asset quality of banks deteriorated in the third quarter due to this fiat, called asset quality review.


The committee noted with "deep concern" that in spite of various measures taken by the government and RBI, "the NPA problem confronting the financial sector and threatening the stability of the banking system seems far from over".


It said that bank balance sheets continued to remain under pressure and recent quarterly results of banks were a "grim reminder" of the situation, with most banks reporting a sharp dip in profits.


"On the one hand, the country's economy is growing fast and competing with economic superpowers and, on the other hand, the rising trend of NPAs has the potential to damage this growth story," it said.



 From E-Group, Banking-News



RBI warns banks on asset sales


Vishwanath Nair, The Mint

Published on February 25, 2016



Concerns arise of promoters using shell entities to

buy back assets seized by banks at much lower prices


Mumbai: The Reserve Bank of India (RBI) has warned banks to be cautious about the entities to which they sell assets acquired on account of loan defaults, two persons with direct knowledge of the development said.


The note, sent earlier this month, was more an informal warning rather than an official guideline, said the two, who asked not to be identified.


RBI’s warning may have been prompted by fears that promoters of companies acquired by banks after they failed to repay loans may be using shell entities, in India and elsewhere, to buy back these assets at much lower prices, one of the two persons said.


If that is the case, it would also allow unaccounted-for or black money stashed by Indian businessmen overseas to come back into India.


“Bankers have been asking specialists to come and work with them to establish that there is no connection between the new buyers and the current promoters of the company,” said the first person cited above, a senior official at a stressed-asset management firm. The official requested anonymity as these discussions are confidential.


The cautionary note from RBI comes against the backdrop of banks taking over and selling assets where promoters have failed to repay loans. These conversions are happening under the strategic debt restructuring (SDR) scheme which RBI introduced as a tool to help banks resolve their bad-loan problem.


According to SDR rules, banks can convert loans to a majority equity stake in the borrower and find a buyer within 18 months. The rules further stipulated that banks would have to establish that the buyer does not belong to the existing promoter group.


RBI has now re-emphasized this point to bankers and asked them to ensure there are no back-door connections between the existing promoters and the buyers.


“The demand for such enhanced due diligence has come up since prospective buyers in a number of cases are coming from relatively unknown backgrounds and banks need to be sure that there is no foul play,” added the first person.


Such relationships, if discovered, could end the deal.


Since June 2015, when SDR rules were introduced, lenders have converted debt to equity in a number of firms including Electrosteel Steels Ltd, Ankit Metal and Power Ltd, Rohit Ferro-Tech Ltd, IVRCL Ltd, Gammon India Ltd, Monnet Ispat and Energy Ltd, VISA Steel Ltd, Lanco Teesta Hydro Power Pvt. Ltd, Jyoti Structures Ltd and Alok Industries Ltd.


Of these, the only known case where lenders are closing in on a sale is Electrosteel Steels.

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