Recapitalization is the infusion of fresh capital in the banks by the government. As the major owner of PSUs, on October 24, 2017, the government announced Rs2.11 lakh crore to be infused in the banks. This was done for two purposes, i.e. to help them recover from the NPAs that has been saddling the banks for a long time and also to support the banks in meeting their capital requirements. The recapitalization was meant to be done in a phased manner by the government.
As a part of the recapitalization plan, Rs1.53 lakh crore was to be infused by the government and the rest was to be raised from the market. However, the last phase of capital infusion of Rs65000 crore is dependent upon the performance of the banks. IBA had invited bids in May 2018 and the lowest cost for the project was proposed by BCG. The IBA (Indian Banks Association) in association with BCG (Boston Consultancy Group) has been tasked to do a qualitative and quantitative assessment of the banks based on certain defined themes. The themes are basically a set of reforms agenda called EASE (Enhanced Access and Services Excellence). All PSBs have secured the approvals from their respective boards to implement the EASE plan.
In this, banks have a 50-point action plan that includes customer responsiveness, credit offtake, UdyamiMitra for MSMEs, deepening financial inclusion and digitisation. BCG has to validate the functioning of the banks measuring the reforms plan, data collection and do an analysis of the outcomes. Depending on the outcomes BCG is supposed to submit the compliance report by end of 2018, based on which the centre will take a call on the quantum of funds to be infused in the banks. Under the reforms agenda, PSBs are required to maintain a separate vertical for stressed assets management and perform their due diligence for sanctioning of the loans. Apart from this PSBs have to tie up with agencies for specialised monitoring of loans above Rs2.5 billion. Few more reforms suggested are
- Reduce the size of the consortium with a minimum 10% exposure for each participating bank
- Corporate exposure of any bank should not be more than 40%
- Fast paced loan processing for MSMEs
- Improve digitisation (smart banking) by making branch visits redundant
- Strict surveillance of the loan defaulters
- Strict segregation of post and pre-sanction of roles and responsibilities
- Appoint a whole-time director to monitor the reforms every year
All the 21 PSBs are supposed to implement the reforms as a part of EASE agenda. Since NPAs were mainly attributed to “aggressive lending” and hence, reforms are the banks’ strategy to fast-track the recovery of non-performing assets. As the RBI has mandated the banks to comply with BASEL III norms by 31st March, 2019, that includes additional capital conversion buffer, the recapitalization has sought to be a right move by the government. Indian banks’ ability to maintain capital more than the stipulated Basel norms is the reason why Indian banks were not majorly affected by the 2008 financial crisis. The decision to maintain a cushion capital was based on shrewd and better understanding of banking and its problems by RBI. In order to help the emerging economy of India and banks being the major provider of credit, the EASE reforms plan can be considered a great move by the government before the general elections in 2019.
The term LoU or Letter of Undertaking has recently been in news in wake of the banking fraud concerning Punjab National Bank and Nirav Modi. A LoU is a provision of bank guarantees under which a bank can allow its customer to raise money from another Indian bank’s foreign branch in the form of a short-term credit. The LOU serves the purpose of a bank guarantee for a bank’s customer for making payment to its offshore suppliers in the foreign currency.
For raising the LOU, the customer is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. Once the letter of credit is acknowledged and accepted, the lender (the foreign branch of Indian bank) transfers money to the nostro account of the bank that has issued the LoU.
By TJEF Editor Kriti Kanchan Sinha
Finance Minister, Mr. Arun Jaitley presented the much-awaited Union Budget on 1st February, 2018. The budget was focused on rural India with agriculture, insurance, housing and MSMEs being the biggest gainers. There were no big announcements regarding the banking sector apart from a reiteration of the bank recapitalization plan. Some of the key aspects of the Union Budget that will impact the banking, insurance and financial services industry are listed as below:
- Long-Term Capital Gains Tax – Long-term capital gains exceeding 1 lakh will be taxed at the rate of 10%. However, all gains up to 31st January, 2018 will be grandfathered which means all gains made up till 31st January, 2018 will not be taxed. Distributed income by equity oriented mutual fund will also be taxed at the rate of 10%. This may introduce some investor churn in the short-term however as major capital gains are accrued to corporates and LLPs, a long-term impact on equity markets is unlikely.
- Bank recapitalization – This recapitalization will help the public-sector banks in lending additional credit of 5 lakh crore.
- Uncollateralized Deposit Facility – The RBI Act will be amended to institutionalize Uncollateralized Deposit Facility which will act as an instrument to manage excess liquidity without offering any securities as collateral. The funds parked with the RBI through this facility by the banks could earn interest.
- Better Financing for MSMEs – Online loan sanctioning facility for MSMEs will help in prompt and larger financing of MSMEs and also considerably ease cash flow challenges faced by them. Tax rate reduced to 25% for companies who have reported turnover up to 250 crore in the financial year 2016-17. This will benefit the entire class of micro, small and medium enterprises which accounts for almost 99% of companies filing their tax returns.
- Rural Regional Banks – Strong Regional Rural Banks will be allowed to raise capital from the market to enable them to increase their credit to the rural economy.
- Tax Exemptions – The government has put forward a proposal to exempt transfer of derivatives and certain securities by non-residents from capital gains tax in order to promote trade in stock exchanges in IFSC. Further, non-corporate taxpayers operating in IFSC shall be charged Alternate Minimum Tax (AMT) at concessional rate of 9% at par with Minimum Alternate Tax (MAT) applicable for corporates.
- Agriculture Credit – A 10% increase in the volume of institutional credit for the agriculture sector to 11 lakh crore for the year 2018-19 along with 1.5 times hike in Minimum Support Price of all crops will improve rural income and improve the banks’ credit offtake and asset quality for this segment.
- Affordable Housing – The government will establish a dedicated Affordable Housing Fund (AHF) in National Housing Bank, funded from priority sector lending shortfall and fully serviced bonds authorized by the Government of India. Affordable housing will have a positive retail loan growth of banks and NBFCs.
- National Health Protection Scheme – The National Health Protection Scheme will provide free medical care of up to Rs five lakh each to 10 crore poor families – about 50 crore beneficiaries (assuming five members per family). This will improve penetration of the Insurance industry in the rural markets.
- Financing of NBFCs – Refinancing policy and eligibility criteria set by MUDRA will be reviewed for better refinancing of NBFCs. Public sector banks will be onboard the Trade Electronic Receivable Discounting System (TReDS) platform and linked with GSTN.
- Bond Market – Reserve Bank of India has issued guidelines to nudge Corporates access bond market. SEBI will also consider mandating, beginning with large Corporates, to meet about one-fourth of their financing needs from the bond market.
- Cryptocurrencies & Blockchain – It has been clearly mentioned that Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system. However, it is open to exploring block chain technology for ushering in a digital economy.
- No announcement of any change in foreign holding limit in private sector banks from the present 74%.
By Manisha Sharma
Today companies like Paytm extensively use data analytics to provide an unparalleled experience to customers by extending faster and better services. If Indian banks don’t retaliate there are many other companies waiting in the wings to take away their businesses. Today, the need to build better data-centric products is driving the Banking Industry in India. Customer-centricity, combating cyber threat, compliance and risk management and cost containment are some of the key areas where data analytics is applied.
The first instance of usage of data analytics can be traced back to 2000s when HDFC Bank invested heavily in data warehouses and used descriptive and predictive analytics to track customer’s financial habits. This move created opportunities in the area of cross-selling which is currently one of the biggest tools to retain and attract customers in the Indian banking industry. Complex neural network scoring engine is used to assign a credit score to customers and thus help in reducing money laundering. Another bank that uses Business Intelligence (BI) and analytics to identify serious delinquencies (high risk) and early delinquencies (low risk) loans is ICICI Bank. The bank is using a ‘centralized debtors’ allocation model’ to allocate the right set of delinquent cases to the most appropriate collection channel. ING Vysya Bank created a central data repository via SAP BO in order to provide accurate reports to customers. India’s biggest public sector bank, SBI, is not behind in this quest. The bank uses Social Media Analytics to identify prospective customers and to analyse high delinquencies in loans.
But all that glitters is not gold. According to a latest McKinsey survey, most banks have invested significantly in data infrastructure and advanced analytics but are yet to derive expected results from it. Few common mistakes are not asking the right questions to the algorithms, lack of planning, using analytics on a project by project basis and not deriving the full potential of the tools at a detailed level.
In order to utilize technology for their benefits, banks need to develop two assets: a transformation strategy and a vigorous analytics organization to support the usage of analytics in their day to day activities. Different departments in banks contain a huge amount of data. Complete potential can be realized if small samples of information are brought together. Creating interactive dashboards by making the technology simpler to understand can attract more people to use the tools. Usage of feedback loops can help to market faster than competitors. A deep pipeline of analytics talent should be the top priority of banks.
According to a McKinsey survey, more than 90 percent of the top 50 banks around the world are using advanced analytics. Among other things, a combination of talented pool of graduates, innovation labs, clear governance plan and robust data quality controls should be some of the significant tools that will help shape a bank’s future in the competitive banking and financial services industry of India.
- Gupta, B. (2015, February). Analytics in Indian Banking Sector – On A Right Track. Retrieved from: https://analyticsindiamag.com/analytics-in-indian-banking-sector-on-a-right-track/
By TJEF Editor Gandhali Inamdar
We are launching a new infographic series where we will tackle contemporary economic issues every week. Today we are reviewing the impact of Basel IV on credit risk for financial institutions. Take a look at this one and let us know your thoughts!