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 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!
Meaning – MiFID II is a legislative framework instituted by the European Union to regulate financial markets in the bloc and improve protections for investors with the aim of restoring confidence in the industry after the financial crisis exposed weaknesses in the system. It is a revised version of the Markets in Financial Instruments Directive (MiFID) and was rolled out on January 3, 2018.
While the original MiFID only covered multi-lateral trading facilities, the previously unregulated organized trading facilities (OTFs) have also been added in the new framework. There are new safeguards for algorithmic and high-frequency trading activity. Stricter requirements for portfolio management, investment advice, and other investor protections are also included. Additional and reinforced powers of supervision of derivatives markets, coordinated with the European Securities and Markets Authority (ESMA) is also a part of the new regulations.
By TJEF Editor Kriti Kanchan Sinha
Citizens of Venezuela, both the rich and the poor alike, are increasingly turning to the world of cryptocurrency, specifically bitcoins, to salvage the value of their savings with the Bolivar, their national currency, becoming worthless as a result of massive currency inflation. Similar is the case with Zimbabwe where citizens are exchanging money in form of bitcoins as trust in their own institutions fall and hyperinflation has wiped out the Zimbabwean dollar completely. Reading these, you would probably not be wrong in feeling that cryptocurrency seems to be the go-to currency for countries in political or economic distress.
An Introduction to Cryptocurrency
So, what exactly is a cryptocurrency? Investopedia defines it as a digital or virtual currency that uses cryptography for security. This feature of cryptography makes it extremely difficult to counterfeit as it is pure mathematics and logic and the human factor is negligible. The most important aspect of cryptocurrency that makes it so alluring to many is the fact it is independent of central banks and governments. Cryptocurrency in itself has no intrinsic value which is why it has been denounced by some including Axel Weber, Chairman of the Swiss bank UBS AG, as nothing but a speculative bubble. Further, its supply is not determined by any central bank and is limited in quantity – it is one of the reasons for the price volatility of cryptocurrencies. Bitcoin is the most famous of all but there are multiple others including Ethereum, Litecoin, Tron etc. The below figure provides us with the list of top five cryptocurrencies in terms of their market capitalization.
In this article, let us take a look at the usage of cryptocurrency and its legality in different countries around the world.