PSBs need more capital to deal with NPAs: RBI

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Reserve Bank made a strong case for providing more capital to public sector banks to deal with the problem of stressed assets and get back to a position from where they can start generating internal accruals.

“Indian banks got into stress before implementation of Basel III and revised IFRS which provide protection against system level stresses...so we have to find more capital for supporting banks today. Of course government of India has supported entire AQR (asset quality review) exercise that we have done,” RBI Deputy Governor N.S. Vishwanathan said.

“The government has been supportive and they have provided requisite capital for the public sector banks. We need to ensure that stressed asset build-up is contained so that banks get back to generate adequate internal accruals,” he said.

Mr. Vishwanathan also said that provision coverage ratio (PCR) has witnessed a decline in the last few months. — PTI

Pledging PF to buy home may soon become reality

Retirement fund body EPFO may soon introduce a scheme to allow its over 4 crore subscribers to pledge their provident fund to buy low-cost houses and use the account to pay equated monthly instalments.

“We are working on a housing scheme for members of the Employees’ Provident Fund Organisation (EPFO). Under it, members will be allowed to pledge their PF accumulations to buy homes,” Labour Secretary Shankar Aggarwal told PTI.

He added that the proposal will be placed before the EPFO’s Central Board of Trustees meeting expected next month.

Once approved by the CBT, the scheme will be available for the subscribers.

Finer points of the scheme, as to what extent subscribers will be eligible to avail loans and what will qualify as a low cost house, are yet to be worked out.

Aggarwal further said: “We don’t want to impose anything on the subscribers. Therefore, we will not buy land or build houses for them. They will be free to choose their own homes from the open market.”

The panel had suggested this scheme for low income formal workers who are EPFO subscribers and could not buy a house during their entire service period. Under the scheme, there will be a tripartite agreement between member, bank/housing agency and EPFO for pledging future PF contributions as EMI payment. — PTI

Giving India a global-scale bank

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The proposed merger of the State Bank of India with its five associate banks and the Bharatiya Mahila Bank is a long-delayed and welcome move on the path to banking consolidation, especially among state-owned lenders. SBI’s takeover of its five subsidiaries and the three-year-old niche provider of banking services for women will, once consummated, vault the merged entity higher up the rankings ladder on the global banking stage. The resultant benefits to the lender and the economy are evident. The increased balance sheet size will enable the bank to obtain better pricing on both internationally sourced funds and domestic deposits, thus helping it lower lending rates and improve profitability. The added branch network and customer base will also help it expand reach and enable the lender to rationalise resources across the board. There are various estimates of the potential cost savings, with one projection putting the possible reduction in cost-to-income ratio at 1 percentage point. The lender’s increased size, in terms of assets, will also give it the requisite muscle to take on new competition from larger banking entities that are likely to be created by consolidation in the banking industry. The Bank Board Bureau has been tasked with overseeing a restructuring among public sector banks in keeping with the government’s aim of reducing the number of state-owned lenders and improving their financial health.

The merger will, however, pose its unique set of challenges. The scale of the task is substantial given the total staff strength. With more than two lakh employees, the parent will add close to one-fifth that number by way of additions posing a huge test in terms of integration of roles, salary, perquisite and pension structures and, no less importantly, work cultures. Much of the opposition from the bank unions stems from concerns relating to these issues. Customers of the smaller, community or regional market-focussed subsidiaries such as the State Bank of Travancore may be discomfited by having to deal with a larger, more impersonal lender, one where the size of their accounts may be viewed as comparatively marginal. For regulators, the new entity will throw up interesting oversight issues. Already identified by the Reserve Bank of India as the country’s key Domestic Systemically Important Bank, or too big to fail in simple terms, the enlarged SBI’s capital adequacy norms will climb and may require far more by way of infusion of funds than the Centre has committed so far. But such challenges must not be used to undermine the obvious benefits of merger.

Reserve Bank to study why Indians spend large money to buy gold

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The Reserve Bank of India (RBI) has set up a committee to study Indian household financing pattern and why they spend large sum of money on gold.

The panel will look at various facets of household finance in India and to benchmark India’s position vis-à-vis both the peer and advanced countries, it said in a statement on Thursday. The panel headed by Tarun Ramadorai, Professor of Financial Economics, University of Oxford, will have representation from financial sector regulators, SEBI, IRDAI, PFRDA apart from RBI. It will consider “whether, how, and why the financial allocations of Indian households deviate from desirable financial allocation and behaviour (eg., the large household allocation to gold).”

The committee has also been asked to benchmark the current depth of household financial markets in India vis-a-vis those in other major world markets and to identify areas of priority for growth and change. To characterise and evaluate households’ demands in formal financial markets (for assets such as pensions as well as liabilities such as home loans) over the coming decade, is another key term of reference given to it.

Financial products

RBI further said that the panel would evaluate the “design of new systems and the redesign of existing systems” of incentives and regulations to encourage and enable better participation by households in formal financial markets.

The terms of reference also include assessing the role of new financial technologies and products (robo-advising, automatically refinancing mortgages) in the cost-effective provision of high-quality and suitable financial products to Indian households while containing risks.

The committee is expected to submit its report by end July 2017.

The demand for formal financial market investment product like pension as well as liability product like home loan from the Indian household was discussed during the meeting of the Sub Committee of Financial Stability and Development Council (FSDC-SC) held in April.

It was decided that a committee should be set up to look at various facets of household finance in India and submit a report, RBI said. — PTI

The committee is expected to submit its report by end July 2017.

On-tap bank licence not for big corporates

BUSINESS » INDUSTRY

MUMBAI, August 1, 2016

Updated: August 1, 2016 23:49 IST

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The Reserve Bank of India (RBI) building in Mumbai, File Photo: Vivek Bendre

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Final guidelines mandate Rs.500 cr. as minimum capital.

Large industrial houses, whose income from non-banking sources is over 40 per cent of total will not be eligible to set up a universal bank in the country, the Reserve Bank of India (RBI) said on Monday. However, they are allowed to pick up 10 per cent stake in banks.

Final guidelines

In the final guidelines on on-tap licensing, the central bank has allowed individuals with 10 years of experience in banking and finance, as well as business groups with 10 years’ track record to promote universal banks. For business groups with more than Rs.5,000 crore in total assets to be eligible for a licence, their income from non-financial businesses should not account for 40 per cent or more in terms of total assets/in terms of gross income.

“Large industrial houses are excluded as eligible entities but are permitted to invest in the banks up to 10 per cent,” RBI said in its guidelines statement.The existing non-banking financial companies (NBFCs) that are controlled by residents and have a successful track record for at least 10 years will also be eligible. However, an NBFC, which is a part of the group where the non-financial business of the group accounts for 40 per cent or more in terms of total assets/gross income, is not eligible, the banking regulator clarified.

The bank should have a minimum capital of Rs.500 crore and should list on the stock exchanges within six years of commencing operations, RBI said. The bank shall open at least 25 per cent of its branches in unbanked, rural centres. The bank should also maintain a capital adequacy ratio of 13 per cent in the first three years of operation as compared to 9 per cent in existing banks.

NOFHC requirement

Setting up of a non-operative financial holding company (NOFHC) has not been made mandatory for individuals and standalone promoting entities that do not have any other group entities. For others, the RBI has mandated that at least 51 per cent stake in the NOFHC should be owned by the promoter group.

“No shareholder, other than the promoters/promoter group, shall have significant influence and control in the NOFHC,” the norms said.

The promoters should hold a minimum of 40 per cent stake in the bank, locked-in for a period of five years, but the stake should be brought down to 15 per cent within 15 years.

After setting up the bank, the NOFHC will not be allowed to set up any financial services entity for three years, the RBI said.

A Standing External Advisory Committee (SEAC) will be set up by the RBI to vet the applications. The committee would send its recommendations to the Internal Screening Committee (ISC), consisting of the Governor and Deputy Governors. The ISC would then submit its recommendations to the Committee of the Central Board of RBI for the final decision to issue an in-principle approval, which would be valid for 18 months.

Unsuccessful applicants can appeal against the decision to the Central Board of Directors, within one month of being rejected. Names of applicants and successful candidates would be made public, the RBI said.

Keywords: RBI, Reserve Bank of India, Capital

RBI unlocks Rs.40,000 crore additional capital for banks

USINESS » ECONOMY

MUMBAI, March 2, 2016

Updated: March 2, 2016 00:12 IST

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The Reserve Bank of India (RBI) revised norms on capital recognition, making available an additional Rs.40,000 crore to Indian banks. The move comes at a time when public sector banks are facing pressure on their profitability due to a sharp rise in non-performing assets, which is eroding their capital base.

The announcement is a big relief for, mainly, public sector banks, after finance minister Arun Jaitley on Monday announced in his budget speech a capital infusion of Rs. 25,000 crore for the fiscal year starting in April. The minister did not make any increases to the capital infusion amount that was decided in August 2015. Many public sector banks reported huge losses for the quarter ended December 2015after the RBI asked lenders to identify several accounts as non-performing. Banks are expected to post weak earnings in the current quarter too.

“The RBI has made some amendments to the treatment of certain balance sheet items for the purposes of determining banks’ regulatory capital,” the central bank said in a press release on Tuesday. “The review was carried out with a view to further aligning the definition of regulatory capital with the internationally adopted Basel III capital standards.” The revisions introduced include recognition of revaluation reserves arising from change in the carrying amount of a bank’s property consequent upon its revaluation as common equity tier—I capital instead of the earlier tier 2 capital, the central bank said, adding that these would continue to be reckoned at a discount of 55 per cent. The move will unlock Rs 35,000 crore capital for public sector banks and Rs 5,000 crore for private sector banks, industry sources said.

RBI said banks can recognise foreign currency reserves arising due to translation of financial statements of foreign operations to the reporting currency as common equity tier-I (CET1) capital. Deferred tax assets arising due to timing differences may be recognised as CET1 capital up to 10 per cent of a bank’s CET1 capital, it added.