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RBI spells out rules for a bank to exit prompt corrective action framework

The Reserve

Bank of India

has modified the prompt corrective action plans for weaker banks with it laying down criteria for a bank to exit the framework once its financial metrics improve. It has also removed the profitability parameter for invoking the regulatory action.

The revised framework will be effective from January next year. The existing one has been in vogue since April 1, 2017. Under the existing rules, as many as 12 banks were placed under restrictions after they crossed the tolerance threshold. Barring one, all banks have exited the framework over the last two years but no uniform policy was applied for their exit. For example, RBI removed PCA from Bank of India and

Bank of Maharashtra

in January 2019 after their net non-performing assets ratio fell below the risk threshold of 6%.

But they were not profitable when the restrictions were lifted. In contrast, the erstwhile Oriental Bank of Commerce was profitable but its NPA was higher than 6% at the time PCA was removed from it. With the introduction of the structured exit policy, RBI has tried to address this anomaly. Under the existing framework, RBI invokes PCA if a bank makes net loss for consecutive financial years.

This clause has been removed in the revised guidelines. Once a bank is placed under PCA, taking the bank out of PCA framework and /or withdrawal of restrictions imposed under it will be considered if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be audited annual financial statement, RBI said Tuesday.

However, any exit from the framework would depend on RBI’s supervisory comfort of the RBI and assessment on sustainability of profitability of the bank. The regulator has also tweaked the capital norm and leverage rules. The objective of the PCA framework is to enable supervisory intervention at appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health, RBI said.

“The PCA framework is also intended to act as a tool for effective market discipline,” it said. These rules however do not preclude the regulator from taking any other action as it deems fit at any time, in addition to the corrective actions prescribed in the framework, which is applicable to all banks operating in India including foreign banks operating through branches or subsidiaries.

A bank is generally placed under the framework based on the audited annual financial results. However this does not bar RBI from imposing restrictions on any bank during the course of a year in extreme cases.

RBI panel calls for an overhaul of ARC regulations

Mumbai: A central bank panel has suggested an overhaul of the rules governing Asset Reconstruction Companies (ARC) to enhance the availability of bad loans for transactions and bring in a wider set of investors to the market for distressed assets.

The recommendations include purchase of loans classified as fraud, an online system for transparency in transactions, and permission to transact in financial assets owned by mutual funds. The need to define ‘substantial part of business’ to ensure change in management, and permission to participate in the resolution under the Insolvency and Bankruptcy Code (IBC) by ARCs are among the 42 recommendations of the panel.

“There is a need for streamlining and standardising the process of sale of stressed assets undertaken by the banks/ FIs,” said the report of the Reserve Bank of India (RBI) committee headed by Sudarshan Sen. “Certainty and transparency in such processes are critical for development of an efficient stressed assets market.”

The regulator roped in its former executive director Sen this April to suggest a revamp of the rules after disputes, delays and controversies arose in the sale and resolution of bad assets. The central bank itself had rejected the purchase of Aircel by UV Asset Reconstruction Co for not being compliant with the resolution and recovery laws governing ARCs. “Currently, regulations prohibit banks from selling fraud accounts to ARCs,” said the report.

“Since a fraud results in criminal procedures whereas recovery involves civil procedures, it makes economic sense not to hinder the recovery of debt despite a fraud being associated with the account. In fact, IBC allows insolvency proceedings in parallel with investigation into the fraud. Therefore, sale of fraud accounts to ARCs may be permitted with appropriate safeguards, without diluting the fixing of accountability at banks/ FIs.”

These are recommendations and not the final guidelines. The RBI has sought public comments on the report before making changes to the rule. While the bad loans resolution processes have been evolving over the years, the duration has been painfully long as aggregation of loans turned out to be tedious.

RBI gearing up to fintech challenge, asks banks to be vigilant too

RBI will soon launch a web- based supervisory system that will enable off-site and on-site supervision of modern functions like digital banking, cyber security, said RBI deputy governor MK Jain.

At the same time Banks need to be careful in complying with rules and invest in technologies to meet the supervisory challenges as they experiment with new services in the post COVID world though ultimately its governance standards, business model, risk culture, and assurance functions will decide how well it fares in the long run, he said.

“For continuous engagement with supervised entities, a web-based and an end-to-end workflow automation system has been developed ( by RBI) ” said Jain in a keynote address at a summit. It has various functionalities including inspection, compliance and incident reporting for cyber security, etc. with a built-in remediation workflow, time tracking, notifications and alerts, Management Information System reports and dashboards. “This is being launched shortly”.

With the proliferation of digital banking, cyber security has become an extremely important area of supervisory concern. To address this concern, the Reserve Bank has developed a model-based framework for assessing cyber risk in banks using various risk indicators, risk incidents. ” Cyber drills are conducted based on hypothetical scenarios”.

While a lot is being done in the cyber security space, these risks are continuously evolving in the dynamic environment we operate in, and hence there should be constant vigil and continuous enhancements of IT systems, warned Jain.

Globally, fintechs are challenging banks with more convenient offerings, better reach and lower cost to customers. Besides, developments in areas artificial intelligence, robotics and chat advisory, digitalisation, Distributed Ledger Technology, quant computing, cloud arrangements, data analytics, new ways of remote, though have their benefits but are also generating new risks, Jain warned. Also, climate change, KYC / AML, cyber security, virtual currencies as well as increasing reliance on outsourcing are some of the other major challenges that will need to be addressed, he said.

Banks need to be agile and creative to stay ahead of the digital curve, but banks will have to align their products in compliance with existing laws and regulations. ” Financial institutions would need to experiment with new technologies and tailor their products and services in alignment with business strategy and in compliance with existing laws and regulations” Jain said. “Leveraging on technology will also require enhanced financial investments, building expertise and capacities, proper resource allocation and further strengthening of the operational capabilities”.

Stressed PMC Bank customers not to get Rs 5 lakh deposit cover in first lot: RBI

Customers of stressed Punjab & Maharashtra Co-Operative Bank (PMC Bank) will not get up to Rs 5 lakh insurance cover in the first lot as the multi-state co-operative bank is under the resolution process. Deposit Insurance and Credit Guarantee Corporation (DICGC) in the first lot will pay customers of 20 stressed banks except PMC Bank. For the first lot, the mandatory 90 days period concludes on November 30.

It is to be noted that RBI had in June given in-principle approval to a consortium of Centrum Financial Services and fintech startup BharatPe to acquire the stressed PMC Bank.

Clearing decks for the takeover, the RBI earlier this month gave licence for small finance bank to the consortium.

Recently, the DICGC said there may be a need to invoke the provisions of Section 18 A (7) (a) of the Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021,

As per the Section 18 A (7) (a) of the Act, if a stressed bank is under the resolution process, the period for disbursement of Rs 5 lakh can be further extended by 90 days.

“The Reserve Bank finds it expedient in the interest of finalising a scheme of amalgamation of the insured bank with other banking institution or a scheme of compromise or arrangement or of reconstruction in respect of such insured bank, and communicates to the Corporation accordingly, the date on which the Corporation shall become liable to pay every depositor of such insured bank may further be extended by a period not exceeding ninety days,” it said.

In September 2019, the RBI had superseded the board of PMC Bank and placed it under various regulatory restrictions after detection of certain financial irregularities, hiding and misreporting of loans given to real estate developer HDIL.

The Reserve Bank of India (RBI) had imposed restrictions on the withdrawal of deposits from these stressed banks. Of the 20 banks, 10 are from Maharashtra, five from Karnataka, and one each from Uttar Pradesh, Kerala, Rajasthan, Madhya Pradesh, and Punjab.

Last year, the government increased the insurance cover on deposits by five times to Rs 5 lakh. The enhanced deposit insurance cover of Rs 5 lakh came into effect from February 4, 2020.

Every bank used to pay 10 paise as an insurance premium per Rs 100 of deposit. It was raised to 12 paise per Rs 100 in 2020. It cannot be more than 15 paise at any point in time per Rs 100 deposit.

It is to be noted that the enhanced deposit insurance cover of Rs 5 lakh is effective from February 4, 2020. The increase was done after a gap of 27 years as it has been static since 1993.

Forex reserves decline by $908 mn to $640.1 bn

The country’s foreign exchange reserves declined by USD 908 million to USD 640.1 billion in the week ended October 22, RBI data showed. In the previous week ended October 15, the reserves had increased by USD 1.492 billion to USD 641.008 billion. The reserves had touched a lifetime high of USD 642.453 billion in the week ended September 3, 2021.

In the reporting week ended October 22, the dip in the reserves was due to a fall in foreign currency assets (FCA), a major component of the overall reserves, and in the gold reserves, Reserve Bank of India’s (RBI) weekly data released on Friday showed.

FCA declined by USD 853 million to USD 577.098 billion in the reporting week, the data showed.

Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.

Gold reserves were down by USD 138 million to USD 38.441 billion in the reporting week, the data showed.

The special drawing rights (SDRs) with the International Monetary Fund (IMF) rose by USD 74 million to USD 19.321 billion.

The country’s reserve position with the IMF increased by USD 10 million to USD 5.240 billion in the reporting week, the data showed.

India Inc may rush to bond street amid signs cost of funds to rise

Companies are rushing to raise bond funds after the Reserve Bank of India (RBI) took steps to cut easy money in its bi-monthly policy last week, resulting in an uptick in rates.

Companies including Indian Railway Finance Corporation, State Bank of India (IRFC), Punjab National Bank and IndusInd Bank are likely to raise about Rs 15,000 crore in one or two weeks, market sources told ET.

Indian Railway Finance is aiming to raise about Rs 5,000 crore. It is already in talks with the Employees’ Provident Fund Organisation (EPFO) and is also set to hold discussions with potential investors this week.

India Inc may rush to bond streetET Bureau

These borrowers did not reply to ET’s queries. EPFO could not be contacted immediately for comment.

“The company always seeks to rationalise its fund costs, which may rise in coming days,” said a senior executive involved in the matter.

State Bank of India is set to launch its Additional Tier 1 bond sales this week, aiming to raise up to Rs 6,000 crore.

“Changing rate sentiment will drive borrowers to raise money, particularly when the economy is reopening,” said Mahendra Jajoo, chief investment officer – fixed income, at Mirae Asset Investment Manager (India).

It is natural for companies rushing to garner funds before they turn costlier, he said. “Bond Street should witness heightened activity in the coming days.”

The RBI discontinued the Government Securities Acquisition Programme in the last credit policy. It is billed as a step towards liquidity normalisation.

The central bank also proposed to conduct the 14-day long-term variable rate reverse repo (VRRR) auctions on a fortnightly basis for a total estimated amount of Rs 25 lakh crore by December 3. This will suck the excess money out of the banking system that has a surplus of Rs 7.83 lakh crore now versus Rs 8.33 lakh crore at the beginning of the month.

“Market is now fairly convinced about RBI’s objective, which in turn is already reflecting in some of the money market rates and benchmark bond yields,” said Ajay Manglunia, managing director – head of institutional fixed income, at JM Financial. “Borrowers are engaging with arrangers or directly talking to potential investors to raise debt via bonds before the rates start moving one-way northward,” he said.

The benchmark bond yield rose as much as 17 basis points in the past three weeks, raising overall funding costs.

At a 14-day VRRR auction last Friday, the cut-off rate, above which none can bid, yielded almost 4%, on par with the repo at which banks borrow money from the RBI. It was 3.60% in the previous fortnight. Before that on September 28, the 7-day VRRR cut-off yield came at 3.99%, twisting interest rate sentiment compared with 3.38% the preceding fortnight.

In the past one week, corporate bond sales totalled just about Rs 1,000 crore, much less than usual volumes. Investors chose to stay off the bond street ahead of the RBI’s monetary policy that was widely anticipated to spell out a stance on liquidity.

Invoicemart finances MSME invoices worth $2 billion

MUMBAI: Invoicemart has facilitated financing of MSME invoices of more than $2 billion through its online platform. The RBI licensed market-place is the only TReDS platform to get 11,000 participants (including 10000 MSME vendors) enrolled.

This could be achieved with increased participation from corporates and participation by government entities on the platform. The latter are now routing payments to their MSMEs through the platform.

Digital transformation and adoption of invoice financing platforms like TReDS has helped MSME vendors to get early payments and bounce back to pre-COVID levels. Invoicemart, through its digital invoice discounting solution has taken the benefits of TReDS to MSMEs in 570 cities across India. It has been able to reach MSME vendors through webinars organized by corporates, government entities, planned outreach programs and tie-ups with local trade associations. The platform has worked closely with several government entities to release pending payments to its MSMEs.

The company currently has a customer base of 920 anchor CPSEs/PSUs, corporates, banks and NBFC factors. 10,000 MSMEs who have registered as participants are availing benefits of routing their invoices through TReDS and getting competitive rates.

Major policy changes announced by the government like introduction of new definition for MSMEs, issuance of Udyam Registration Certificate to MSMEs through an online portal, inclusion of traders in definition of MSME and the recent approval of the Factoring Regulation (Amendment) Bill, 2021 allowing around 9000 NBFCs to register as financiers are expected to boost the participation on TReDS. The platform is now expanding its reach and is in talks with various state governments who are keen to help their MSMEs.

The ease of access to invoice financing and the market-place concept is getting popular among the MSME vendors. Invoicemart has seen 790,000 invoices routed through its platform and there is demand for the platform to get more of their buyers to participate on TReDS.

In a statement, Prakash Sankaran, MD & CEO, A. TReDS Ltd said “We attribute this achievement to all our customers – PSUs/corporates, nanks, NBFC and MSMEs and their participation on the platform. We are hoping to set newer benchmarks in the TReDS and fintech space.”

BSE receives in-principle approval from RBI for TReDS business

MUMBAI: BSE Technologies Private Limited (BSE Tech), wholly owned subsidiary of BSE has received an in-principle approval from RBI for setting up and operating Trade Receivables Discounting System (TReDS) under the Payments and Settlement Systems Act, 2007.

TReDS is an electronic platform for facilitating the financing/discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).

The TReDS platform will bring all the aforesaid participants together for facilitating uploading, accepting, discounting, trading and settlement of the invoices, bills of MSMEs. The TReDS business of BSE will commence only after the receipt of final approval and certificate of license from RBI.

In a statement, Ashishkumar Chauhan, MD & CEO, BSE said, “BSE Tech provides wide range of IT solutions focusing on commodities, banking and financial services markets. With the in-principle authorisation provided by RBI to set up TReDS, BSE Tech will now have the capability to provide an option to MSME to manage their working capital more efficiently through the TReDS platform. BSE is always at the forefront in creating the eco system around MSMEs and keeping this in view we are widening our product offering to MSMEs. We are hopeful with the launch of this TReDS platform the financing issues of MSMEs will be better addressed and contribute to their growth”

BSE Tech is an established player in e-enabling the businesses in financial services sectors. BSE Tech is a leading provider of cutting edge IT solutions with focus on Commodities, Banking and Financial Services markets in India. BSE Tech is founded and managed by a team of professionals, instrumental in setting up and operating India’s largest stock exchange. BSE Tech team is also considered to be the pioneer in introducing the exchange traded financial derivatives trading to Indian market place.

Regulation should not constrain innovation in fintech space: RBI Governor

Underlining the need for innovation in the financial sector for effective service delivery, RBI Governor Shaktikanta Das on Thursday called for effective regulation that should help innovation in the fintech space and not suffocate it.

Effective regulation is a priority for the Reserve Bank, and regulation should not constrain innovation in the fintech space, the governor said at Times Network India Economic Conclave.

The governor also said that maintaining banking sector health with strong capital base and ethics-driven governance remains a policy priority.

Underlining the huge role that technology and innovation played in serving the consumers better and faster, Das said the RBI processed 274 crore digital transactions to provide direct benefit transfer to people, most of which happened during the pandemic.

“Since RTGS, which along with NEFT has been made round the clock now, has multi-currency capabilities, there is scope taking it beyond our shores,” the governor said.

Despite its official opposition to the private crypto currencies, Das said the central bank is assessing financial stability concerns as it works on way ahead for central bank digital currency.

The central bank chief also said that the RBI is committed to using all policy tools to support the economic recovery while preserving price stability and financial stability.

Admitting that the spike in new pandemic infections is a matter of concern, Das, however, said the nation is equipped with additional insurances this time to tackle the afflictions.

RBI bans Haribhakti & Co from undertaking audit assignments for two years

The Reserve Bank of India (RBI) has barred chartered accountant firm Haribhakti & Co. LLP, from undertaking any type of audit assignments for any entities regulated by it for a period of two years with effect from April 1, 2022.

“This action has been taken on account of the failure on the part of the audit firm to comply with a specific direction issued by RBI with respect to its statutory audit of a systemically important non-banking financial company,” RBI said without naming the NBFC.

The ban is the first since the RBI put in place a framework to take action against erring auditors for lapses during audits in 2018.

The RBI action will not impact audit assignments of Haribhakti & Co in RBI regulated entities for the financial year 2021-22.