WEEKLY FINANCIAL SNIPPETS – 24/09/2016

1. GOVERNMENT APPOINTS MONETARY POLICY COMMITTEE TO HELP RBI SET INTEREST RATES: The government appointed three members in the Monetary Policy Committee (MPC), putting the seal on India’s new architecture for setting interest rates and ending the Reserve Bank of India governor’s role as sole arbitrator. The three members will be joined by three Reserve Bank members, with Governor of RBI having a casting vote. Its first policy review is slated to be held on October 4 th .

2. CABINET CLEARS MERGER OF RAILWAYS AND UNION BUDGETS: In a sweeping change of India’s annual budget process, the government ended the 92 years old practice of having a separate rail budget. The union cabinet has decided that from the coming year the rail budget and the general budget will be amalgamated. The Union cabinet also approved the finance ministry’s proposal to advance the general budget’s presentation by a month.

3. INDIA LESS PRONE TO BANKING CRISIS RISKS: According to Bank for International Settlements (BIS) India is less vulnerable to banking distress among the major economies while neighbouring China faces higher risks. As per data compiled by BIS of more than 40 economies show that credit-to- GDP gap was among the least for India.

4. SEBI WANTS RATING AGENCIES TO MAKE FULL DISCLOSURE: SEBI is asking credit rating agencies to come out with a slew of disclosures while doing corporate ratings and fix accountability in view of the recent surge in corporate indebtedness. Now the rating agency will have to spell out how the rating is conducted, responsibilities of the analysts, and evaluate the performance of their respective rating committees, particularly if there is an unforeseen default.

5. RBI PLANS FUND TO PUSH CARD SWIPE MACHINES: Reserve Bank of India is planning to create a fund to push card swiping machines. Concerned over low use of debit cards in electronic payments, the RBI wants banks those who are not installing card accepting machines to contribute to this fund that will subsidise installation of point of sales (PoS) terminals. There are 68 crores debit cards in India. But the number of PoS machines is only 14 lakh. The average debit card use at PoS machines is one transaction for every 10 transactions in an ATM.

6. RBI SAYS BANKS MUST REPORT ALL CYBER CRIMES: The Reserve Bank of India has issued an ultimatum to Indian banks on cyber crimes, asking them to immediately report any breach of security so that the overall network is not compromised. Some banks are reluctant to report such frauds in order to avoid negative publicity. RBI has set an deadline of March 31 st 2017, for banks to put in place a mechanism to report cyber-crimes immediately.

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WEEKLY FINANCIAL SNIPPETS- 17/09/2016

1. BASEL-III NORMS MAY RESULT IN HALF OF INDIAN BANKS BRAECH CAPITAL TRIGGERS: Increased capital requirement under Basel-III norms may result in half the Indian banks breaching the trigger levels. This is as per the report released by credit rating agency- Fitch. With poor existing capital buffers and weak prospects for raising capital through market channel, the state run banks are more at risk.

2. CBDT TO HONOUR HONEST TAX PAYERS: The Central Board of Direct taxes (CBDT) will soon honour lakhs of “honest and compliant“ tax payers who have paid their tax dues diligently over the years. CBDT has created four broad categories of tax payers for the purpose: Large, Regular, Compliant and Diligent tax payers. Such people will be issued commendation certificates by policy making body of the IT department signed by CBDT Chairman.

3. PSBs CANNOT SELL PERPETUAL BONDS TO RETAIL INVESTORS: Public Sector Banks (PSBs) will not be able to sell perpetual bonds to its retail customers. The Securities & Exchange Board of India (SEBI) has struck down requests of PSBs to sell these securities to smaller investors, siting potential risks of mis-selling.

4. CRITERIA REVISED FOR RECAPITALISATION OF PSU BANKS: The Finance Ministry has revised its norms for recapitalisation of Public Sector Banks. PSBs looking forward for the next round of capital infusion will need to fulfil the new set of criteria. The second round of capital infusion to these banks would be based on cost of operations, recovery of credit, quality of credit on the basis of risk weighted assets. Only those banks fulfilling these criteria for the third quarter (October-December) in this fiscal will be eligible for capital infusion. The government had released its first round of capital infusion of Rs 22915 crores to 13 banks. The next round of capital infusion is linked to greater efficiency, growth of both credit and deposits and reduction in cost of operations.

5. NEW LENDING NORMS MAY NUDGE BANKS TOWARDS RETAILS LOANS: State Bank of India Chairperson Mrs. Arundhati Bhattacharya has said that stringent norms proposed by RBI for corporate lending will force state run banks to tilt more towards retail lending. Reserve Bank of India, last month had come out with draft guidelines on credit to large corporate borrowers asking banks to make additional provisions if the loan amount crosses the prescribed limit. The latest norms towards lending to large corporates make corporate lending costly, both for banks as well as the borrowing companies.

6. NO CLOSURES, ONLY BRANCH RELOCATIONS AFTER ASSOCIATE BANKS MERGER WITH SBI: The State Bank of India (SBI) may relocate many of its branches after the merger of its associate banks with itself and none of the branches would be shut down. As per the statement made by its chairperson Mrs Arundhati Bhattacharya, these branches will be relocated as it will have better reach. With this the productivity will improve with same number of employees and will have more customer coverage. The merged entity will have more than 24000 branches, will continue to have same number of branches.

7. EQUITAS SMALL FINANCE BANK BEGINS OPERATIONS FROM CHENNAI: Equitas Small Finance Bank Limited (ESFBL) has commenced its business from Chennai with three branches. This is the first private sector Bank from Tamil Nadu post-independence. By the end of 2016-17 the bank plans to have a network of around 400 branches across 11 states with 25% of branches to open in un-banked villages.

WEEKLY FINANCIAL SNIPPETS- 10/09/2016

SBI RAISES MONEY FROM PERPETUAL BONDS ISSUE : State Bank of India, country’s largest Bank, has raised Rs.2,100 crores through perpetual bonds at coupon rate of 9%. Private Sector lender Yes Bank Ltd has invested the entire sum. PERPETUAL BONDS are bonds with no maturity, and the issuer of the bonds pays interest forever. Investors do not have to redeem the bonds except on call date announced by the issuer. Here SBI has given a five year call option. So Yes Bank has the option to withdraw the money after five years. Perpetual bonds are treated as safe investment but there is catch here- If the issuer incurs losses then he may delay or may not pay the interest. With interest rates falling, some wealthy investors are investing in these bonds, but some of the investors are not fully aware of the inherent risk it carries.

SARFAESI ACT TO COVER NBFCs:Now as per Budget proposal Non-Banking Financial Companies (NBFC) with assets of more than Rs.500 crore, will now be covered under the Securitisation and Reconstruction of Financial Assetsand Enforcementof Security Interest (SARFAESI) Act, 2002. This will allow NBFCs to enjoy the benefits of SARFAESI Act, 2002 that presently apply only to Banks. The measure is a big boost to NBFCs. This will help them to strengthen their recovery capabilities. This will also enable NBFCs to lend with greater confidence as they can be assured of speedier recovery.

TWO INDEPENDENT VALUATIONS A MUST BEFORE SALE OF BAD LOANS: the Reserve Bank of India has tightened the recovery norms for banks by mandating that banks to have two mandatory valuations for assets of bad loans of more than 50 crores, before selling them to Asset reconstruction Companies(ARCs).  These measures could accelerate the sale and bring down the unrealistic price expectations by banks.

RESERVE BANK WIDENS THE SCOPE FOR SALE OF STRESSED ASSETS: In a bid to improve the sale of bad loans by banks, the Reserve Bank of India has   now allowed banks to sell these bad and stressed assets to other banks, non-banking Financial companies(NBFCs) or financial institutions. It has also made banks’ boards more accountable for stress resolution.

DELINQUNCIES OF PERSONAL LOANS LOWER THAN HOUSING LOANS: Personal Loans, a type of unsecured(clean) loans which typically has a higher rate of delinquencies (defaults), has seen surprisingly lower rate of delinquency as compared to housing loans. This is as per the report released by the credit agency Equifax. According to the report the delinquency of personal loans stands at 0.47% at the end of January-March quarterof 2016. During the same period the housing loan delinquency stood at 0.49%. Home loans, being a secured product, usuallyhave lower rate of delinquencies.  For some other products such as auto loans and business loans the percentage of delinquency during the said period stood at 1.11% and 3.22 % respectively.This may be because of the reason that banks have become more vigilant and choosy in granting personal loans.

INDIA’S SAVINGS RATE NEEDS A BOOST: As per the report of DBS there is a decline in the gross savings by Indians, estimated to have fallen to 31% of GDP. This needs to be contained as relying on foreign savings puts pressure on the growth path.  Increase in Domestic savings is required to fund investments, which otherwise must be financed with foreign capital.

GOODS AND SERVICES TAX(GST) in Nutshell

Goods and Services Tax (GST) is an indirect tax that brings most of the taxes imposed on goods, services, manufacture, sales and consumption of goods under its ambit in to a single domain at the national level.  It will change the taxation pattern that is levied separately on goods and services and will introduce a consolidated tax, based on a uniform rate of tax fixed by the government  for both goods and services and it is payable at the final point of consumption.

GST has two components, CGST (Central Goods & Service Tax) and SGST(State Goods & Service Tax). Both Centre and State will simultaneously levy tax across the value chain. Under GST since the taxes will be integrated hence it will bring transparency as the burden will be shared between manufacturing and services. It will promote growth, create more employment opportunities and boost the economy as a whole.No tax reform has generated such enormous interest among business and general public as GST. It has in some ways has become a barometer for government’s success. And for the first time the Centre and State have come together on a common platform for GST implementation.

GST makes India a common unified market. There will be just one tax on the supply of goods and services right from sourcing to customer. The new tax regime may be effective from April 01st 2017. Some companies will gain as the GST rate will be lower than the tax now it is paying and some companies will lose as the GST will be more than the tax now they are paying.

BENEFITS OF GST TO BUSINESS & INDUSTRY: 1. Easy Compliance. 2. Common tax rates.3. Removal of cascading effect of taxes. 4. Improved competitiveness.

BENEFITS OF GST FOR THE GOVERNMENT: 1. Easy to administer. 2. Better control of tax leakage. 3. Higher revenue.

BENEFITS OF GST TO THE CUSTOMER: 1. Single and transparent tax. 2. Relief from overall tax burden.

THE BIGGEST BENEFIT WILL BE THAT THE MULTIPLE TAXES LIKE OCTROI, CENTRAL SALES TAX, STATE SALES TAX, ENTRY TAX, TURNOVER TAX ETC WILL NOT BE THERE AND ALL THAT WILL BE BROUGHT UNDER GST. DOING BUSINESS WILL BE MORE EASIER AND COMFORTABLE AS VARIOUS HIDDEN TAXATION WILL NOT BE THERE.

 SOME OF THE SECTORS WHICH WILL BE BENEFITED BY GST: Textiles, Auto and Auto dealers, Engineering & capital goods, Power equipment industry, Pharmaceuticals FMCG, Cement.

SOME OF THE SECTORS WHICH WILL HAVE NEGATIVE IMPACT BY GST: IT Sector, Airlines, Mutual Funds, Real estate.

 CONCLUSION:The present taxation of goods and services in India is misallocation of resources resulting in to lower productivity and thus lower economic growth. But with the implementation of GST the problems will be effectively addressed as the tax burden is equally distributed from Production/Trade to final consumption. Under GST all different stages of production/distribution and consumption will be covered and taxed.

MARGINAL COST OF LENDING RATES(MCLR) BY BANKS

Most Bankshave announced the shift from Base Rate(BR) to Marginal Cost of Lending Rate (MCLR)from April 2016 as per RBI Guidelines. .

 The new methodology uses the marginal cost or latest cost conditions reflected in the interest rate given by the banks for obtaining funds (from deposits and while borrowing from RBI) while setting their lending rate. This means that the interest rate given by a bank for deposits and the repo rate (for obtaining funds from the RBI) are the decisive factors in the calculation of MCLR.

In essence, the MCLR is determined largely by the marginal cost for funds and especially by the deposit rate and by the repo rate. Any change in repo rate brings changes in marginal cost and hence the MCLR should also be changed.

How MCLR is different from base rate?

The base rate or the standard lending rate by a bank is calculated on the basis of the following factors:

  1. Cost for the funds (interest rate given for deposits),
  2. Operating expenses,
  3. Minimum rate of return (profit), and
  4. Cost for the CRR (for the four percent CRR, the RBI is not giving any interest to the banks)

On the other hand, the MCLR is comprised of the following main components.

  1. Marginal cost of funds
  2. Negative carry on account of CRR
  3. Operating costs
  4. Tenor premium

It is very clear that the CRR costs and operating expenses are the common factors for both base rate and the MCLR. The factor minimum rate of return is explicitly excluded under MCLR.

But the most important difference is the careful calculation of Marginal costs under MCLR. On the other hand under base rate, the cost is calculated on an average basis by simply averaging the interest rate incurred for deposits. The requirement that MCLR should be revised monthly makes the MCLR very dynamic compared to the base rate.

Under MCLR:

  1. Costs that the bank is incurring to get funds (means deposit) is calculated on a marginal basis
  2. The marginal costs include Repo rate; whereas this was not included under the base rate.
  3. Many other interest rates usually incurred by banks when mobilizing funds also to be carefully considered by banks when calculating the costs.
  4. The MCLR should be revised monthly.
  5. A tenor premium or higher interest rate for long term loans should be included.

 The MCLR should be revised monthly by considering some new factors including the repo rate and other borrowing rates.  Specifically the repo rate and other borrowing rate that were not explicitly considered under the base rate system.

As per the new guidelines, banks have to set five benchmark rates for different tenure or time periods ranging from overnight (one day) rates to one year.

 IN SHORT WE MAY CONCLUDE THAT MARGINAL COST OF LENDING RATE WOULD REPLACE BASE RATE  WHICH WOULD BE BENEFICIAL TO THE BORROWERS.

WEEKLY FINANCIAL SNIPPETS

1.First Small Finance Bank—Capital Small Finance Bank starts operation in Chandigarh. It commenced business with 10 Branches and has approval for 27 branches.

2.Gold Imports dip to 8% in 2015-16. Gold imports in 2015-16 declined to around 8% due to weak Glbal prices.

3.No Interest subsidy on Crop Loans above Rs 3.00 lakh. A Government panel set up to suggest Better implementation of Farm credit has SUGGESTED that interest subvention should not be       Provided to short term crop loans of above Rs 3.00 lakhs.

4. Parliamentary panel clears Bankruptcy law, sets stage for passage of the Bankruptcy law.

5.The rising Number of Bad Loans in Public Sector banks added by the Vijay Mallya Issue has Prompted the CVC ( Central Vigilance Commission) to ask public sector Banks to draw up a       Proper second layer of verification process for valuation reports and legal reports and such       Documents submitted by potential borrower.

6.Public Sector banks have been informed and instructed by the Government to gear up their recovery measures in NPA accounts, if they are expecting capital infusion from the Government.

7.Government to set up National Infrastructure Investment Fund ( NIIF)with a initial corpus of Rs.40000/- crores. Under this the NIIF will deal with stressed Bank assets. It will look for viable Projects which are stressed, acquire it from Banks and financial institutions at a discounted price, nurse them back to good financial health and sell it back to prospectiveinvestors.

8.The Reserve Bank of India has suggested that Peer To Peer ( P 2 P) lenders be treated as Non Banking Finance Companies( NBFC) with a minimum capital infusion of Rs 2.00 crores. The RBI has allowed P2P  lenders to continue connecting lenders and borrowers through an online platform.  They have specifically been restricted from taking any form of Deposits. RBI has clearly stated  that P2P lenders will not indulge in any lending or borrowing activities.

9.Luxury Items like Gold Jewellery can’t stay out of tax net. The Government has ruled out roll Back of 1% excise duty on Gold jewellery levied in the recent budget, calling it an luxury item. It said  Gold cannot stay out of tax net when goods used by common man were being taxed.

WEEKLY FINANCIAL SNIPPETS

1. International Arbitration Centre to open in Mumbai in August 2016. Instead of sending these large contractual disputes beyond Indian borders like Singapore, Dubai and London, now the disputes can be well settled in Mumbai itself.

2.Oriental Bank Of Commerce is the First Public Sector Bank to announce monthly interest credit in Savings Bank accounts.

3.RBI launches new Payment system called “UNIFIED PAYMENT INTERFACE ( UPI). This will enable people to send and receive funds across Bank accounts just through a single identification code. While using UPI, account holder need not share any account details.

4.RBI bets on payment banks for innovation in Banking field.

5.BharatiAirtel is the first Company to receive the formal licence to form the payment Bank under a joint venture  with Kotak  Mahindra Bank.

6.RBI Governor hints at further rate cuts if Monsoon is good.

7.Total Bank Deposit growth for the financial year 2016 slows to 53 year low of 1%

8.Many Banks announce certain schematic Deposit Schemes for number of days like 444 days, 555 days, 1111 days etc. Under such deposit schemes the Interest payment should be calculated in the form of simple interest  for the  actual number of days for which period the deposit is held. But some Banks calculate interest on quarterly basis for the completed quarters and balance interest on the number of days remaining. This actually reduces the total interest paid  as compared to interest to be paid purely in terms of total number of days.

WEEKLY FINANCIAL SNIPPETS- 03/09/2016

1.HDFC BANK TO LAUNCH “ROBOT” IN SOME OF ITS BRANCHES: The country’s second largest private sector Bank is planning to launch a Robot (Humanoids) in some of its branches. HDFC Bank is trying to match its Japanese Counterpart as Bank of Tokyo- Mitsubishi has launched a Robot named Nao. HDFC Bank will name its Robot “Project AI”( Artificial Intelligence). The Bank’s first Robot will only perform a limited role, acting as a receptionist.

2.RBI POINTS OUT LOW TRANSMISSION OF RATE CUTS INTO BANK LENDING RATES: Reserve Bank of India has reiterated that there has hardly been any transmission of policy rate cuts into bank lending rates. The Reserve Bank of India has cut the policy rate by 150 basis points ( bps) from January 2015 to April 2016, whereas the median base rate of banks has fallen only by 60 bps. At the same time the decline in median deposit rate is 92 bps. This is because the banks’ deteriorating asset quality and higher provisioning. With Banks turning stingy in passing the  RBI’s rate cuts to its consumers (rate cuts in home loans is fallen only by 0.26%), corporates have managed to bring down their borrowing cost by 1.44 % points by tapping bonds market.

3.FUTURE OF INDIAN BANKING SYSTEM BRIGHT DESPITE NPAs: As per a report from Boston Consultancy, despite the on-going stress of deteriorating asset quality, the Indian banking system is expected to bethe third biggest in the next decade. Boston Consultancy predicts the Indian banking revenue will be close to $ 400 billion by 2026. Here it says private banks will continue to outshine the state run banks as they will continue to grab more market share year on year.

4.RBI REFORMS HAVE OPENED UP CURRENCY MARKET: The measures RBI announced for development of corporate bond and currency markets covers all the three areas, A) Market Regulations and institution support—here RBI has proposed to cap banks’exposure to any group companies, this will force corporates to move to bond markets, B) Market participants—At present participation in bond repos is restricted to entities like banks, primary dealers, Mutual funds, Insurance companies etc. But now individual authorised brokers will be allowed to participate in corporate bond repo market, C) Instruments—here RBI has proposed to permit banks to issue perpetual debt instruments(PDI) and debt capital instruments. When these things are implemented it will have deep impact on the corporate debt market.

5.RELIEF FOR BANKS, AS FINANCE MINISTRY RELAXES “FATCA”COMPLIANCE NORMS: Banks and financial institutions have received a breather as regards complying with US enacted Foreign Account Tax Compliance Act (FATCA). The Finance Ministry has said that banks and financial institutions need not enforce “closure“ of accounts by 31st August, 2016 in respect of accounts where self-certification is not obtained and due-diligence not completed. The revised time-lines for completing due diligence and obtaining self-certification will be further notified.