Tighter regulation of NBFCs was long overdue

The Reserve Bank of India's (RBI) working group on non-banking finance companies (NBFCs) has done well to suggest tighter regulation of the sector. The underlying rationale is sound. Banks and NBFCs are engaged in essentially the same business - lending and investing. They should be brought under similar regulations, like similar prudential norms for asset classification, income recognition, provisioning, capital adequacy and so on. Now, the regulatory regime for NBFCs is far more lax than for banks. This has resulted in regulatory arbitrage, with NBFCs - often bank-promoted, like Citi Financial - indulging in activities that are out of bounds to banks. The new recommendations are intended to plug this gap by bridging the regulatory divide between banks and NBFCs. The idea that the RBI should have the power to lay down 'fit-and-proper' criteria and have the power to remove NBFC directors in the event of their not meeting the criteria and even appoint directors where it is necessary to do so in public interest or for financial stability is in tune with this. Rules saying that the RBI should have the power to supersede NBFC boards in the interest of financial stability and constitute a fresh board, if necessary and any significant acquisition of ownership and control in NBFCs should have the prior approval of the RBI are to ensure safety. The financial crisis in the West was as much a crisis of banks as of shadow banks. So, the working group wants to dispense with the somewhat artificial distinction between banks and NBFCs. The latter will, no doubt, have to work under a tighter leash. But there will be some positives too. Today most NBFCs are unable to recover bad debts using the enabling framework of the Sarfaesi Act even though their borrowers may be exactly the same as those of banks. The working group, rightly, recommends that the Act be extended to NBFCs as well.  Also, the tax treatment for provisions, it suggests, should be the same for banks and NBFCs. The aim, quite clearly, is to ensure a level playing field as far as possible; without jeopardising the safety of the system.

ET

RBI must frame pricing norms for factoring services, says House panel

New Delhi : A Parliamentary Panel wants Reserve Bank of India (RBI) to frame guidelines on pricing of factoring services so as to protect the interests of micro, small and medium enterprises (MSMEs). Also, the rates charged by factors should not be higher than those charged by banks for similar services. These suggestions form part of the Standing Committee on Finance’s report on the Factoring Regulation Bill 2011. This report was tabled in Lok Sabha on Tuesday. The House Panel headed by Mr Yashwant Sinha is of the view that pricing of factoring services cannot go unregulated as it would only lead to "exploitative practices". The Standing Committee’s suggestion is in sharp contrast to the Finance Ministry’s stance that the RBI cannot be asked to administratively determine the rates of commission or discount charged by the factor to the assignor (MSME). The Finance Ministry had in its submissions told the Standing Committee that the RBI had moved away from administered rate of interest regime for financial products and any suggestion to administratively determine the rates would not be in line with the existing policy.  Factoring is a financial transaction where a business sells its accounts receivable to a third party called ‘factor’, which undertakes the activity of financing the receivables, administration of debt and collection of debt. Meanwhile, the Government is likely to exempt factoring transactions from stamp duty by moving an amendment to the Indian Stamp Act, 1899 through a schedule to the present Factoring Regulation Bill. An indication to this effect was given to the House Panel by the Finance Ministry through their written submissions.

HBL

Beware! There’s another scam mail in circulation that uses the name of the RBI to get your bank details

Scamsters are once again using the RBI’s name in a fake e-mail, asking people for numerous personal details to register for a one-time password

Don't hesitate to delete an e-mail that ostensibly asks for your bank details to register your account with a one-time password (OTP). That's because it's very likely that it is a spam message from scamsters who are using the name of the Reserve Bank of India (RBI) to appear legitimate. In reality, the apex bank never asks for these details for the purpose of verification, by e-mail. Many Internet users have mentioned they are receiving this e-mail message with the subject line, "Reserve Bank of India: OTP Registration For All Indian Bank Users", asking people to give their bank details for verification.  The message explains that this is part of a regular process  to screen the activities of various accounts. It also states that certain restrictions have been put on your account after it was found to have issues for safe use. The messages states that in order to lift these restrictions, "we will require some further information from you to enable us register your account for OTP (one-time password)."  Receivers of the message are asked to furnish information such as credit/debit card number, transaction password, ATM PIN number, expiry date and other personal details like e-mail address and mobile phone number. Experts point out that the neither the RBI nor any individual bank asks for the PIN number for account verification. It is only when the accountholder voluntarily opts for mobile or internet banking that one requires to enter a password or PIN number for the purpose of transaction. According to the OTP activation procedure described in the message, once the necessary details are confirmed and verification is successful, a manual containing a PIN (number) and the process to activate it is sent by e-mail in a couple of weeks.  This is again strange, as all banks send the PIN number and necessary account details either by post or they ask the customer to collect it from the bank's branch personally. Moneylife has reported earlier about a fake e-mail circulated, similarly using the RBI's name to offer unclaimed lottery funds. Clearly, this time too this is another fraud in progress again. So, if you receive such a message, delete it immediately. To read some key points that will help you identify fake/fraud messages log on to websites like www.truthorfiction.com, www.fraudwatchers.org or www.scambaits.com that give special attention to this matter, to help potential victims and catch the scamsters.

Moneylife

Biometric-based smart card for pensioners

CHENNAI: To prevent a repeat of the great pension robbery, the government will launch biometric-based smart cards to help old-age pensioners encash their monthly allowance. Chief minister J Jayalalithaa is likely to inaugurate the pilot project on Friday in three taluks in the southern districts through video conferencing from Chennai. So now, a bank-appointed staffer will deliver the cash at the pensioners' doorstep - hitherto done by postmen. All that the pensioner has to do is let the biometric machine with the staffer read his/her smart card that has a chip with the thumb impression. The machine will spit out a slip, like an ATM, and the staffer will hand out the cash. The transaction will be registered in the bank's central server. The revenue department has captured the fingerprints and images of the beneficiaries. The nationalised banks have designated bank staffers in each of the villages as per the guidelines of the Reserve Bank of India., aiming at extending the micro-financial services to the rural pockets. The flexible smart card allows the pensioners to maintain zero-balance account or approach the same staffer any time later to withdraw money. The major advantage is that the pensioners will get a print-out, like ATM transaction. A TOI expose on the great pension robbery led to the arrests of 11 postmen by the Central Bureau of Investigation in September last year. Poor monitoring of pension disbursement had emboldened several postmen to make a killing. The postmen demanded bribe from poor and illiterate pensioners for letting them have their money. Later, when the revenue department verified the authenticity of beneficiaries, it found that money was paid in the name of ghost pensioners for months. In the proposed system, officials said, biometric reader would authenticate the identity of the pensioners before allowing any transaction. The state disburses Rs 1,000 per month to old aged/destitute persons under various social security schemes, including Indira Gandhi national old-age pension scheme. "At least 25,000 pensioners in three taluks, Kattumannarkoil in Cuddalore, Thoralai taluk in Kanyakumari and Manaparai in Trichy district will benefit under the pilot project. The smart cards will be introduced in the rest of the state if the project is a success," said a senior government official. A collector of a southern district said, "This way, we can ascertain the real beneficiaries. None can claim pension for deceased kin". The revenue department will hand over the cheque to the nationalised banks every month and the account holders' database. There are 23.94 lakh pensioners across the state and Rs 239.44 crore are paid in pension every month.

TOI

Raising the bar

The Reserve Bank of India took a measured step towards licensing new private sector banks by releasing a set of draft guidelines on Monday. The central bank's concerns on licensing-related issues have been evident right from the time the Finance Minister mooted the idea in his February 2010 budget speech; unsurprisingly, these find expression in the guidelines. Allowing private players to start banks has always been a sensitive issue in India's recent history. More so when it is seen to benefit large industrial houses and business groups, whose questionable practices in banks they owned were one of the justifications for bank nationalisation that began in 1969. RBI Governor D. Subbarao was airing a widely held apprehension when he said recently that the “gaps” in the existing regulations could lead to corporations “self-dealing” in banks they promote or using them “as a private pool of readily available funds.” The limited attempts at licensing new private banks through guidelines issued in 1993 and 2001 do not offer any valuable lesson for current policymaking beyond the quite obvious fact that only banks with sound promoters do succeed. The RBI has therefore done well to insist on “sound credentials”, “integrity”, “diversified ownership” and a 10-year track record. Prospective promoters should not have even a 10 per cent exposure to real estate and broking businesses. That is ostensibly meant to keep out those from “speculative” sectors. The stipulation that a new bank can be set up only through a wholly owned non-operative holding company is an important safeguard designed to ring fence the bank and its depositors from problems in related entities. Necessary amendments to the Banking Regulation Act 1949 will be carried out to remove the restriction on voting rights while concurrently empowering the RBI to approve acquisition of shares/voting rights of 5 per cent or more by persons who are “fit and proper.” The RBI will get sweeping powers, for instance, to supersede the bank's board in certain cases. The minimum capital requirement is fixed at Rs.500 crore and the capital adequacy ratio at 12 per cent. New banks will have an up-to-date technology platform from day one and ensure that every fourth branch is located in rural areas. Furthering financial inclusion is one of the main reasons for licensing new banks. It is likely that only a small number of applicants will qualify and fewer still will be able to get the licence from an RBI-appointed expert committee. The central bank has said that licences will not be issued to all those who qualify. It is clearly not about to open the floodgates.

HBL

Too much to handle?

This refers to the edit “Banking on licences” (August 31). At present, we have a number of public and private sector banks, a huge list of co-operative banks (scheduled and non-scheduled) and several foreign banks with business and branches in India. The question is if it would be better to add more banks to this list. The Reserve Bank of India’s (RBI’s) intentions may be good – financial inclusion, competition and so on – but does the central bank have the machinery and the manpower to monitor the performance of various types of banks in the country. Definitely not. This is clear from the considerable number of scams, frauds and failures that were exposed in the banking sector in the last decade alone. Another major concern will be monitoring the possible diversion of funds from the banking ventures of industrial houses to their other group businesses. No doubt, with the economic growth projected to remain strong – particularly in the services sector – the demand for banking services, especially retail banking, mortgages and investment services is expected to be high. But the current list of banks is certainly enough to take care of this demand. A better alternative is consolidation, mergers and acquisitions, takeovers and asset sales to have a strong and reliable banking system on which the common man can depend.

J S Broca, New Delhi (BS)

RBI lens on off-balance sheet exposures of foreign banks

The Reserve Bank of India (RBI) has stepped up its oversight on the off-balance sheet (OBS) exposures of foreign banks, which have risen exponentially. Off-balance sheet deals, which include currency and interest rate derivatives, securitised loans and guarantees, are more lucrative for banks than their other portfolios............

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Reviving growth - Reduce interest rates and undertake specific reforms to revive growth - Shyam Ponappa

From this perspective, raising interest rates to combat inflation appears decidedly ill-advised. As expected, interest rate increases have not reduced inflation. The reduction can happen only when economic activity slows so much that demand for essentials falls, a horrific prospect. As for attracting foreign investment, rate hikes do little to induce confidence in foreign investors in skittish times, because they look to India and emerging markets for growth, not for stability. To be a safe haven, India has to be perceived not as a developing economy, but as an equivalent of the Organisation for Economic Co-operation and Development — a long way and many years ahead. The economy, therefore, needs shoring up. Can RBI and the government take steps to reverse the decline?

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Inflation can’t be tackled by rate hikes alone

Naina Lal Kidwai, country head, India, and director of HSBC Asia Pacific, said an increase in interest rates alone cannot tackle high inflation and that India needs to address supply-side issues. She also said the banking sector is not growing fast enough to accommodate the growth of corporations.......

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Religare moves in for bank entry

MUMBAI: Religare Enterprises, the financial services group which is promoted by the Singh family that had promoted pharma major Ranbaxy, has set up a panel of three senior business leaders to advise the group on its banking foray. Noted professional manager Kiran Karnik and economist Sumar Bery are already on the panel, while a former managing director of a large PSU bank is expected to join hands with Religare, sources said. The move comes within a day of the Reserve Bank of India making public the draft guidelines for entry of new entities into the country's banking space. Religare, in a statement on Monday, said it was moving ahead to win a banking license since it qualified under most of the parameters set by the regulator, including a business track record of more than 10 years, no real estate exposure and broking being less than 10% of promoter group revenue. "The panel consists of luminaries in diverse fields of policy formulation, economics, banking, development finance & technology - elements critical to developing a new paradigm in banking," the company said in a release. "The panel will support management's efforts in charting out the group's banking strategy and its application for a new banking license under the guidelines to be issued by the RBI," it said. Bery, a former director general of National Council of Applied Economic Research (NCAER) in New Delhi, has also worked with the World Bank and RBI. Karnik is a former president of Nasscom, the software industry trade body, and was appointed the chairman of Satyam Computer by the government to help stabilize the company post its crisis.

TOI

Corporates take expert help to clear bank licence test

Corporates are rushing to rope in experts to ensure that the business model for their proposed foray into banking meets all regulatory guidelines, just days after the Reserve Bank of India announced draft guidelines for new licences. Under the draft norms, finance companies can be converted into banks, and promoter groups with "sound credentials and integrity" and with a 10-year track record of successfully running their businesses can set up banks.

ET

Banking admission only for steadfast

From a macro perspective, RBI has directionally signalled two things. One is to permit Indian business groups to enter banking, but only those very suitable and who are prepared to meaningfully contribute to financial inclusion. Two, allowing NBFCs to convert into or set up banks, sans any potential regulatory arbitrage between the proposed banking and their existing ‘banking-type’ businesses.

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Bank credit to NBFCs zooms by 55.6%

Despite the central bank’s concerns, bank credit to non-banking financial companies (NBFCs) continues to grow at a robust pace......

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NBFCs better placed than corporates for bank nod

Non-banking finance companies (NBFCs) seem to have an edge over corporates in bagging the new banking licences, if the draft norms issued by the Reserve Bank of India are any indication. This is particularly the case with NBFCs with strong track record. “Though corporates are eligible to apply for banking licences under these norms (draft guidelines for new banking licences), there is ambiguity on how RBI would define ‘diversified ownership’.  As a result, clarity is yet to emerge on eligibility of Reliance Capital (54% promoter holding), Bajaj Finserv (58%) and Mahindra & Mahindra (25%),” said Pathik Gandotra, Chinmaya Garg, Kavitha Rajan of IDFC Securities in a report on Monday. The analysts are also of the view that, “NBFCs with strong track record (as Shriram Transport, IDFC) and diversified parent ownership (as L&T Finance) could be likely recipients of the new bank licences.” However, few analysts think differently. Mahrukh Adajania and Parees Purohit of Standard Chartered said in a report on Tuesday said that it is positive for groups without existing financial businesses and less so for those with existing NBFCs.  “Less positive for existing NBFCs -M&M Finance and Shriram as their asset financing business will need to merge with the bank,” said Adajania and Purohit. Also, if industrial houses come into the picture it may trigger acquisition of small private sector players in the banking sector. Mihir Sheth, Anil Agarwal, Subramanian Iyer, Reshma Seth and Sumeet Kariwala of Morgan Stanley Research said in a report on Tuesday, “From a near-term perspective, the fact that industrial houses have been allowed to apply could be perceived by investors / markets to be a positive catalyst for small private sector banks (as potential acquisition plays).” Also, increase in number of players may have its own disadvantages. “It (introduction of new aggressive banks) is likely to increase existing fragmentation levels, raise competitive intensity (both on the lending and deposit sides) as well as escalate cost pressures,” said Manish Chowdhary, Aditya Narain of Citigroup Global Markets in a report on Monday. This could also lead to an erosion of the scarcity premium for existing private sector banks - especially the smaller ones (Yes Bank, Kotak, old private sector banks) - though should be gradual and over a longer period of time, said Chowdhary and Narain.

DNA

NBFCs fret over RBI proposals

Non-banking finance companies (NBFCs) are upset over new regulatory recommendations from a Reserve Bank of India panel that wants them to increase their cash cushion by redefining what constitutes a substandard loan. If the RBI working group's suggestion to make asset classification norms similar to banks is implemented, NBFCs will have to classify loans that involve due payments of more than 90 days as "substandard" and make provisioning of 15% with respect to their assets. What this could mean is that a greater share of loans will be seen as non-performing assets (NPA) - triggering a squeeze on the firms' funds, harsher methods to recover loans or interest and a loss of business, say the NBFCs. They add they might have to charge higher rates. "We give loans to mostly the un-banked people such as truck drivers who want to buy second-hand trucks. Most of them are first time customers. They have no collateral and no repayment track record. And banks do not fund them. From those customers' point of view, stricter norms will make things difficult," said R.Sridhar, Managing Director, Shriram Transport Finance Corporation.  "For banks 90 days (to classify a loan as substandard) is okay. But, for NBFCs what is reasonable is 180 days," added Sridhar, whose company extends 400,000 loans a year for pre-owned trucks. "Ninety days mean we have to start acting after 30 days of overdue. This will change recovery practices," Sridhar said. N. Sivaraman, president, L&T Finance, said unorganised sector customers need a different approach. "For example, small contractors may not be very regular in repayment. It does not mean they default," he said. Ramesh Iyer, managing director, Mahindra Financial Services Ltd, said the new norms for vehicle loans suggest legal support for recovery and income tax benefits, which might balance the tough cushioning norms.

HT

Indian companies will find it difficult to raise funds abroad, says RBI

NEW DELHI: Indian companies will find it difficult to raise funds from the overseas market due to the impact of US sovereign debt rating downgrade by Standard and Poor's on global financial market, the Reserve Bank of India (RBI) has said.  Several lenders and financial institutions including Rural Electrification Corporation (REC), IDBI Bank, Bank of India and Indian Bank have already postponed their overseas offerings, said a central bank note on impact of rating downgrade on India. RBI further said its decision to relax the norms for repayment of Foreign Currency Convertible Bonds (FCCBs) may not yield the desired results. "The relaxation in ECB (external commercial borrowings) guidelines offered by the Reserve Bank for repayment of... liabilities (by companies) may not be as useful as foreign sources might dry up," the note to the Sub-Committee of Financial Stability and Development Council (FSDC) said. In May, RBI had raised the overall limit for ECBs to $30 billion from $20 billion for the current financial year, a move seen as a breather for corporates battling high interest rates. Earlier this month, S&P downgraded the US government's 'AAA' sovereign credit rating -- a development which raised concerns that investors will lose confidence in its economy. As per the note, the outstanding of trade credit and loans is about $205 billion as on March 31, 2011, as per India's International Investment Position.

ET

Nebulous, hazardous norms

...One is at a loss to find the RBI mandating listing within two years of licensing. Why this tearing hurry when the insurance regulator had barred insurance companies from going public for ten years by putting a bar on Indian promoters holding 74 per cent of the capital from offering their shares to the public during this period?....

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Central bank’s proposed norms may hit NBFCs’ profitability

The guidelines suggested by an RBI working group on Monday are likely to impact the NBFCs’ profitability. Industry experts feel that with increased capital requirement in a rising interest rate scenario, NBFCs are likely to face tough challenges in maintaining a decent bottomline growth once the guidelines are implemented...........

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A tale of two banking sectors

Sure, times are difficult for the banking sector as a whole with slowing credit growth, hikes in interest rates and rise in non-performing assets. However, public sector banks have additional pressures to deal with, mostly concerning asset quality.

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Madhavpura Mercantile Bank seeks merger in order to survive

Madhavpura Mercantile Co-operative Bank (MMCB), infamous for its association with stock broker Ketan Parekh, has got a six months’ breather from the banking regulator. As a last-ditch attempt to keep the bank alive, a revival package is being worked out by merging MMCB with another bank, said an official of the Gujarat Urban Cooperative Banks Federation (GUCBF).

Mint

Mandi Urban Bank awaits RBI nod to restart operations

Shimla: With the financial health of Mandi Urban Cooperative Bank (MUCB) having improved, the government awaits a nod from Reserve Bank of India to permit the bank that was asked to suspend operations 7 years to start functioning again. Papers laid in the Vidhan Sabha monsoon session that concluded on Wednesday revealed that RBI carried out a statutory inspection of MUCB under Banking Regulation Act for the year 2010-11 from 3rd to 9th August, 2011. A proposal to RBI for relaxing or removing restrictions imposed on the bank was submitted in March and April, 2011 and a response for the request to resume normal banking operations was still awaited, chief minister Prem Kumar Dhumal who is also the state finance minister disclosed in the paper. Financial position of the bank on 30th July, 2011 was shown that it had total deposits of Rs 29.47 crore and had investments of Rs 27.62 Cr.  MUCB with a share capital of Rs 2.1 Cr had reserves of 4.36 crore and the financial position of the bank was conducive for normal functioning of the bank, Dhumal stated. Reserve Bank of India (RBI) had imposed a complete ban on withdrawal of money from the bank seven years ago after it detected misappropriation of funds and other large scale financial bunglings. At the time of closure there were about 2600 depositors with the bank and non performing assets had crossed Rs 7.7 crore.  An RBI inspection then had revealed that loans had been advanced to employees and relatives of those in the management. Loans of even those not eligible were noticed to have been written off.

My Himachal

I-T sleuths train their guns on co-operative banks

AHMEDABAD: The many erring co-operative banks in the state might find income tax (I-T) sleuths on their doors soon. The I-T department has decided to go behind the banks which allegedly help tax evaders by flouting norms like Know Your Customer (KYC) and Anti-money Laundering (AML) guidelines among others. Sources with the department said that the soon to be set-up Directorate of Income Tax (Criminal investigation), or DCI, which will have directors posted in eight cities of the country including Ahmedabad, will look into these cases. "Details of cash transactions, especially those above Rs 10 lakh in banks, remain to be a crucial data during investigations of the I-T department. But a number of cash transactions go unnoticed when banks flout AML guidelines. Banks flouting KYC norms can knowingly or unknowingly help tax-evaders open dummy accounts to manage their black money," said an I-T official. Reserve Bank of India (RBI) has in the last eight months slapped Rs 1 lakh and Rs 5 lakh fine on more than 50 co-operative banks in Gujarat for flouting such norms. There are over 1,700 big and small co-operative banks in the country. Gujarat is among the top five with 280 banks, the majority of which are located in rural areas. The main complaint against co-operative banks is that they allow multiple accounts of a single person or company and hide higher value transactions. RBI had in 2002 made it mandatory for banks to share monthly details of all accounts where cash transaction of more than Rs 10 lakh has taken place with the Financial Intelligence Unit, India. But on several occasions, state co-operative banks have fallen short of complying with the RBI guidelines. "More than 75% of the total banks RBI has penalized in the country in the last one year are from Gujarat. Most of these banks are in rural centers and don't have a trained and aware staff. Several banks have started training their staff and are conducting workshops so that they don't fall on the other side of law due to ignorance," said a co-operative bank director.

TOI

‘Islamic banking has emerged a viable source of financing'

...The importance of Islamic finance has been realised by some big corporates in India. To take an example, Reliance launched Sharia-compliant portfolio management scheme and so has many others. The Reserve Bank is considering starting Islamic NBFCs (non-banking financial companies). In the mutual fund industry, too, a few but big mutual funds have launched Sharia-compliant scheme.......

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