PwC s Banking Insights March 2018

Transcription

1 PwC s Banking Insights March 2018

2 3 of regulatory changes in March

3 Preface Earlier this month, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to keep repo rates unchanged for the fourth time in a row. In doing so, the Regulator has maintained its cautious stance on continuing inflation risks. The inflation projection for the first half of the new financial year has now been revised to % from the previous range of % that was released in February Following the Regulator s statements and the minutes of the MPC, the benchmark 10-year bond yield was up by almost 17 basis points. This fall in bond prices is likely to complicate things further for public sector banks, which have already been riddled with the problem of growing non-performing assets (NPAs). Further, it is likely to impede the plans of public sector banks for raising capital from the market. This will further increase dependencies on the government for capital infusion. High interest rates are expected to increase debt servicing costs for firms, affecting profitability as well as their ability to make new investments, further leading to a strain on the banking system. This increase in bond yields is unlikely to be reversed in the near future. However, things could change if crude prices witness a correction or if the Goods and Services Tax (GST) stabilises as any indication of further fiscal slippage may push up bond yields further. However, such a situation is unlikely as crude prices are expected to reach 80 USD in the next few months. Further, the increasing level of NPAs in the economy has brought into focus the need to improve corporate governance and skill levels in both public and private sector banks. While this was assumed to be a major concern with public sector banks, it is difficult for one segment to remain an island of higher standards and not get contaminated. It now seems governance is poor across India s banking sector. The recent MPC also witnessed some policy measures by the Regulator for strengthening supervision and regulation as well as promoting financial inclusion. The RBI announced that it would introduce a mandatory loan component in working capital finance. This measure is likely to promote greater credit discipline among borrowers, which is a sheer necessity given the surge in NPAs. After issuing caution several times in the past, the Regulator has come down heavily on cryptocurrencies and virtual currencies, barring all regulated entities from dealing with them. The Regulator has now given a three-month buffer to entities to unwind associated business relationships. However, while doing so, the Regulator has also recognised the potential benefits of the blockchain and distributed ledger technology for financial inclusion, thereby constituting an inter-departmental group to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency. This issue covers an impact analysis of key regulations issued in the month of March 2018, including those around priority sector lending targets and classification, separate limits for interest-rate futures for foreign portfolio investors, hedging of commodity price risk and freight risk, and discontinuance of letters of undertaking (LoUs) and letters of comfort (LoCs). 3 PwC PwC s Banking Insights

4 Preface Priority Sector Lending Targets and Classification 1 Circular reference: RBI/ /135 FIDD.CO.Plan.BC.18/ / Dated 1 March 2018 Extract from the regulation: Please refer to the revised priority sector guidelines issued to banks vide FIDD. CO.Plan.BC.54/ / circular dated April 23, It was stipulated therein under Para (II) (i) that the subtargets for lending to small and marginal farmers and micro enterprises shall be made applicable for foreign banks with 20 branches and above, post 2018 after a review in Accordingly, after undertaking a review of the priority sector lending (PSL) profile of the above banks and to create a level-playing field within banks, it has been decided that the sub-target of 8 percent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEOBE), whichever is higher, shall become applicable for the foreign banks with 20 branches and above, for lending to the small and marginal farmers from FY Applicability: All Scheduled Commercial Banks Further, the sub-target of 7.50 percent of ANBC or CEOBE, whichever is higher, for bank lending to the Micro Enterprises shall also become applicable for the foreign banks with 20 branches and above from FY Additionally, in the light of feedback received from various stakeholders and in line with the increasing importance of services sector in our economy, it has been decided to remove the currently applicable loan limits of 5 crore and Myriad Pro 10 crore per borrower to Micro/ Small and Medium Enterprises (Services) respectively, for classification under priority sector. Accordingly, all bank loans to MSMEs, engaged in providing or rendering of services as defined in terms of investment in equipment under MSMED Act, 2006, shall qualify under priority sector without any credit cap PwC PwC s Banking Insights

5 Foreign banks with more than 20 branches in India shall need to comply with the target requirement for lending to small and marginal farmers and micro enterprises. This is in addition to the existing priority sector targets and sub-targets for agriculture and weaker sections. From the FY , the below targets need to be complied with by foreign banks: Lending to small and marginal farmers 8% of ANBC or CEOBE, whichever is higher Lending to micro enterprises 7.50% of ANBC or CEOBE, whichever is higher The credit cap for qualification under the PSL has been done away with for lending to micro/small and medium enterprises. Therefore, any amount of loan given to MSMEs shall qualify for PSL if the entity is engaged in providing services as defined in terms of investment in equipment under the Micro, Small and Medium Enterprises Development (MSMED) Act, PwC PwC s Banking Insights

6 Separate limit of Interest Rate Futures (IRFs) for Foreign Portfolio Investors (FPIs) 2 Circular reference: RBI/ /137 FMRD.DIRD.6/ / Dated 1 March 2018 Applicability: All Market Participants Background and objective: The limit provided to FPIs is fungible between investments in government securities (G-Secs) and investments in IRFs. FPIs are not allowed to take long positions in IRFs once the G-Sec limit utilisation reaches 90%. In this notification, the RBI allowed FPIs a separate limit of 5,000 crore INR to take long positions in IRFs. Extract from the regulation: Foreign Portfolio Investors, registered with Securities and Exchange Board of India, are permitted to purchase or sell Interest Rate Futures subject to the following conditions: the aggregate long position of all FPIs, each of whom has a net long position in any IRF instrument, shall not exceed 5000 crore, aggregated across all IRF instruments, and the total gross short (sold) position of any Foreign Portfolio Investor shall not exceed its consolidated long position in : The changing of limits will help to attract foreign funds to the Indian market. The investments flowing in the market will see tremendous growth as FPIs can invest 3,01,500 crore INR purely in G-Secs and can utilise the new limits provided solely for the purpose of investing in IRFs. Such Government securities and Interest Rate Futures, at any point in time. The limits prescribed for investment by FPIs in G-secs (currently 3,01,500 crore) will be exclusively available for investment in G-secs. All other terms and conditions of the extant IRF directions will remain unchanged. The detailed operational guidelines in this regard will be issued separately by SEBI. The above directions are issued under section 45 (W) of the RBI Act, 1934 enhancement of limits will also help to promote the derivatives market. As this notification relates to all the market participants, this can be used as a dynamic opportunity to hedge risks arising from the fluctuations that take place in interest rates PwC PwC s Banking Insights

7 Hedging of Commodity price risk and Freight risk in overseas markets 3 Circular reference: RBI/ / 138 A.P. (DIR Series) Circular No.19 Dated 12 March 2018 Applicability: All Category-I Authorised Dealer Banks Background and objective: The RBI constituted a working group under the chairmanship of Mr Chandan Sinha to review the guidelines for hedging of commodity price risk by residents in overseas markets. Based on the report of the working group and comments received on the report, draft directions for hedging of commodity price risk and freight risk were released for comments on 12 January Further, based on feedback received on the draft directions, the Hedging of Commodity Price Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions, 2018, have been finalised and are presented below. Extract from the regulation: The Reserve Bank of India has notified that residents hedging their commodity price risk and freight risk under a specific approval from RBI given under the approval route based on the previous set of guidelines would be permitted to continue hedging under the said approval till June 30, 2018 or the last date specified in the approval, whichever is earlier. With respect to this circular, the Reserve Bank of India has gone ahead to provide In case of Direct Exposure All Commodities except Gold, gems and precious stones Eligible Commodities* In case of In-direct Exposure Aluminium Copper Lead Zinc, Nickel, and Tin. Nickel Tin the definitions of eligible entities, direct and indirect exposure to commodity price risk, exposure to freight risk where in it is mentioned that An eligible entity will be said to have exposure to freight risk if it is engaged in the business of refining oil or is engaged in the business of shipping. The reserve Bank of India has also addressed the eligible commodities and permissible products as listed below Generic Products Futures and Forwards Vanilla Options (Call and Put) Swaps Eligible Products Structured Products Products which are combination of either cash instrument and one or more generic products Products which are combination of two or more generic products PwC PwC s Banking Insights

8 This list of eligible commodities would be reviewed annually. Further, Banks may permit eligible entities to hedge commodity price risk and freight risk overseas using permitted products and may remit outside India foreign exchange in respect of such transactions after satisfying themselves that the below mentioned points have been satisfied The entity has exposure to commodity price risk or freight risk, contracted or anticipated. The quantity proposed to be hedged and the tenor of the hedge are in line with the exposure. The following relevant instructions on subjects contained in the following circulars shall stand withdrawn as on 1 April 2018: AP. (DIR Series) circular number 68 dated 17 January 2012 on risk management and inter-bank dealings - commodity hedging. Section E and F of AP. (DIR Series) circular number 32 dated 28 December 2010 on comprehensive guidelines on foreign exchange derivatives and overseas hedging of commodity price and freight risks and the relevant appendices. AP. (DIR Series) circular number 35 dated 10 November 2008 on remittance related to commodity derivative contract issuance of standby letter of credit/bank guarantee. Banks shall have to develop a method of keeping on record full details of all hedge transactions and related remittances made by the entity. Banks shall obtain an annual certificate from the statutory auditors of the entity confirming that the hedge transactions and the margin In case of OTC derivatives, the requirement to undertake OTC hedges is justified. In case of hedging using a benchmark price other than that of the commodity exposed to, the requirement to undertake such hedges is justified. Such hedging is taken up by the management of the entity under a policy approved by the Board of Directors of a company or equivalent forum for other. remittances are in line with the exposure of the entity. The statutory auditor shall also comment on the risk management policy of the entity for hedging exposure to commodity price risk and freight risk and the appropriateness of the methodology to arrive at the quantum of these exposures. Banks shall undertake immediate corrective action in case of any irregularity or misuse of these directions. All such cases should be reported to the Chief General Manager, Financial Markets Regulation Department, RBI. Banks shall submit a quarterly report to the Chief General Manager, Financial Markets Regulation Department, RBI, in the format provided below in an Excel file to: commodityreturns@rbi.org.in. In case there are no transactions, a nil report may be submitted by a bank. 8 PwC PwC s Banking Insights

9 Report Hedging of commodity price risk and freight risk in overseas markets during the quarter ending Name of the authorised dealer: Commodity Exposure (quantity) Hedges booked (quantity) Direct Indirect OTC Exchanges Gross outflow (million USD) Gross inflow (million USD) Total outstanding SBLCs/guarantees issued for hedging of commodity price risk: SBLCs outstanding (million USD) Guarantees outstanding (million USD) SBLCs/guarantees invoked by the overseas counterparty (customer wise): Date Customer SBLC/guarantee amount invoked (million USD) 9 PwC PwC s Banking Insights

10 Discontinuance of Letters of Undertaking (LoUs) and Letter of Comfort (LoCs) for Trade Credit 4 Circular reference: RBI/ /139 A.P. (DIR Series) Circular No. 20 Dated 13 March 2018 Applicability: All Authorised Dealer Category I Banks Background and objective: An LoU is an undertaking provided by one bank to another bank in favour of or on behalf of a customer. A customer uses this facility for availing short-term credit in a foreign country. Initially, LoUs could be used by customers who had an existing relationship with a bank. LoUs for securing credit are backed by margin money or a sanctioned credit limit by a bank. The issuance of an LoU is in accordance with the foreign trade policy. Extract from the regulation: On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category I banks with immediate effect. Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions : LoUs were liberally issued instead of LoCs because they helped AD category-1 banks to earn fees for just issuing a guarantee. This shall affect the fee income of banks. AD category-1 banks will have to reduce/ pay back liabilities to balance their books as these instruments would have to be wound up in the next three months This, however, will increase costs for importers as alternatives like letters of credit are higher-priced than LoUs. contained in Department of Banking Regulation Master Circular No. DBR. No. Dir. BC.11/ / dated July 1, 2015 on Guarantees and Co-acceptances, as amended from time to time. AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers PwC PwC s Banking Insights

11 Agency commission payable to banks for operating Special Deposit Scheme (SDS) 5 Circular reference: DGBA.GBD.2294/ / Dated 15 March 2018 Applicability: All Agency Banks handling Special Deposit Scheme Background and objective: All agency banks that handle SDS 1975 are entitled to get agency commission for conducting government business. With respect to this, a circular stating the manner of claiming agency commission has been released. The circular states that all claims will be settled at the Central Accounts Section (CAS), Nagpur, rather than the respective regional offices of the RBI. However, agency banks will have to continue to claim the reimbursement of interest paid and withdrawal from the SDS accounts from the respective regional offices of the RBI in which such mirror accounts are maintained. Extract from the regulation: Please refer to para 2 of our Master Circular RBI/ /2 dated July 1, 2017 on Conduct of Government Business by Agency Banks- Payment of Agency Commission where in it is mentioned that SDS transactions undertaken by agency banks are eligible for agency commission. In this connection, it has been decided that agency commission claims on SDS related transactions (where mirror accounts are maintained in RBI) will be settled at Central Accounts Section (CAS), Nagpur and not in respective Regional Offices of RBI, with immediate effect. Accordingly, all agency banks handling SDS are advised to submit their agency commission claims related to SDS transactions to CAS, Nagpur on quarterly basis. However, agency banks will continue to claim reimbursement of interest paid and withdrawal from SDS accounts from the respective Regional Offices of RBI in which the mirror accounts are maintained. : Beginning immediately, all agency banks that handle SDS 1975 will have to settle agency commission claims on SDS-related transactions (where mirror accounts are maintained with the RBI) at CAS, Nagpur, and not in the respective regional offices of the RBI. Accordingly, all agency banks handling SDS accounts will have to submit their agency commission claims related to SDS transactions to CAS, Nagpur, on a quarterly basis. Agency banks will have to continue to claim the reimbursement of interest paid and withdrawal from SDS accounts from the respective regional offices of the RBI in which such mirror accounts are maintained PwC PwC s Banking Insights

12 Preface Circular ref. no. Name of the circular RBI/ /136 dated 1 March Review of Currency Distribution & Exchange Scheme (CDES) Brief instructions The RBI, with a view to sustain the objectives of its Clean Note Policy, formulated a scheme of incentives titled Currency Distribution and Exchange Scheme (CDES) vide its Master Direction - RBI/DCM/ /36 Master Direction DCM (CC) No.G-4/ / dated 20 July As per the above stated Master Direction, banks were eligible for financial incentives for the installation of machines which extend cash-related retail services to the public, such as: Cash recyclers; ATMs dispensing lower denomination notes (i.e. up to 100 INR) and higher denomination notes (i.e. 500 INR and above) were not eligible for this reimbursement. The maximum amount of reimbursement allowed to banks for the machines were: In metros/urban areas: Cash recyclers 50% of the actual cost of the machine or 2,00,000 INR, whichever is lower ATMs dispensing lower denomination notes (up to 100 INR) 50% of the actual cost of the machine or 2,00,000 INR, whichever is lower In semi-urban/rural areas: Cash recyclers 60% of the actual cost of the machine or 2,50,000 INR, whichever is lower. ATMs dispensing lower denomination notes (up to 100 INR) 60% of the actual cost of the machine or 2,50,000 INR, whichever is lower. Since the objective the scheme has largely been achieved, the RBI has decided to withdraw the incentives which were being given to the banks for the installation of cash recyclers and ATMs dispensing only lower denomination notes (mentioned in the point above). Withdrawal of the incentive scheme for installation of cash recyclers and ATMs dispensing only lower denomination notes stands effective from 1 March Banks can, however, claim the incentives at the RBI s regional offices for the machines that were delivered to them on or before 1 March 2018; the incentives will be subject to limits defined in Master Direction DCM (CC) No.G- 4/ / dated 20 July (See point 3 above) PwC PwC s Banking Insights

13 Circular ref. no. RBI/ /146 dated 31 March Name of the circular Taking over of valuation of Government Securities (G-Sec) by Financial Benchmark India Pvt Ltd. (FBIL) - valuation of portfolios Brief instructions According to the circular, RBI-regulated entities, including banks, non-bank financial companies, primary dealers, co-operative banks and all-india financial institutions, that were required to value G-Secs using prices published by the Fixed Income, Money Market and Derivatives Association of India (FIMMDA), as per current directions, may now use FBIL prices with effect from 31 March Other market participants who have been using G-Sec prices/ yields published by FIMMDA may use prices/ yields published by FBIL for valuation of their investment portfolio PwC PwC s Banking Insights

14 Preface In lieu of the recent Aadhaar data security breaches reported, 8 the Supreme Court has been critical of Aadhaar security and also gave a chance to the Unique Identification Authority of India (UIDAI) to defend the Aadhaar system. However, continuous clarifications about Aadhaar, coming from various regulatory bodies, along with the limitations of are proof of how deep Aadhaar has already entered the system and any interventions at this stage would cause a ripple effect in the country. Considering the increasing importance and dependence on, we bring to you a dashboard depicting volumes of daily transactions. The KYC master direction has also been suitably amended by mandating Aadhaar, subject to consent from customers. Number of e - KYC transactions 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 Daily transaction trend 24-Mar Mar Mar Mar Mar Mar Mar Mar Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr-18 Source: UIDAI 8. Chitral, R. (26 March 2018). Aadhaar data leak via two PSEs, fixed a month after alert: Experts. The Times of India. Retrieved from 14 PwC PwC s Banking Insights

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