PwC s Banking Insights November 2017

Transcription

1 November 2017

2 Table of contents Topic Page no. Preface 3 Impact assessment of regulatory changes in November Introduction of Legal Entity Identifier for large corporate borrowers 4 Risk Management and Inter-Bank Dealings Simplified Hedging Facility 8 Statement on Developmental and Regulatory Policies - October 4, Banking Facility for Senior Citizens and Differently abled Persons 12 Secondary market transactions in Government Securities Notional Short Sale 15 Over-the-Counter Government Securities Transaction by Foreign Portfolio Investors (FPIs) Settlement Period 18 Other notifications in November Contacts 22 2 PwC PwC s Banking Insights

3 Preface Impact assessment of regulatory changes in November 2017 Other notifications in November 2017 Contacts During the Reserve Bank of India s (RBI) six-member Monetary Policy Committee (MPC) meeting which was held this month, it was decided to keep the short-term lending rate (repo rate) unchanged, citing upside risks to inflation. While not everyone may be in agreement with the RBI s assessment of India s inflation trajectory, the Regulator s policy stance was more focused on maintaining a word of caution on the upside risks emanating from high commodity prices, mainly crude oil, which have gone above the psychological mark of 60 USD per barrel. On the global front, for the third time this year, the US Federal Reserve System hiked interest rates by 25 BPS. While dollar inflows from foreign institutional investors (FIIs) have been particularly robust in the past, this foreign inflow is vital for the Indian economy, which is still recovering from demonetisation and the Goods and Services Tax (GST). However, post the hike by the Federal Reserve System, there are expectations that a part of the money will flow back to the US as there will be investment safety and also good returns. With the RBI keeping the rates unchanged and the Federal Reserve hiking them, the interest rate differential is narrowing fast. This will impact short-term investments in the domestic market and also create upward pressures that will affect new investment and expansion projects. Further, Indian bonds may also become a less attractive investment option, and the economy is likely to witness their sell-off by FIIs. With the Central Government focussed on digitisation, the Regulator is also rationalising the framework for merchant discount rates (MDRs) applicable on debit card transactions for achieving the twin objectives of increased usage of debit cards and ensuring sustainability of business for the entities involved. Thus, this framework provides further impetus to the government s efforts for digitisation of small transactions. While the Central Government and the Regulator are aiming to bring about several changes, the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 which was tabled in Parliament in August 2017 has been making news due to its controversial bail-in clauses. However, it is imperative to understand the bill in its entirety so as to analyse its impact on depositors and the banking system at large. The bill aims to put in place rules so that financial firms can fail in an orderly manner and also provides insurance to bank deposits. While the Regulator has hitherto leaned on peer banks to take over failing banks, it is now aiming to replace this ad hoc system with a more sophisticated, well-defined one that makes banks more accountable and gives an early warning of ill health, without exposing depositors to more risk than they face today. Also, there is an incremental protection for depositors because this controversial bail-in can be invoked and the deposits can be lost only if they have given consent to the bank when signing the deposit forms. Further, the Regulator has expressed serious concerns and warned investors for the third time against investing in virtual currencies. Although economists and regulators have issued warnings against these currencies and described them as a bubble, their surging prices are making them hard to resist. However, there s much more to this than hype-stoked crypto markets. The intense attention on this unprecedented economic phenomenon is prompting people to ask probing questions on their viability. Banks will need to keep a check on anti-money laundering (AML) and terror financing through the use of cryptocurrencies. 3 PwC PwC s Banking Insights

4 Preface Impact assessment of regulatory changes in November 2017 Other notifications in November 2017 Contacts Introduction of Legal Entity Identifier for large corporate borrowers 1 Circular reference: RBI/ /82 DBR.No.BP.BC.92/ / Dated 2 November 2017 Applicability: All Scheduled Commercial Banks (Excluding Regional Rural Banks), All India Financial Institutions (Exim Bank, SIDBI, NHB, NABARD), Local Area Banks, Small Finance Banks Background and objective: To understand how the vast network of market participants were connected to one another and how they minimised their risks, leaders from the world s largest economies, operating through the G-20 and Financial Stability Board (FSB), agreed to develop a coordinated solution. This effort resulted in a public interest initiative that is now the global legal entity identifier (LEI) system. LEI is a reference code used across markets and jurisdictions to uniquely identify a legally distinct entity that engages in a financial transaction. It is a 20-digit alphanumeric code and an associated set of six reference data items to uniquely identify a legally distinct entity that engages in financial market activities. LEI registrations mandate applicants to provide details of parent and ultimate parent companies. The RBI has emphasised on the establishment of LEIs through different publications. In June 2017, it had issued a notification to mandate LEI for over the counter (OTC) derivative contracts. This circular now mandates obtaining LEIs for all facilities offered to large corporates having exposures worth 50 crore and above in a phased manner PwC PwC s Banking Insights

5 Extract from the regulation: The Legal Entity Identifier (LEI) code is conceived as a key measure to improve the quality and accuracy of financial data systems for better risk management post the Global Financial Crisis. LEI is a 20-digit unique code to identify parties to financial transactions worldwide. The LEI for the participants of the OTC derivatives market has since been implemented vide circular RBI/ /314 FMRD.FMID No.14/ / dated June 01, 2017 in a phased manner. In the Statement on Developmental and Regulatory Policies dated October 4, 2017 it was indicated that LEI system for all borrowers of banks having total fund based and non-fund based exposure of 5 crore and above will be introduced in a phased manner (extract enclosed). Accordingly, it has been decided that the banks shall advise their existing large corporate borrowers having total exposures of 50 crore and above to obtain LEI as per the schedule given in the Annex. Borrowers who do not obtain LEI as per the schedule are not to be granted renewal / enhancement of credit facilities. A separate roadmap for borrowers having exposure between 5 crore and up to 50 crore would be issued in due course. Banks should encourage large borrowers to obtain LEI for their parent entity as well as all subsidiaries and associates. Entities can obtain LEI from any of the Local Operating Units (LOUs) accredited by the Global Legal Entity Identifier Foundation (GLEIF) the entity tasked to support the implementation and use of LEI. In India, LEI code may be obtained from Legal Entity Identifier India Ltd (LEIIL), a subsidiary of the Clearing Corporation of India Limited (CCIL), which has been recognised by the Reserve Bank as issuer of LEI under the Payment and Settlement Systems Act, 2007 and is accredited by the GLEIF as the Local Operating Unit (LOU) in India for issuance and management of LEI. The rules, procedure and documentation requirements may be ascertained from LEIIL. After obtaining LEI code, banks shall also ensure that borrowers renew the codes as per GLEIF guidelines. These directions are issued under Section 21 and Section 35(A) of the Banking Regulation Act, PwC PwC s Banking Insights

6 Extract from the regulation: Schedule for implementation of LEI Total Exposure to SCBs To be completed by 1000 crore and above Mar 31, 2018 Between 500 crore and 1000 crore Jun 30, 2018 Between 100 crore and 500 crore Mar 31, 2019 Between 50 crore and 100 crore Dec 31, 2019 Extracts from Statement on Developmental and Regulatory Policies dated October 4, 2017: Legal Entity Identifier (LEI) - It has been decided to require banks to make it mandatory for corporate borrowers having aggregate fund-based and non-fund based exposure of 5 crore and above from any bank to obtain Legal Entity Identifier (LEI) registration and capture the same in the Central Repository of Information on Large Credits (CRILC). This will facilitate assessment of aggregate borrowing by corporate groups, and monitoring of the financial profile of an entity/group. This requirement will be implemented in a calibrated, but time-bound manner. Necessary instructions will be issued by end-october PwC PwC s Banking Insights

7 Impact assessment: Banks may update their credit policies to incorporate LEI requirements. LEI requirements need to be integrated in credit appraisal, limit sanctioning and monitoring processes. Banks systems shall be updated to incorporate details of LEI and restrict transactions where LEI is not provided (considering the above timelines). Banks need to instruct their credit appraisal teams to check the validity of the LEI numbers provided by their clients at the time of credit appraisal, as well as at the time of renewal and enhancement. The same can be automated through transaction processing systems. Business teams of banks shall encourage large corporates to obtain LEI for their parent entity as well as all subsidiaries and associates. Banks will be able to identify the concentration of risk by accessing details available on the websites of local and global local operating units (LOUs). LEIs issued by all LOUs (local and global) along with relationship records are available in the public domain. Banks will be able to effectively monitor debt exposure of corporate borrowers by preventing multiple loans to companies against the same collateral. Banks may ask their business teams to remind their clients to regularly renew LEIs as LEIs are have a one-year validity. Banks need to be prepared for change in formats of reports and disclosures, as per the requirements of the RBI. 7 PwC PwC s Banking Insights

8 Risk Management and Inter-Bank Dealings Simplified Hedging Facility 2 Circular reference: RBI/ /88 A.P. (DIR Series) Circular No. 11 Dated 9 November 2017 Applicability: All Authorised Dealer Category - I Banks Background and objective: In order to simplify the documentation requirement for hedging of exchange rate risk, the RBI has released guidelines on simplified hedging facilities, applicable from 1 January The apex bank aims to increase operational ease as the guidelines reduce the requirement of submitting documents, thus promoting a hedging culture. The scheme was first announced in August 2016 and the draft guidelines were released in April The guidelines are applicable for entities (other than individuals) undertaking hedging through OTC derivative products or exchange traded currency derivative (ETCD) products, as permitted under the Foreign Exchange Management Act (FEMA), The designated bank (any AD category-i bank), as appointed by the user, shall be responsible for assessing the hedging requirement, setting the limit up to the stipulated limits on outstanding contracts and reporting the trades to the transaction repository PwC PwC s Banking Insights

9 Extract from the regulation: Operational guidelines, terms and conditions The user shall appoint an AD Cat-I bank as its Designated Bank. The designated bank will assess the hedging requirement of the user and set a limit up to the stipulated cap on the outstanding contracts. If hedging requirement of the user exceeds the limit in course of time, the designated bank may re-assess and, at its discretion, extend the limit up to 150% of the stipulated cap. Hedge contracts in OTC market can be booked with any AD Cat-I bank, provided the underlying cash flow takes place with the same bank. Cost reduction structures can be booked by users provided that resident unlisted companies can use such structures only if they have a minimum net worth of Rs. 200 crores. Users are not required to furnish any documentary evidence for establishing underlying exposure under this facility. Users may, however, provide basic details of the underlying transaction in a standardised format2, only in the case of OTC hedge contracts. Cancelled contracts may be freely rebooked with the same bank. In case of hedge contracts booked in OTC market, while losses will be recovered from the user, net gains i.e. gains in excess of cumulative losses, if any, will be transferred at the time of delivery of the underlying cash flow. In case of part delivery, net gains will be transferred on a pro-rata basis. For hedge contracts on underlying capital account transactions, gains/losses may be transferred to the user as and when they accrue if the underlying asset/liability is already in existence. On full utilisation of the limit or in case of breach of limit, user shall not book new contracts under this facility. In such a case, contracts booked earlier under this facility will be allowed to continue till they expire or are closed. Any further hedging requirements thereafter may be booked under other available hedging facilities. 9 PwC PwC s Banking Insights

10 Extract from the regulation: Users booking contracts under this facility shall not book contracts under any other facility in OTC or ETCD market except as provided in para (ix). At the end of each financial year, the user will provide the designated bank with a statement signed by the head of finance or the head of the entity, to the effect that, Banks shall have an internal policy regarding the time limit up to which a hedge contract for a given underlying can be rolled-over or rebooked by the user. a. Hedge contracts booked in both OTC and ETCD market, under this facility, are backed by underlying exchange rate exposures, either contracted or anticipated. b. The exposures underlying the hedge contracts booked under this facility are not hedged under any other facility. On being appointed, the designated bank shall report the details of the users and limits granted to the Trade Repository (TR). On a request by the TR, the exchanges shall report all contracts booked by such users to the TR on a daily basis. The TR will compute user wise outstanding position (across OTC and ETCD market) and provide this information to the designated bank for monitoring. If the outstanding contracts of a user exceeds the limit (or the extended limit, if applicable) the designated bank shall advise the user to stop booking new contracts under this facility. When user migrates to other available facilities, the designated bank shall report this information to the TR. The TR shall update this information in its records and notify the recognized stock exchanges to stop reporting data for the user concerned. 10 PwC PwC s Banking Insights

11 Impact assessment: As an outcome of the guidelines, the following responsibilities are vested in designated banks: Banks need to amend the existing policy/formulate a new policy for setting the time limit for rolling over or rebooking of the hedge contract. Banks are to decide the hedging limits to be fixed for the client. Any subsequent revisions in the limits shall be undertaken by the bank after proper analysis and assessment. Banks shall inform the limit setting and contract booking under other facilities to the trade repository (TR). The TR shall further inform the banks of the daily open positions. In case the limit of the user is breached, the bank should not allow further booking of contracts under this facility. Banks shall also collect a certificate at the year end from the user, as stipulated in the operational guidelines. 11 PwC PwC s Banking Insights

12 Statement on Developmental and Regulatory Policies - October 4, Banking Facility for Senior Citizens and Differently abled Persons 3 Circular reference: RBI/ /89 DBR.No.Leg.BC.96/ / Dated 9 November 2017 Applicability: All Scheduled Commercial Banks (including RRBs) All Small Finance Banks and Payments Banks Background and objective: Various branches of certain banks have been found to turn away differently abled or senior citizen customers. It is imperative to be sensitive to the requirements of senior citizens and differently abled persons. In light of this, the RBI has decided to issue a guideline to banks instructing them to have certain facilities to meet the needs of such persons PwC PwC s Banking Insights

13 Highlights of the regulation: The guideline has mentioned certain steps that the bank has to take to ensure inclusion of these specially-abled persons as well as senior citizens. These guidelines are mentioned as below: The banks are advised to have a specific designated counter for such persons, including visually impaired persons It is advised that banks shall ensure that when a Life Certificate is submitted in any branch, including a non-home branch, of the pension paying bank, the same is updated/ uploaded promptly in CBS by the receiving branch itself, to avoid any delay in credit of pension. With respect to cheque book facility the following points have been laid down: i. Banks shall issue cheque books to customers, whenever a request is received, through a requisition slip which is part of the cheque book issued earlier. ii. iii. iv. Banks are advised to provide minimum 25 cheque leaves every year, if requested, in savings bank account, free of charge. Banks shall not insist on physical presence of any customer including senior citizens and differently abled persons for getting cheque books. Banks may also issue cheque books, on requisition, by any other mode as per bank s laid down policy. Automatic conversion of accounts to senior citizen accounts based on the date of birth that is captured in the system, must be ensured. Banks are advised that the facilities that are provided to sick/old/ incapacitated persons vide Paragraph 9 of the Master Circular DBR. No.Leg.BC.21/ / dated July 1, 2015 on Customer Service in Banks (regarding operations of accounts through identification of thumb/toe impression/mark by two independent witnesses and authorising a person who would withdraw the amount on behalf of such customers) shall also be extended to the visually impaired customers. With respect to ease of filing form 15G/H, banks are advised to provide senior citizens and differently abled persons Form 15G/H once in a year (preferably in April) to enable them to submit the same, where applicable, within the stipulated time. Based on instructions on Doorstep Banking vide circular DBOD.No.BL. BC.59/ / dated February 21, 2007 under Section 23 of Banking Regulation Act, 1949 and in view of the difficulties faced by senior citizens of more than 70 years of age and differently abled or infirm persons (having medically certified chronic illness or disability) including those who are visually impaired, banks are advised to make concerted effort to provide basic banking facilities, such as pick up of cash and instruments against receipt, delivery of cash against withdrawal from account, delivery of demand drafts, submission of Know Your Customer (KYC) documents and Life certificate at the premises/ residence of such customers. 13 PwC PwC s Banking Insights

14 Impact assessment: The impact of this guideline is that banks will now have to take various measures to ensure that differently abled individuals as well as senior citizens are not neglected and turned away, notwithstanding the need to push digital transactions and use of ATMs first and will have to comply with the guidelines that have been laid down for the same. In terms of this guideline, banks will need to make certain modifications such as having to set up a separate designated counter for all differently abled (including visually impaired individuals) persons as well as senior citizens. Further, banks will now have to modify their internal policy on the issuance of cheque books to ensure that going forward physical presence of any account holder (including differently abled and senior citizens) is not required while obtaining cheque books. Banks will have to strengthen process on core banking solution (CBS) systems to ensure timely updation of life certificates in the system so as to prevent hardships that maybe caused to pensioners and to avoid late credits. From a cost perspective, all banks will have to ensure that going forward, basic facilities such as the picking up of cash and instruments against receipts, delivery of cash against withdrawal from accounts, delivery of demand drafts and submission of know your customer (KYC) documents will be made available at the premises/residences of such customers. Banks will have to comply with these guidelines via a letter, as well as actually implementing such changes by 3 December They will also have to specifically mention this in their branches as well as on their respective websites. 14 PwC PwC s Banking Insights

15 Secondary market transactions in Government Securities Notional Short Sale 4 Circular reference: RBI/ /96 FMRD.DIRD.04/ / Dated 16 November 2017 Applicability: All market participants Background and objective: Market participants undertaking notional short sale were not permitted to use securities from their HTM/AFS/HFT portfolio for delivery against short sale PwC PwC s Banking Insights

16 Extract from the regulation: Market participants undertaking notional short sale need not compulsorily borrow securities in the repo market. While the short selling entity may ordinarily borrow securities from the repo market, in exceptional situations of market stress (e.g. short squeeze), it may deliver securities from its own HTM/ AFS/HFT portfolios. If securities are delivered out of its own portfolio, it must reflect the transactions as internal borrowing. All notional short sales must be closed by an outright purchase in the market. It may be ensured that the securities so borrowed are brought back to the same portfolio, without any change in book value. The short selling entity must adhere to the extant regulations and accounting norms governing sale or valuation of securities in its portfolios. The bank may frame a Board approved policy for this purpose. 16 PwC PwC s Banking Insights

17 Impact assessment: Market participants will not be required to borrow securities in the repo market for their overnight notional short sale. Banks will have to frame a policy, approved by their boards, for the short selling of securities through internal borrowing. 17 PwC PwC s Banking Insights

18 Over-the-Counter Government Securities Transaction by Foreign Portfolio Investors (FPIs) Settlement Period 5 Circular reference: RBI/ /97 FMRD.DIRD.05/ / Dated 16 November 2017 Applicability: All market participants Background and objective: Foreign portfolio investors (FPIs) were required to settle transactions in government securities in the OTC market on a T+2 basis PwC PwC s Banking Insights

19 Extract from the regulation: FPIs to settle OTC secondary market transactions in Government Securities either on T+1 or on T+2 basis. However, it may be ensured that all trades are reported on the trade date itself. All other existing conditions for settlement of transactions in Government Securities remain unchanged. 19 PwC PwC s Banking Insights

20 Impact assessment: Margin requirements of FPIs will be reduced on T+2 day since the contracts on T day have already been settled. 20 PwC PwC s Banking Insights

21 Preface Impact assessment of regulatory changes in November 2017 Other notifications in November 2017 Contacts Circular ref. no. Name of the circular Brief instructions RBI/ /95 Dated 16 November RBI/ /100 Dated 23 November RBI/ /103 Dated 30 November Agency Commission for GST receipt transactions Special Deposit Scheme (SDS)-1975 Payment of interest for calendar year 2017 Reporting of Transactions by agency banks to RBI 1. All agency banks, authorised to collect GST, are advised to submit their agency commission claims pertaining to GST receipt transactions at the Mumbai Regional Office only. 2. Agency commission claims with respect to GST receipt transactions will be settled at the Mumbai Regional Office of the Reserve Bank of India only. 1. It is advised that interest for the calendar year 2017 may be disbursed to the SDS account holders through electronic mode or by way of account payee cheques on 1 January 2018 itself. 2. The interest rate for the above period shall be referred to from the Government of India s website namely, egazette.nic.in (notifications related to interest rates for SDS 1975). 3. Suitable instructions to be issued to all deposit offices. The RBI has decided that for Central Government transactions, if the transactions or any adjustments thereof are reported after a gap of 90 days from the date of the transaction, agency banks have to take prior approval from the concerned ministry and submit the same to the RBI separately at the time of reporting such transactions for settlement PwC PwC s Banking Insights

22 Vivek Iyer Partner Mobile: Dnyanesh Pandit Director Mobile: Vernon Dcosta Director Mobile: Rajeev Khare Manager Mobile: Dhruv Khandelwal Assistant Manager Mobile: PwC PwC s Banking Insights

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