Thursday 17 September 2015

The Joint Lenders’ Forum (JLF)

JLF is a committee formed by bankers if the principal or interest amount on a loan is due for more than 60 days to a client .
This committee can be formed if the total aggregate exposure of banks to a single client is more than Rs 100 cr or more.
The joint lenders’ forum is a consortium of lenders formed when a loan shows incipient signs of stress. Formation of the JLF was mandated by the banking regulator last year in the wake of a secular rise in bad loans in recent years. However, large banks had a grouse that forum lenders with limited exposure were not cooperating to iron out the kinks.
The formation of the JLF is a component of the new norms, which mandates lenders to form a group if interest or principal is due for more than 60 days.

Job of JLF:

A loan becomes non-performing if it is due for more than 90 days.
The consortium is supposed to come up with corrective action plan within 45 days after the formation of the committee. It is supposed to determine if it needs to initiate recovery or restructuring  or suggest steps to decide on the given issue
Execution of the Plan:
Any plan at the JLF can be sanctioned or approved only if 75 %  in numbers and 60 % of lenders in terms of  exposure…number of lenders agree to the plan/proposal

Reserve Bank of India (RBI) restrictions:

The Reserve Bank of India (RBI) is planning to restrict the numbers of members in the joint lenders’ forum (JLF) — a move aimed to break the logjam banks often face in resolving distress.
The suggestion is to have a regulatory limit on the number of members in a consortium, so that every member will have a serious, independent credit appraisal, and credit mindset.
Unless there is proper coordination between the interested parties, all efforts at revival are likely to fall flat.

Formation of Central Repository of Information on Large Credits (CRILC)

It was also proposed in the Frame Repository of Information on Large Credits (CRILC) work that the Reserve Bank of India (RBI) will set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders. Now banks will be required to report credit information, including classification of an account as SMA(Special Mention Account) to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs.50 million and above with them.
 

Monday 7 September 2015

contd:-  payment banks:


Internet banking –
 The RBI is also open to applicants transacting primarily using the Internet. The Payments Bank is expected to leverage technology to offer low cost banking solutions. Such a bank should ensure that it has all enabling systems in place including business partners, third party service providers and risk managements systems and controls to enable offering transactional services on the internet. While offering such services, the Payments Bank will be required to comply with RBI instructions on information security, electronic banking, technology risk management and cyber frauds.
Functioning as Business Correspondent (BC) of other banks –
 A Payments Bank may choose to become a BC of another bank for credit and other services which it cannot offer.
The Payments Bank cannot set up subsidiaries to undertake non-banking financial services activities. The other financial and non-financial services activities of the promoters, if any, should be kept distinctly ring-fenced and not comingled with the banking and financial services business of the Payments Bank.
The Payments Bank will be required to use the word “Payments” in its name in order to differentiate it from other banks.

5. Deployment of funds
The Payments Bank cannot undertake lending activities. Apart from amounts maintained as Cash Reserve Ratio (CRR) with RBI, minimum cash in hand and balances with a scheduled commercial bank/RBI required for operational activities and liquidity management, it will be required to invest all its monies in Government securities/Treasury Bills with maturity up to one year that are recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR). The Payments Bank will participate in the payment and settlement system and will have access to the inter-bank uncollateralised call money market and the collateralised CBLO market for purposes of temporary liquidity management.

6. Capital requirement
Since the Payments Bank will not be allowed to assume any credit risk, and if its investments are held to maturity, such investments need not be marked to market and there may not be any need for capital for market risk. However, the Payments Bank will be exposed to operational risk. The Payments Bank will also be required to invest heavily in technological infrastructure for its operations. The capital will be utilised for creation of such fixed assets. Therefore, the minimum paid up voting equity capital of the Payments Bank shall be Rs. 100 crore. Any additional voting equity capital to be brought in will depend on the business plan of the promoters. Further, the Payments Bank should have a net worth of Rs 100 crore at all times. The Payments Bank shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time. However, as Payments Banks are not expected to deal with sophisticated products, the capital adequacy ratio will be computed under simplified Basel I standards.
As the Payments Bank will have almost zero or negligible risk weighted assets, its compliance with a minimum capital adequacy ratio of 15 per cent would not reflect the true risk. Therefore, as a backstop measure, the Payments Bank should have a leverage ratio of not less than 5 per cent, i.e., its outside liabilities should not exceed 20 times its net-worth / paid-up capital and reserves.

7. Promoter’s contribution
The promoter’s minimum initial contribution to the paid up voting equity capital of Payments Bank shall be at least 40 per cent which shall be locked in for a period of five years from the date of commencement of business of the bank. Shareholding by promoters in the bank in excess of 40 per cent shall be brought down to 40 per cent within three years from the date of commencement of business of the bank. Further, the promoter’s stake should be brought down to 30 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to 26 per cent within 12 years from the date of commencement of business of the bank. Proposals having diversified shareholding and a time frame for listing will be preferred.

8. Foreign shareholding

The foreign shareholding in the bank would be as per the extant FDI policy.

9. Voting rights and transfer/acquisition of shares
As per Section 12 (2) of the Banking Regulation Act, 1949, the voting rights in private sector banks are capped at 10 per cent, which can be raised to 26 per cent in a phased manner by the RBI. Further, as per Section 12B of the Act ibid, any acquisition of 5 per cent or more of voting equity shares in a private sector bank will require prior approval of RBI. This will also apply to the Payments Banks.

10. Prudential norms
As the Payments Bank will not have loans and advances in its portfolio, it will not be exposed to credit risk and, the prudential norms and regulations of RBI as applicable to loans and advances, will therefore, not apply to it. However, the Payments Bank will be exposed to operational risk and should establish a robust operational risk management system. Further, it may face liquidity risk, and therefore is required to follow RBI’s guidelines on liquidity risk management, to the extent applicable.

11. Business plan
The applicants for Payments Bank licences will be required to furnish their business plans and project reports with their applications. The business plan will have to address how the bank proposes to achieve the objectives of setting up of Payments Banks. The business plan submitted by the applicant should be realistic and viable. Preference will be given to those applicants who propose to set up Payments Banks with access points primarily in the under-banked States / districts in the North-East, East and Central regions of the country. However, to be effective, the Payments Bank should ensure widespread network of access points particularly to remote areas, either through their own branch network or BCs or through networks provided by others. The bank is expected to adapt technological solutions to lower costs and extend its network. In case of deviation from the stated business plan after issue of licence, RBI may consider restricting the bank’s expansion, effecting change in management and imposing other penal measures as may be necessary.

12. Corporate governance
The Board of the Payments Bank should have a majority of independent Directors.
The bank should comply with the corporate governance guidelines including ‘fit and proper’ criteria for Directors as issued by RBI from time to time.

13. Other conditions
Entities other than the promoters will not be permitted to have shareholding in excess of 10 per cent of the voting equity capital of the bank.
The Payments Bank shall operate in remote areas mostly through BCs and other networks. Therefore, the requirement of opening at least 25 per cent of branches in unbanked rural centres (population up to 9,999 as per the latest census), is not stipulated for them. However, the Payments Bank will be required to have at least 25 per cent of access points in rural centres.
The operations of the bank should be fully networked and technology driven from the beginning.
The bank should have a high powered Customer Grievances Cell to handle customer complaints.

The compliance of terms and conditions laid down by RBI is an essential condition of grant of licence. Any non-compliance will attract penal measures including cancellation of licence of the bank.

Sunday 6 September 2015

contd:-
Now what is payment bank..
What is Payment Bank ?
Nachiket cites the “case study” of M-Pesa, to strengthen his argument in favour of Payment banks.
1. Objectives
There is a need for transactions and savings accounts for the underserved in the population. Also remittances have both macro-economic benefits for the region receiving them as well as micro-economic benefits to the recipients. Higher transaction costs of making remittances diminish these benefits.
Therefore, the primary objective of setting up of Payments Banks will be to further financial inclusion by providing
(i)                small savings accounts and
(ii)             payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment.

2. Registration, licensing and regulations
The Payments Bank will be registered as a public limited company under the Companies Act, 2013, and licensed under Section 22 of the Banking Regulation Act, 1949, with specific licensing conditions restricting its activities to acceptance of demand deposits and provision of payments and remittance services. It will be governed by the provisions of the Banking Regulation Act, 1949, Reserve Bank of India Act, 1934, Foreign Exchange Management Act, 1999, Payment and Settlement Systems Act, 2007, other relevant Statutes and Directives, Prudential Regulations and other Guidelines/Instructions issued by RBI and other regulators from time to time, including the regulations of SEBI regarding public issues and other guidelines applicable to listed banking companies.

3. Eligibility criteria
The existing non-bank PPI issuers authorised under the Payment and Settlement Systems Act, 2007 (PSS Act) and other entities such as Non-Banking Finance Companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives and public sector entities may apply to set up a Payments Bank. Even banks can take equity stake in a Payments Bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949.
The entities and their Promoters/ Promoter Groups as defined in the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 should be ‘fit and proper’ in order to be eligible to promote Payments Banks. RBI would assess the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and successful track record of at least 5 years in running their businesses.
4. Scope of activities
Payment Banks means “Digital Wallet or Mobile Currency” which can be used to book movie tickets, pay utility bills, do shopping etc. Doesn’t it sound similar to PPI or what existing banks offer? But here is the difference, the payment banks could be supermarket chain, mobile service provider, non-banking financial companies, post offices, agri/dairy type cooperatives etc.
The Payments Bank will be set up as a differentiated bank and shall confine its activities to further the objectives for which it is set up. Therefore, the Payments Bank would be permitted to undertake only certain restricted activities permitted to banks under the Banking Regulation Act, 1949, as given below:
Acceptance of demand deposits, i.e., current deposits, and savings bank deposits. The eligible deposits mobilised by the Payments Bank would be covered under the deposit insurance scheme of the Deposit Insurance and Credit Guarantee Corporation of India (DICGC).
Payments Banks will initially be restricted to holding a maximum balance of Rs. 100,000 per customer. After the performance of the Payments Bank is gauged by the RBI, the maximum balance can be raised. If the transactions in the accounts conform to the “small accounts” transactions, simplified KYC/AML/CFT norms will be applicable to such accounts as defined under the Rules framed under the Prevention of Money-laundering Act, 2002.
Payments and remittance services through various channels including branches, BCs and mobile banking. The payments / remittance services would include acceptance of funds at one end through various channels including branches and BCs and payments of cash at the other end, through branches, BCs, and Automated Teller Machines (ATMs). Cash-out can also be permitted at Point-of-Sale terminal locations as per extant instructions issued under the PSS Act. In the case of walk-in customers, the bank should follow the extant KYC guidelines issued by the RBI.
Features of Payment Banks
1. Payment Banks can accept demand deposits (only current account and savings accounts) with a ceiling limit of Rs.1 lakh per customer.
2. Payment Banks will pay interest at the rate notified by the RBI.
3. Payment Banks can issue Debit Cards but not credit cards.
4. Payment Banks cannot engage in lending services i.e. they cannot give loans,
     thus phasing out the fear of NPA.
5. The Deposit up to Rs.1 lakh is insured by the DICGC (Deposit Insurance and  
     Credit Guarantee Corporation), same as in bank accounts.
6. Payment banks cannot involve in any credit risk and can only invest in less than
    one year G-Secs or treasury bills.
7. Payment Banks will charge a fee as commission. This will be the sole earning
     for the banks.
8. Payment bank will also have to maintain CRR (Cash reserve ratio) just like other
     Scheduled commercial banks (SBI, PNB, BoB, Dena, ICICI etc).

to be contd:-



Wednesday 2 September 2015

RBI appointed a Committee for financial services under Nachiket Mor for Payment banks.

The idea came from PPI..!!!!        First of all what is PPI??
A) Pre –Paid Instruments Providers (PPI)
Pre-paid Instruments are just like pre-paid SIM cards; you recharge them with the desired amount and use it to perform various transactions such as shopping, paying bills, booking tickets etc. Funds are added into the Pre-paid instrument by the direct bank transfer or from the credit card of the holder.
·         PPI doesn’t offer interest rate. From financial inclusion point of view, this doesn’t help the poor people and small businessmen save their money.
·         PPI is a nested payment model: you give money to PPI, they deposit it in an escrow account in some bank. Every time you do something using digital wallet, they take out money from that escrow account and pay on your behalf. What’s the problem?
·         Problem is nested models= they increase “contagion risk”.
·         Contagion risk = bad thing happens @one place, then it also leads to more negative outcomes @other places in the market.

Who are  Pre –Paid Instruments Providers (PPI)
        Airtel money is an example of PPI.
 What do they do?
·         You give them money (from your regular bank account)
·         They give you a “digital wallet” tied with your mobile.
·         You can use it to pay bills, shopping, movie tickets etc.
What are the features/characteristics of such PPI?
·         They’re regulated by RBI under Payment and Settlements Act of 2007.
·         KYC norms apply.
·         You don’t earn interest rate on the money saved in it
·         You can put maximum Rs.50000 in it.
·         You cannot ‘pull out’ money from it. (Meaning you’ve to spend. You cannot ask for refund in cash. Except under some special models/schemes.)
·         Transaction fee applies. Every time you buy something using your Airtel Money account, they charge ~0.5% as commission.

Other examples of PPI:
·         Gift cards issued by banks e.g. prepaid.onlinesbi.com /giftcard.html
·         Airtel money, Oxigen Prepaid cards.smart cards of BP
·         Paypoint, Zipcash, flipkart wallet, Paytm, Mobikwik
·         The money added in the Pre-paid instruments does not earn any interest. So the small businessman and poor people did not like PPI.
·         Once money added to the PPI, it cannot be transferred back to bank or any other PPI, holder has to spend it.
·         Money added in the PPI is not as safe as in bank account.
·         Further, every transaction through the PPI attracts a fee of 0.5% as commission and the maximum limit of the money which can be added to the PPI Rs.1 lakh (earlier Rs.50,000).

Therefore, Nachiket Mor Committee recommends:
1.     RBI should NOT give any more licenses to open PPI.

2.     Still, If anyone is interested, RBI should ask him to become a Banking business correspondent OR apply for Payment Bank license.