MUMBAI: The Reserve Bank of India has said that up to six banks will be designated as systemically important, or SIBs, for the domestic financial market and will need to have higher capital than their peers to prevent the financial system from collapsing if there is a crisis.
The central bank said it would now go about identifying these banks which are too big to fail and would release a list of names in August 2015, according to a report uploaded on its website on Tuesday evening.
State Bank of India, Punjab National Bank, Citibank, Standard Chartered Bank, ICICI Bank and HDFC Bank may be among the six, according to consultants and analysts. Banks falling in this category will have to set aside more capital per loan than their peers.
Size, interconnectedness, lack of readily available substitutes or financial institution infrastructure and complexity will determine the systemic importance of banks as determined by Basel global standards. But, in India, size would be assigned higher weight than other factors, said RBI.
Based on which category the bank falls, it has to set aside 0.2% to 0.8% of the loan as capital buffer. In other words if the bank was setting aside Rs 1 earlier, it would now have to set aside between Rs 1.20 and Rs 1.80. “Size is a more important measure of systemic importance than any other indicators and, therefore, size indicator will be assigned more weight than the other indicators,” RBI said. “Banks having a size beyond 2% of GDP will be selected in the sample.” However banks whose size is less than 2% of GDP may also face tighter norms.
Banking regulators across the world are tightening capital norms for banks and other key financial institutions as the lack of capital was seen as a root cause of the 2008 credit crisis that threatened to bring down the global financial system.
Although bankers were able to beat back tough capital norms in some instances, overall the regulators have managed to tighten a bit.
“We have to be careful with how much capital we burden banks to raise,” said Shikha Sharma, chief executive at Axis Bank. “For the risk banks carry on books, we need to set aside capital.
Too much charge on capital will affect growth. One has to get the balance right.”
Although the Indian arms of most foreign banks will escape the need for tougher capital norms because of the relatively smaller asset base, the central bank will also consider their derivatives exposure to assess their importance.
“Foreign banks are quite active in the derivatives market, and the specialised services provided by these banks might not be easily substituted by domestic banks,” said RBI. “It is, therefore, appropriate to include a few large foreign banks also in the sample of banks to compute the systemic importance.”
Some analysts say that the new regulations, whenever they are implemented, may not prove to be such a drag on banks’ profitability or make their life difficult since most of them have capital which is well above prescribed levels.
“The additional capital requirement is no hindrance for large (private sector) banks to grow as they are already well above the level,” Ananda Bhoumik, senior director, India Ratings, a unit of Fitch. “For large public sector banks, the government’s willingness to provide capital would be strong due to this.”
(Source: The Economic Times, July 23, 2014)
DRAFT REGULATORY BILL MAY BE TAKEN UP IN WINTER SESSION
NEW DELHI: The government is set to revive an initiative of its predecessor to make regulators of key sectors such as power, telecommunications and railways accountable to Parliament, a move that is expected to boost private investment in infrastructure.
Planning minister Rao Inderjit Singh has asked the infrastructure division of the Planning Commission to finalise the Draft Regulatory Reform Bill, 2013 by incorporating the views of different ministries, a senior government official told ET on condition of anonymity. The minister is keen to introduce the Bill in the winter session to revive investor confidence as soon as possible, the official added.
The draft Bill, if approved, will be applicable to sectors including oil & gas, coal, internet, broadcasting & cable television, posts, airports, ports, waterways, mass rapid transit system, highways, water supply and sanitation.
In 2009, the Congress-led UPA government had mooted a law to monitor the functioning of a large number of regulatory authorities in the country. The government’s aim was to ensure orderly development of infrastructure services, enable competition and protect the interest of consumers through the regulators while securing access to affordable and quality infrastructure.
However, the Bill could not see the light of day during the term of the UPA government.
Last week, admitting that the regulatory commissions in the country were accountable to neither government nor Parliament, Singh said in Parliament, “The present legal framework on regulatory reforms needs some rethinking. Regulatory commissions in different sectors follow very divergent practices and require re-examination to have a uniform framework. Our government will undertake regulatory reforms in order to make them effective and answerable.”
The UPA government had set a target of $1-trillion investment in infrastructure during the 12th Five-year Plan (2012-17), half of which has to come from private players. The Regulatory Reform Bill is expected to draw private players that have been wary of investing in infrastructure development for want of transparency.
The key provisions of the draft Bill include an institutional framework for regulatory commissions, their role and functions, accountability to the legislature and interface with the markets and the people. Besides, their overall functioning would be subject to scrutiny by Parliament on a yearly basis and their decision could be challenged before the appellate authority.
(Source: The Economic Times, July 23, 2014)
FINMIN WANTS BANKS TO BE EXEMPT FROM CSR SPEND
MUMBAI: Indian banks, particularly those owned by the government and facing an urgent need to raise capital, could get some relief.
The finance ministry has written to the corporate affairs ministry, asking the latter to exempt banks from the corporate-social responsibility (CSR) spending mandated by the Companies Act.
The Act, which came into effect from the current financial year, mandates companies to spend at least two per cent of their average net profit for the immediately preceding three financial years on CSR activities.
The CSR provisions within the Act are applicable to companies that have annual turnover of Rs 1,000 crore or more, or net worth of Rs 500 crore or more, or net profit of Rs 5 crore or more.
Almost all commercial banks have made profits of more than Rs 5 crore in the past three financial years. The Act also requires companies to set up CSR committees comprising their board members, including at least one independent director.
Profitability growth of bank groups differed significantly last financial year. The new private banks were able to maintain a healthy growth rate of 19.7 per cent in their profit after tax during 2013-14, compared to a contraction of 30.7 per cent in the net profits of public-sector banks during the year.
According to the finance ministry, since the country is considered a bank-led economy and as the economy is not doing well, banks should be exempted from spending on CSR activities till the economic conditions improve.
All private-sector banks, both old- and new-generation ones, are incorporated under the Companies Act, and so are foreign banks’ branches.
Nationalised banks are incorporated under the Nationalised Bank Act. Though it is not clear if public-sector banks also need to spend on CSR activities – Reserve Bank of India laws allow them to make donations – the finance ministry wants all banks to be exempted from the stipulation for now. If the corporate affairs ministry agrees to the request, it will be a big relief for banks, particularly the public-sector ones.
The move comes at a time when the government is constrained in infusing capital into state-run banks. According to the government’s own estimates, public-sector banks will need Rs 2.4 lakh crore of capital infusion over the next five years, mainly to meet the Basel-III norms and to fund their business growth. Banks’ capital positions are under pressure due to mounting non-performing assets (NPAs) and this is putting pressure on profitability. Also, from April 1 next year, banks will have to treat restructured assets as NPAs, for which provisioning requirement will go up sharply. At present, standard restructured assets require a provisioning of five per cent, while sub-standard assets need provisioning of 15-20 per cent, depending on whether a loan is secured or not.
(Source: Business Standard, July 23, 2014)
STATES TO TAKE CENTRESTAGE AS MODI LOOKS TO ATTRACT FDI
NEW DELHI: Starting with PM Narendra Modi’s slated visit to Japan in September, the government is likely to put in place a new strategy to promote India as a premier investment destination.
The Centre will, in all overseas visits of important government functionaries and high-level trips of visiting dignitaries to India, push the specific needs of interested states rather than the current norm of describing the country as a whole and opportunities in general terms.
To this effect, the ministry of commerce will soon ask states for details on the status of available land in hectares, industry-wise break-up of skilled labour, sectors in each state which have the potential to boost manufacturing, agriculture and services, the power situation, a list of feasible projects, fiscal incentives, in addition to phone numbers as well as addresses / website links of key contact persons and state government agencies, official sources told FE. These will then be made into power-point presentations or pamphlets in English and the national language of the partner country.
The idea is also to identify states that are proactive in being more connected to the world, as well as to encourage the laggards to catch up with the best practices followed by others. This will help the Centre and states function as a team in promoting the country to attract foreign investment and technology, the ministry said.
This new strategy is being taken forward based on the consideration that each state may have different priority areas and could be looking at unique development models given their unique locations. Therefore, promoting the country without understanding the needs of individual states may not be fruitful. Besides the power to approve projects, especially those related to mega infrastructure projects where the Centre wants huge investments including from overseas sources as also land clearances, lies with the state government.
Addressing the concerns of each state is an area the Modi government wants to accord top priority to. The PM has backed the idea of making the states compete with each other on development, industrialisation and infrastructure, as well as in attracting investment, generating employment and boosting exports. For better coordination, the government is also seeking a closer relationship between the Prime Minister’s Office and offices of CMs.
In his address to Parliament in June, the PM had said his government believes in “cooperative federalism” and a situation where best practices followed in any part of India is imbibed by other states as well.
The move comes at a time when the Centre is looking at re-energising platforms such as Inter-State Council and the National Development Council. The Centre is also engaging with states for faster roll out of the Goods and Services Tax.
The government’s pitch for ensuring that India remains a top investment destination comes in the wake of a recent survey by consulting firm AT Kearney which showed that the country has plunged to its lowest ranking since 2001 in the foreign direct investment confidence index. Though it ranked third in 2010 and second in 2012, 2007 and 2005, India was ranked only seventh in the 2014 FDI confidence index. “India attracted $25.5 billion in FDI inflows in 2012, down from $31.6 billion the previous year. The cooling-off in investor sentiment we foresaw last year appears to have taken shape, with a two-place drop from fifth to seventh, its lowest rank since 2001,” AT Kearney said.
(Source: The Financial Express, July 23, 2014)
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