Money & Banking
RBI's Financial Stability Report points to increased stress in system
The Financial Stability Report released by the Reserve Bank of India (RBI), while indicating two positive trends also wans of increased stress in the system, says a research report.
 
In the note, Religare Capital Markets Ltd says, over the past six months there are two positive trends, including improvement in corporate credit health with exposure to levered players reducing to 14% in March 2016 compared with 19% in September 2015. In addition, there is a meaningful decline in stressed advances ratio for the infrastructure sector to 17% from 22%.
 
"On the other hand, the FSR warns of increased stress in the system with a special mention accounts (SMA)-1 exposure rising 35%, sectoral stress tests revealing a severe hit on bank profits and system gross non-performing assets (GNPAs) likely rising to 8.5% by March 2017 even amid a stable macro," the report says.  
 
According the FSR, proportion of levered companies is declined to 14% in March 2016 from 19.4% in September 2015. As per RBI’s analysis of around 1,800–2,600 non-government non-financial (NGNF) listed companies under FSR, the proportion of levered companies declined, and even their share in total debt fell to 21%  from 30% during this period. The report however did not cite any reasons for the sharp improvement in corporate credit health over the last six months.
 
As per the report, stressed levels in infrastructure sector too declined to 17% during the same period. While the GNPA ratio for the industrial sector worsened to 11.9% in March 2016 from 7.3% in September 2015, its stressed advances ratio declined marginally to 19.4% from 19.9% during this period. Within the sector, stress levels increased in sub-sectors such as metals (to 34%), construction (27%) and textiles (21%), but declined in the infrastructure sector to 17% from 22% in September 2015.
 
While there is a sharp decline in advances to SMA-2 accounts, SMA-1 advances jumped 35% during September 2015 to March 2016 period. Advances to large borrowers classified as SMA-2 declined sharply by 40%, and restructured standard advances slipped by 25% between September 2015 and March 2016. Simultaneously, GNPAs for these borrowers spiralled up 66.3%, largely reflecting reclassification during this period. However, advances to large borrowers classified as SMA-1, that shows early signs of asset quality stress, increased sharply by 35.1% in the last six months, Religare pointed out.
 
According to Religare report, the sectoral credit stress tests carried out by RBI indicate a hit on bank profits. The RBI assessed the credit risk arising from exposure to the infrastructure sector by conducting sectoral credit stress tests. "The tests revealed that on converting a portion of existing restructured standard advances in the infrastructure sector into NPAs and exposing other standard advances in each sector to shocks, the hit on profitability of banks would be severe. The tests further revealed that the most significant effect of the single sector shock would come from the power and transport sectors," the research note added.
 
The Financial Stability Report -FSR from RBI also expects system GNPAs to touch 8.5% by March 2017. The RBI’s macro stress tests suggest that under the base case, the GNPA ratio in the system and public sector banks (PSBs) may rise to 8.5% and 10.1%, respectively, by March 2017 from 7.6% and 9.6% in March 2016. "However, under a severe stress scenario, the ratio may jump to 9.3% and 11.0% by March 2017. Private banks may fare better with their GNPA ratios rising to 3.1% and 4.2% by March 2017 under base and severe stress scenarios," Religare concluded.

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COMMENTS

MG Warrier

11 months ago

The FSR has made the following observation in its ‘Overview’:

“Assessment
India’s financial system remains stable, even though the banking sector is facing significant challenges. As global uncertainties and transiting geopolitical risks impact India, continuation of sound domestic policies and structural reforms remain the key for macroeconomic stability.”

The recent timely initiative by RBI to save the assets of the banking sector from getting totally impaired by assault by corporate borrowers who turned out to be wilful defaulters has started showing results. Banks, in the past did not experience the pain from stressed assets, as they were able to create provisions from the wide margins they enjoyed. With global changes in interest rates regime, such margins will not be available now. But all is not lost. Awareness about the need for professionalism has dawned at the right time. Now what is required is freedom for regulators and banks to manage their affairs professionally.

7th Pay Commission to boost consumption by Rs45,110 crore
The union cabinet cleared the Seventh Central Pay Commission (7CPC) recommendations, which would boost consumption to the economy by Rs45,110 crore or about 0.30% of gross domestic product (GDP) and increase savings by Rs30,710 crore (0.20% of GDP), says India Ratings and Research (Ind-Ra). 
 
Ind-Ra says it believes that after the sharing of central taxes with the state governments, the central government's net tax revenue will increase by Rs14,100 crore or around 0.09% of GDP in FY17.
 
"The revised salaries of central government employees are likely to be paid from 1 July 2016. While the employees will get salary arrears from 1 January 2016, allowances will be paid only from 1 July 2016. Thus the gross impact of 7CPC is likely to be Rs94,775 crore or 0.63% of GDP," it added. 
 
After sharing the increase in income tax and excise duty with states, the central government will receive income tax on this pay out and collect excise duty on consumption. Thus, Ind-Ra says the net impact on the central government finances is estimated to be Rs80,641 crore or about 0.54% of GDP.
 
Ind-Ra says it believes the impact of pay revision of state government employees will be felt only in FY18. "The Seventh Central Pay Commission award is expected to be less severe on state finances than expected earlier due to a lower arrear pay out. In all likelihood, the impact of a salary revision of the Seventh Central Pay Commission on state government finances will be Rs1.58 lakh crore in FY18, which is about 0.95% of FY18 GDP," the ratings agency says.
 
Salaries and pension of state and central government employees are not alike; however, the common thread between the revisions is constitution, award and implementation. Now that the central government has accepted the report of the Central Pay Commission, most state governments will also follow suit after a gap of six months to a year.
 
A major difference between the previous pay commissions and the seventh pay commission is that there is hardly any lag between the day from when the award is to be implemented and the date on which the award was announced. As a result, the size of the arrears to be paid will be negligible compared with the payouts of the fifth and sixth pay commissions. The fiscal impact of the arrears of the sixth pay commission was so onerous that it was spread over two fiscals, FY10 and FY11.
 
Although 7CPC is applicable to central government employees, the salaries and pensions of state government employees, urban local bodies, central and state public sector undertakings, autonomous bodies and universities will also be revised in FY17 and FY18. 
 
Ind-Ra's estimate shows that the demand boost to the economy as a result of the revision in the salaries and pensions of the above mentioned employees will be at least four times the 7CPC's award.
 
Ind-Ra says it does not see any immediate threat to inflation due to the award of 7CPC. "Though consumer price inflation may inch up somewhat due to higher prices of services, impact on wholesale price index is likely to be muted due to the counter balance provided by the deflation in commodity prices and the availability of excess capacity in several manufacturing sectors. A rise in demand is likely to not only increase capacity utilisation but may also help revive the investment cycle earlier than expected," it added.
 
The pay panel had in November 2016 recommended 14.27% hike in basic pay at junior levels, the recommendations amount to 23.55% overall hike in salaries, allowances and pension. The date of implementation for the recommendations is 1 January 2016. However, it is likely that allowances will be paid only from 1 July 2016.
 

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RBI's vision document on payment systems shies away from uniform charges
While talking about aiming to make payment systems cashless through four strategic measures, the Reserve Bank of India (RBI)'s vision 2018 documents falls short of making uniform the consumer charges as well as convenience charges levied by banks and merchants for similar services. Non-uniformality of charges is what leads to several grievances of banking customers. As pointed out by Moneylife in the past, banks have discovered that it is extremely easy to pick the pockets of depositors and customers to make them pay for a variety of basic services, because they are too disorganised to pose a challenge. 
 
The Vision-2018 document released by the central bank focuses on four strategic initiatives like responsive regulation, robust infrastructure, effective supervision and customer centricity. RBI also talks about improving five broad contours like coverage, convenience, confidence, convergence and cost. "For coverage, we aim to enable wider access to a variety of electronic payment services. Convenience would be provided by enhancing user experience through ease of use and of products and services. Similarly, we will build confidence by promoting integrity of systems, security of operations and customer protection. Convergence would be achieved by ensuring inter-operatibility across service providers. We also aim to make services cost effective for both the users and service providers," the central bank says.
 
However, according to consumer activists, there is no uniformality on charges levied by banks for different services, like cheque clearance, usage of ATMs, and point-of-sales (POS) terminals. "Charges levied by some POS are as high as 2.5% whereas some POS do not pass on them to customers. Similarly, when it comes to using netbanking facility to pay any bill, MTNL gives 1% discount; BEST does the same thing but levies internet banking charge. Ticket booking through IRCTC is chargeable by some banks and not by other banks. ICICI bank charges for online National Electronic Funds Transfer (NEFT) while Bank of Baroda (BOB) and YES Bank do not. This one leads to consumer complaints which we all consumer activists have been facing for quite some time," says Abhay Datar, retired banker and consumer activist, who is associated with Moneylife Foundation's free helplines.
 
Meanwhile, banks are eliminating the convenience of their massive investment in core banking solutions (which promised anytime, anywhere banking) by dreaming up new charges. A senior citizen told Moneylife about how he was levied an ‘intercity charge’ of Rs50 for depositing cash in his own bank account in Bengaluru (not his home branch). A Moneylife reader was charged a fee to deposit cash in his own account. Reversing these charges requires a sustained battle, so most depositors simply give up.
 
According to RBI, all segments of electronic payments, particularly retail electronic payments, have shown healthy growth both in terms of volume and value of usage. For example, RTGS and NEFT volumes increased almost threefold between 2013 and 2016 reflecting greater adoption of the system by all segments of users. Similarly, with increasing number of banks offering mobile banking services and driven by the growth in e-commerce and use of mobile payment applications, the volume of mobile banking transactions has increased nearly seven-fold and the value of transactions has shown a steep rise. Card transactions have also grown significantly at both ATMs as well as at the POS with the growth in debit card usage at POS picking up significantly. The growth in volume and value of transactions using prepaid payment instruments (PPIs) issued by banks and authorised non-bank entities has also been significant. 
 
The volume and value in Immediate Payment Service (IMPS) has also grown significantly with the development of the IMPS as a multi-channel system providing various options to customers to originate transactions. Cheque payments, on the other hand, are showing a declining trend in terms of volume as well as value between 2013 and 2016, the central bank says.
 
RBI says safety and security of payment systems and transactions is an important factor that helps in boosting the trust and confidence of the customers in using electronic payment mechanisms. It said, it has advised all banks to issue all new cards based on EMV Chip and PIN. 
 
"Presently the ATMs in the country read and process the card transactions only on the basis of data contained in the magnetic stripe, even though the card may be a Chip and PIN card. With the roadmap in place for issuance of EMV Chip and PIN cards, the aim will be to ensure that all the ATMs in the country migrate to processing of EMV Chip and PIN cards on the basis of Chip data rather than magnetic stripe data," RBI said.
 
According to RBI, customer acceptance and usage of payment products provide one half of the required network effect in payment systems with the other half coming from the entities willing to accept such payments. It says, "Confidence, convenience, and cost are key aspects that will encourage wider customer adoption and usage of electronic payments. Customers' increasing expectations are driving provider responses. Towards this end, Vision-2018 would strive to keep the customer interest at the centre of payment system policy actions."
 
The central bank aims to strengthen customer grievance redressal mechanism, enhance customer education and awareness, and protect customer interests.
 
Strengthening customer grievance redressal mechanism: A robust and responsive customer grievance redressal system is essential to build an environment of trust and confidence in payment systems. Further, customer experience should be uniform irrespective of whether the service is being provided by banks or non-bank entities. Hence, 
i. The Bank would frame necessary guidelines to ensure that existing complaint redressal framework of authorised non-bank entities is improved, and that new payment systems are set up with appropriate mechanisms to address customer grievances in a proactive manner.
ii. Payment System Operators (PSOs) would also be required to adequately train their own front office staff and their agents to understand and appropriately address diverse requirements when servicing their customers.
 
Enhancing customer education and awareness: Customer confidence in payment systems is reposed with usage combined with better awareness of the product and processes. A well informed customer base would also facilitate faster migration away from cash payments. 
 
Involvement of stakeholders in this exercise can help to reap greater benefits, and, as such, the Bank would collaborate with other stakeholders in creating an environment of awareness and education on e-payments. Hence, 
i. The Bank, in collaboration with all the stakeholders, would endeavour to enhance customer awareness through structured Electronic Banking Awareness and Training (e-BAAT) programs.
ii. Further, the Bank would prepare a framework requiring PSOs to transparently disclose all fees they charge as part of their service along with the applicable terms and conditions, including liability and use of customer data.
 
Protecting Customer's interest: The Bank would encourage payment system providers to adopt best practices for protecting customer interests, by putting in place robust fraud and risk monitoring systems. In addition, a regulatory framework to limit customer liability in case of unauthorised transactions would be put in place.
 
RBI also talks about making available positive confirmation for RTGS transactions, similar to NEFT payments. NEFT system has the feature of sending positive confirmation to remitters regarding the completion of the funds transfer, thus giving an assurance to the remitter that the funds have been successfully credited to the beneficiary account. "In order to provide the same confidence to customers using RTGS system for funds transfer, the Bank will incorporate the feature of positive confirmation for RTGS transactions too. Further, the feature in the NEFT system will also be strengthened by ensuring that all banks send the confirmation in a timely manner," it added.
 
"Leaving aside the internal aspects like infrastructure and mechanism, the overall approach of the said vision appears to be consumer friendly," Mr Datar says.
 
Payment & Settlement Systems in India: Vision-2018
 
Building best of class payment and settlement systems for a “less-cash” India through responsive regulation, robust infrastructure, effective supervision and customer centricity...
 
 
 
 

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COMMENTS

Santhanam Krishnan

11 months ago

Sadly RBI still lacks the practical approach of customer issues. While deciding charges on ECS etc. they believe only in arm chair policy makers who are far removed from the day to day realities. All stake holders like Customers representatives, Operating bankers and the benificiary utility companies etc, are not involved. At times the software programmes on which these transactions are based, ignore the realities as programmers do not fully understand the nuances. Fr instance in one of the banks with which I dealt has a software that calculates maturity dates of deposits, as it is done in the case of commercial bills transaction until I pointed out the flaws in the system. The result is customers of the banks suffer, until some one files a PIL or lodges a case in Consumer Councils. It is high time RBI learns to make a comprehensive policies keeping in mind the average common man.

Uday Thakurdesai

11 months ago

Once upon a time, in the eighties and nineties, when the computer systems were not as sophisticated as they are today, utilities payments were debited to the bank account of the user exactly on the due date through ECS. Today, if any bank account holder opts for ECS or an auto debit to his account, the amount is charged to the account anywhere between four to seven days before the due date, depending upon the bank and the payment gateway. Moreover, there is simply no option to make payment through either of the modes on the prepayment date where the utility offers a discount for early payment. In the case of MSEDCL, the discount works out to a hefty 34% per annum (if payment is made eleven days before the normal due date) which the banks happily deprive their ‘customer’ of, even as they charge almost as much for delayed credit card payments.

Effectively, the so-called free service of auto debit comes at a heavy cost to the customer. If the payments of all the customers are aggregated, banks make a neat pile of money from this ‘advance’ collection. And the service is camouflaged as ‘free’.

Can someone explain why banks do not:
debit the customer’s account on the due date when they were doing so in the pre-computerisation days?
allow the customer the facility of choosing a date of payment that is x days before the normal due date so as to give him the benefit of the discount?
Once upon a time, in the eighties and nineties, when the computer systems were not as sophisticated as they are today, utilities payments were debited to the bank account of the user exactly on the due date through ECS. Today, if any bank account holder opts for ECS or an auto debit to his account, the amount is charged to the account anywhere between four to seven days before the due date, depending upon the bank and the payment gateway. Moreover, there is simply no option to make payment through either of the modes on the prepayment date where the utility offers a discount for early payment. In the case of MSEDCL, the discount works out to a hefty 34% per annum (if payment is made eleven days before the normal due date) which the banks happily deprive their ‘customer’ of, even as they charge almost as much for delayed credit card payments.
Effectively, the so-called free service of auto debit comes at a heavy cost to the customer. If the payments of all the customers are aggregated, banks make a neat pile of money from this ‘advance’ collection. And the service is camouflaged as ‘free’.
Can someone explain why banks do not:
debit the customer’s account on the due date when they were doing so in the pre-computerisation days?
allow the customer the facility of choosing a date of payment that is x days before the normal due date so as to give him the benefit of the discount?

B. Yerram Raju

11 months ago

Uniform charges dilute the spirit of competition and the consumer may have to face cartellisation by banks.

Parimal Shah

11 months ago

While many points raised are correct I disagree about varying charges for certain services. If some banks are not charging for NEFT and other services are reasonably charged the customers will take their custom to such banks away from those who charge unreasonably. Such competition is desirable.
The difficulty of closing accounts in one bank and opening account in any bank is now not so difficult if one is a genuine customer.

Vaibhav Dhoka

11 months ago

here customer or consumer has no place of concern.Regulators or higher authority has no time to look in practical difficulty .Mahatma Gandhi's preaching for all service providers is shunned .It is easy to levy charges and to reverse is most uncomfortable for them.

Vaibhav Dhoka

11 months ago

here customer or consumer has no place of concern.Regulators or higher authority has no time to look in practical difficulty .Mahatma Gandhi's preaching for all service providers is shunned .It is easy to levy charges and to reverse is most uncomfortable for them.

Vaibhav Dhoka

11 months ago

here customer or consumer has no place of concern.Regulators or higher authority has no time to look in practical difficulty .Mahatma Gandhi's preaching for all service providers is shunned .It is easy to levy charges and to reverse is most uncomfortable for them.

Vaibhav Dhoka

11 months ago

here customer or consumer has no place of concern.Regulators or higher authority has no time to look in practical difficulty .Mahatma Gandhi's preaching for all service providers is shunned .It is easy to levy charges and to reverse is most uncomfortable for them.

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