Dhanlaxmi Bank fails to repay a coupon on debt instrument indicating capital pressures
Dhanlaxmi Bank's failure to pay a coupon on a subordinated debt instrument in July 2016 highlights the increased risk to bank capital investors from the mounting asset-quality and capital-adequacy pressures on India's banking sector, says Fitch Ratings.
 
Fitch says, "This was the case in 2014 at United Bank of India, and more recently at UCO Bank and Indian Overseas Bank. However, Dhanlaxmi Bank is a privately owned, small regional bank that was unable to attract new capital from its shareholders. State support appears not to be on offer, and therefore creditors are more exposed to non-performance if there are capital pressures." 
 
"This is the first time investors in India have had to forego interest on a bank capital instrument. We view this as a positive development for a system with a high expectation of support for banks and where moral hazard has developed around the assumption that support could be extended to regulatory capital instruments," the ratings agency says in a report. 
 
The Reserve Bank of India (RBI) can prohibit banks from paying coupons on subordinated debt instruments if capital adequacy ratios fall below the minimum requirements. RBI raised these to 9.625% in April 2016 from 9%, exposing creditors to risks at banks with tight capital ratios. The RBI is progressively pushing minimum capital requirements higher to meet Basel III capital requirements, and will reach 11.5% by end-March 2019. Systemically important banks will have a higher threshold of an additional 0.2%-0.6%. 
 
Fitch says, market concerns about bank capital have increased because of the RBI-imposed asset-quality review, which uncovered higher non-performing loans, triggering first-time losses at some banks. This limits banks' ability to generate new capital internally and makes it more difficult for them to access new sources of capital from the market, it added. 
 
"We believe Indian banks will need to raise an additional $90 billion of capital by 2019 if they are to meet minimum capital adequacy requirements. As long as potential capital shortfalls persist, creditors will remain exposed to high non-performance risk, which will affect banks' market access to new capital. This is likely to put pressure on the government to inject additional capital into the banks, over and above what it has budgeted so far," the ratings agency says. 
 
According to the report, capital ratios at the state-owned banks, which represent around 75% of sector assets in India, are particularly thin. 
 
The RBI appears to be making a distinction between banks that have new capital lined up, which so far have been public-sector banks, in decisions about the performance of regulatory capital instruments. Where capital ratios fell below, or very near to, regulatory minimum requirements, public sector banks have received capital injections from the government and were able to make coupon payments on regulatory capital instruments, it added.  
 
Fitch Ratings says, sovereign support remains a relevant ratings factor for it, particularly for the large state-owned banks and systemically important private-sector banks. 
 
"We think asset-quality indicators are close to their weakest point, but expect bank earnings to remain weak at least for the next 12-18 months. Capital ratios will continue to show signs of strain over the short to medium term, and banks will remain under pressure to raise additional funds. Until they do, risks for creditors will remain high," the ratings agency concluded.
 
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RBI draft circular seeks to protect customers from unauthorised transactions
The Reserve Bank of India (RBI) has proposed that the customer will have no or zero liability in case of fraud being committed because of a bank's negligence or by a third party. In addition, where the customer’s own involvement is not clearly established, customer liability will be limited to a maximum of Rs5,000 if it is reported within four to seven working days, the draft circular says.
 
However, where customer's own involvement is established, customer will be liable, the draft circular on 'Customer Protection - Limiting Liability of Customers in Unauthorised Electronic Banking Transactions' issued by the central bank says.
 
The recent surge in customer grievances relating to unauthorised electronic banking transactions resulting in debits to their accounts and cards, has necessitated a review of the criteria for determining the customer liability in these circumstances, RBI said in a release.
 
"If customer reports beyond seven working days, customer liability will be determined based on bank's Board approved policy," said the draft, on which the RBI has sought feedback till 31 August 2016.
 
On being notified by the customer, the draft said the "bank should credit (shadow reversal)" the amount involved in the unauthorised electronic transaction to the customer's account within 10 working days.
 
"The burden of proving customer liability in case of unauthorised electronic banking transactions shall lie on the bank," the RBI proposed.
 
It is also proposed that banks should ensure that a complaint is resolved within 90 days and in case of debit card or bank account the customer does not lose out on interest.
 
Banks should also ensure that in case of credit card the customer does not bear any additional burden of interest.
 
The RBI said the recent surge in customer grievances relating to unauthorised electronic banking transactions resulting in debits to their accounts/cards, has necessitated a review of the criteria for determining the customer liability in these circumstances.
 
"Banks must ask their customers to mandatorily register for alerts for electronic banking transactions. The alerts shall be sent to the customers through different channels (email or SMS) offered by the banks," it proposed.
 
Suggestions or comments, on the Draft Circular can be sent by post to... 
Chief General Manager, 
Department of Banking Regulation, 
Reserve Bank of India, 
Central Office, 12th Floor, 
Shahid Bhagat Singh Marg, 
Mumbai-400 001, or 
 
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COMMENTS

R Varadarajan

2 years ago

A right step in fraud prevention.

United Bank gets new chief
Pawan Kumar Bajaj has taken over as Managing Director and Chief Executive Officer of the state-run United Bank of India, the bank said in a release on Wednesday.
 
Bajaj, who has three decades of experience in the industry, took charge on Tuesday. 
 
Prior to his new appointment, Bajaj was the Executive Director of Indian Overseas Bank
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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