Zero MDR Will Lead to Collapse of Payments Acquiring Industry: PCI
Raising concerns over the zero merchant discount rates (MDRs) the Payments Council of India (PCI), which represents more than 100 players in the payments and settlement systems, says this move will lead to a collapse of payment acquiring industry.
 
Vishwas Patel, chairman, PCI, and Director- Infibeam Avenues said, "Indian MDR is one of the lowest across the globe even when monthly retail digital payments volumes are negligible at about $250 billion. The real issue for merchants to accept digital payments is the avoidance of tax and requires urgent simplifying of tax both goods and services tax (GST) and income tax (I-T). International benchmarking should be done before such policies are implemented. It is well established that in any growing economy for the payments infrastructure to grow, we need the policies that are 'acquirer friendly', which can attract capital."
 
With the banks being asked to bear the burden of Zero MDR, their acquiring business profitability will be impacted, feels Deepak Chandnani, chief executive (CEO) for South Asia and Middle-East at Worldline. Further, he says, it is likely that banks would in turn try to recover some of this from their non-bank Fintech partners, thus negatively impacting all eco-system players, which are key to driving much needed growth of the acceptance and acquiring eco-system."
 
While compulsory usage of various digital payment options by all merchants above Rs50 crore turnover and penalty mechanism in case the same are not offered is a positive move, the zero MDR for all merchants, with cost to be borne by the Reserve Bank of India (RBI) and banks comes as a surprise, which has not gone well with and appreciated by the payments industry.
 
According to Loney Antony, co-chairman of PCI and vice-chairman of Hitachi Payments non-bank payment service providers (PSPs) like aggregators and processors are a significant part of the ecosystem. "If there is no commercial model, they will be forced to shut down, banks may have multiple ways to recover money from the merchants, but non-bank players do not have any other avenue than the MDR. These PSPs are employing at least over a several lakh jobs, and in the absence of revenue, there will be survival issues and the industry will eventually collapse. Digital payments grew from 6% of GDP to 14% and now slipped to 12%. Cash is also 12% of GDP. We have not made any progress on this front and if this trend continues, we will go back to single-digit very soon," he says.
 
PCI says, multiple digital payments reports over decades have never recommended zero MDR. This includes some of the recent ones like 'Committee for Deepening of Digital Payments Chaired by Nandan Nilekani', 'Framework for digital payments Chaired by Ratan Watal' and many more. All had recommended market-based pricing with support and focus to drive Merchant Acquiring. Recent RBI Vision 19-21 the document also recommends creating some additional efficiency wherever possible in costs, and not eliminating the MDR.
 
Naveen Surya, chairman, FCC and chairman emeritus of PCI says, "Considering digital payment in retail is little more than just 10%, we have miles to go and need many more players to be willing to invest and work to provide these services. This announcement of industry bearing MDR would lead to the whole digital payment industry without any business and revenue model. The charge of 2% tax deduction at source (TDS) on cash above Rs1 crore received by the bank, would not be sufficient for the larger eco-system to be rewarded for their efforts."
 
Digital payments have received quite high interest from various investors both domestic and international. Private equity and strategic investors in this place are looking for consistency and principle-based policies to invest in this market. 'Knee jerk' policy changes like this is likely to spook such investors and will not be in favour of government of India, PCI says.
 
The council says it believes that this announcement will deflate the hard work done by the acquiring industry and MDR if not charged to the customers and merchants should be borne by the government. "This will help the acquirers to focus and invest in the expansion of the acquiring infrastructure. Digital payments and Fintech is a high growth area and with right policies and support, can work towards the acceleration of adoption of digital payments," PCI concludes.
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Exclusive: RBI’s Risk Assessment Reports on Axis Bank: Missing the Forest for the Trees
On 26 June 2019, confronted with a contempt petition filed in the Supreme Court of India by Right to Information Act, 2005 (RTI) activist, Girish Mittal, the Reserve Bank of India (RBI) finally disclosed the hitherto confidential annual inspection reports, called risk assessment reports (RARs), of select banks for the years FY12-13, FY13-14 and FY14-15.
 
These are State Bank of India, Axis Bank, ICICI Bank and HDFC Bank. 
 
The RAR, conducted by RBI after the end of the financial year, is a comprehensive document about its assessment of the concerned bank for that year. RBI grades every bank with a rating from 1 to 4, with 4 being the worst and 1 the best. 
 
RBI collects considerable material from banks, which is fed into a model that is weighted, and calculates a risk number. Neither the weightage nor the detailed calculation is disclosed to the banks. After discussing the draft report with senior management prior to its finalisation, RBI has the final word and the bank has to show signs of improvement in the subsequent year on the weaknesses highlighted in the report. In this article, we evaluate RBI’s RAR of Axis Bank in FY12-13, FY13-14 and FY14-15.

Axis Bank: RBI Risk Assessment Report 
 
(Note: Colour coding not in original report Source: RBI sourced via RTI)
 
RBI’s RAR of Axis Bank for FY12-13 presents a poor portrayal of the Bank’s governance, leadership and banking ability. The core skill of managing a bank is risk management, and the banking supervisor was of the view that this critical area needed to be 'toned up'. According to RBI, the business and control heads were working in segregated silos and “did not ensure that issues were brought before the relevant committees” for intensive examination and for guidance. The RBI’s rating for risk governance, at 2.38, was even higher than the already high risk rating of 2.301 for the overall aggregate risk for the bank, which indicates how poor risk governance was at Axis Bank. 
 
Credit risk, at 2.36, was marginally better than risk governance; nevertheless, it is higher than aggregate risk. RBI found “major weakness in the quality of credit appraisal,” as there was a shortfall in the valuation of securities at the time of settlement, compared to valuation at the time of sanction and origination, which pointed to lax collateral management. 
 
The division, which had the highest risk in the Bank, was market/treasury, at a very alarming 2.553. This division appears to have been mismanaged, as it had incurred operating losses on a stand-alone basis for four of the previous five years, and the Bank’s internal systems did not separately identify income from treasury and from the Bank’s internal customers through transfer pricing. 
 
There was also no independent verification of achievement of targets by treasury dealers.
 
The Bank did not maintain or monitor individual profit and loss for individual dealers. Worse, no disciplinary track record was incorporated in dealers’ performance appraisal in terms of breaches in risk limits. 
 
A bank’s treasury is an extremely sensitive, sanitised and restrictive area, but Axis Bank’s treasury was apparently porous. The dealers extensively used Reuters Messenger (RM) which had 'no audit trail and no oversight', and the Bank did not have a policy for its use.
 
In a violation of RBI policies, it was used as a primary means of communication with external customers in negotiations for pricing of deals. In both, the derivatives and foreign exchange treasuries, there was no separate inter-bank desk and customers’ desk, resulting in “inter-bank dealers communicating directly with external customers.” The trading book and derivatives book were also headed by the same individual. 
 
(Source: Axis Bank)
 
Despite Axis Bank reporting low gross NPAs (non-performing assets), between 1.1%-1.3%, in the FY12-13 to FY14-15 period, RBI’s RAR reveals that it was concerned with the credit risk at the Bank. What is peculiar in RBI RAR for Axis Bank over the three years is that, while the aggregate Bank rating improved from 2.301 in FY12-13 to 2.175 in FY13-14 and to 2.151 in FY14-15, the all-important credit risk rating only marginally improved from 2.36 in FY12-13 to 2.346 in FY13-14, and then deteriorated to 2.377 in FY14-15. 
 
To grasp the significance of this, we need to note that in Indian banks, credit risk is the major risk; indeed, it constitutes the overwhelming majority of risk-weighted assets. In Axis Bank for FY12-13, FY13-14 and FY14-15, credit risk assets were 85.2%, 84.4% and 83.8%, respectively, of total risk-weighted assets. With the credit risk rating persistently remaining above 2.3, which RBI considers high-risk, and credit forming the overwhelming bulk of risk-weighted assets, it is puzzling that the aggregate risk rating of Axis Bank improved. 
 
Axis Bank: Composition of Risk-weighted Assets
 
 
(Source: Axis Bank Annual Reports)
 
What is even more unusual is that it is the responsibility of senior management and the board of directors to monitor credit risk. Hence, the credit rating risk score should be mirrored in the score given to the board and to the senior management.
 
However, while credit risk remains poor, there is a significant improvement in the risk rating of the board and the senior management in FY13-14  compared with FY12-13, prior to deteriorating in FY14-15. While the credit risk score in FY14-15 is worse than in FY12-13, the score given to the board and senior management in FY14-15 is significantly better than in FY12-13. 
 
The public and the stock market are now well aware from events post-FY14-15.
 
That it was the major mismanagement in the Bank’s corporate loans which impacted the Bank performance and along with other issues of operational risk and integrity of accounts contributed to the truncating of the fourth term of former managing director and CEO, Shikha Sharma. There is, therefore, an obvious flaw in RBI’s rating of the board and the senior management in its RAR, as it appears to be delinked from the credit risk score. One hopes that RBI has corrected this from FY15-16 onwards.
 
Another critical shortfall in RBI’s RAR of Axis Bank for these years is its inability to comment on and rectify the strategic weakness in the Axis Bank board, which contributed to its poor performance and finally to the removal of its CEO, Shikha Sharma, by the banking regulator.
 
In all 3 years of Axis Bank inspection reports, while commenting on certain issues of the board pertaining to nominees of SUUTI (Special Undertaking Unit Trust of India) and Life Insurance Corporation (LIC) and certain other issues, the banking supervisor failed to highlight the elephant in the boardroom, namely, the negligible commercial banking and corporate credit expertise on the board of directors of a prominent private sector commercial bank. 
 
(Note: In FY12-13 & FY13-14 Nominations Committee was separate, chaired by SB Mathur & Kaundinya & Barua were members. In FY14-15 both committees were merged) Source: Axis Bank Annual Reports
 
One of the many shortcomings of Ms Sharma and the Nominations and Remuneration Committee (chaired by Prasad R Menon) was their inability to select seasoned commercial bankers, well-versed in corporate credit as directors on the board. Axis Bank was practically unique amongst commercial banks in India in that, during FY12-13-FY14-15, barring Somnath Sengupta (executive director, October 2012 – 2014) and his successor, Sanjeev K Gupta (ED & CFO only in FY2015, as he too, like Mr Sengupta, took early retirement) none of the executive directors had exposure to commercial banking, nor had they managed corporate credit or worked in a bank branch prior to their appointment in Axis Bank. 
 
Ms Sharma, appointed as CEO in June 2009, had a background in life insurance, investment banking and retail finance with the ICICI group. V Srinivasan, prior to his appointment in Axis Bank in 2009, had a background in investment banking, fixed income, treasury and foreign exchange. Debt and treasury management has limited corporate credit exposure, as it deals in highly rated credit instruments requiring negligible credit assessment and credit monitoring skills.  
 
In the three years under examination,  Axis Bank’s board of directors consisted of 13-14 members and, in each of those years, at best, the board had only three (two in FY12-13 and FY13-14) experienced commercial bankers, one of whom was a non-executive director.
 
Apart from the executive directors, the only non-executive directors who had commercial banking experience were KN Prithviraj and V Visvanathan (from FY14-15). 
 
From FY15-16 onwards it got worse, with V. Visvanathan (independent director) being the sole board member having commercial banking and corporate credit expertise; with the early departures of Mr Sengupta and Sanjeev Gupta the new executive directors such as Rajesh Dahiya (exposure to general corporate management) and Rajiv Anand (background in investment management and treasury) lacked  commercial banking and corporate credit expertise. 
 
In the light of recent events in Yes Bank and in many government banks, we can see that, even though the inclusion of experienced commercial bankers on the board of directors is not a foolproof mechanism for prudent credit risk management, a negligible and token presence of such expertise on the board of a bank is a major red flag.
 
It is apparent, that RBI did not consider the lack of commercial banking and corporate credit expertise on the board of a prominent private sector bank as a major risk factor which needed to be addressed – this in a bank which had 84% of its risk-weighted assets in credit and 45% (FY14-15) of total credit in corporate credit. 
 
This was all the more important when RBI had given Axis Bank a high risk credit score exceeding 2.3 in all the three years. It appears that the board, especially its nominations and remuneration committee (NRC), was oblivious to the need to get experienced bankers on the board in order to rectify the high risk credit score that RBI RARs were giving the Bank.
 
Unfortunately for Axis Bank shareholders, the board of directors, and the banking supervisor’s inability to address this gaping and visible hole, contributed to the Bank’s corporate credit quality rapidly deteriorating.
 
In FY12-13, the operational (non-IT) risk was 2.423, which indicates high risk, and RBI observed the bank had a high turnover of staff, e.g., while the Bank recruited 15,217 employees, 9,033 staff quit the Bank, and at the entry level, and in the sales and front-office, attrition rose significantly. 
 
The sales culture has put tremendous pressure on the front-office to sell financial products, and in the industry, at the base level, there appears to be high turnover, as staff move to other banks in an attempt to escape the pressure. 
 
RBI also noted the high and rising incidence of both, internal (staff) and external (customers) fraud. It also noted that the Bank had de-emphasised staff training, as expenditure allocated was low. Although the rating improved over the next two years, it became a major issue during demonetisation, when bank staff were arrested for money laundering.
 
In FY13-14, RBI’s RAR scored the Bank’s liquidity risk at 2.475, as it was concerned with the Bank’s dependence on short-term funds and volatile CASA (current and saving accounts) deposits; the Bank’s average cost of term deposits was higher than the median and average rate offered by major banks in the market.
 
The Bank’s liquidity was also constrained due to its reliance on top depositors for funding short-term 14-day liquidating assets. Since the liquidity risk rating improved to 2.19 in FY14-15, it appears that the Bank addressed the issue. 
 
The objective of RBI’s RARs of banks is to highlight the weaknesses and improve upon the risk management of the bank. Contrary to capital market expectation, banks are in the business of managing risk and not only to maximise profits. 
 
In the context of the three years of Axis Bank’s RAR being made available to the public via the RTI, one should credit RBI with having correctly identified the poor credit risk management of the Bank from FY12-13 to FY14-15. However, the role of the banking supervisor is to also identify the accountability for the same and monitor its improvement. 
 
In Axis Bank RBI not only failed to hold the board of directors and the senior management responsible, but gave the board and the senior management a better aggregate risk score in FY14-15 compared with FY12-13, while showing a worsening score for credit risk for those years. 
 
Shockingly, RBI inspectors were also unable to see the strategic risk in the composition of the Axis Bank board of directors and the virtual non-existence of commercial banking and corporate credit expertise at the top.
 
Events since FY14-15 have clearly revealed the failure of the Axis Bank board and its senior management in managing credit, operational risk and the integrity of the financial accounts. The RBI too has to accept responsibility for failing to act and to restructure the board at the necessary time. 
 
In this sense, then, the RBI's RARs of Axis Bank, though interesting for students of banking, misses the forest for the trees.
 
Here are the inspection reports of the Axis Bank as provided by RBI to Girish Mittal under the RTI Act...
 
 
 
 
 
 
You may also want to read…
 
 
 
 
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COMMENTS

SuchindranathAiyerS

6 days ago

India's movers and shakers are all completely out of their depth as behooves products of a National "culture" that demolished all standards to make the tyrants, Backwards and Backwardness look good

Finally, RBI Shares Inspection Reports of SBI, ICICI Bank, Axis Bank and HDFC Bank under RTI
The Reserve Bank of India (RBI) after getting strictures and strict warning from the Supreme Court, has finally shared inspection reports of four banks under the Right to Information (RTI) Act with activist Girish Mittal about a fortnight ago.  
 
RBI, in a letter on 26 June 2019, wrote to Mr Mittal, that "In compliance with the SC judgement (on 26 April 2019), please find enclosed a CD containing inspection reports sought by you...after severing information which is exempted from disclosure under Section 8(1)(j) of RTI Act."
 
 
RBI shared inspection reports of ICICI Bank, Axis Bank and HDFC Bank for 2013, 2014 and 2015. For SBI, the period is for four years from 2012 to 2015. "...in view of the stay order by the High Court of Bombay in writ petition no.7711 of 2016 and no.8409 of 2016, we regret our inability to disclose the inspection reports of ICICI Bank, Axis Bank and HDFC Bank for the year 2012 at this state," the central bank said. The first of our analyses of these reports is out today. Its is on SBI, done by our columnist R Balakrishnan.
 
Mumbai-based Mr Mittal had been trying to get information from the central bank on inspection reports of ICICI Bank, Axis Bank, HDFC Bank and State Bank of India (SBI) under the RTI Act. However, instead of sharing copies of the reports, the RBI tried not to share the reports citing fiduciary relations at every stage. 
 
RBI even challenged the decision of central information commission (CIC) before the apex court. However, the Supreme Court repeatedly told RBI to share information. In fact, in March 2019, the apex court even threatened the RBI with contempt proceeding for not disclosing banks' annual inspection reports under the RTI Act. 
 
Earlier, both, the apex court as well as CIC had held that RBI cannot refuse to put in the public domain the annual inspection reports of banks. However, RBI has refused to follow these orders saying that these reports contain 'fiduciary information' as defined under the RTI Act and, hence, cannot be placed in the public domain. 
 
RBI’s repeated refusal to share banks’ inspection reports, prompted Mr Mittal to approach the Supreme Court. 
 
In his petition before the SC, Mr Mittal, represented by senior counsel Prashant Bhushan and Pranav Sachdeva, contended that he had sought information under the RTI Act in December 2015 like copies of inspection reports of ICICI Bank, Axis Bank, HDFC Bank and State Bank of India (SBI) from April 2011 and copies of case files, with file notings on various irregularities detected by RBI in the case of Sahara Group of companies and erstwhile Bank of Rajasthan.
 
The petition recalled the Supreme Court ruling in a case that RBI is clearly not in any fiduciary relationship with any bank. RBI has no legal duty to maximise the benefit of any public sector or private sector bank and thus there is no relationship of 'trust' between them. (Read: SC issues contempt notice to RBI in RTI case)
 
Another issue pending before the courts is declaring the wilful defaulter’s list. Last year in November, the CIC had issued a show-cause notice to Dr Urjit Patel, the then governor of the RBI, for not honouring a judgement of the Supreme Court on disclosure of wilful defaulters’ list who had not paid loans of Rs50 crore and more. (Read: RBI Governor Gets Show Cause Notice from CIC for Not Disclosing Defaulters’ List)
 
In the notice, the then central information commissioner Prof Sridhar Acharyulu had also asked the prime minister’s office (PMO), finance ministry and RBI to make public the letter sent by previous governor Raghuram Rajan on bad loans.
 
Earlier in February 2016, the Supreme Court had directed RBI to furnish a list of the companies which are in default of loans in excess of Rs500 crore or whose loans have been restructured under corporate debt restructuring (CDR) scheme by banks and financial institutions. (Read: Supreme Court asks RBI to submit list of big defaulters)
 
Even in December 2015, the apex court, in a landmark judgement, had told RBI that the banking regulator cannot withhold information citing 'fiduciary relations' under the RTI Act. 
 
Hearing a set of transferred cases, a division bench of Justice MY Eqbal and Justice C Nagappan had said, "From the past we have also come across financial institutions which have tried to defraud the public. These acts are neither in the best interests of the Country nor in the interests of citizens. To our surprise, the RBI as a Watch Dog should have been more dedicated towards disclosing information to the general public under the Right to Information Act. We also understand that the RBI cannot be put in a fix, by making it accountable to every action taken by it. However, in the instant case the RBI is accountable and as such it has to provide information to the information seekers under Section 10(1) of the RTI Act."
 
 
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COMMENTS

P M Ravindran

5 days ago

Good that the apex court found merit in disclosing bank inspection reports overriding the fiduciary claims. How about disclosing info under the RTI Act about the judicial proceedings which have no such claims? Even a decision of the Central Information Commission, upheld by two benches of the Delhi high Court, is pending on appeal by the apex court in the apex court.

drravindravpawar

6 days ago

🙏

Bina Damania

6 days ago

Similar corruption exists in govt offices. Police,municipality,housing societies-so much open bribery without questioning or ombudsman-can RTI change things.

Ramesh Poapt

1 week ago

pvt banks can be as much dirty aspsu banks, if not more...
ex yes bank

Ramchandra Karve

1 week ago

List of defaulters should be published on the Front Page of all the leading news papers along with their photos and photos of the bank officers who helped them in the process of looting the public funds in the banks.

REPLY

PRADEEP KUMAR M S

In Reply to Ramchandra Karve 1 week ago

👍

Mayank Raina

1 week ago

The Government of India should shut down retail operations of all PSBs; having only 1 or 2 branches in any city thereby cutting down on staff having all lending decisions made by central committee which can be 4-6 depending upon carving out of zones on a pan-India basis lending only to NBFCs against quality portfolio, Large Corporates and MSMEs; though not going to be 100% effective but would be a significant improvement from the current mess. Besides, will also result in cost-cutting.

PRADEEP KUMAR M S

1 week ago

Exhilarating, but long way to full clean up.
To me HDFC bank is a Rothschilds baby, a foreign bank in Indian skin.
A wolf in wolf form is far more safer than a shylock in Angels(Oberoi's) clothing.
At Oberoi, they serve Puries very very clean. As for HDFC.................? 🤔

Ajay Sharma

1 week ago

Where can we access the reports?

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