PROJECT FINANCE -- SIMPLE UNDERSTANDING

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How strong our banks are? What is the need of the hour

How strong our banks are? What is the need of the hour based on RBI's Financial Stability Report for SEPT-2017.

Banking is a backbone of the country and their strength reflect the strength of the country and its rating in the international market. A better rating by the Rating agencies viz. Moody, Standard and poor, will help the country, its corporate and financial institutions to raise funds from the international market at a cheaper rate.

RBI has released the financial stability report for the half year ended Sept 2017 wherein they have vividly brought out the issues faced by the financial system in India. We will take the Banking sector report and understand the strength of our banks.

Business growth

The deposit of all SCBs on a year on year basis has decreased from 11.1% to 7.8 % between March and September 2017. The reason may be the demonization factor which helps the Bank with the flood of deposit in the month of Nov and Dec 2016. 

The credit growth on the same period increased from 4.4% to 6.2 % and the public sector banks recorded growth of 0.7% to 2.2 % reversing the declining trend of past years.

It may be noted that the Foreign Banks has registered a negative growth during the period ending Sept 2017 both in deposit and loan portfolio.

Soundness – Capital adequacy and leverage ratio

Capital to risk-weighted asset ratio (CRAR) of SCBs increased from 13.6 percent to 13.9 percent between March and September 2017 largely due to an improvement for private sector banks (PVBs). The CRAR is almost stagnant at 12.2% due to the laxity of the Government to induct additional capital and now only the finance ministry has proposed to infuse additional capital for the Banks. All the Banks should achieve a minimum CRAR of 11.5% by Mar 2019 as per Basel III. However, the banks which fall under the category of too big to fail must have an additional capital requirement of 2.5%.

Asset quality  

The asset quality of a bank plays the very important role as it is the main factor which affects its health, profitability, and efficiency of the bank. The main factors in the asset quality are classified into Gross Non-Performing Asset (GNPA), Restructured Standard Advance (RSA) and Stressed Advances (SA) and Net Non Performing Assets as all these are interconnected.

For the Indian banks, the GNPA ratio of SCBs increased from 9.6 percent to 10.2 percent between March and September 2017, whereas, their RSA ratio declined from 2.5 percent to 2.0 percent. The SA ratio rose marginally from 12.1 percent to 12.2 percent during the same period. GNPA ratio of PSBs increased from 12.5 percent to 13.5 percent between March and September 2017. Stressed advances ratio of PSBs rose from 15.6 percent to 16.2 percent during the period

The GNPAs of all SCBs has increased by 18.5 percent on a y-o-y basis in September 2017. PVBs registered a higher increase in GNPAs (40.8 percent) as compared to their public sector counterparts (17.0percent)

Net non-performing Assets

The net non-performing advances (NNPA) as a percentage of total net advances increased from 5.5 percent to 5.7 percent between March and September 2017. PSBs recorded distinctly higher NNPA ratio of 7.9 percent

 NNPAs of all SCBs increased by 11.1 percent on a y-o-y basis in September 2017

Sector-wise asset quality.

The asset quality of SCBs deteriorated across broad sectors between March and September 2017 with the industrial sector leading this cohort, among the major industry sub-sectors, mining and quarrying, food processing, engineering, construction, and infrastructure registered an increase in their stressed advances ratios between March and September 2017. The asset quality of sub-sectors such as textiles, rubber, cement, basic metals, and vehicles, however, improved during the same period. It is evident that most of the NPA come from basic metal and infrastructure sector.

Credit quality of large borrowers

The share of large borrowers both in total SCBs’ loans as well as GNPAs declined between March and September 2017.  The total stressed advances of large borrowers increased by 2.4 percent between March and September 2017. Advances to large borrowers classified as special mention accounts also increased sharply by 56.5 percent during the same period.  

The GNPA ratio of large borrowers increased from 14.6 percent to 15.5 percent between March and September 2017. The GNPA ratios went up for both PSBs and PVBs, whereas, the same came down for foreign banks (FBs). The share of standard advances (excluding restructured standard advances) in the total funded amount outstanding of large borrowers declined from 80.9 percent to 80.6 percent between March and September 2017. The top 100 large borrowers (in terms of outstanding funded amounts) accounted for 15.5 percent of credit and 25.0 percent of GNPAs of SCBs

Stress Testing -- NPA

The stress test indicated that under the baseline scenario, the GNPA ratio of all SCBs may increase from 10.2 percent in September 2017 to 10.8 percent by March 2018 and further to 11.1 percent by September 2018. However, if the macroeconomic conditions deteriorate, the GNPA ratio may increase further under such consequential stress scenarios.

Under the assumed baseline macro scenario, six banks have CRAR below the minimum regulatory level of 9 percent by September 2018. However, if the macro conditions deteriorate, CRAR of more banks in the stress test goes below the minimum regulatory requirements. Under the severe stress scenario, the system level CRAR declines from 13.5 percent in September 2017 to 11.5 percent by September 2018. The recent capitalization plan announced by the GoI for PSBs is expected to significantly augment capital buffers of affected banks as also the credit growth

Stress test – Interest rate Risk

For investments under available for sale (AFS) and held for trading (HFT) categories (direct impact), a parallel upward shift of 2.5 percentage points in the yield curve will lower CRAR by about 123 basis points at the system level. At the disaggregated level, four banks accounting for 5.3 percent of the total assets were impacted adversely and their CRAR fell below 9 percent. The total loss of capital at the system level is estimated to be about 10.3 percent. The assumed shock of a 2.5 percentage points parallel upward shift of the yield curve on the held to maturity (HTM) portfolios of banks, if marked-to-market, reduces the CRAR by about 280 basis points resulting in 19 banks’ CRAR falling below 9 percent.

Liquidity risk

Scenarios, there will be increased withdrawals of uninsured deposits Simultaneously, there will also be increased demand for credit resulting in an attempt to withdraw unutilized portions of sanctioned working capital limits as well as utilization of credit commitments and guarantees extended by banks to their customers.  Using their HQLAs required for meeting day-to-day liquidity requirements, most banks (49 out of the 54 banks in the sample) remain resilient in a scenario of assumed sudden and unexpected withdrawals of around 12 percent of deposits along with the utilization of 75 percent of their committed credit lines

Credit concentration risk

Credit risk arising from exposure to the infrastructure sector (specifically power, transport, and telecommunications) was examined through a sectoral credit stress test where the GNPA ratio of the sector was assumed to increase by a fixed percentage point impacting the overall GNPA ratio of the banking system. The results show that shocks to the infrastructure segment will considerably impact the profitability of banks, with the most severe shocks (15 percent of restructured standard advances and 10 percent of standard advances becoming NPAs and moving to the sub-standard category) wiping out about 87 percent of the profits. The most significant effect of the single factor shock appears to be in the power sector

Conclusion:

The credit growth has improved during the 6 month period ended Sept 2017 but the growth does not commensurate with the economic growth of 5+% of the country. Either the banks deliberately keep the credit growth under control to maintain the quality of the credit portfolio or divert their resources to reduce the NPAs.

The NPAs are on the rise due to the policies of the government and inefficiency of the Bank to take advantage of the legal system. Despite the creation of DRT, Sarfaesi act etc, the recovery percentage of NPA is poor. Therefore, we need to look into the process and take corrective action. It is also observed there is the sudden rise in NPA during the last year and also current half year in private sector/ public sector banks is due to suppression of NPAs and provisioning to present a better balance sheet and lack of supervision of the regulator over the banks and the financials. Lack of knowledge in managing the credit portfolio is also evident.

The banking system is managing the interest rate risk well although a shock of 2.5 % upward shift will reduce around 280 basis points CRAR and 19 banks CRAR will fall below 9 % mark.

The liquidity risk is under control.

The need of the Hour

Let is wait for the Government program to augment capital of the Public sector banks which will improve the risk perception of the bank. The need of the hour is to control the NPAs and speedy recovery of the same. Although there is accountability at the lower level, it is high time to consider accountability at the top management level also as the major chunk of the NPAs are from the large borrowers.

Under universal banking, it is necessary to provide all products including insurance, credit cards, and mutual funds to the customer under one umbrella. At the same time, the core business of banking viz. accepting deposit and quality lending should not be pushed to back seat. 

This is based on the RBI report on Financial Stability report for sept 2017  all graphical representation are from the same report.(www.RBI.ORG.IN)

21 Employee Engagement Activities that Work---https://www.kainexus.com/

21 Employee Engagement Activities that Work

Spread Improvement.

1 - Help your employees get to know each other better People emotionally invest in other people, not companies, so creating a strong bond between team members is critical. You might organize a lunch with people from different departments, or stage a happy hour in the office. Anything that encourages people to mingle.

 2 - Start a mentorship program Sometimes the most rewarding work is helping others. Give your employees the opportunity to help others grow by starting a mentorship program.

 3 - Focus on collaboration Cross-functional collaboration is essential to innovation, but it isn’t something that often happens on its own. One way to encourage it is to hold a training session on why collaboration is important and how to make it happen. It also makes sense to invest in technology that supports it.

4 - Encourage health and wellness It’s tough to go all in at work when you aren’t feeling well. Anything that supports the physical and mental well-being of your team can help contribute to engagement. You might provide funds for gym memberships, bring in a massage therapist, give employees a mental health day, or organize a walking group during lunch.

5 - Be clear about responsibilities and goals This might not seem like an engagement activity, but it really is. One of the top reasons that employees leave their company is that they don’t understand how their work fits into goals and objectives of the organization.

 6 - Evaluate your employee onboarding process Start earning engagement on day one by making sure your new hires have an excellent experience during the on-boarding process. Make sure they feel connected to the team from the very start. Spread Improvement.

7- Increase individual market value Today’s workers know they need to constantly expand their skills in order to keep up. Offer opportunities to help employees move forward by providing time and budget for continuing education.

8 - Redecorate Some types of businesses require a fairly ridged workspace layout, but others don’t. If you can, let your employees have a say in how space is arranged and decorated. Let it reflect your team’s personality.

9 - Encourage networking In today’s connected world, having a large network of colleagues and peers is of high value. Encourage your employees to grow their networks by reimbursing them for professional subscriptions to sites like LinkedIn or networks like the National Association of Professional Women.

10 - Serve the community Giving back is especially important to the Millennial generation. You might organize an event that provides funds for a charity, build a house with Habitat for Humanity, or allow employees to take paid time off to volunteer.

11 - Give your employees visibility These days, everyone is interested in building their personal brand. You can help your employees with this by letting them put their name on things that will be made public, like blogs or the team page on your website. Mention key employees in a press release when appropriate.

12 - Celebrate accomplishments People on your team do remarkable things and contribute great ideas all the time. Make sure to broadcast these achievements to the entire organization. Spread Improvement.

13 - Ask for employee engagement ideas This one’s a no-brainer. If you want to know what activities will help your team stay engaged, why not ask them for ideas?

14 - Try cross-training One way to get folks out of a rut is to mix things up by letting them work in another department for a little while. This helps break up the monotony and gives the employee the opportunity to learn a new skill. Who knows, you might even find someone who would flourish in a different role.

15 - Hold a birthday breakfast with the CEO Facetime with executive leadership is highly prized by front-line workers, but difficult to come by without a plan. One idea is to have held a monthly breakfast with the CEO and everyone who has a birthday that month.

16 - Promote from within Seeing others climb the ladder can be very motivational. Promoting from within not only helps keep the promoted employee engaged, but it also signals to others that there are opportunities for those who stretch.

 17 - Hire a motivational speaker.  Sometimes it makes sense to bring in someone from outside the company with a great inspirational story. Professional motivators are available in almost every market and less expensive than you might imagine.

18 - Have a regular potluck lunch. Lunch is a great time for employees to get to know each other and bond a bit, but usually, people scatter during lunch time. A potluck is a cool (and inexpensive) way to bring people together for a little while. Spread Improvement.

 19 - Let your employees help choose their colleagues. Getting your team involved in the hiring process is a good way to reinforce how important they are to the organization. They may also have useful insight into what it takes to do the job and who would be the perfect fit.

 20 - Get social helping your employees amplify their social media presence is good for them and good for the company. Provide social media training for employees who are less comfortable with the concept. Feed employees links and content that they can easily post to grow their following and yours.

21 - Involve everyone in improvement nothing is more frustrating to an employee than knowing how to solve a problem, but being unempowered to do so. Employees who know that their ideas for improvement will be taken seriously are more likely to offer them and exercise discretionary effort to implement solutions. This list isn’t exhaustive, of course, but hopefully you’ve seen an idea or two that might work for your organization. If you’ve tried one of these or something else that worked well, we’d love to hear about it

I read this article in https://www.kainexus.com/ and found interesting. Hence, I am Sharing your benefit 

2G verdict --a news /article Business Standard

I am sharing the news/article in Business standard on 2G verdict

All accused acquitted: The 2G verdict exonerates cronyism. It is a travesty

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The CBI Special Court’s decision to acquit all the accused in the 2G scam – including Andimuthu Raja and MK Kanimozhi, daughter of M Karunanidhi - is essentially a big win for crony capitalism. Or rather, crony socialism, since the whole justification for giving spectrum in 2008 at 2001 prices was post facto justified by the need to make telecom prices affordable. This was the crux of former Communication Minister Kapil Sibal’s “zero-loss” theory.

Judge OP Saini, who previously exonerated former Finance Minister P Chidambaram because no case was made out that he benefited from going along with Raja’s flawed decisions, has essentially ruled that the prosecution has to prove actual skulduggery to make an executive decision a mala fide one. Without closing the financial loop connecting ministerial decisions to favours, the case does not stand.

No less than three politicians (Raja and Kanimozhi of the DMK, and Chidambaram of the Congress party), two bureaucrats working with Raja (Siddharth Behura, then telecom secretary, and RK Chandolia, Raja’s private secretary), and 15 businessmen and top executives, including those from two big business groups (Anil Ambani and the Ruias) were among the accused at various stages. Chidambaram, who was finance minister when Raja was busy pulling off his 2G caper, was the target in a separate case filed by the irrepressible Subramanian Swamy, who wanted him included as one of the accused in the scam. He got his reprieve early in 2012 when the same judge exonerated him by observing that merely going along with Raja’s decisions on spectrum pricing or allowing companies who got under-priced spectrum to sell shares at huge premiums did not amount to any criminal conspiracy on his part.

This is a huge, huge indictment of the criminal investigation and justice system that what looked like an open-and-shut case of favouritism by A Raja - which both former Prime Minister Manmohan Singh and former Finance Minister Chidambaram probably suspected and tried to prevent ineffectually – is now being made to look like a case of major victimisation of the innocent. The damage done to the cause of justice is incalculable.

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The Saini verdict also indirectly shows the Supreme Court in bad light, for the highest court had in 2012 cancelled all the 122 licences allocated by Raja on the ground that this was done in a “totally arbitrary and unconstitutional” manner, with three telecom companies being asked to pay a fine of Rs 5 crore each for offloading their shares to foreign partners without starting any business.

An inkling of the CBI court’s final verdict could probably have been discerned in 2012 itself when Judge Saini let off Chidambaram from being added as an accused in the 2G scam case. The judge said in his order: “In the end, Mr P Chidambaram was party to only two decisions, that is, keeping the spectrum prices at 2001 level and dilution of equity by the two companies (Swan and Unitech). These two acts are not per se criminal. In the absence of any other incriminating act on his part, it cannot be said that he was prima facie party to the criminal conspiracy.”

Today’s (21 December 2017) verdict only takes the same logic forward. The CBI, which put the losses due to Raja’s “arbitrary” decisions on spectrum allotment at Rs 30,000 crore, has been told that its entire case is built on sand – a mere conjecture that losses to the exchequer effectively meant that there was some hanky-panky and corruption. The need to prove the financial trail by linking executive decisions to actual pecuniary advantage gained by them has not been proven. The logic given to exonerate Chidambaram has probably been used to give the same benefit of doubt to the main and subsidiary accused.

It is possible that the CBI will try to seek a review of the judgment by filing an appeal, but in the absence of direct evidence of someone making money from the decisions, it is difficult to see the possibility of a total reversal of the verdict. Even if it comes, it may take years to come.

While we will have to wait for the full judgment of Judge Saini to figure out the logic that decided his verdict, there is little doubt that a crime was committed, and most of the key players knew something wrong was about to happen in 2007-08. From then PM Manmohan Singh, who tried to dissuade Raja from allotting spectrum at 2001 prices, to Chidambaram and his Finance Secretary D Subbarao, who wanted spectrum sold through a market-discovered price, the top ministers knew what Raja was up to, and what he was about to do may be morally indefensible. More so when Raja additionally and arbitrarily preponed the cutoff date for licence allotment from 10 October 2007 to 1 October, thus eliminating 408 of the 575 applications for telecom licences, which included free spectrum to anyone who paid Rs 1,650 crore for the licence.

If Manmohan Singh was not worried about Raja’s decision, his Principal Secretary would not have written to the telecom ministry after the licences were allotted on 10 January 2008, that “the Prime Minister wants this informally shared with the department (that) he does not want a formal communication and wants PMO to be at arm’s length.”

However, this was not to be, and Raja’s principal argument throughout his trial, in which he represented himself, was that there can be no conspiracy when he had kept everyone informed of what he was doing.  By bringing in Manmohan Singh and Chidambaram, he effectively made it impossible for the judicial system to convict him without implicating – at least morally – the highest political executives in the land.

The worst indictment of the system is that a decade after the alleged crime, all those who went after the corrupt have egg on their faces while the accused are celebrating. The scam happened in 2007-08, the Comptroller and Auditor General came out with his revenue loss figure of Rs 1.76 lakh crore in November 2010, Raja was arrested in February 2011, the charges were framed in October that year, the trial began in November 2011, the Supreme Court cancelled 122 licences in February 2012, and five-and-a-half years later, no one is guilty.

What a travesty of justice.

http://www.business-standard.com/article/economy-policy/all-accused-acquitted-the-2g-verdict-exonerates-cronyism-it-is-a-travesty-117122100323_1.html

BITCOIN INVESTMENT IN INDIA

BITCOIN INVESTMENT IN INDIA

It is in the news that Income Tax department has issued the notice to 500,000 High net-worth Individuals trading Cryptocurrencies/bitcoin exchanges across India after surveyed the major bitcoin exchange and collect information about transactions from the angle of tax evasion.

RBI on Bitcoins

As of now, there is no regulation preventing trading/buying/holding in Cryptocurrencies / Bitcoin. The RBI notification issued in 2012 and 2017 only indicate the risk involved. The gist is as under

2013-14/1261 RBI

·         VCs being in digital form are stored in digital/electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorized central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.

·         Payments by VCs, such as Bitcoins, take place on a peer-to-peer basis without an authorized central agency which regulates such payments. As such, there is no established framework for recourse to customer problems/ disputes/chargebacks etc.

·         There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.

·         It is reported that VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.

·         There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combat the financing of terrorism (AML/CFT) laws.

2016-17 2054

It is clear from the above that the Bitcoin is not illegal in India.  RBI itself has noted the operation of Cryptocurrency exchanges hence we can say that bitcoin is legal.  Although RBI in its regulation says that there are KYC issues involved in the Cryptocurrency, why there is no regulation.  Maybe RBI treats the Cryptocurrency as the commodity even if it so, there should be the regulation under forex regulation.

Government on Bitcoin

In April 2017 the government set up an inter-disciplinary committee—chaired by special secretary (economic affairs)—to examine the existing framework of virtual currencies. The committee was supposed to submit its report within 3 months. The committee was set up to take stock of the present status of virtual currencies both in India and globally, examine the existing global regulatory and legal structures governing virtual currencies, suggest measures for dealing with such virtual currencies including issues relating to consumer protection, money laundering and examine any other matter related to virtual currencies that may be relevant. In December 2017, finance minister Arun Jaitley told the media that the government doesn’t consider bitcoin as a legal tender and it is working on recommendations for such currencies.

SEBI on Bitcoin

 In the meantime, Bitcoin gets listed on US stock exchange even FED Reserve has not recognized it. Securities Exchange Board of India (Sebi) on 20 December said that if bitcoin is considered as a commodity derivative then Sebi might regulate it. In countries such as the US, the Sebi-equivalent regulatory body is looking into cryptocurrencies. Experts say, considering cryptocurrencies are looked at as a commodity, Sebi should look at regulating them. Chairman of SEBI also said the Bitcoins cannot be ignored

Bitcoin in capital market

Modelled on the initial public offers for issuance of new shares in the stock market, some entities have begun resorting to initial coin offers to raise funds from investors, including HNIs and other individuals, who are getting lured into claims of huge returns from bitcoins and other such variants--apparently getting minted in the digital world but also reaching the real world including as wedding gifts.

Conclusion 

Though there are still no clear regulations or proper jurisdiction, the income-tax department is clear that tax has to be paid on all cryptocurrency transactions. Though there is no mention of cryptocurrencies in the Act, income tax will still have to be paid on any gains accruing from cryptocurrency transactions.  Sooner or later, we will full regulation on Bitcoin either or both by RBI and SEBI as an investment option in India. Please remember it is a very high-risk investment and hence return is also very high.

Financial Resolution and Deposit Insurance Bill 2017---and--- Prompt Corrective Action Framework

 Financial Resolution and Deposit Insurance Bill 2017---and--- Prompt Corrective Action Framework

This is in continuation to my earlier write-up on FRDI.

Financial Resolution and Deposit Insurance Bill 2017 (FRDI), proposed banking reform act, which creates lots of doubt in the mind of the public fueled by the opposition and media that the deposit in the banks will not be safe as the banks may be bail-in, in case of failure.  We have to realize that this is the redefined, legalized initiative of the present Prompt Corrective Action framework (PCA) a regulation formed by the RBI. This bill is necessary for the wake of financial crisis in 2007 caused by Layman Brothers failure and also ineffectiveness of the PCA framework of  RBI which could not control deterioration of Bank’s Health.

What is the salient feature of Prompt Corrective Action Framework?

A. Capital, asset quality, and profitability continue to be the key areas for monitoring in the revised framework.

B. Indicators to be tracked for Capital, asset quality, and profitability would be CRAR/ Common Equity Tier I ratio¹, Net NPA ratio and Return on Assets respectively.

C. Leverage would be monitored additionally as part of the PCA framework.

D. Breach of any risk threshold (as detailed under) would result in invocation of PCA..

*CCB would be 1.875% and 2.5% as on March 31, 2018 and March 31, 2019 respectively

i.        Breach of ‘Risk Threshold 3’ of CET1 by a bank would identify a bank as a likely candidate for resolution through tools like amalgamation, reconstruction, winding up, etc.

ii.        In the case of a default on the part of a bank in meeting the obligations to its depositors, possible resolution processes may be resorted to without reference to the PCA matrix.

E. The PCA framework would apply without exception to all banks operating in India including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

F. A bank will be placed under PCA framework based on the audited Annual Financial Results and the Supervisory Assessment made by RBI. However, RBI may impose PCA on any bank during the course of a year (including migration from one threshold to another) in case the circumstances so warrant.

Mandatory and discretionary actions
Specifications	Mandatory actions	Discretionary actions
Risk Threshold 1	Restriction on dividend distribution/remittance of profits. Promoters/owners/parent in the case of foreign banks to bring in capital	Common menu Special Supervisory Interactions Strategy related Governance-related Capital-related Credit risk related Market risk related HR related Profitability related Operations related Any other
Risk Threshold 2	In addition to mandatory actions of Threshold 1, Restriction on branch expansion; domestic and/or overseas Higher provisions as part of the coverage regime
Risk Threshold 3	In addition to mandatory actions of Threshold 1, Restriction on branch expansion; domestic and/or overseas Restriction on management compensation and directors’ fees, as applicable

Common menu for selection of discretionary corrective actions'

1. Special Supervisory interactions

·         Special Supervisory Monitoring Meetings (SSMMs) at quarterly or other identified frequency

·         Special inspections/targeted scrutiny of the bank

·         Special audit of the bank

2. Strategy related actions

RBI to advise the bank’s Board to:

• ·         Activate the Recovery Plan that has been duly approved by the supervisor
• ·         Undertake a detailed review of the business model in terms of sustainability of the business model, the profitability of business lines and activities, medium and long-term viability, balance sheet projections, etc.
• ·         Review short-term strategy focusing on addressing immediate concerns
• ·         Review medium-term business plans, identify achievable targets and set concrete milestones for progress and achievement
• ·         Review all business lines to identify scope for enhancement/ contraction
• ·         Undertake business process re-engineering as appropriate
• ·         Undertake to restructure of operations as appropriate

3. Governance-related actions

·         RBI to actively engage with the bank’s Board on various aspects as considered appropriate

·         RBI to recommend to owners (Government/ promoters/ parent of foreign bank branch) to bring in new management/ Board

·         RBI to remove managerial persons under Section 36AA of the BR Act 1949 as applicable

·         RBI to supersede the Board under Section 36ACA of the BR Act 1949/ recommend supersession of the Board as applicable

·         RBI to require bank to invoke claw back and malus clauses and other actions as available in regulatory guidelines, and impose other restrictions or conditions permissible under the BR Act, 1949

·         Impose restrictions on directors’ or management compensation, as applicable.

4. Capital-related actions

·         Detailed Board level review of capital planning

·         Submission of plans and proposals for raising additional capital

·         Requiring the bank to bolster reserves through retained profits

·         Restriction on investment in subsidiaries/associates

·         Restriction in expansion of high risk-weighted assets to conserve capital

·         Reduction in exposure to high-risk sectors to conserve capital

·         Restrictions on increasing stake in subsidiaries and other group companies

·          

·         5. Credit risk related actions

·         Preparation of time-bound plan and commitment for reduction of stock of NPAs

·         Preparation of and commitment to plan for containing generation of fresh NPAs

·         Strengthening of loan review mechanism

·         Restrictions on/ reduction in credit expansion for borrowers below certain rating grades

·         Reduction in risk assets

·         Restrictions on/ reduction in credit expansion to unrated borrowers

·         Reduction in unsecured exposures

·         Reduction in loan concentrations; in identified sectors, industries or borrowers

·         Sale of assets

·         Action plan for recovery of assets through identification of areas (geography wise, industry segment wise, borrower wise, etc.) and setting up of dedicated Recovery Task Forces, Adalats, etc.'

6. Market risk related actions

·         Restrictions on/reduction in borrowings from the inter-bank market

·         Restrictions on accessing/ renewing wholesale deposits/ costly deposits/ certificates of deposits

·         Restrictions on derivative activities, derivatives that permit collateral substitution

·         Restriction on excess maintenance of collateral held that could contractually be called any time by the counterparty

7. HR related actions

·         Restriction on staff expansion

·         Review of specialized training needs of existing staff

8. Profitability related actions

·         Restrictions on capital expenditure, other than for technological upgradation within Board approved limits

9. Operations related actions

·         Restrictions on branch expansion plans; domestic or overseas

·         Reduction in business at overseas branches/ subsidiaries/ in other entities

·         Restrictions on entering into new lines of business

·         Reduction in leverage through reduction in non-fund based business

·         Reduction in risky assets

·         Restrictions on non-credit asset creation

·         Restrictions in undertaking businesses as specified.

Any other specific action that RBI may deem fit considering specific circumstances of a bank

What is the change in the proposed bill?

 The bill provides resolution of the financial service provider in distress and deposit insurance. The Resolution Corporation to be formed by under the act will be provided i. deposit insurance, ii. Classify the service provider, iii. Undertake resolution in case of failure and iv. Investigate the activities of the service provider including search and seizure operations.

The financial service provider will be classified into six categories based on risk and viability viz. a. Low, b. Moderate c. Material d. imminent e. Critical. All the rating will be made public to understand the bank’s rating except Critical.

What is the benefit out of the new bill?

Although RBI has formulated the PCA framework in Mar 2001 and monitoring the banks on the parameters specified therein. In my view, RBI could not control effectively through PCA framework due to the reasons are known to them. They could not found out the concealment of Non-performing assets by the management in order to show a better balance sheet.  After all, damages are done, RBI has put many bankers under the scanner of PCA which includes Corporation Bank, Oriental Bank of Commerce, UCO Bank, Central Bank of India, IDBI Bank, Dena Bank, United Bank of India, Bank of Maharashtra and Bank of India. Had action initiated at the appropriate time this might not have happened.

Hence, this action of the forming a Resolution Corporation may help in controlling the bank effectively.  However, without the supervision rights, I have my own doubts about monitoring the rating of the banks by the Corporation. Hence, it is high time the government should segregate the supervision function of RBI into banking supervision body which should conduct Compliance AUDIT on the bank not only at the head office but also at major business branches to validate the rating parameters. Further, the supervisory body must have the right to punish the management of the erring bank. As per the regulation the rating of the bank will be made available to the public and hence there will be awareness among the public about the functioning of the bank. The action of winding up of the bank may be started early and done by the Resolution Corporation benefit the depositors.

All these points depend upon the management of the resolution corporation and it is effectiveness otherwise the bill will not have any benefit to the public. The establishment of resolution will reduce the time log in case of winding up of a bank as in normal course an official receiver is to be appointed by the Court who will collect all the due and distribute to the depositor.  The Bill also covers the insurance sector to protect the interest of the public as there is much private insurance player are in the field.

However, any bail-in process will result in systemic risk causing distrust on the banking sector hence, it should be avoided.  

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