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Banking

Will Our Balance Sheet Reflect A Picture Different From The Harsh Reality Of Mounting NPA’s?

By Banking No Comments

The virus-induced lockdown has raised “Liquidity” and Non-Performing Assets (“NPA”) issues popularizing the buzzwords in financial circles and beyond. Anticipating a domino effect on loan defaults amongst small to medium-sized businesses, the Finance Ministry in conjoined efforts with Regulators and the Reserve Bank of India (RBI), introduced numerous measures for the maintenance of equilibrium between the market forces of demand and supply during the pandemic.

One of the preliminary measures taken by the Ministry was the suspension of Sections 7 and 9 of the IBC, followed by a moratorium on loan payments until August 31. While this move was appreciated by Corporate Borrowers at the outset, a closer look at the policies revealed deep financial woes in the long-run. Consequently, the embargo may pause the economic ripple effect on businesses for some time, but does not discount or waive off payment liabilities due to losses that occurred on the pretext of COVID-19; however the increase in threshold value to Rs. 1 crore for initiation of insolvency leaves out a massive chunk of small to medium businesses having debts lesser than 1 crore leaving them limited options of traditional litigation, which are time-consuming and expensive.

Further, relaxations in compliance requirements, an extension of the ITR filing deadline to November 30th along with deferred interest payments in relation to loan moratorium are myopic and are likely to create issues in the long-term for all stakeholders. These measures are collectively aimed at keeping businesses afloat while testing the resilience of financial institutions offering relaxations – a necessary cushion. Loan-loss provisioning for NPAs as mandated by the newly-introduced amendments has seriously eroded the capital base of several banks, limiting their ability to make further loans. There is general consensus that the state of Indian banking is among the biggest challenges facing the country in accelerating investments, growth, and sustainability. 

A cherry on the cake for defaulting Corporate Borrowers was last week’s Supreme Court’s ruling which stated that Default will not result in NPA until further orders. In view of this, the accounts which were not declared NPA till August 31 shall not be declared NPA till further orders. RBI’s circular dated 27th March 2020 was considered to be ultra vires to the extent that it was charging interest on the loan amount and also charging interest on interest (compound interest) on the deferred loans during the moratorium period.

In light of this, all pertinent decisions cannot be left to individual banks and the Supreme Court stated that clarification on interest upon interest will have to be obtained. The main purpose of the moratorium was to provide a sigh of relief to those in distresses and not as a weapon or an opportunity for those already defaulting on payment of their loan amounts. This pandemic created hardships to the borrower’s especially individual borrowers and also obstruction in the “right to life” as guaranteed by Article 21 of the Constitution of India. Also charging compounding interest during the moratorium period in the wake of the COVID-19 pandemic had no merit as such as held by the apex court. 

Non-recognition of NPAs until the end of this year will certainly distort the harsh reality of mounting NPAs in the country and the increasing burden on financial institutions. With the shadow financing industry already struggling with funds in light of recent crises such as the IL&FS fiasco, COVID-19 has further jeopardized the survival of the sector at large. At this juncture, it is necessary to implement an all-encompassing framework supporting the demand and supply side of the economy so as to avoid any potential systemic risks to the financial sector and accordingly take corrective steps.

As the nation awaits orders from the apex court, there is a dire need for the RBI to develop better mechanisms for monitoring macro-prudential indicators, especially to watch out for credit bubbles. Over the medium term, a simple indicator would be a rate of credit growth that is way out of line with the trend rate of growth of credit or with the broad growth rate of the economy. This way, the economic ripple effects throughout the country can be traced and mitigated at the source to avoid further damage. 

The pandemic has drastically reduced the Indian GDP by 23 percent ruling out a waiver of interest on bank loans during the moratorium period for all borrowers providing a suggestion of long-term rescheduling. Any “ex post facto” change in terms and conditions of the moratorium favoring those who availed of it over those who made the extra effort of repaying would be grossly inequitable and patently unfair for those who did not avail of the benefits of moratorium initially or gave it up subsequently.

With the scales of economic relief mostly tipped in favor of small-scale borrowers, it further paves way for banks to restructure loans. In fact, NBFCs have requested RBI to allow them a one-time restructuring of all loans till March 2021, as their borrowers are facing funding issues amid the pandemic. This is a preferred move for financial institutions as there won’t be any buyers in a cash-strapped economy, even if impacted companies are taken to bankruptcy courts.

So it is wise of financial institutions to work out a restructuring package without calling for a change in ownership while allowing the loans to remain ‘standard’. However, misuse of previous restructuring frameworks by promoters has made the RBI wary of approving any such rejig with existing promoters at the helm. Bankers are mindful that any proposal has to have strong checks and balances to ensure it is not misused.

Despite these measures, a formidable overhand of NPAs may linger long after the COVID-19 pandemic dust is settled. Restructuring of loans is a static relief formula and may derail the debt rehabilitation process. Subsequently, this shall defer NPA recognition, as it did a few years ago, however restructuring may rose tint balance sheets for a few months but the risk of an impending credit bubble burst is a high possibility if a custom policy to sustain the economy is not implemented in a timely manner. 

Will special purpose vehicles for NBFC funding help?

By Banking No Comments

Special purpose vehicles (SPVs), a catchphrase during the 2008 financial crisis, have again taken center-stage as companies and financial institutions scramble for monies in a contracted economy in the wake of the pandemic. The key elements that led to the popularity of SPVs are bankruptcy-proof, absorptive capacity, flexibility, easy multiparty funding, longevity, and legitimacy. Empirical evidence suggests SPVs have served the development community and beneficiaries well, but it remains to be seen if these will stand the test of subsisting unprecedented times.

The shadow financing sector was struggling with funds in light of the IL&FS crisis when Covid-19 hit. Pursuant to RBI notification, SBICAP, a subsidiary of SBI, set up an SPV and operationalized Rs 30,000 crore. It shall serve the purpose of purchasing investment-grade commercial papers and non-convertible debentures of NBFCs and HFCs until September 30, 2020, and is expected to recover all dues by December 31, 2020.

At the outset, this scheme acts as an enabler for NBFCs/HFCs to get investment grade or better rating for the bonds issued, thereby augmenting the flow of funds from the shadow financing sector. These measures, however, lack concrete action. First, SPVs entail high costs, such as cost of incorporation, registration, stamp duty at the time of transfer of the company, compliance with FASB Rules. The efficacy of the SPV until September 30 as opposed to the industry requirement of over two years is being criticized. The sector is in dire straits for long-term funds so they don’t run into an asset-liability mismatch, but this move may lead to a vicious cycle of extending loans. Second, high thresholds and requirements set by RBI for NBFCs and HFCs in terms of registration, profitability, and other financial considerations are likely to face criticism for the reason that many entities in dire need of financial support and liquidity will be left out of this scheme.

Third, the number of NBFCs and HFCs availing of this scheme shall be contingent on the rate and amount they receive as part of this scheme, which will be a determining factor of whether the scheme is a true liquidity potion or just another half-baked solution. Fourth, the complexity of SPVs—often in the form of layers upon layers of securitized assets—can make it near-impossible to monitor the level of risk involved and whom it lies with.

In theory, SPVs are bankruptcy-proof. But there exists a moral hazard, not for banks but for end-investors who know they have no financial obligation and thus little incentive to monitor the credit quality of underlying assets. This means SPVs could be inefficient, both from a risk and regulatory perspective. If the SPV is separated from sponsor SBI, albeit with regulation, the moral hazard from the point of view of SPV investors would be removed. In practice, it is not a credible threat that the sponsor will leave an SPV to collapse during difficult times.

Despite inherent risks, SPVs are a step in the right direction enabling large NBFCs/HFCs to obtain finances, transfer risks, and perform other investment activities to maintain adequate liquidity levels, eliminate or mitigate systemic risks, augment lending resources of NBFCs/HFCs, although for a short duration of three months. To mitigate the gargantuan effects of pandemic-induced depressionary forces on the shadow financing sector, the government must introduce a dark horse to soothe its long-term woes and not a mere quick-fix.

Banks’ FY2021 recovery to take a hit as new IBC cases banned for a year

By Banking No Comments

The suspension of fresh insolvency proceedings and coronavirus-related disruptions will impact recovery for lenders in fiscal 2021 as resolution mechanisms outside the Insolvency and Bankruptcy Code (IBC) are scarce, experts said.

Sonam Chandwani, managing partner, KS Legal and Associates, believes that banks, primarily concerned over deteriorating asset quality due to the lockdown, have been crippled by the announcement of a blanket ban on the IBC for a year. The lack of effective recovery outside the IBC is a worrisome issue for banks looking for resolution under a legal framework, said Chandwani.

“The freezing of IBC for a year closes an effective avenue of debt resolution for lenders leading to lower recoveries. The suspension could be a huge setback for banks relying on IBC as an efficacious means of recovery supported by a legal skeleton and a sanctioned tribunal,” she said.

The rating agency, Icra, expects the resolution of corporate insolvency resolution proceedings (CIRPs) would be impacted during FY21 due to a fall in the number of cases yielding a resolution plan. It also expects an increase in haircuts for lenders.

Icra said financial creditors could realize about Rs. 60,000-70,000 crore in FY21 through successful resolution plans from the IBC, as compared to about Rs. 1 trillion in FY20. The resolution amount would also be lower as the previous year witnessed large non-performing assets (NPAs) successfully being resolved, it said.

Concerned over deteriorating asset quality post-covid-19, banks are now hamstrung with regard to resolution and recovery. While the impact of the lockdown is expected to lead to a pile of bad assets, the lack of effective recovery mechanisms outside the Insolvency and Bankruptcy Code (IBC) is worrisome for lenders.

The power of personalized banking

By Banking No Comments

The banking sector, a bulwark against the breakdown of other industries, is left to nibble away the remnants in the wake of the virus-induced global economic slowdown. Banks wrote off over Rs 80,000 crore of loans in the first half of the financial year 2020. But major Indian banks have demonstrated resilience through uninterrupted services, offering EMI moratoriums or fee waivers to borrowers. Unfortunately, historic trends allude to a grim scenario where financial institutions (FIs) were resigned to overlook defaults, thereby leading to grave profitability concerns and credit risks associated with them in the wake of the pandemic. As the sector is left scrambling for money, more financial institutions are embracing technology to achieve their objective of survival, growth, expansion or otherwise.

Personalized banking: Tech giants like Amazon, Facebook and Google have spurred a desire for more customized interactions and fostered a willingness to trade data for a better experience. As a result, the concept of “personalized banking” becomes more important now. Targeting customer micro-segments and tailoring offers for them will enable banks to differentiate themselves, build customer engagement and gain a competitive advantage.

The first step would be to identify what personalization is. Thereafter, banks and FIs can leverage the large repository of customer data, customer touch-points and digital platforms to deliver meaningful and powerful personalized experiences. To be sure, personalized banking is not primarily about selling. It’s about providing service, information and advice, often on a daily basis or even several times a day. Such interactions, as opposed to infrequent sales communications, form the crux of the customer’s banking experience. Yet many banks still tend to focus their personalization efforts on the sales arena.

Today, machine learning and data analytics can be harnessed to deliver an omnichannel digital experience to customers. For banks and FIs with a wealth of data available, hyper-personalization represents a window of opportunity to stay ahead of the curve with a value proposition that makes customers feel understood. It also promises significant gains, with Boston Consulting Group estimating that successful personalization at scale could represent an increase of 10 percent in a bank’s annual revenue.

The biggest takeaway for a bank is staying ahead of the curve as you get to know your customer better and leverage those insights and trends to create tailored digital experiences that boost revenues. On the other hand, as customers expect a basic level of customization, hyper-personalized experiences in personal finance can lead to amplified satisfaction and engagement, fraud-prevention, better decision-making coupled with a sense of humanized understanding from their bank. This humanized understanding by banks can be demonstrated in many ways.

Behavioural personalization: This attempts to determine the visitors’ interest based on their actions, which include visit count, search phrase, content viewed, functions performed and referrers’ websites.

IP-based personalization: This can gain information about the anonymous visitor from the IP address and DNS record. This type of personalization makes use of geolocation tracking and company attributes to customize the experience.

Online banking, CRM and loan or deposit applications: These use data from other banking platforms to drive personalization. While it may seem complex, implementation is often easier than perceived. However, customization leads us to a larger question of whether technological advancement and privacy can be allies?  

At present, the Information Technology Act, 2000 and Information Technology Rules, 2011 govern India’s data protection regime. However, they fail to protect individual interests. Geo-location tracking, biometric data and facial recognition apps could invariably violate the right to privacy, but there is no legal framework that regulates or enables the use of such technologies without violating the Fundamental Right to Privacy. Even the Personal Data Protection Bill, 2019, likely to be approved soon, fails to take into account all stakeholders involved in data breaches. For instance, the Bill imposes heavy fines for violations but exempts the “consent” requirement in certain circumstances, where data is required by the State, for legal proceedings, or to respond to a medical emergency. These regulatory changes are necessary considering India’s growing digital footprint in the world. Personalization is without a doubt a promising area that might be able to answer some of the questions that internet banking must deal with today and in the future. The possibilities of personalization are not yet fully utilized, nor is there sufficient hands-on experience or research-based knowledge about the most advanced ideas of how to personalize internet banking services. The importance of hitting the right target in both selecting the things to be personalized and the way of presenting them visually are delicate matters. If not done right, they might compromise the most important customer values: Speed, efficiency and trust. Thus as the impact of the contagion relies upon the gravity, degree and dissemination of the cataclysm, which remains uncertain even today, the banks must leverage personalized online banking to boost revenues in a cash-strapped economy and possibly help the banking sector rise from the ashes.

Fair-practice norms may prompt ARCs to cherry-pick deals, improve transparency

By Banking No Comments

While the Indian stressed asset market is often seen as dismal, globalization has tightened the screws on the government and regulators to take decisive action. 

Earlier, India’s bad debt headache was alleviated somewhat with the introduction of the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest), allowing banks to recover monies without judicial intervention. 

But the problem of mounting non-performing assets (NPAs) kept growing, thereby bringing asset reconstruction companies (ARCs) into prominence.

Need for Fair Practices Code

In the wake of the mounting NPAs, the banking sector is under immense pressure to get its house in order. 

Realizing this, banks resorted to offloading bad debts from their loan books to ARCs thereby leading to a massive reduction in their distressed assets. 

However, during this exercise, banks made no provisions for these bad loans on their books and bore no losses in case of defaults. 

This issue led to intervention by the Reserve Bank of India (RBI) in the form of the Fair Practices Code to ensure transparency in cash transactions.

Maintaining transparency

Another reason for the need for the Code was that the sale of assets conducted by ARCs turned out to be no different from the sale of assets by state finance corporations or others vested with similar special powers of recovery. 

There have been many instances wherein ARCs sold assets through private auctions and simply served a notice to the borrower. 

In this procedure, there was no account of the sale proceeds, description of the buyer or competing bidders, information on how the asset was sold, etc. 

This is where the RBI’s notification ensures transparent and non-discriminatory practices in terms of the acquisition of assets. 

To curb the issues and unclear process of assets being sold to bidders where there is no trace of information of who these individuals are, the notification states that the invitation to participate in the auction should be made public. 

This will provide transparency on how many assets are being sold. The Insolvency and Bankruptcy Board of India’s (IBBI) involvement to make sure these rules are being held up is of utmost importance. 

When dealing with buyers, Section 29A of the Insolvency and Bankruptcy Code (IBC) must guide the process. 

Simply put, a wilful defaulter or a person who was a promoter or was in the management of the corporate debtor, among other conditions, would not be allowed to bid for the concerned insolvent company. 
Thus, the notification aims to address issues of transparency and borrowers being kept in the dark during such sale of assets while keeping a check on the aggressive sale of assets by the banks and easy purchase by ARCs.

Also, the sale of assets was not transparent and was far too commonly done at prices that do not represent fair values. 

Thus, these malpractices by ARCs forced the RBI to come up with Fair Practices Code to ensure transparency in transactions and keep a check on their practices. 

Under the notification, ARCs are entitled to release all securities on the repayment of dues. 

If the right of set-off is exercised, then a notice to the buyer must be sent with information regarding full particulars of the remaining claim and the conditions under which ARCs are entitled to retain the securities till the relevant claim is settled or paid.

Ethical recovery processes

Hereafter, ARCs must ensure adequate training to staff to deal with customer matters appropriately. 

This will prevent or mitigate unlawful and uncivilized harassment inflicted upon debtors in the name of debt recovery processes. 

In the spirit of this Code, ARCs must establish a code of conduct for recovery agents and hold the company accountable in case of breaches by their agents. 

A proper grievance redressal mechanism within the company should be constituted by ARC. The officer’s name designated to that redressal must be mentioned during the process. 

Such machinery will prove to be a step towards settlement of issues subsisting between the ARCs and the borrowers or the banks.

In addition to this, initiatives to address the absence of a poor secondary market have been taken up. 

To outsource an activity, a suitable policy needs to be established for the delegation of authority to monitor and review the operations.

Conclusion 

Overall, the RBI’s guidelines rewarding assertive steps yet ethical recovery practices are strides in the right direction. This move will rationalize recent trends in the industry and prove advantageous to various stakeholders in the stressed asset sector, including defaulting borrowers. In the light of the new guidelines, ARCs are likely to change their bidding strategy and cherry-pick deals backed by hard assets, reducing the number of transactions.

At the heart of the Fair Practices Code is the protection of the debtor by humanizing the recovery process while striking an optimum balance between lender-borrower interests in the recovery framework. 

With an emphasis on compliance, transparent and non-discriminatory practices in the acquisition of assets and required release of securities upon repayment of dues, the guidelines may collectively help insulate debtors from the clutches of the sale process. 

Adherence to these guidelines will place these bad bank sponges on a game-changing pathway leading to reduced NPAs thereby reviving stressed assets in the banking sector and the Indian economy one step at a time.

RBI On Revamping Loan Transfers

By Banking No Comments

The watchdog and facilitator of monetary exchange recently proposed a new set of rules for the purpose of governing sales of stressed assets, which would entail greater flexibility to the lenders in the pricing of loans and in taking decisions as to whom they should sell to. RBI has released two draft frameworks to facilitate its move of revamping the loan transfers. One of the drafts is for the securitization of standard assets and another one is for the sale of loan exposures. The draft guidelines categorically mention that any lender seeking to sell stressed assets will be supposed to do so under a board-approved policy. Lenders can consider all the assets classified as “doubtful assets” for the purposes of sale hereafter.

The central bank has given primacy to suit the requirements of the lender as well as accommodate that of the borrower. One of the salient features lays down that the buyer of the stressed asset need not be a financial entity. The onus has been put on the seller to conduct thorough due diligence of the buyer to ensure that they are not barred under the Insolvency & Bankruptcy Code which prevents certain persons who are painted tainted under the law from becoming contenders to revive a company undergoing CIRP. Alongside, the proposal includes that the sale process should be conducted through a public call for bids and the potential buyers must be given sufficient time in order to conduct due diligence of the assets, with a floor of a minimum of 2 weeks.

Loan exposure envisages the aggregate of the unpaid principal amount of all the loans made by the Banks. The second draft addresses the issues under similar heads and is supposed to operate as an umbrella of the first framework in order to govern all the loan transfers. In order to understand the new proposition of RBI, we need to understand the various aspects of the concerned framework.

The Draft Sale Framework can be broadly divided into three parts-
 (i) General conditions applicable to all loan transfers;
(ii) Provisions dealing with sale and purchase of standard assets; and
(iii) Provisions dealing with sale and transfer of stressed assets [including the purchase by ARCs (asset reconstruction companies)].

The core principles of transfer appear like the previous guidelines on direct assignment. However, the modification introduced here is that the scope of transfer has now been expanded to include various kinds of economic transfers of loan assets, including participation arrangements and transactions in which the loan exposure remains on the books of the transferor even after the said transactions.

Under this framework, three types of transfers have been recognized- (i) Assignment (ii) Novation, and (iii) Loan participation which includes both the risk participation and the funded participation. Whilst loans can be transferred through any of the abovementioned transfer methods like the revolver loans, borrowing with bullet payments of principal and interest can only be transferred through novation and loan participation, whereas the stressed assets can only be transferred through assignment and novation. Transfer by way of novation is exempted from the applicability of the guidelines, except for a condition that approval of all parties, including the borrower, is required for opting for novation.

The RBI probably intends that these transfers result in immediate legal separation of the transferor from the assets, which have been transferred and beyond the reach of the transferor as well as its creditors. It also suggested that such kind of transfers must be of remote nature with regard to bankruptcy norms and a legal opinion must be obtained for considering this. The transfer of a single loan asset or a part of a single asset to a financial entity through the method of novation or loan participation has been made permissible as well. However, only the financial entities carrying on business in India will be eligible to participate in the endeavor. Loans acquired from other entities can also be assigned with the methods of assignment working in such cases.
However, in line with the position during the 2012 guidelines, transferors are not permitted to offer any credit enhancement or liquidity facility for loan transfers. Diligence requirements continue to be strict and the purchasing lender is required to apply the same standard of care while assessing the asset, as if it were originating the asset directly and cannot outsource its due diligence.

This framework definitely stands as a significant move by the RBI as it is expected to streamline the loan transfer system of India. It reinforces RBI’s focus on addressing the health of the banks and the bad debts of the country while being constantly committed towards a balanced approach to the sale of the assets. The ultimate outcome of the proposal would finally determine whether it is a positive move by our regulator in developing a robust market for the secondary transfers.

RBI’s liquidity move for NBFCs, HFCs is a quick fix for a long-term problem

By Banking No Comments

Non-banking finance companies (NBFC) constitute around 9% of total assets of the Indian financial sector. So, insulating them from potential bankruptcy has become imperative for the Reserve Bank of India (RBI) to ensure financial stability. And last week, the RBI unveiled a scheme aimed at improving the liquidity condition of NBFCs.

The RBI announced that SBI Capital Markets Ltd, a subsidiary of State Bank of India, will set up a special purpose vehicle (SPV) to purchase short-term paper, maturing within three months and rated as investment grade, from NBFCs and housing finance companies (HFCs). The central bank operationalized Rs 30,000 crore for this scheme.

This SPV will buy investment-grade commercial paper and non-convertible debentures of NBFCs and HFCs until September 30, 2020, and is expected to recover all dues by December 31, 2020.

The scheme aims to prevent any potential financial or systemic risks in the finance sector and ensure economic stability. However, the RBI lays out stringent requirements for beneficiaries under the scheme.

These conditions include that the NBFCs and HFCs must be registered with the RBI and that they must have been profitable in at least one of the two preceding years 2017-18 or 2018-19.

Also, the NBFCs and HFCs must fulfil the requirements related to capital to risk-weighted assets ratio, capital adequacy ratio, non-performing assets and special mention accounts. Moreover, the NBFCs and HFCs must be rated by an investment grading agency approved by the Securities and Exchange Board of India.

Solution or slump?

The shadow financing sector was already struggling with funds in light of the IL&FS crisis when COVID-19 hit, jeopardizing the survival of the sector at large.

NBFCs and HFCs are compelled to sit on bad debts for an extended period with provision of EMI holidays to debtors on one side and an embargo on legal remedies on the other, thereby slowing down recoveries.

In cognizance of this twin pressure, the RBI’s notification aims to improve the liquidity position of NBFCs and HFCs. 

At the outset, this  scheme acts as an enabler for NBFCs and HFCs to get investment grade or a better rating for the bonds issued, thereby augmenting the flow of funds from the shadow financing sector.

Moreover, the scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio and merely transfer their financial risks. The advantages bring the government closer to its objective of eliminating or mitigating any potential systemic risks in the financial sector.

However, these measures lack concerted and concrete action.

First, statistics from an RBI report on NBFCs suggests that the total borrowings by the NBFCs exceed Rs 1 lakh crore and thereby, the efficacy of a SPV, active till September 30, 2020 has been vociferously criticized and questioned.

This move is a three-month short-term liquidity shot as opposed to the industry requirement of about two-three years. The sector is in dire straits for long-term funds so that they don’t run into an asset-liability mismatch.

However, the present move may lead to a vicious cycle of extending loans. For instance, if somebody were to draw three months’ money, they will have to create another liability at the end of 90 days to be able to repay this.

Second, the high thresholds and requirements set by the RBI for NBFCs and HFCs means many entities in dire need of financial support and liquidity will be left out of this scheme, thereby providing a lopsided-cushion to the sector.

Third, the number of NBFCs and HFCs availing of this scheme will be contingent on the rate and amount they receive. This will be a determining factor of whether the scheme is a true liquidity potion or just another half-baked solution. 

What remains to be examined is whether this scheme will provide cheaper and easier funds to even those NBFCs and HFCs which are not in dire need for emergency funds as long as they meet the eligibility criteria. The answer to this dilemma shall judge the extent of success of this announcement. 

In order to mitigate the gargantuan effects of the pandemic-induced depressionary forces on the shadow financing sector, the government must introduce a dark horse to soothe its long-term woes and not a mere quick fix.

Novelty to Necessity: The Power of Personalization in Banking

By Banking No Comments

The banking sector – a bulwark against the breakdown of other industries is left to nibble from the remnants in the wake of the virus-induced global economic slowdown!

Banks wrote off over ₹80,000 crore of loans in the first half of FY2020. The number exceeded ₹2 trillion in the past two years. But major Indian banks have demonstrated resilience through uninterrupted services, offering EMI moratoriums or fee waivers to borrowers. Unfortunately, historic trends alludes a grim scenario where Indian financial institutions were resigned to overlook defaults thereby leading to grave profitability concerns and credit risks associated with it in the wake of the COVID-19 pandemic.

Given the current slow-balisation, financial institutions cannot press for repayments from individuals and are expected to sit on bad assets for a longer period in light of RBI’s moratorium effective until 31st August 2020. As the sector is left scrambling for money, more financial institutions are embracing technology to achieve their objective of survival, growth, expansion or otherwise. 

Online Banking

At the outset, banks and financial institutions adopted technology as a means to stay connected to customers, deliver services and perhaps make money. Essentially, online or web banking offers customers almost every service traditionally available through a local branch including deposits, transfers, and online bill payments through desktop, laptop or mobile phones. At the core, online banking permits users to avail services in just a few clicks!

There are several advantages of online banking such as 24/7 access to their bank accounts from world-over, fast and easy fund transfer, coupled with highly safe and secure transactions of low to high value. The latest trend in Internet banking is to integrate third parties into the electronic business. Typically, customers use banks to interact with a third party, for example to pay their bills. In this case, the Internet channel can also be used to do the complete transaction electronically, resulting in impressive cost and time saving, not only for the bank and its customer, but also for the other involved parties. In addition, the electronic business aspect of Internet banking is creating completely new types of services – services that do not exist in other banking channels – that can be offered to new customer segments and used to create new revenue.

Personalized Banking

Tech Giants like Amazon, Facebook, and Google have spurred a desire for more customized interactions and fostered a willingness to trade data for a better experience. As a result, the concept of “personalized banking” becomes important now more than ever before!  Targeting customer micro-segments and tailoring offers for them will enable banks to differentiate themselves, build customer engagement, and gain competitive advantage.

The first step would be to identify what personalization is and what it is not. Thereafter, banks and financial institutions can leverage on the large repository of customer data, customer touch-points and digital platforms to deliver meaningful and powerful personalized experiences. To be sure, personalization in banking is not primarily about selling. It’s about providing service, information, and advice, often on a daily basis or even several times a day. Such interactions, as opposed to infrequent sales communications, form the crux of the customer’s banking experience. Yet many banks still tend to focus their personalization efforts on the sales arena.

Today, machine learning and data analytics can be harnessed to deliver an omni-channel digital experience to your customers. For banks and finance companies with a wealth of data available, hyper-personalization represents a window of opportunity to stay ahead of the curve with a value proposition that makes customers feel understood. It also promises significant gains, with Boston Consulting Group estimating that successful personalization at scale could represent an increase of 10% in a bank’s annual revenue.

The biggest takeaway for a bank is staying ahead of the curve as you get to know your customer better and leverage on those insights and trends to create tailored digital experiences that boost revenues. On the other hand, as customers expect a basic level of customization, hyper-personalized experiences in personal finance can lead to amplified satisfaction and engagement, fraud-prevention, better decision-making coupled with a sense of humanized understanding from their bank.

This humanized understanding by banks can be demonstrated in many ways, including:

  1. Behavioral Personalization: This personalization attempts to determine the visitors interest based on their actions, which includes visit count, search phrase, content viewed, functions performed, and referrers websites. 
  2. IP Based Personalization: This personalization can gain information about the anonymous visitor from the IP address and DNS record. This tytpe of personalization makes use of Geo location tracking, company attributes to customize the experience. 
  3. Online Banking, CRM, and Loan or Deposit applications: These effective types of personalization use data from other banking platforms to drive personalization. While this type of personalization may seem complex, the implementation is often easier than first perceived.    

However, customization leads us to a larger question of – whether technological advancement and privacy can be allies?   

Presently, the Information Technology Act, 2000 and Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 govern India’s data protection regime. However, these legislations fail to protect an individual interests in today’s time. Geo-location tracking, biometric data and facial recognition apps could invariably violate the right to privacy, but there is no legal framework that regulates or enables the use such technologies without violating the Fundamental Right to Privacy granted under Article 21 of the Constitution. 

Even the Personal Data Protection Bill, 2019 which is likely to be approved by the Parliament in the Monsoon session of 2020 fails to take into account all stakeholders involved in data breaches. For instance, the Bill imposes heavy fines upto Rs 15 crores or 4% of the annual turnover for violations, but exempts the ‘consent’ requirement in certain circumstances where – data is required by the State, for legal proceedings, or to respond to a medical emergency. These regulatory changes, though onerous to many, are almost a natural and necessary trajectory considering India’s growing digital footprint in the world!

Conclusion

Personalization is without a doubt a promising area that might be able to answer some of the burning questions that Internet banking must deal with today and even more in the days to come. The possibilities of personalization are not yet fully utilized, nor is there sufficient hands-on experience or research-based knowledge about the most advanced ideas of how to personalize Internet banking services. The importance of hitting the right target in both selecting the things to be personalized and the way of presenting them visually are delicate matters. If not done right, they might compromise the most important customer values: speed, efficiency and trust.

Thus as the impact of COVID-19 flare-up relies upon the gravity, degree, and dissemination of the cataclysm, which remains uncertain even today, the banking sector must leverage personalized online banking to boost revenues in a cash-strapped economy and possibly help the banking sector rise from the ashes!

Coronavirus effect: SEBI clamps down on companies! promoters, insiders can’t buy shares until June 30

By Banking No Comments

The COVID-19 pandemic has reduced highway traffic to a bare minimum. People obsessively washing their hands every hour and not to forget the remarkable stock market crashes. The pandemic has brought catastrophic consequences both physically and financially.

Next in line are the promoters and insiders of companies. The Securities and Exchange Board of India (SEBI) reportedly prohibited promoters and insiders from buying company shares from April 1, 2020, to June 30, 2020. This prohibition may have been a direct effect of the additional time given to companies to report their financial results.

On March 19, the SEBI released a circular providing relaxation from compliance to certain provisions of the SEBI’s (Listing Obligations and Disclosure Requirements) Regulations, 2015.

This included an extension of quarterly and annual financial results reporting by one month, from May 30 to June 30, 2020.  The beneficiaries of such relaxation are listed entities, stock exchanges, and depositories.

Customarily, the trading window is subject to closure for a certain period after the financials of a company are published. The period for restriction on trading can be made applicable for 48 hours from the end of every quarter.

This would mean a closure of the trading window for insiders and promoters for 48 hours from May 30, 2020. However, in light of the ongoing lockdown, SEBI has reportedly prohibited promoters and insiders from trading between April 1, 2020, and June 30, 2020.

The rationale behind the decision is clear. Numerous companies may have reached a stage where financial results may be suggestive of the ultimate outcome, although not entirely accurate.

Such information is considered Price Sensitive Information (PSI). Relaxation of filing deadlines suggests a higher possibility of misuse by insiders, promoters, and management if the trading window is left open from April 1 to June 30, 2020.

What appeared to be just another WhatsApp forward disclosed the financial results of top companies in 2019. People remember this and so does the regulator. In light of past and current circumstances, SEBI rejected requests for exemption from this trading restriction.

Knowledge of PSI and acting upon such information amounts to insider trading and may subject a person to penalties under Section 15H of the Securities and Exchange Board of India Act, 1992. A person found guilty of insider trading will be liable to the following penalty: –

1.    Rs 10 lakh or more, subject to a maximum of Rs 25 crore, or

2.    Three times the amount of profits made from insider trading, whichever is higher.

Further, all connected persons and insiders will fall under the purview of this restriction. Connected persons include directors, deemed directors, employees, professionals having access to unpublished PSI and also include connected persons six months prior to the act of insider trading.

Promoters and insiders of companies are regularly exposed to PSI, thereby favourably positioning them to cushion a bear run especially in turbulent times where capital markets have hit rock bottom.

This is a welcome move by the regulator in its attempt to disarm holders of price-sensitive information from further wreaking havoc in the markets and penalizing them if found to be in violation of this trading restriction.

HUMANIZING DEBT COLLECTIONS: A FAIR PRACTICES CODE FOR ARCs

By Banking No Comments

While the depiction of Indian stressed asset market is often painted to look dismal, the global slowbalisation has put the screws on government and regulators to take decisive action. In a similar vein, India’s bad debt headache was alleviated with the inception of SARFAESI Act, allowing banks to recover monies without judicial intervention. Despite that, the problem of mounting non-performing assets grew multi-fold thereby enhancing the prominence and aggression of Asset Reconstruction Companies (ARC) in financial circles.

Need for Fair Practice Codes

In wake of the mounting NPAs, the banking sector is under immense pressure to get their house in order. Realizing this, banks resorted to offloading bad debts from their loan books onto ARCs thereby leading to a massive reduction in their distressed assets. However, during this exercise banks made no provisions for these bad loans in their books, and bore no losses in case of defaults. This issue led to the intervention by RBI in form of Fair Practice Code to ensure transparency in form of cash transactions.

Maintaining Transparency 

Another reason for the need of the Code was that the sale of assets conducted by ARCs-in spirit-emerged to be no different from the sale of assets by state finance corporations or others vested with similar special powers of recovery. There have been many instances wherein ARCs sold assets through ‘private auctions’, and simply served a notice to the borrower. In this procedure, no account of the sale proceeds, description of the buyer or competing bidders, information on how the asset was sold or expenses on the sale was provided to borrowers. 

At this juncture, the RBIs notification will ensure transparent and non-discriminatory practises in terms of acquisition of assets. To curb the issues and unclear process of assets being sold to bidders where there is no trace of information of who these individuals are, the invitation to participate in the auction will be made public. This will also provide transparency in the way how much assets were being sold. The Boards involvement to make sure these rules are being held up is of utmost importance. When dealing with buyers Section 29A of the IBC must guide the process. Simply put, a wilful defaulter or a person who was a promoter or was in the management of the corporate debtor, among other conditions would not be allowed to bid for the concerned insolvent company. Thus, the notification aims to address issues of transparency and borrowers being kept in the dark during such sale of assets while keeping a check on the aggressive sale of assets by the banks and easy purchase by the ARCs.

Also, the sale of assets was not transparent and was far too commonly done at prices that do not represent fair values. Thus, these malpractices by the ARCs forced the RBI to come up with Fair Practice Codes to ensure transparency in transactions and keep a check on their practices. Under the notification, ARCs are entitled to release all securities on the repayment of dues. If the right of set-off is exercised, then a notice to the buyer must be sent with information regarding full particulars of the remaining claim and the conditions under which ARCs are entitled to retain the securities till the relevant claim is settled or paid.

Ethical Recovery Processes

Hereafter, ARCs must ensure adequate training to staff to deal with customer matters appropriately. This will prevent or mitigate unlawful and uncivilised harassment inflicted upon debtors in the name of debt recovery processes. In the spirit of this Code, ARCs must establish a code of conduct for Recovery Agents and also hold the company accountable in case of breaches by their Agents. 

A compulsory set up of a proper Grievance Redressal within the company should be constituted by ARC. The officer’s name designated to that redressal must be mentioned during the process. Such machinery will prove to be a step towards settlement of issues subsisting between the ARCs and the borrowers or the banks.

In addition to this, initiatives to address the absence of poor secondary market have been taken up. In intention to outsource an activity, a suitable outsourcing policy needs to be established, a delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities.

Conclusion 

Overall, the RBI’s guidelines rewarding assertive steps yet ethical recovery practices are strides in the right direction. This move will rationalize recent trends in the industry and prove advantageous to various stakeholders in the stressed asset sector, including defaulting borrowers. In light of the new guidelines, ARCs are likely to change their bidding strategy and cherry-pick deals backed by ‘hard’ assets reducing the number of deals.

At the heart of ‘Fair Practices Code’ guidelines is the protection of debtor by humanizing the recovery process while striking an optimum balance between lender-borrower interests in the recovery framework. With an emphasis on compliances, transparent and non-discriminatory practices in the acquisition of assets and required release of securities upon repayment of dues, the FPC guidelines may collectively help insulate debtors from the clutches of the sale process. Adherence to these guidelines will place these bad bank sponges on a game-changing pathway leading to reduced NPAs thereby reviving stressed assets in the banking sector and the Indian economy one step at a time.

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