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Sep 15
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neo bank india

NEO Bank Legal Blocks in India

By Corporate Law, Banking, Others No Comments

NEO Bank in India

With the rise of easy credit and convenience in the economy, NEO banks can be seen on the path to a successful trajectory. The financial woes being exacerbated by the pandemic, it has been the major contributor to the successful launch and trajectory of the NEO banks in India.

With higher digitization penetration in India and growing usage of mobile technology, the country has seen a paradigm shift from archaic physical banks to online banking being offered by NEO banks. Thus, it can be rightly stated that the pandemic has ushered the paradigm and a seismic shift in the banking and payments industry in India.

A NEO bank is a bank that operates bank exclusively online. With its newer system of operation, it does not have any traditional physical branch networks. Thus it can quite rightly be stated as a new entrant in the digital payments space.

The detestable hurdles

Talking about the NEO banks in the Indian context, neo-banks are not directly regulated by the banking regulator. This is mainly due to the fact that RBI does not grant licenses for operating virtual banks in India. It is interesting to note that it effectively has permitted conventional banks to outsource certain functions.

This has been done under the guidelines on managing code of conduct and risks in outsourcing financial services. This was back in 2006. With the newer regulations, the association or the ability to partner with cooperative banks has been limited and has been curtailed. The ability to partner with the NEO banks has been done in the case of serving the unbanked or underbanked sectors.

It is to be noted that there are certain sectors like agriculture that are underbanked or underserved by the banks. But with the curtailment of the partnership of the co-operative banks and the Neo banks, has curtailed and restricted outsourcing of core management functions.

It is to be noted that Indian neo-banks typically enter into partnerships with Cooperative banks to outsource arrangements in order to provide a host of products and services to various sectors. Thus, since the banks have been barred to outsource core management functions such as compliance functions, internal audits, and decision-making functions, they will be barred from offering some key banking services.

This is mainly due to the fact that most crucial core management functions have been denied to the NEO banks like compliance with know your customer (KYC) norms and sanctioning loans and investment portfolio management, which are quite crucial for any entity that is effectively offering banking services.

Now, it is to be noted that NEO banks are of strategic importance in the economy. First, as aforementioned, it finances the unbanked sectors that have a hard time getting loans for functioning. This includes some crucial sectors like agriculture which is the largest contributor to the economy.

Secondly, the Neo-banks have been targeting both the retail and the business sector. Given that these sectors were the worst hit during the pandemic and are still reeling under the effect of the pandemic, NEO has taken the central stage in rebuilding the economy.

NEO banks have been helping the retail sector and the MSMEs to effectively open digital savings or current bank accounts. But with the latest amendments of RBI, such an ambition might be hazy. Additionally, NEO banks are best suited for facilitating money transfers efficiently using existing payment rails. This is mainly done by Neo-banks to support their customers in availing credit lines; thus they often act as a direct selling agent for financial institutions. Thus, NEO banks’ attributes are quite crucial.

Given the aforementioned detestable attributes, several other factors contribute to the block in the NEO banks’ functioning. The main hurdle is the ambiguity that is offered by the RBI. This is due to the fact that the RBI does not entirely recognize virtual banks. On the other hand, it does not even regulate neo-banks. As a matter of fact, many neo-banks choose to act as business correspondents of various conventional banks. This is effectively leading the entities to further financial inclusion in remote areas. This is due to the fact that in order to act as BCs, companies need to effectively have widespread retail outlets.

Secondly, the biggest discrepancy that NEO banks are facing is the threat to security. this is due to the fact that conventional banks would emphatically expect infrastructure and security practices of neo-banks. This would be effectively needed before partnering with them.

neo bank blocksThus in pursuit of a successful partnership, NEO banks will have to definitely upgrade their systems so that safer services can be provided. Lastly, the most important cornerstone of the whole structure is data privacy. It is to be noted that for secure online transactions and payment systems, ensuring data privacy is the key.

Thus, given various roadblocks in the future of the NEO banks, it is quite hard to decipher the future of the same at the moment. Perhaps, bringing the NEO banks under the ambit of the RBI regulations will be a start. With regulations in place, credit debacle or bubble can be avoided, which can prove quite crucial for the upcoming future of the upcoming digital payments system.

On the other hand, with the onslaught of the pandemic, the RBI should emphatically consider fully embracing virtual or branch-banking services. Thus, what will be the stance of the government or the RBI is something we’ll have to wait and watch.

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neo bank blocks

Sep 15
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central bank digital currency

Will Central Bank Digital Currency Be a Game Changer?

By Economy, Banking No Comments

Central Bank Digital Currency

Given the rise of digital currency the previous year, it is to be noted that it has spiked the interests of many for investments, even though it might put them on the wrong side of the law and at odds with the government. Given such a spike in the public’s interest, it is quite right to see that the interest of the regulators to regulate the unpredictable market has also spiked. This has effectively led the world’s central bankers to begin discussions on the idea of central bank digital currency.

On the other hand, countries like El Salvador and Miami have shown their burgeoning interest in the crypto that has led even the International Monetary Fund and its managing director to talk openly about the pros and cons of the contentious digital currency.

This conversation should also take into consideration the fact that cash is hugely being used less and less in various other countries. At the same time, digital payment systems in various countries will essentially give CBDC tough competition. Various payments apps like PayPal, Venmo in the West; Alipay and WeChat in China, and Paytm in India can offer attractive alternatives to the central bank’s services and initiatives.

central bank digital currencyBut here it is to be noted that only commercial banks have the access to central banks’ balance sheets. This also effectively includes that central banks’ reserves are already held as digital currencies, this is why central banks will be more efficient and cost-effective than any other payments platform in mediating interbank payments and lending transactions.

Given that no other individuals or corporations enjoy such unhindered access, they too must rely on licensed commercial banks to process their own transactions. Thus central banks have an upper hand in processing payments and transactions and thus a more reliable digital banking system.

Talking along similar lines, RBI too recently indicated the fact that it too is considering a phased introduction of a central bank digital currency (CBDC). Given that the unregulated black market is booming under the vigilance of the central regulator, it has become quite mandatory for the RBI to regulate the uncanny market.

Thus, the introduction of a CBDC will fundamentally do just that, it will change the archaic, fundamental currency and payments ecosystem. But given a certain amount of freedom that will be provided in such a model, RBI will be seen as assuming a greater role as the issuer of digital currency.

It is to be noted that an introduction of CBDC will revolutionize digital payments as digital currencies are currently able to effectively penetrate remote areas. This is because a user only needs internet connectivity and a mobile phone to transact using a digital currency, thus CBDC will help penetrate the banking system not only in urban areas but also in rural areas. 

Another enticing advantage that will be included in the model will be a high convenience factor, which would be unconventional given the bank’s lengthy transacting procedures that are a canker for its users. A regulated CBDC will help keep the model safe, and low-cost, thus making the payment experience convenient. The low-cost model will not be only beneficial to the end consumer but also to banks as lower costs will be incurred for printing paper currency.

Another area where a CBDC can significantly and effectively reduce time and settlement risks in cross-border transactions. And it is to be noted that once the domestic model and cross-border transaction regulatory framework is set up and well-defined, the market can positively and optimistically expect a lot of product innovation in a similar space.

 It is to be noted that once CBDC will be regulated and will be under RBI’s scrutiny and vigilance it will be essentially given legal tender that will be issued in a digital form. Some of the other key benefits of CBDC have already been achieved via UPI-based payment products. Given, that CBDC will be regulated, it will essentially lower systemic risk and will help introduce diversity and innovation in digital payments.

central bank digital currency rbiThough, it is to be noted here that RBI, as the issuer of CBDC, will effectively decide whether CBDC tokens will be interest-bearing and whether the ability to “convert” CBDC to physical cash shall be given or not. Additionally, RBI will also decide upon the degree of anonymity that will be associated with the use of CBDC, which seems quite unlikely as anonymity of character is what will render RBI’s vigilance and analyzing program useless. 

Additionally, RBI’s role in the mole restructuring will be quite prominent as its choices will determine the severe implications for the digital payments ecosystem in the economy. Well, it will depend on RBI whether CBDC should be utilized for both retail payments or should its usage be limited to wholesale payments for transactions only. Father, RBI’s sagacious amassing tools will only determine whether CBDC be issued via an account-based or a token-based model.

But this gives rise to an inquisitive question that how will the model work whether the settlement and interfaces in connection with a CBDC be undertaken solely by the central bank itself or will the roles of private banks in the banking and payment systems be invariably changed? Once a wider consumer base for CBDC is built, a reduction in bank deposits would directly and indefinitely affect the pricing of and access to credit. This is when RBI would have to factor in other commercial banks to share the burden. 

Thus, the decision to introduce a CBDC  to not includes higher analysis and scrutinization. And what really such a centrally monitored digital currency brings to the economy is yet to be deciphered.

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Sep 14
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npa crisis in india

IBC and The NPA Crisis in India: A Ray of Hope?

By Economy, Banking 2 Comments

IBC and The NPA Crisis in India

One can describe India’s banking and financial sector to be plagued by the NPA crisis, which is, at the moment, eating away at the robust edifice of the system. It is no news that a stable, robust financial sector is a prerequisite demand for the smooth functioning of an economy or any business. Secondly, a strong financial sector of the country provides immense and much-needed confidence to its investors and consumers which are the driving forces in the economy.

The last financial year, for India, can be best described as aversive and crippling, especially when its economy is taken into consideration. The odious pandemic had adversely affected the country’s GDP, so much so that India saw itself slipping into a technical recession after decades.

But it isn’t quite an exception for India as various countries across the world have also tasted the bitter crippling of their economies too. But what sets India as an exception is its already crippling banking sector which was plagued with incessant NPAs long ago.

To put this scenario in perspective, the 21st issue of the Financial Stability Report (FSR) by the Reserve Bank of India should be quoted. The report emphatically presented a grim, striking picture of the status of Non-Performing Assets (NPAs) in the country.

The stress test conducted by the Reserve Bank of India (RBI) shows the ill health of the Indian banking sector which is all set to worsen given pandemic has crippled consumer’s and debtors’ ability to pay back their dues. Thus it can be rightfully stated that the report is indicative of the fact that the challenging situation, that is being posed by COVID-19, could result actively and effectively in higher Gross Non-Performing Assets (GNPA) in the future.

According to reports, the GNPA increased to a whopping 12.5 percent in March 2021 compared to 8.5 percent in March 2020. This emphatically points toward the deteriorating health of the Indian financial sector which will surely have an adverse effect on the economy and investors’ confidence which can spell doom for the economy. As per Standard and Poor’s estimates (June 2020), gross NPA could rise to 13-14 percent for India.

It is to be noted that the government’s response to the pandemic, to lower the debt burden on the micro sectors will emphatically lead to an adverse impact on the banking sector. This is due to the fact that moratoriums on payments by micro-industry were placed and were later extended.

The put the scenario in numbers, RBI, the central bank, had proposed a three-month moratorium in March 2020 along with a freeze on ratings of customers who were availing of the loan. Consequently, given the intense state of the Indian economy, the moratorium period was further increased to August 31, 2020.

the npa crisis in indiaThis was done as a part of the stimulus package. Simultaneously, various loans, in order to revive the economy were placed out. Thus, the government’s amalgamation of fiscal, monetary, and regulatory interventions that ensured the almost normal functioning of the Indian financial markets can be called a recipe for disaster for future troubled banks of India.

Is the need for incessant restructuring required?

According to reports, at end of April 2020, 50 percent of the debtors had availed of the moratorium facility. But since then the number has dropped, as, at the end of June 2020, only 30 percent were shown to have availed of the moratorium facility. Thus, providing incessant restructuring and blanket moratorium facilities to all would be a fault that the Indian authorities should not commit.

What emphatically is needed now is a calibrated approach of stimulus to be provided by the RBI. The approach should include only those sectors which are still bearing the brunt of the pandemic. A blanket approach to all is what one would call an ill-advised policy, as various analyses show that individuals and corporates are taking undue advantage so such policies.

IBC- India’s solution to its NPA crisis

IBC can be best described as a game-changer and a transformational reform in the Indian banking sector. One can even describe it as a code that is a one-stop solution for resolving insolvencies that are plaguing the Indian banking sector. According to various banking analyses, the IBC, which can be effectively initiated by the debtors or creditors, has shown constructive results in regard to NPAs.

The most important aspect of recovering loans is the percentage of the bad loans that can be recovered so that banks don’t have to bear a huge brunt. But taking this problem into consideration, IBC is well versed to retract debt that various banks have lost.

According to the RBI’s report titled Trend and progress of banking in India 2018-19,  the amount that IBC recovers as a percentage of the amount involved has been much higher, standing at a significant 49.6 percent in 2017-18. Compared to recovery by various other archaic, traditional bodies like Debt Recovery Tribunals, the percentage of recovery is quite high. Thus it can be rightfully stated that IBC has emphatically proved itself to be a masterstroke in curbing the bad loan crisis in India. 

Additionally, it is to be noted that the restructuring and liquidation of bad loans, if done in a timely manner will open up new vistas for foreign and domestic investors to invest sagaciously and pompously in distressed Indian assets. It is no news that timely resolution and resolving insolvencies creates a much-needed conducive environment for investors and helps attract impressive foreign portfolio investments.

However, a certain revelation, in light of the pandemic, needs to be made that corrective and growth response to the blow inflicted by the pandemic on various sectors, the Insolvency, and Bankruptcy Code proceedings had been suspended for one year.

This was done so that companies would not be dragged into judiciary proceedings at the time of financial crippling and disaster. Additionally, it is to be noted that the minimum payment threshold for the effective triggering of bankruptcy proceedings against the defaulting party has been increased to Rs 1 crore as compared to Rs 1 lakh earlier.

Lastly, the most prominent and prerequire aspect that must be kept in mind is that the IBC is not an answer to all banking issues as it is a disaster management scheme and not a preventive one. With various other financial instruments like Know Your Customer (KYC) norms, it is possible for banks to effectively and emphatically ensure that their customers have the capacity to repay the loan.

It is quite a fact that the capacity to repay is a rudimentary requirement for no defaults in the future and smooth functioning of the banking sector. Thus, bankers should be consistently and effectively monitoring and actively assessing risks associated with their customers through the KYC financial tool, so that required action can be initiated. 

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Sep 14
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debt laden lelecom player

Banks to Discuss Next Course of Action on Debt Laden Vodafone Idea

By Telecom, Banking, Others No Comments

Action on Debt Laden Vodafone Idea

What is Debt laden Vodafone Idea? Call it an ill-omened debacle or a case of poor strategy but Vodafone has brought its investors to the front of a despicable negotiation table. Negotiations that will include talks about the future course of action in regard to their exposure to the debt laden telecom player. It is to be noted that the telecom player is currently struggling to stay afloat.

Given the debt-ridden state of the telecom giant, quite rationally the investors and promoters have denied infusing cash into Vodafone’s Idea. Additionally, in much interesting turn of events, the apex Court has recently dismissed a plea for rectification of alleged miscalculation adjusted for gross revenue dues.

The revenue has to be played by the company to the government which is quite an aversive situation for the telecom giant. The Supreme court has also actively condemned the telecom operator to bankruptcy and has recommended that it can raise fresh capital. It is to be noted, that given Vodafone’s bankruptcy status, it quite unlikely that it will be able to raise cash in the market. As for its investors and promoters, they have denied infusing extra cash in the telecom giants to get it out of troubled waters.

As aforementioned, the prospects of fundraising for the company look quite bleak. But why are Vodafone investors actually denying the only chance to save the telecom giant? It is due to a pertinent fact that any new strategic investor will be pouring billions of dollars into the government coffers. This effectively means that the funds will not be strategically or effectively reinvested in the company to prepare it for the new 5G world but will be redirected to the government.

debt laden telecomIn addition to court proceedings, another potential discouragement that has come for various other investors is that Kumar Mangalam Birla has stepped down as non-executive director and non-executive chairman of Vodafone Idea. Additionally, much to the dismay of the telecom giant and its investors, he has offered the government to buy out Aditya Birla’s group’s stake in the company. Aditya Birla Group Chairman has effectively offered to hand over his stake in VIL to the government or any other entity so that Vodafone remains functional.

Given all the aforementioned, aversive situations, Vodafone’s Idea is highly unlikely to be able to service its gross debt. It is to be noted that the telecom giant’s debt stands at a whopping Rs 1.8 lakh crore. According to reports, the telecom operator owes at least Rs 28,700 crore to several state-owned lenders. If official data is scrutinized thoroughly, it can be noted that VIL had an adjusted gross revenue liability of Rs 58,254 crore. But it is to be remembered that the telecom operator has paid Rs 7,854.37 crore.

Given a major telecom giant is under immense financial stress, it is to be noted that Section 10 of the Insolvency and Bankruptcy Code can be used as a preference. The Sector 10 of IBC allows a company to file for insolvency after a payment default. But such a voluntary application requires a maximum shareholder approval I.e. of 75 percent. It is to be noted that the default required to trigger IBC can be a failure to repay bonds, a loan, or an operational debt.

In the case of Vodafone, it crippled the financial state of the company. Thus, given Vodafone’s delay in payment of financial dues, it can surely use IBC as a reason for default, or the AGR liability.

It is to be noted here that if Vodafone opts for this step, Section 10 might actually offer a protective umbrella because that is what it is intended for. This is quite apt for a company as it can trigger the proceedings under legitimate business failure.

On the other hand, it will not come as a surprise to many but banks in India have started marking Vodafone as a stressed company. IDFC is the first Bank that has marked Vodafone’s Idea as stressed. Additionally, the bank has also provided for 15 percent of the outstanding debt.

Given the Vodafone debacle, it can be seen in the near future that it could have a bearing on the earnings performance of these banks. This will be due to the fact that the banks will have to make hefty provisions against these ill-omened loan accounts.

Given that another telecom giant is defaulting on the economy, various concerns in the banking sector have been raised. Such claims have also been corroborated by S S Mallikarjuna Rao the MD and CEO of Punjab National Bank. The developments in the last few days, in the case of Vodafone, have led to concern for the banking industry, referring to the AGR-related issues for the telecom players.

telecom player debt ladenHowever, banks that are already marred with a huge number of defaulters like PNB will not be highly affected by such a debacle. This is due to the fact that PNB’s stake in the company is not very high, thus, it is not going to impact PNB’s balance sheet.

The whole debacle comes after the apex court had asked the telecom players to settle their AGR-related dues. The AGR-related dues were worth Rs 93,520 crore to the government which needed to be settled over a period of 10 years.

Concerns for the same were risen by Birla in a letter to Cabinet Secretary Rajiv Gauba in the month of June. Birla, who holds a significant 27 percent stake in VIL had aired his concerns that investors were not willing to invest in the company. The hesitancy was due to the absence of clarity on AGR liability.

Additionally, ambiguity regarding an adequate moratorium on spectrum payments was also a potential deterrent. But most importantly floor pricing regime being above the cost of service was the main reason for hesitancy amongst the investors.

Compared to its peers,  the aggregate gross revenue liability of Bharti Airtel stands at Rs 43,980 crore. Similarly for the Tata group, its AGR liability stands at Rs 16,798 crore. BSNL has an AGR liability of Rs 5,835.85 crore and MTNL has Rs 4,352.09 crore.

Thus, given the huge telecom debacle, it might come as no surprise that SBI was the worst Nifty50 performer today and was down by 3.3 percent. Similarly, no one needs to wonder why shares of IDFC First Bank have tanked over 5 percent recently. Similarly, shares of YES Bank have plummeted by 2 percent.

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Sep 13
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retrospective tax law

Retrospective Tax Law: Good Radiance To a Bad Taxation Approach

By Economy, Corporate Law, Banking, Others No Comments

Retrospective Tax Law – Good Radiance to a Bad Taxation

Retrospective Tax Law: In an interesting turn of events, India is all set to end its retrospective tax. The retrospective tax was a tax of special capital gains that was extracted from the sale of assets located in the country by the entities that were registered abroad.

The crackdown on companies came at the back of the fact that many escaped paying taxes to India while transferring assets to the country. To be more specific, the statute was criticized after a series of significant setbacks in arbitration disputes. Retro tax demands were challenged in these arbitration disputes by companies like Cairn Energy and Vodafone.

Quite ruefully, the Indian government, which has been fighting for taxes for years now, will also refund the money that had been collected on the basis of retrospective taxation. However, it should be highlighted that the Indian government will do so without charging interest if certain conditions are met.

In reality, the international business community has been calling for an end to retrospective taxation for a long time. This is because, once the retrospective tax is abolished, it will effectively remove businesses’ undue anxiety about India’s massive, crushing corporate tax liabilities which effectively cripple investments in India.

Will there be any effective future scope for retrospective tax in the country after its nullification?

The Indian government’s action raises the intriguing question of whether the retrospective tax would have any future application in India. Given that the government is modifying the Income Tax Act of 1961 through the Taxation Laws (Amendment) Bill, 2021, it will be done in such a way that future retrospective tax demands would not be possible. This was done because the new amendment bill causes tax claims to be nullified if they were made before May 28, 2012.

Surprisingly, the President had given his assent to the financial bill 2012 on this date. As a result, it is reasonable to conclude that the most recent modification will render the retrospective bill obsolete. Though it is to be noted that this certain defeat that has been claimed by the government will cost the government US$1.2 billion, just by refunding the claims of Cairn Energy.

The legalities

The amendment bill also effectively and emphatically proposes to amend the Finance Act, 2012. This will be amended to strategically provide the validation of demand, etc. It’s worth noting that, if certain criteria are met, section 119 of the Finance Act of 2012 will be effectively repealed. The withdrawal of pending litigation is one of the stipulated criteria, as is a strategic undertaking that no demand for cost, damages, interest or other fees will be filed.

What is the need to introduce the bill right now?

Why is India now bowing out after fighting for its dues for so long? It should be mentioned that the Indian government’s taxes bill 2021 is a major endeavour to effectively ensure that the idea of tax certainty prevails in India. For years, the retrospective tax has been a major disincentive for foreign investors who believe it is the cause of tax uncertainty in India, making the investment climate in India unfavourable. As a result, international investors and multinational corporations operating in India have long requested such favour in order to give tax certainty.

Furthermore, it is fairly obvious that the high-profile tax arbitration disputes between Cairn Energy and Vodafone have severely harmed India’s reputation as a business-friendly nation. This substantially negated the benefits of bureaucratic reforms and harmed India’s plan to expand industrial production and upgrade infrastructure.

This comes after the Indian government lost an international arbitration in December 2020 over the taxation of Cairn Energy PLC retroactively. On the contrary, the tribunal had effectively ordered India to return the value of shares it had invariably sold while claiming its tax.

This also included dividends seized and tax refunds that were withheld to recoup the tax demand. In a similar case, the Indian government had again lost against Vodafone, citing it as a “breach of the provision of fair and equitable treatment” that was essentially secured by the bilateral investment protection deal signed by India and the Netherlands.

However, here it is to be highlighted that the Indian government’s liabilities, covering all the legal costs in this matter are significantly less. This is due to the fact that in this case, the Indian government had not taken action to recover the retro tax demand from Vodafone. Thus, to state that India has ended its humiliating losing streak against international companies would be an understatement.

Tags: retrospective tax, retrospective taxation, retrospective tax law, retrospective tax meaning, retro tax meaning, retrospective tax law vodafone, retrospective taxation law

Sep 13
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what does vodafone demise

What Does Vodafone Demise Mean for Our Banking Industry?

By Telecom, Banking No Comments

What Does Vodafone Demise Mean?

The Vodafone demise: Call it a foreboding debacle or a case of poor strategy, but Vodafone has pushed its investors to the front of a heinous bargaining table. Negotiations will include discussions about their future course of action in relation to their exposure to the indebted telecom player. It should be noted that the telecommunications company is currently struggling to stay afloat.


Given the debt-ridden state of the telecom giant, quite rationally the investors and promoters have denied infusing cash into Vodafone’s Idea. Additionally, in much interesting turn of events, the apex Court has recently dismissed a plea for rectification of alleged miscalculation adjusted for gross revenue dues.

The revenue has to be paid by the company to the government which is quite an aversive situation for the telecom giant. The Supreme court has also actively condemned the telecom operator to bankruptcy and has recommended if it can raise fresh capital. It is to be noted, that given Vodafone’s bankruptcy status, it quite unlikely that it will be able to raise cash in the market.

As for its investors and promoters, they have denied infusing extra cash into the telecom giants to get it out of troubled waters. If Vodafone goes bankrupt, it will be the government’s worst nightmare because it owes the government a massive debt in the form of AGR dues and spectrum charges.

vodafone idea latest newsAs previously stated, the company’s prospects for raising funds appear bleak. But why are Vodafone’s investors blocking the company’s last hope of survival? Any new strategic investor will be putting billions of dollars into the government coffers, which is a necessary fact. This practically means that the funds will be transferred to the government rather than being strategically or successfully reinvested in the company to prepare it for the new 5G world.

In addition to the judicial proceedings, Kumar Mangalam Birla has stepped down as non-executive director and non-executive chairman of Vodafone Idea, which could be a deterrent to other investors. He has also offered the government to buy out the Aditya Birla group’s interest in the company, much to the chagrin of the telecom behemoth and its investors.


The Chairman of the Aditya Birla Group has effectively volunteered to hand over his stake in VIL to the government or any other company in order for Vodafone to continue to operate.

Vodafone Idea is highly unlikely to be able to service its gross debt in light of the aforementioned difficult circumstances. It’s worth noting that the telecom behemoth’s debt totals Rs 1.8 lakh crore. According to estimates, the telecom company owes various state-owned lenders at least Rs 28,700 crore. When official data is thoroughly examined, it can be seen that VIL had a gross revenue liability of Rs 58,254 crore. However, it should be noted that the telecom operator has paid a total of Rs 7,854.37 crore.

Banks in India, on the other hand, have begun classifying Vodafone as a stressed firm, which will come as no surprise to many. Vodafone Idea has been designated as stressed by IDFC, the first bank to do so. In addition, the bank has made a provision for 15% of the outstanding debt.

Given the Vodafone fiasco, it’s easy to understand how it might affect these banks’ financial performance in the near future. This is because banks will have to set aside a large amount of money to cover these risky lending accounts.
Various banking concerns have been raised as a result of another telecom major failing in the economy. S S Mallikarjuna Rao, the MD, and CEO of Punjab National Bank have backed up these assertions. The recent developments in the case of Vodafone have caused alarm in the banking industry, pointing to AGR-related difficulties for telecom companies.

vodafone demise meanThe whole shambles began after the Supreme Court ordered telecom companies to pay their AGR debts. The AGR-related dues to the government totaled Rs 93,520 crore, and they had to be paid over a ten-year period. Though Vodafone filed a review petition but considering the past events the chances of overturning the judgment are quite less.

Birla expressed his concerns about the situation in a letter to Cabinet Secretary Rajiv Gauba in June. Birla, who owns a 27% stake in VIL, has expressed his concern that investors are unwilling to invest in the company. The hesitation stemmed from a lack of clarity on AGR liability. Uncertainty over a sufficient embargo on spectrum payments was also a possible disincentive. The fact that the floor pricing regime was above the cost of service was the main source of investor skepticism.

If Vodafone goes out of business, the market will be dominated by only two major competitors, resulting in a duopoly, which is disastrous for the economy. Tariffs will rise because acquiring a Vodafone customer is also a cost-increasing activity, with the consumer bearing the ultimate burden.

The only way to save Vodafone is for the loans to be restructured, or for the AGR judgment to be overturned, which would give the beleaguered telecom sector a break, or for the government to offer some sort of assistance package. According to reports, the lender has proposed to the government that their debts be converted into equity, and if this happens, there’s a good probability it’ll be combined with BSNL, which is facing a slow death.

Top Insolvency Lawyers Mumbai

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Sep 10
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united co operative bank ltd

RBI’s Monetary Policy Conundrum

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RBI’s Monetary Policy

The RBI’s monetary policy Conundrum: It is no news that the central bank’s responsibilities pile up whenever a disaster struck a market. This scenario is especially true for pandemics like the covid. The problem of being economically destitute is something that the public in India and around the world is emphatically facing. With policy measures trying to restore normalcy in the market, consumer and producer confidence aren’t actively inspiring confidence in the economic recovery.

Not only has consumer confidence affected trade severely but also the crippled global supply chains are adding to the detestable attribute of the pandemic. This has led the RBI to maintain an accommodative stance in the economy, so as to infuse enough liquidity in the market.

This is being done to revamp the business and the financial sector of the economy. Since crippling lockdowns were placed in the economy, manufacturing and economic activity had contracted at an unprecedented level, so much so, that the economy had contracted by 23.4 percent in decades.

rbi's monetary policyBut such easy credit necessarily isn’t helping the economy. As a simple rule of economics, banks usually face two short-term tradeoffs. These are trade-offs between growth and inflation in the economy.

Given that the RBI has maintained an accommodative stance, supporting the growth for quite some time, inflation signs in the economy are starting to appear. These have been more persistent and significant in the consumer price index due to the burgeoning crude prices in the economy. Given, that OPEC has yet again decided to restrict the supply of crude, stating that demand is not robust, such woes are bound to be exacerbated.

RBI, in fact, has recently deciphered that inflation had hovered above its tolerance limit. The inflation of 6 percent was obliviously an uncomfortable range for the RBI given it tends to keep inflation in the 2-4 percent range (+- 2percent). Thus, the RBI now faces a conundrum, whether to prioritize the growth or inflation monitoring in the economy.

The Conundrum

The RBI right now faces a tough challenge between growth and inflation monitoring. This is due to the very crucial fact that the economic recovery is still in its nascent stage of recovery. The impetus or momentum that is needed to bring it on track can only be provided through excess liquidity in the economy.

As unemployment is on the rise, the manufacturing sector needs its engine oil to revamp in order to take on the world demand and to increase exports.

But, it is to be noted that this excess liquidity does not only pose a threat to inflation but also to bad debt in the economy. Given that the financial standing of many has been crippled by the pandemic, there are effectively high chances of default of repayment on loans. On the other hand, the USA is robustly considering and signaling toward the tightening of the monetary policy. This can lead to a taper tantrum and reversal of FDI in India. Thus, growth prospects can seem bleak for the country.

It is no news that when India had gone into lockdown back in the month of March last year, inflation was not even a blip on our anxiety radar. But in comparison to last year, today, the fiscal and monetary policymakers need to give serious attention to the concept of “stagflation”. This effectively means that the government will have to decipher early odious signs that signify any odd rise in prices amid economic stagnancy.

rbi monetary policy todayAccording to the reports, Retail inflation had effectively broken away from the Reserve Bank of India’s tolerance limit of 6% in the month of June. Consequently, it had risen to just above 6.73% for the month of July. But, for the month of August, it had taken a dip to 6.69%, which emphatically points towards its persistence in the economy. A closer look at the data shows that the immense contributor to inflation is the increasing food prices. Of these, protein-rich items are especially getting dearer.

Though to point down one reason is not feasible, it can be rightfully stated that an obvious culprit can be the snapped-off supplies. Though most of the restrictions have been eased, however not all supply chains have been fully restored.

Lastly, it is to be noted that as long as the inflation stays above the 6% mark, which marks the uncomfortable range for the RBI, it would face the policy conundrum and will be definitely wary of easing money any further. But if the rate cuts might actually stoke prices, so could a fiscal stimulus by the Central authorities, which can be a sagacious alternative. With the economy in a dire state of need of funds and state spending, the expansionary policy of the RBI is important.

Thus, this effectively means that the government will have to make important and crucial decisions now. An alternative could be that RBI can swerve to control the rupee’s internal rather than external value. With India largely acting open to capital flows, it can attract investments. Thus, what stance the Indian authorities will take will depend on what RBI perceives as a priority.

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Sep 08
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Changes To ECB Policy: A Bane or A Boon?

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Changes To ECB Policy

ECB Policy: Given the current market conditions in India, Indian corporations have had difficulty obtaining overseas finance. Credit from debt capital markets and onshore lending markets has been tough to come by given the current situation. The Securities and Exchange Board of India’s recent policies has effectively attempted to increase India’s debt capital market. This was also started in order to reduce corporate India’s reliance on loans from the Indian banking industry.

This is due to the fact that certain Indian corporations must absolutely, without exception, fund a specific percentage of their debt by effectively issuing bonds in order to obtain loans from the Indian banking sector.
The upcoming SEBI new standards for the Indian banking sector on single and group exposures have effectively driven some of the larger corporations to look at other choices. For satisfying their debt funding needs, these choices will look beyond their normal, conventional, favored relationship with onshore banks.

Significant sources of onshore debt in India, such as the mutual fund business and the non-banking sector, are apparently dealing with their own set of problems, which doesn’t help the situation. Given the current state of the onshore debt market, the proposed changes to the External Commercial Borrowing framework have been greeted with optimism.

The moves have been applauded since they will enable Indian enterprises to explore. This has also been done to ensure that Indian businesses are able to meet their financing requirements successfully.

This will go a long way toward easing the resolution of stressed assets in the Indian banking system, which is currently under strain. It should also be emphasized that the bad debt financing in India will ease off during the peak of the country’s crisis, with enormous potential to grow in the future. Due to the epidemic that has destroyed the financial situation of many people and businesses, numerous debt financing techniques and channels are required.

The Reserve Bank of India liberalized the framework that had previously governed ECBs in 2019. End-use restrictions were relaxed, and domestic lenders were allowed to transfer and assign their existing INR loans offshore.

What has changed with ECB revenues is that they can now be used to repay onshore INR loans and meet working capital requirements as needed. Non-banking financial companies that are registered with the RBI, on the other hand, will now be able to raise ECBs.

Companies in the infrastructure and manufacturing sectors, for example, can successfully raise ECBs to pay back INR loans. These can be used to fund INR targets that were obtained onshore and when the revenues of such loans were used to fund capital expenditure. Companies that are currently classed as SMA-2 or NPA (according to RBI rules) as a result of a settlement or agreement reached with the company’s lenders.

However, international branches and subsidiaries of Indian banks are not permitted to offer ECBs. The SEBI’s relaxations are expected to become more relevant for higher-rated Indian firms. Those who can get the best ratings. ECBs will be allowed to access offshore markets at a set price.

The RBI treats ECB funds that are utilized by borrowers in the infrastructure and manufacturing sectors to repay onshore loans, including stressed assets and NPA loans, more positively. Because the RBI’s latest move is designed to help resolve stressed assets. As a result, this is the most significant development in the Indian NPA market. This is because it allows Indian banks to sell nonperforming loans. The loans can be offered directly to ECB-approved offshore lenders.

Notably, this will very definitely lead to increased foreign direct engagement in the Indian distressed credit market. However, this is a major paradigm shift from the previous method. The current framework restricts investments to onshore vehicles and security receipts.

As a result, this innovative idea should enable onshore banks to allocate troubled loans to eligible offshore lenders. However, these foreign lenders should be immune from the RBI’s securitization rules. Resolving stressed assets in this creative way reduces the possibility of certain difficulties. Concerns emerge from the securitization procedure according to the RBI’s securitization requirements.

Notably, SEBI and RBI’s creative measures will allow troubled Indian firms to access foreign financial markets. To refinance their existing INR debt or to meet their specific working capital needs. The option will only be offered to higher-rated Indian firms. Using this approach, other Indian corporations will be able to receive considerable debt finance from the domestic debt markets.

The changes, on the other hand, are quite progressive, allowing direct assignment or transfer of current INR loans to foreign lenders. This will help to struggle Indian enterprises since it will help resolve stressed loan assets in India.

 

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Sep 06
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Securitization of Financial Assets: A Potent Panacea to Non-Performing Assets

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Securitization of Financial Assets

With the burgeoning of globalization & liberalization, there has been a paradigmatic shift in the role of the banking and financial sector in monetized economies. There is an important reason to believe that a large number of non-performing assets in financial institutions is an important reason for the causation and deterioration of financial crisis. But is the NPA crisis an invincible enemy which cannot be mitigated? Thankfully, Asset securitization is the answer to the detestable NPA problem in the economy which can significantly help to bring the NPA crisis to its knees.

Asset securitization is considered an effective way to deal with NPA. The key issue in restricting securitization is the selection of NPA. It is to be noted, that many NPAs are significantly caused by a short-term cash flow shortage. But an opportunity can be presented to a bank if a significant quantity of funds can be committed to asset securitization which can emphatically have a good chance to covert NPAs into quality assets.

In financing terms, the advantages of asset securitization are tremendous. First and foremost, the financing costs are low. It is no news that disposing of NPAs requires huge cash flows, additionally, management of the same incurs humungous costs. Alternatively, in asset securitization, the user costs of the financing proceeds are relatively low. Compared to bank loans, relatively high-interest rates can be significantly avoided.

Additionally, compared to equity financing, the financing costs can be reduced while the enterprise’s organizational structure is maintained. Further, through asset securitization, the limit imposed by the credit rating of the NPAs themselves may be overcome through credit enhancement, to issue securities of a higher rating.

One of the biggest problems with lending out loans is the high risks associated with it. Consequently, NPAs too pose a huge risk to a banking structure. In contrast, an asset portfolio can reduce the risks of a single NPA. According to the investment portfolio theory, without reducing the anticipated return rates, combining negatively correlated securities can cause the risks of the securities portfolio to be less than the risks of any one type of security held.

As aforementioned, the credit rating of NPAs is relatively poor and the risks of default are quite high, but due to securitization, assets are of different risk levels which can be combined into an asset pool. Securitization allows different types of NPAs to enter one asset pool to achieve risk hedging; and, through accelerated transfer, separation, and centralized disposal of the NPAs by the capital market, the percentage of non-performing loans can be directly reduced.

Additionally, Risk remoteness emphatically eliminates the risks of the payment of the returns associated with the financed party. This leads to the major development in the design of an asset securitization structure i.e. establishment of a special purpose vehicle (SPV). This particular financed party removes the underlying assets from its hands by transferring the same to the SPV through a “genuine sale”. Subsequently, the SPV can use these as security to issue the securities. This emphatically helps in raising additional capital and a chance to gain profit through its gains.

Securitization, can additionally also allow the rapid removal of NPAs from the balance sheet. It allows quick sanitization of the on-balance-sheet assets and digestion of the accumulated risks from the sliding economy. This in turn leads to optimization of the asset-to-liability structure and strengthening of business operation capabilities, risk management capabilities, and core competitiveness.

Additionally, the market-based and mass disposal method has a scaling effect, reducing the economic and time costs of disposing of NPAs. As it is known, a huge percentage of NPA on the balance sheet of the bank speaks ill of its management and mitigation policy and in return hurts its credibility. Thus, asset securitization provides an ideal and profitable way of clearing the bad bank books.

NPA securitization can also increase an organization’s capital sources. Asset securitization can provide enterprises with a new means of financing. This effectively allows enterprises to break their current over-reliance on bank borrowing. Thus, Securitization effectively expands enterprises’ revenue sources. Through NPA securitization, an enterprise generally can revitalize existing funds, without in general increasing liabilities. Additionally, mitigating liabilities, it helps secure a low-cost fund source, increasing asset liquidity for a bank.

Is asset securitization a potent solution solely for the banking sector? Certainly not. Asset management companies too can profit from such lucrative ventures. Thus, specializing in the disposal of NPAs can present asset management companies with even greater opportunities.

Through NPA securitization, asset management companies can earn asset management fees, handling fees, and other such intermediary service fee income. This will deeply satisfy capital regulations and leverage the regulatory requirements of an asset management company.

Unlike in some countries where Assets Reconstruction Companies have been set up for the purpose of the bailout, in India, the Government has proactively initiated certain measures to control its burgeoning Non-Performing Assets crisis. In order to mitigate the Non-Performing Assets and quicken recovery, the Government of India in 1985 had set up SICA/BIFR, Debt Recovery Tribunals, and Debt Appellate Tribunals under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

In an environment where market risks are relatively huge, currently, a pandemic struck the economy presents such a picture, that non-performing loan securitization products can provide new investment products for the capital markets.

In addition to capital markets, it emphatically can also provide products like open investment channels and increased product choice. While helping enterprises in effectively resolving non-performing loans, such products can satisfy different investors’ risk appetites and their ever-diversifying investment demands.

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Sep 06
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How Indian Authorities, Yet Again, Failed to Make a Difference in Its NPA Crisis Approach

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Indian Authorities Failed to Make a Difference in NPA Crisis

The second wave of the COVID-19 pandemic ushered in an era of disintegrating companies, arduous acquisition battles, and heated arguments in courtrooms. While most companies struggled to stay afloat, those with deep pockets jumped onto the acquisition and organic growth bandwagon.

A giant that swore by this mindset was the Piramal Group whose resolution plan for Rs 37,250 for debt-ridden Dewan Housing Finance Limited (DHFL) received a conditional nod from the Nation Company Law Tribunal (NCLT), which subsequently received pompous and overwhelming approval from 94% creditors.  

Despite being one of India’s largest mortgage lenders, DHFL’s tainted history of unwise financial handlings led to it being the first financial services company to be notified for insolvency resolution under Section 227 of the Insolvency and Bankruptcy Code, 2016 by the Reserve Bank of India.

The case itself poses an exception, as the corporate insolvency resolution process under the Insolvency and Bankruptcy Code by the Reserve Bank of India is not applicable to financial service providers or banks. Therefore, the government’s action regarding the insolvency proceedings of financial service providers to enable the insolvency process of DHFL, which had defaulted on payment obligations, comes across as an exception to the Code.

The NPA crisis in India is an archaic evil eating into the mighty edifice of India’s banking sector. However, the government’s sheepishly reluctant attitude to deal with the burgeoning crisis is indeed one of the factors that have led to the digging of the grave of the mighty financial sector of India. Statistically, India’s bad debts amount to 11% of the total lending, whereas corporate bad debts constitute 56% of the total bad debts of nationalized banks. 

With another financial unit succumbing to the NPA crisis owing to governance concerns and payment defaults, India’s financial monitoring framework is ripe for reform and to nurse its post-pandemic financial system to health. The official perspective seems to maintain that the government looked after the vulnerable small and midsize firms during the pandemic.

This, according to the official authorities, has been done by guaranteeing fresh bank loans and mortgages under RBI. Consequently, this belligerent view has been supported by the low take-up rate for the RBI’s one-time restructuring offer. Given low consumer confidence and crippled economic growth due to partial lockdowns, the NPA crisis is doomed to materialize sooner or later.

According to the authorities, the NPA crisis can be dealt with later but what exactly is the question? Given, the DHFL’s insolvency, the financial system is doomed to fail given its failure to combat the NPA crisis. 

Papering over an economy-wide solvency problem by flooding the financial system with high liquidity is not only risky but also fatal for financial stability. It is to be noted, that the same strategy of incessant capitalization of the financial sector by the Indian authorities has time and again proved to be a concocted measure in vain, as NPAs of the financial sectors have never plummeted in recent history.

Even if they have, it is due to the practice of writing off loans from the accounting books in order to clean the financial records of the organization. But it is also something that the monetary authorities want to continue indefinitely which does little to help the bankrupt organizations. Alternatives, however, in the case of India are scarce.

This is due to the fact that India doesn’t have good tools to deal with insolvency. The 2016 bankruptcy law, had been reeling under the pressure even before the pandemic had struck. Liquidation, the outcome in most bankruptcy cases, has led to creditors recovering only 15%. This gross inefficiency can be scrutinized when compared with the global average of 80%.

Given all the detestable conditionalities against the government’s liquidity approach, the government extended the same regime to failing shadow banks. Dewan Housing Finance Corp., as aforementioned, is a mortgage lender whose controlling shareholders are currently in judicial custody on charges of accounting fraud and misappropriation of funds.

Talking about the archaic process adopted by the Indian authorities to settle DHFL, has left the suitors groaning about how shabbily the process was being run. With how the acrimonious contest shaped up, it’s certain that when the buyers control the reins, it will have to go through a lengthy legal challenge and will turn out expensive for creditors.

Clearly, due to all the aforementioned reasons, the task at hand is much more than filling the hole left by the $2.5 billion alleged fraud by Dewan’s former owners. With the government’s pro spending budget and increase in expenditure due to the vaccination campaign, bankruptcy in the financial sector is likely to wreak havoc on the monetary and political goals of the Indian authorities with the DHFL precedent.

 

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