Yes Bank Investors Fearing A Repeat In Audit

After the huge parting that took place  between Yes Bank Ltd’s assessment of its Non- performing assets (NPAs) and that of RBI for two simultaneous years, investors feared a repeat in the audit for FY18 as well. 

It was almost a foregone conclusion that Yes Bank had more skeletons to hide in its closet. “There is an interim inability to address the gap between perceived asset quality worries and headline stress ratios,” analysts at JM Financial Institutional Equities had said in a note in mid-2018.

So, it’s clearly an understatement to say that the lack of any bad loan divergence came as a huge surprise. The audit of the private sector lender’s books by the central bank showed that Yes Bank has recognized all toxic assets and provided for them for FY18. Stock market investors looked most surprised, what with Yes Bank shares rising more than 30% on Thursday.

There are two key takeaways for investors. One, Yes Bank has amended its ways and its new chief will have a fairly clean book to work with. Ravneet Gill, who takes charge as CEO of the bank next month, will have no legacy pain. Gill, of course, will have to contend with delinquencies that arise from business as usual. However, investors will test him for that and not for the remnants of former head Rana Kapoor’s performance.

Indeed, for investors, the gross NPA ratio of 2.1% as of December can perhaps be taken at face value and the fact that the bank has provided for exposure to Infrastructure Leasing and Financial Services Ltd (IL&FS) and other pain points should also give comfort.

However, this clean chit report also throws up a question as it puts a question mark on the regulator’s decision to demand a change in leadership. A Mint story dated 29 October 2018 has said that RBI had found serious lapses in the functioning of Yes Bank. What were the serious lapses? One way of looking at it is that the regulator perhaps reacted to the previous year’s bad loan divergences and found it appropriate to punish Kapoor, even if after a long gap.

As brokerage firm Jefferies India Pvt. Ltd said, “We believe it is time for the RBI to increase transparency on decisions that have a significant impact on minority shareholders.”

Be that as it may, investors can rejoice that the bank has got not just a new chief, but a clean balance sheet vetted by the regulator as well. Two big overhangs are now done with and analysts noted that, from here on, the stock would truly reflect the bank’s performance.

Under Gill, it is hoped that Yes Bank would deliver the same high growth it did in the previous regime, but with an added measure of prudence.

RBI Imposes ₹ 5 Crore Penalty On Four PSU Banks Over Violation Of Banking Norms

The Reserve Bank of India has imposed a penalty amounting to ₹ 5 crores of four Public Sector Banks (PSU) for violating various banking norms. The list includes SBI and Corporation Bank as well 

The monetary penalty on the banks has been imposed for non-compliance with various directions issued by RBI on monitoring of end use of funds, exchange of information with other banks, classification and reporting of frauds, and on restructuring of accounts, RBI said in a statement.

A penalty of Rs 2 crore has been imposed on Corporation Bank and Rs 1 crore each State Bank of India (SBI), Bank of Baroda and Union Bank of India.

The RBI, however, added the fines are based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the banks with their customers.

Repo Rate Cut By RBI, Positive For Banks, NBFCs

The Monetary Policy Committee (MPC) has changed its stance from ‘neutral’ to ‘calibrated tightening’ on Thursday. It came in the MPCs sixth bi-monthly monetary policy review meeting. The surprise factor alongwith it was the repo rate that was cut of 25 basis points (bps). 

The rate cut by the Reserve Bank of India (RBI) will help banks to address liquidity issues and at the same time, low cost of funds is likely to boost consumption, suggest experts. Fall in the cost of funds will also aid lending, so it is positive for banks as well as NBFCs.

“A rate cut of 25 basis points is an act of fine balance between maintaining real income and boosting economic growth. Benign inflation trajectory and low private capex were key enablers for a rate cut, which is good for mid and small-cap companies,” Dharmesh Kant, Head – Retail Research, IndiaNivesh told Moneycontrol.

The RBI has removed 100 percent risk weights for NBFCs and now their risk weights will be as per their rating, which is a positive development for higher rated NBFCs, suggest experts. The future commentary suggests that more cuts are in the offing that will be taken positively by traders and investors.

RBI said that with a view to facilitating the flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would be risk-weighted. This will be as per the ratings assigned by the accredited rating agencies, in a manner similar to that for corporates.

“It’s a double bonanza for NBFCs—low cost of funds and a boost in consumption on account of low inflation/high disposal income. What interim Budget 2019 missed for corporates has been largely compensated by the monetary policy committee’s change in stance to neutral. It will bring stability to the financial environment,” Kant said.

In the fifth bi-monthly monetary policy resolution in December 2018, CPI inflation for 2018-19 was projected in the range of 2.7-3.2 percent in H2:2018-19 and 3.8-4.2 percent in H1:2019-20, with risks tilted to the upside.

The actual inflation outcome at 2.6 percent in Q3:2018-19 was marginally lower than the projection. There have been downward revisions in inflation projections during the course of the year, which hints at a possibility of further rate cuts in the offing.

“The RBI MPC has delighted market participants by changing stance to neutral and cutting repo rate by 25 bps. Q3FY20 inflation expectation cut to 3.9 percent means some more rate cuts can be expected in the course of the next few meetings,” Dhiraj Relli, MD & CEO, HDFC Securities on RBI Monetary Policy told Moneycontrol.

“Bond yields are likely to fall materially when FPIs revise their short-term view on India (overcoming their fears on the fiscal situation). Equity markets could rise some more, welcoming an attempt to address recent issues in the credit markets, ultimately leading to higher growth,” he said.

RBI Repo Rate Cut Down To 6.25 Per Cent, EMIs May Get Cheaper

The Reserve Bank of India cut down repo rate by 25 basis points (bps) declining to 6.25 per cent. It also changed its stance on monetary policy from “calibrated tightening” to “neutral” for inflation stayed below the 4 per cent target of Central bank. 

The policy statement is the first under newly appointed RBI governor Shaktikanta Das, who took charge in December last year following sudden exit of Urjit Patel. 

The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reverse repo rate is the rate at which the central bank borrows money from commercial banks. The reverse repo rate has been reduced to 6 per cent. 

Usually when RBI cuts repo rate, banks typically pass on the benefit to the customers. If the banks decide to pass on the rate cut, then the auto, home and other loans are likely to get cheaper.

“Turning to the growth outlook, GDP growth for 2018-19 in the December policy was projected at 7.4 per cent (7.2-7.3 per cent in H2) and at 7.5 per cent for H1:2019-20, with risks somewhat to the downside,” the RBI said in a statement. 

In its December monetary policy review, the RBI had kept interest rates unchanged but held out a promise to cut them if the upside risks to the inflation do not materialise. 

Data released by the Central Statistics Office (CSO) showed consumer price index (CPI) based inflation at an 18-month low of 2.19 per cent in December against 2.33 per cent a month ago, as food prices continued to slide. 

A softer stance would bode well for Prime Minister Narendra Modi’s government, which wants to boost lending and lift growth as it faces elections by May.

The government is already in an election mode. In its budget on February 1, it has doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing. 

The RBI’s monetary policy xommittee (MPC) began its three-day meet on Tuesday to decide on key rates amid expectations that it may change its policy stance to ‘neutral’ from ‘calibrated tightening’ on low inflation footprint, even as a rate cut was ruled out by many experts. 

Markets also surged on across-the-board buying amid expectations of shift in RBI’s policy stance and rate cut. 

“Domestic market rallied 1 per cent led by broad-based buying across sectors, Nifty breached its narrow trading band of 10650- 10950 on expectation of a shift in RBI’s policy stance and strong FII inflows. Additionally, drop in bond yield and marginal strength in rupee added strength to this expectation,” said Vinod Nair, head of research, Geojit Financial Services.

Post-Budget Meeting of RBI to Be Held on February 9

According to sources, the board meeting on February 9 would also take up request of the government for interim dividend for the current fiscal.

The government expects Rs 28,000 crore from the RBI as interim dividend for the current fiscal based on the financial position of the first half of the central bank.

Finance Minister Piyush Goyal is scheduled to address the customary post budget meeting of the central board of Reserve Bank of India on February 9 and highlight the key points of the interim Budget.

The meeting will take place two days after the sixth monetary policy review which is expected to take a call on policy rates.

The Reserve Bank, which follows July-June financial year, paid Rs 40,000 crore as dividend for the current fiscal.

The customary post-budget meeting will take place against the backdrop slight deviation from fiscal deficit target for the current fiscal, tax rebate for Income up to Rs 5 lakh and income support scheme for 12 crore farmers.

The government announced ‘Pradhan Mantri Kisan Samman Nidhi’ (PM-KISAN) scheme under which Rs 6,000 per year would be provided to farmers holding cultivable land of up to 2 hectare.

Apart from direct income support to farmers, Goyal, in the interim budget for 2019-20, also announced extended interest subsidy on loans availed for animal husbandry and fishery as well as to those farmers affected by severe natural calamities.

The government also decided to increase standard deduction from existing Rs 40,000 to Rs 50,000 and also raised TDS threshold on interest earned on bank/post office deposits from Rs 10,000 to Rs 40,000.

India Will Surpass China in Economic Growth, Says Raghuram Rajan

Addressing a session on Strategic Outlook for South Asia, former RBI Governor Mr. Raghuram Rajan said Indian economy would continue to grow while growth rate is slowing down in China.

India will eventually surpass China in economic size and will be in a better position to create the infrastructure being promised by the Chinese side in South Asian countries, Rajan said Tuesday.

“Historically, India had a bigger role in the region but China has now grown much bigger than India and has presented itself as a counter balance to India in the region,” Mr Rajan said at the WEF Annual Meeting 2019.

“India will become bigger than China eventually as China would slow down and India would continue to grow. So India will be in a better position to create the infrastructure in the region which China is promising today. But this competition is good for the region and it will benefit for sure,” he said.

The comments assume significance with China working on a lot of infrastructure projects across the region, including in Nepal and in Pakistan.

In 2017, India became the sixth largest economy with a GDP of USD 2.59 trillion while China was the second larges with a GDP of USD 12.23 trillion, as per World Bank data.

At the same session, Nepal Prime Minister K P Sharma Oli cited collaboration with China as well as India as reasons for his country’s economic growth.

Afghanistan CEO Abdullah Abdullah also pitched for greater collaboration among the countries in the region.

Mr Rajan said there is an opportunity to create regional companies, and cited as an example that someone can just study how people in South Asia borrow and that would be great insight for banks.

Besides Free Trade Agreement (FTA), there is a lot of scope for work to be done. Apart from business, social sector can be another way and we can have more sharing of students across the region, he added.

While noting that people movement and especially youth going to another country can have a strong impact, Mr Rajan said that India is the largest country in the region and it must play the role it needs to play.

There are many places where India has funded the process, but a lot more can be done, including on trade side, so that tariffs can come down, he noted.

He also asked industries to work towards convincing their governments for taking the necessary steps.

Mr Rajan said he is hopeful of results, if not today, then may be at Davos meetings later.

Declining Crude Prices May Ring In More Inflation

The actual inflation and fiscal deficit will finally depend on the level of government intervention (changes in tax and subsidy) in the domestic oil market, the study concludes.

A sudden surge in crude prices can upset the nation’s key macro-stability parameters, as it can sharply spike the current account deficit (CAD), inflation and the fiscal numbers, whittling the benefits of higher growth, warns a Reserve Bank of India (RBI) study.

Since the country is heavily dependent on oil imports to the tune of over 80 per cent for meeting its domestic demand, it remains susceptible to global crude price shocks.

Besides CAD, rise in crude prices can also impact inflation and fiscal deficit, says the report.

The international crude prices increased by around 12 percent between April and September 2018.

The mid-year spike in crude prices happened mainly due to spurt in demand, on the back of global growth revival, and partly due to geopolitical risks that led to supply-side shocks.

However since mid-November 2018, the crude prices have declined significantly but they remain volatile.

“An increase in crude price worsens the CAD and this adverse impact cannot be significantly contained through a higher growth. So, a crude price shock will be followed by high CAD to GDP ratio,” says the latest issue of the Mint Street Memos titled ‘The Impact of Crude Price Shock on CAD, Inflation and Fiscal Deficit’ pencilled by in-house economists at the central bank.

The finding shows that in the worst case scenario, when crude prices hit USD 85/barrel, the deficit on account of oil balloons to USD 106.4 billion, which is 3.61 per cent of the GDP.

“Every USD 10/barrel increase in crude prices leads to an additional USD 12.5 billion deficit, which is roughly 43 bps of the country’s GDP. So, every USD 10/barrel increase in crude price will shoot up the CAD/GDP ratio by 43 bps,” it says.

The study says crude price shock will increase inflation, if the price increase is passed on directly to the final consumers.

“Under the most conservative estimate, we quantify that a USD 10/barrel increase in crude price at the price of USD 65/barrel will lead to a 49 basis points increase in headline inflation. A similar increase at USD 55/barrel gives around a 58 bps increase in headline inflation,” it says.

Further, if the government decides on a zero pass-through to the final consumers, a USD 10/barrel spike in crude prices could increase the fiscal deficit by 43 bps.

This zero pass-through scenario allows us to put an upper band on the amount of fiscal slippage, it adds.

Urjit Patel Resigned Due to Personal Reason- Said PM Modi

Mr Urjit Patel resigned after months of perceived acrimony between the government and the central bank over issues ranging from liquidity and credit flow to tackling weak banks, which raised concerns about the RBI’s independence ahead of general elections this year.

The Congress and other opposition parties alleged that Mr Patel was forced to quit after resisting immense pressure from the government.

When asked if there was any political pressure on the governor to resign, PM Modi denied that was the case.

“No such question arises. I acknowledge that Patel did a good job as RBI governor,” he said.

Urjit Patel had wanted to resign for months because of “personal reasons”, Prime Minister Narendra Modi said on Tuesday, talking about the resignation of the former Reserve Bank of India governor in December amid speculation of a rift with the government. “He wrote to me personally,” PM Modi said in an interview.

PM Modi also said Urjit Patel had done a good job.

“The governor himself requested (to resign) because of personal reasons. I am revealing for the first time, he was telling me about this for the past six-seven months before his resignation. He gave it even in writing. He wrote to me personally,” PM Modi said.

Delayed Communication over Pension Can Lead RBI to More Trouble?

The government was expected to communicate by month-end its nod for improvement of the RBI’s pension scheme, but that has not been done yet. With the year coming to an end, and no communication on the issue of updating pension yet, the Reserve Bank of India (RBI) could be heading towards big agitations in the New Year.

The central bank has a pension kitty of over Rs 160 billion with which it manages the pension of its staff. For this purpose, it doesn’t seek money from the government like other central government departments. At the very least, the RBI wants its staff to have pension on par with central government employees, and with a provision that it is inflation indexed, or the amount gets adjusted with inflation.

In August, the RBI staff went on mass leave, protesting the government’s rigid stance on the issue, harming the “real-time gross settlement” system for a few hours. However, this time, the unions may go on an indefinite strike and the RTGS system, which is the backbone of financial transactions in the country, could get severely impacted for days on end, the unions have threatened.

Even as this indexation benefit is somewhat there for newly retired employees, the old retired employees didn’t have this benefit. Besides, the RBI pensioners get less than central government employees, and the unions want the government to increase it to at least at par with central government employees.

Even as the government doesn’t have to commit to money here, it always has said no to the scheme. The logic here is that if they allow the central bank to have a special pension plan, it would create a “precedence risk” and other such institutions would also ask for upgrading of their pension schemes. Not everyone has a pension kitty like the RBI, and therefore the burden on the government would be immense in this respect.

The RBI had initiated an improved pension plan, which was curtailed in 2008 by the finance ministry under then finance secretary D Subbarao. However, after Subbarao became the RBI governor, he realised he probably made a mistake and tried to reverse his own order. He actively took up the issue, but could not overturn it. Subbarao became unpopular in the bureaucratic circle for his efforts, especially because it was opposite to what he himself thought was right while working on the finance ministry’s side.

“The argument that the government put forward was that the RBI did not seek prior permission before devising the scheme to improve pension. Subsequently, the said they fear the precedence risk and the impact it would have on other such institutions,” said an RBI union member.

However, after the August agitation, the government agreed to listen to the RBI’s demand, and asked for a detailed plan by December. The central bank, however, gave the plan by September itself. Representatives from the government side said they would respond by December. No such communication has come and the unions are likely to plan a prolonged agitation from January.

The pension issue was taken up very aggressively by subsequent governors Raghuram Rajan and Urjit Patel. Both raised the issue with the government at every possible opportunity. Patel introduced an RBI medical scheme for the retired staff, on a reimbursement basis.

“The outpatient treatment scheme was very useful and well appreciated. Updating of pension, though, is the need of the hour as there are some retired senior executives, who could be receiving pension of just Rs 3,000-5,000 as they retired 15 years ago,” said an employee of the central bank.

Notwithstanding a new governor in place, the central bank staffers are clearly losing patience, and 2019 could be a very different year for the RBI.