Current Affairs - Banking & Finance

The Reserve Bank of India (RBI) is now fully operationalising a College of Supervisors (CoS) to further strengthen supervision over regulated entities.

Objective of CoS

• To augment and reinforce supervisory skills among its regulatory and supervisory staff both at entry level and on a continuous basis.
• To facilitate the development of unified and focused supervision by providing training and other developmental inputs to the concerned staff.

Composition of the CoS

• The CoS will be headed by former deputy governor of RBI, N S Viswanathan and will have five other members.
• The CoS will have a full-time Director supported by an Academic Advisory Council (AAC).Rabi Narayan Mishra, former Executive Director, RBI, has been appointed as the Director of CoS.

Function of AAC

• The AAC will identify areas where skill building/up-skilling is required, plan and develop curricula of all programmes, benchmark the programmes with international standards/best practices, develop appropriate teaching methods, etc.

The Reserve Bank of India on December 5, 2021 introduced the Legal Entity Identifier (LEI) for large value transactions over Rs 50 Crore in Centralised Payment Systems, which will be effective from April 1, 2021.

• The 20-digit LEI number is used to uniquely identify parties to financial transactions worldwide while improving the quality and accuracy of financial data systems for better risk management post the global financial crisis.
• Those seeking to obtain an LEI can reach out to any Local Operating Units (LOUs) accredited by the Global Legal Entity Identifier Foundation (GLEIF). In India, RBI has given the permit to Legal Entity Identifier India Ltd. (LEIL) to issue LEI under the Payment and Settlement Systems Act, 2007.

RBI Operationalizes PIDF Scheme to Boost Digital Payments

• The Reserve Bank has operationalised Payments Infrastructure Development Fund to create 30 lakh new touch points every year for digital payments in Tier-3 to Tier-6 centres.
• In June last year, the RBI had announced the creation of Payments Infrastructure Development Fund (PIDF).
• The fund intended to subsidise deployment of payment acceptance infrastructure in Tier-3 to Tier-6 centres, with special focus on the north-eastern states.
• An Advisory Council (AC), under the Chairmanship of RBI Deputy Governor BP Kanungo, has been constituted for managing the PIDF.
• It will be operational for a period of three years from January 01, 2021, and may be extended for two more years, depending upon the progress.
• The objective of PIDF is to increase the number of acceptance devices multi-fold in the country.
• The Scheme is expected to benefit the acquiring banks/non-banks and merchants by lowering overall acceptance infrastructure cost.

• Government has decided to extend the benefit of the scheme for Remission of Duties and Taxes on Exported Products (RoDTEP) to all export goods with effect from 1 January 2021 to boost export.
• The scheme will refund to exporters the embedded Central, State and local taxes that were so far not being given rebate or refunded.
• The refund will be credited in the exporter's ledger account with Customs and used to pay Basic Customs duty on imported goods. The credits can also be transferred to other importers.
• The RoDTEP rates will be notified shortly by the Department of Commerce, based on the recommendation of a Committee chaired by former Commerce and Home Secretary Dr. G.K. Pillai.
• The final Report of the Committee is expected shortly.
• An exporter desirous of availing the benefit of the RoDTEP scheme will have to declare his intention for each export item in the shipping bill or bill of export.
• The notified rates, irrespective of the date of notification, shall apply with effect from 1st January, 2021 to all eligible exports of goods.

• Various measures have been taken by the GST Council Secretariat towards the rising menace of GST fake invoice frauds.
• oMandatory Physical Verification:The government has introduced mandatory in-person physical verification of business premises for the purposes of obtaining GST registration.
• oBiometric-Based Aadhaar Authentication: In case an applicant opts for Aadhaar authentication, he will undergo biometric-based Aadhaar authentication at one of the facilitation Centres notified by the Commissioner.
• o‘Pay 1% in Cash’: Separately, a new rule has been introduced by the Central Board of Indirect Taxes and Customs that mandates businesses with monthly turnover of over Rs. 50 lakh to pay at least 1% of their GST liability in cash instead of using input tax credits to discharge their entire liability.
• oChanges in Validity of e-Way Bills: The validity of e-way bills has also been tweaked, doubling the distance to be covered for each day of validity, effective January 1. Till now, an e-way bill for transporting goods under GST allowed transporters to cover 100 km in one day. Now, that distance for each day of validity has been increased to 200 km. While four days were granted in terms of e-way bill validity to cover 400 km, going forward, only two days will be granted for the same distance.

• The United Nations (UN) celebrated the first ever International Day of Banks across the globe on 4th December 2020.
• The United Nations General Assembly (UNGA) adopted the resolution on 19th December 2019.
• The day is observed to recognise the important potential of multilateral development banks and other international development banks in financing sustainable development.
• This reaffirms the importance of achieving the targets of Sustainable Development Goals (SDG) by 2030.

• On 24^th September, 2020, the Reserve Bank of India(RBI) released Cyber Security Vision Framework for Urban Cooperative Banks (UCBs).

Need

• In recent time, the number, frequency and impact of cyber incidents/attacks have increased manifold in the financial sector including Urban Co-operative Banks (UCBs).
• Therefore, it has, become essential to enhance the security posture of UCBs so as to prevent, detect, respond to and recover from cyber-attacks.

Mission

The framework aims at enhancing the cyber security posture of the UCB sector through a five-pillared strategic approach –GUARD

• Governance Oversight
• Utile Technology Investment
• Appropriate Regulation and Supervision
• Robust Collaboration
• Developing IT and Cyber Security Skills Set

Mission – Specific Action Points

Governance Oversight

Focus on Board Oversight

• The Board of Directors shall be ultimately responsible for the information security of the UCBs and shall play a proactive role in ensuring an effective IT (Information Technology) and IS (Information Security) governance.

IT Vision Document

• UCBs could play a crucial role in strengthening financial inclusion.
• Therefore, UCBs need to develop their own technology vision document outlining their plans to incorporate IT solutions into their business in a secure manner.

Utile Technology Investment

Creation of Fund for Implementation of Cyber Security Projects

• Fund for cyber security projects may be created out of UCBs’ annual net profits over a period of time.

Management of Business IT Assets

• In order to have proper monitoring of life cycle of its IT assets, both hardware and software, UCBs shall venture to invest and upgrade their IT infrastructure.
• Furthermore, a comprehensive process for Software License Management (SLM) shall be implemented by the UCBs.

Banking Services Availability

• In order to avoid major operational disruptions, UCBs shall have a Business Continuity Plan (BCP).
• The focus may be on prioritizing systems and processes in order to keep business operating smoothly and safely.

Appropriate Regulation and Supervision

Supervisory Reporting Framework

• Considering the large number of UCBs, an effective supervision of UCBs will be setup to monitor compliance of UCBs with respect to cyber security guidelines.

Appropriate Guidance in Implementing Secure Practices

• A uniform Cyber Security Hygiene document for all the cooperative banks shall be issued.
• It shall cover various best practices such as Privilege access management, network segmentation,secure configuration and security incident.

Robust Collaboration

Forum to Share Best Practices

• UCBs may explore the possibility of setting up a forum at State/regional level with stakeholders from various banks.

Adoption of Cloud Services

• Cost effective technologies such as cloud based services may be used for implementing IT solutions and cyber security controls after taking appropriate risk assessment.

Developing IT and Cyber Security Skills Set

Imparting Technical Skills to manage IT and Cyber Security

• Targeted skill-oriented training and certification programmes would be designed to impart technical skills to personnel for managing the risk of cyber security.
• Steps would be taken to tap expertise available in various institutes/ universities across the country to provide such training in regional languages.

Providing Training for all UCBs on Cyber Security

• Awareness training programmes would be imparted to all UCBs through various training institutes of the RBI and other such institutes approved by RBI.
• The main objective is to communicate the cyber security challenges and regulatory expectations to the UCBs in local language for better understanding of the cyber security.

Significance

• The implementation of the approach outlined in Technology Vision document will strengthen the cyber resilience ecosystem of the Urban Co-operative Banks.

FinCEN Files is a cross-border investigation based on secret documents that exposes how banks and regulators have failed the public by allowing dirty money to flow unchecked around the globe. It shows how politicians, crooks, and tycoons profit at the expense of governments and ordinary people.

• The FinCEN Files are leaked documents from the Financial Crimes Enforcement Network (FinCEN), investigated by International Consortium of Investigative Journalists (ICIJ), and globally publicised on 20 September 2020.
• The reports describe over 200,000 suspicious financial transactions valued at over US$2 trillion that occurred from 1999 to 2017 across multiple global financial institutions.
• The documents appear to show that while both the banks and the United States Government had this financial intelligence, they did little to stop activities such as money laundering.
• The information implicates financial institutions in more than 170 countries who played a role in the facilitation of money laundering and other fraudulent crimes.

What is FinCEN?

• It is a bureau of the United States Department of the Treasury that collects and analyses information to combat money laundering, terrorism financing, evasion of economic sanctions and other financial crimes.
• FinCEN collates suspicious activity reports (SARs), reports required to be filed by financial institutions when they suspect their clients are engaging in financial crime.
• Unauthorized disclosure of a SAR is a US Federal criminal offense, as it could undermine or hamper ongoing investigations, and threaten the safety of financial institutions and those who file the SARs.
• SARs are not evidence of a crime, but the FinCEN claims they provide vital information to the investigate crimes.

Who worked on the FinCEN Files investigation?

• ICIJ, BuzzFeed News and 108 other media partners in 88 countries spent 16 months organizing and analyzing leaked documents, and obtaining hundreds of other confidential documents, court records, archives, public records, and interviews.

What is ICIJ?

• The International Consortium of Investigative Journalists (ICIJ) is an independent, Washington, D.C.-based international network of more than 200 investigative journalists and 100 media organizations in over 70 countries.

• The Centre on September 9 launched the Aatmanirbhar Bharat ARISE-Atal New India Challenges programme to support MSMEs and start-ups for making India innovative, resilient, tech-driven, and research and development (R&D)-oriented.
• The NitiAayog's Atal Innovation Mission (AIM), in collaboration with ISRO and four ministries (defence, health and family welfare, housing and urban affairs, and food processing industries), will focus on challenges in 15 sectors through the programme.
• The programme provides a great opportunity for the government to become the first buyer of indigenous Made in India technology solutions.
• A grant-in-aid of up to Rs 50 lakh for 9-12 months have been earmarked for start-ups to develop a minimum usable prototype.
• The AIM is a flagship initiative of the NitiAayog to promote innovation and entrepreneurship in the country, based on detailed study and deliberations on innovation and entrepreneurial needs of India in the years ahead.

• On 7^th September, 2020,the Reserve Bank of India (RBI) released a report by the K V Kamath Committee which was formed to make recommendations on the required financial parameters to be factored in the resolution plans under the ‘Resolution Framework for Covid-related Stress’, along with sector specific benchmark ranges for such parameters.

Key Highlights

• The Committee recognizes that:
  • The Covid-19 pandemic has affected the best of companies.
  • These businesses were otherwise viable under pre-Covid-19 scenario.
  • Impact is pervasive across several sectors but with varying severity – mild, moderate and severe.
• The committee has recommended financial parameters including aspects related to leverage, liquidity and debt serviceability.
• It selected five parameters based on their relevance while considering the resolution plan(RP).These ratios would provide the requisite assessment framework for the RP. These include:
  • Total Outside Liability/Adjusted Tangible Net Worth (TOL/Adjusted TNW)
  • Total Debt/EBIDTA
  • Current Ratio
  • Debt Service Coverage Ratio (DSCR)
  • Average Debt Service Coverage Ratio (ADSCR)
• It suggested financial ratios for 26 sectors which could be factored by lending institutions while finalising a resolution plan for a borrower. These sectors include aviation, hospitality, real estate which are some of the most stressed sectors in the economy due to the impact of Covid-19 pandemic.

Source: Business Standard

• Considering the large volume and the fact that only Standard assets are eligible under the proposed scheme, a segmented approach of bucketing these accounts under mild, moderate and severe stress, may ensure quick turnaround.
• To complete this task simplified restructuring for mild and moderate stress may be prescribed. Severe stress cases would require comprehensive restructuring.

Key Recommendations on Sector Specific Parameters

• The sector specific parameters may be considered as guidance for preparation of RP for a borrower in the specified sector.
• The RP may be prepared based on the pre-Covid-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance in Q1 and Q2FY21, to assess the cash-flows for FY21 / FY22 and subsequent years. In these financial projections, the threshold TOL/Adjusted TNW and Debt/ EBIDTA ratios should be metby FY23.
• The other three threshold ratios should be met for each year of the projections starting from FY22. The base case financial projections need to be prepared as part of RP.
• In respect of those sectors where the threshold parameters have not been specified by the Committee, lenders can make their own internal assessments for the solvency ratios i.e. TOL/Adjusted TNW and Total Debt/EBIDTA. However, the current ratio and DSCR shall be 1.0 and above, and ADSCR shall be 1.2 and above.
• The Committee has uniformly proposed thresholds for current ratio, DSCR and ADSCR in most of the sectors.
• The borrowers eligible under the current Framework are Standard Accounts and as such, they may require some time to restore their position to pre-Covid-19 levels.
• As per the recommendations, the resolution process should be treated as invoked once lenders representing 75 percent by value and 60 percent of lenders agree to do so.

Analysis

• According to the experts, the K V Kamath panel's loan recast recommendations are better than the erstwhile corporate debt restructuring (CDR) mechanism, but these may result in banks postponing recognition of stress through short-term relief.
• The CDR was extensively used to suppress non-performing assets and had a success rate of as low as 15 percent.
• The framework is for a limited time-period and stresses upon upfront heavy provisioning, stringent financial thresholds for eligibility and supervisory mechanism.
• In the absence of an economic revival and sector-specific packages to be introduced by the government, the new mechanism will be "challenging" and may also end up induce uncertainty in the credit markets as banks focus on working out the recast plans in the limited window.
• Stressed borrowers in real estate, traders, hotels/restaurants segments will be helped, but resolving stress in lumpy power and infrastructure sectors through this mechanism will be challenging without economic revival and sector-specific packages or initiatives by the government.
• It is feared a "good portion" of the accounts which will be restructured will eventually turn non-performing and added that it gives a ""short-term relief" alone.
• The framework is much broader than anticipated but leaves some scope for subjectivity as thresholds are to be met 2021-22 onwards based on base-case financial projections.

The shapes of economic recovery is determined by both the speed and direction of GDP prints. This depends on multiple factors including fiscal and monetary measures, consumer incomes and sentiment.

• Z-shaped recovery: It is the most-optimistic scenario in which the economy quickly rises like a phoenix after a crash. It more than makes up for lost ground (think revenge-buying after the lockdowns are lifted) before settling back to the normal trend-line, thus forming a Z-shaped chart.
• V-shaped recovery: It isthe next-best scenario in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.
• U-shaped recovery: It is a scenario in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels.
• W-shaped recovery: It is a serious situation - growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart.
• L-shaped recovery: Itis the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.
• J-shaped recovery: It is a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.
• Swoosh shaped recovery:It is similar to the Nike logo — in between the V-shape and the U-shape. Here, after falling, growth starts recovering quickly but then, slowed down by obstacles, moves gradually back to the trend-line.
• Inverted square root shaped recovery: In this, there could a rebound from the bottom, the growth slows and settles a step down.

Why is it important?

• The Indian economy was slowing down even before Covid hit, and the trouble has now been amplified manifold because of the lockdowns.
• Experts predict a fall of up to 5 per cent in the GDP in FY-21. This is clearly a crisis situation, and our getting out of the hole will depend a great deal on the shape of the economic recovery that will hopefully follow.

Which Shape of Recovery is Favourable?

• A Z- or at least V-shaped recovery would be the most preferable. If not, we should at least have a U-shaped recovery or a Swoosh to get back on our feet in a couple of years.
• A W-shape will bring in much pain before the eventual gain, while an L-shape or the Inverted-square root will make a wreck of the growth train.