RBI’s Financial Stability Report-- Banking related general awareness

RBI’s Financial Stability Report

The Reserve Bank of India (RBI) released its Financial Stability Report (FSR) on June 26,2015, the 11^th issue of its bi-annual publication.  The report states the easing global crisis and strong  macroeconomic fundamentals in the domestic market, including increased FDIs in the past year offer India a ‘reasonable degree of resilience’ to fight uncertainties, but poor asset quality of banks and managing expectations are key challenges for regulators and the government.

The FSR report is published by a sub-committee of Financial Stability and Development Council. The sub-committee, headed by the RBI Governor Raghuram Rajan, has representations from heads of other financial market regulations like the SEBI, IRDAI, FMC and the PERDA apart from the Finance Ministry and the Finance Ministry and the Finance Secretary, among others.

ABOUT THE REPORT

There is clear warning from the RBI to the North Block on the build up of stress on the balance sheet of Indian banks emerging from infrastructure loans.  The numbers tell us two things; One, bad loans continue to be the head-ache of public –sector banks largely, much more than private or foreign banks.  Second, there is a clear concentration rish developing  from loans given to infrastructure companies. 

There has been a significant improvement in the macroeconomic environment, and going forward, economic performance is expected to be better.  Relatively stronger macroeconomic fundamentals in terms of growth, inflation, and current account and fiscal deficits provide a reasonable degree of resilience to our financial system.

OVERVIEWS OF THE REPORT

Macro-Financial Risks

Global Economy and Markets: Global economic recovery still seems to be far from large-scale monetary accommodation in Advanced Economies (AEs) are increasing the challenges for Emerging Market and Developing Economics (EMDEs).  Monetary accommodation by major Central banks had led to negative nominal yields in many AEs and subsequent swift and abrupt upward shifts in yields inflicted losses on bond holders.

Domestic Economy and Markets:  On the  domestic front, there has been a significant improvement in the macroeconomic environment and going forwards economic performance is expected to be better.  However, managing expectations continues to be a challenge for policy makers as the recovery in business sentiment has not yet taken firm roots.  External vulnerability has reduced and progress has been made on improving the quality of fiscal consolidation.

Financial Institutions

Soundness and Resilience

Scheduled Commercial Banks:

Performance and Risks: The performance of Scheduled Commercial Banks (SCBs) in terms fo growth in business has moderated further during the period from September, 2014 to March, 1915.

Urban Co-operative Banks and Non-Bank Financial Companies: The asset quality of scheduled Urban Co-operative Banks (UCBs) improved, whereas, asset quality of Non-Bank Financial Companies (NBFCs) continued to deteriorate.

Financial Sector Regulation: The financial sector regulatory reforms in India are being driven by the domestic priorities, within the spirit of the global regulatory standards, even as the challenges in uniform implementation of the reforms are coming to the fore, in many jurisdictions.

Banking Sector: While the regulatory move towards encouraging greater market access and market discipline will help the development of domestic financial markets, the banking sector Banks (PSBs)  will be expected to shoulder major responsibility to accelerate growth in the economy.

Securities Market: The concerns emanating from rapid rise in algorithm trading in recent years highlights the need for caution for India’s securities markets.  Significant regulatory steps have been taken with regard to illegal money-raising activities, insider trading and strengthening the risk management systems at depositories.

Insurance Sector: The agricultural insurance needs urgent focus in the wake of frequent episodes of weather related calamities and their impact, particularly on small and marginal farmers.

Commodity Derivative Markets: There is need fro harmonizing the regulation of the physical commodities market and strengthening the linkages between the derivatives markets and physical (cash) markets, mainly in agricultural commodities.

Pension Sector: The expected shifts in demography in coming decades call for attention on old age income security in particular for the unorganized sector – for which a new scheme has been announced by the union government.

Assessment of Systemic Risk Survey (Annex I) conducted by the Reserve Bank in April 2015’ global’ risks and domestic macroeconomic risks continued to be perceived as major risk factors facing the Indian financial system.

Overall, India’s relatively stronger macroeconomic fundamentals in terms of growth, inflation, current account and fiscal deficits provide a reasonable degree of resilience to Indian financial system in the event of spillover effects from global factors.  However, with the continued uncertainty over global growth and in the absence of international monetary policy co-ordination, there can be no room for complacency.

The Main Problem:

The RBI report shows that five sectors (mining, iron & steel, textiles, infrastructure and aviation) that together constitute 24.8% of the total advances of commercial banks, has a share of 51.1% in the total stressed advances.

Of this, infrastructure and iron & steel have significant contribution in total stressed advances.  They alone constitute 40% of the total and PSBs have maximum exposure to them.  Of the five, infrastructure is where most of the trouble is.  As on April 17, 2015, banks have lent  9.33 lakh crore loans to infrastructure, which primarily consists of power, telecommunications and roads.  This part of the loan book has sharply risen by nearly 11% over the year.  Now, what is to be noted here is that while public sector banks’ share to infrastructure loans as a percentage of total advances is about 18% their share is stressed advances is about 31% Compared with this, private sector banks have an 8.4% share to infrastructure loans, while the stress percent from this segment for these banks is 18.2%.

Second to infrastructure is the power sector.  Again PSB are the worst hit.  While, their share  to power loans as a percentage of total advances is about 10.1%, the percentage of stressed assets in this segment is about 17.3%.  For the private sector, this share is 3.8% and 7.3%, respectively.

Domestic Statistics:

Growth: Economic growth in India is estimated to have improved to 7.3% during 2014-15 as per recent revisions in the National Account Statistics (base 2011-2012).  However, notwithstanding this improvement, higher growth seems at odds with low credit growth, relatively lower flow of resources to the commercial sector, low credit growth, relatively lower flow of resources to the commercial sector, low capacity utilization, subdued growth in the index of industrial production and muted corporate performance, among others.

Inflation: Consumer Price Index (CPI) based inflation is expected to be pulled down by base effects till August and thereafter to increase to about 6% by January 2016.

New Rate of SERVICE TAX Came into Effect

Finance Minister while presenting the Union Budget 2015-16 has increased the Service Tax Rate from 12.36% to flat 14%.  This new rate of Service Tax at 14% is applicable from June 1, 2015.  The rate of service tax services provided before June 1, 2015 is 12.36% and for services provided after June, 1 2015 is 14%.  The tax is levied on all services, expect a small negative list.  Some of the key services that will attract higher tax and hence become costlier are – railways, airlines, banking, insurance, advertising, architecture, construction, credit cards, event management and tour operators.  Mobile operators and credit card companies have already started sending messages to subscribers conveying the increase in service tax rate which will have a bearing on the bills.  According to railway ministry officials, fares for first class and AC classes in passenger trains, besides freight charges, will go up by 0.5% from June 1, 2015.

SERVICE TAX:

It is a tax which is payable on services provided by the service provider.  Just like Excise duty is payable on goods which are manufactured, similarly Service Tax is payable on Services provided.  This Tax is payable by the provider of Service to the government of India.  However, the Service Provider can collect this Tax from the Consumer of Service and deposit the same with the government.

SERVICE TAX IMPLEMENTATION IN INDIA:

This tax came into effect in 1994 and was introduced by the then Finance Minister Dr. Manmohan Singh.  Earlier, Service Tax was payable only a specified list of services but Pranab Mukherjee while delivering his budget speech on March 16, 2012 announced that this Tax would be applicable on all services except the negative list of services.

From July 1, 2012 onwards, all services (except) those specified in the negative list of services by the government) are now liable for service tax.  However, there are some services which are composite services.  For e.g., Food being served in a Restaurant.  Although, VAT is levied on Food, but we don’t go to a Restaurant only to have Food but also to avail the services of the waiters, kitchen staff etc. Therefore, Service Tax is also levied on Food served in Restaurant.  In such cases, it is practically impossible to segregate how much the customer has paid for the food and how much he has paid for the services.

GST AND SERVICE TAX:

Jaitley had proposed to raise the service tax rate to 14% to facilitate a smooth transition to the Goods and Service Tax (GST) regime, which the government wants to roll out from April,2016.  Once implemented, GST will subsume service tax, excise and other local levies.

Education cess, which is levied on service tax, will be subsumed in the service tax rate with effect from June 1.  Although the Budget also proposed a 2% Swachh Bharat cess on selected services, the government is yet to come out with a notification in this regard.  The Goods and Products Tax Bill or GST Bill, officially known as The Constitution (122^nd Amendment) Bill, 2014, would be a Value added Tax (VAT) to be implemented in India, from April, 2016.

SERVICE TAX AND RESTAURANT

 Such services are popularly known as Composite Services           and in such cases an abatement scheme is announced by the government under which Service Tax is only levied only on a specified portion of the Total Bill.  Service Tax in Restaurant is to be levied only on 40% of the Food Bill Service Tax on Cash Basis.  Earlier, Service Tax was charged on cash basis for every service provider.

Currently, it is charged on cash basis for individual service providers and for companies it is being charged on a accrual basis i.e., companies liability to deposit tax arises as soon as service are provided irrespective of the collection of funds on the same.  However, individual Service Providers have to deposit this Tax with the government only when the Invoice Amount has been collected.  Service Tax Payment is deposited by the Service Provider with the Government quarterly in case of individual / Partnership and Monthly in all other cases.

EXEMPTION OF SERVICE TAX

All service providers in India, except those in the state of Jammu and Kashmir, are required to pay service tax in India.  It is not levied on the persons residing in Jammu  & Kashmir.

SERVICE TAX RATE PAYMENT

The Service Tax Rate applicable from June 1, 2015 is 14%.  This rate is an inclusive rate and SHEC and Education Cess is not required to be charged above this.  This tax is required to be deposited on a Monthly/ Quarterly basis.  It can be paid either by manually depositing in the Bank or through Online Payment of Service Tax.  In case, of excess payment of Tax by the Service Provider with the government, the Service Provider can either adjust the excess amount paid or can claim Refund of the Excess Tax deposited.

BANKING & ECONOMY ALALYSIS

INDIA’S FOREIGN EXCHANGE RESERVES CROSSED $ 355 BILLION:

India’s foreign exchange reserves has crossed $  355 billion for the first time, Reserve Bank of India data showed on June 26, 2015. The reserves rose $ 1.171 billion in the week to June 19 to $ 355.459 billion with the Central Bank intervening in the forex market to nullify the impact of steady dollar flows.

Rupee gains with strong dollar flows but this makes exports less remunerative.  RBI sterilizes the flow to prevent the rupee gaining sharply when it wants to keep Indian exports competitive in the International market.  RBI data showed that foreign currency assts rose $ 1.136 billion to $ 330.717 billion.

INDIA AMONG TOP 10 FDI RECEIPIENTS:

After 2008, for the first time, India again broke in to the top 10 recipients of Foreign Direct Investment (FDI) during 2014, the United Nations Conference on Trade and Development (UNCTAD) said in its World Investment Report 2015 on June 24, 2015.  India jumped to the ninth rank in 2014 with a 22% rise in FDI inflows to $ 34 billion.  India was at the 15^th position in the previous two years.  India, however, is the only Brazil, Russia, India and China (BRIC) country that hasn’t year crossed the $ 50 billion-a-year FDI mark.

EPFO MADE `UAN’ MANDATORY FOR ALL EMPLOYERS

Retirement fund body EPFO on June 22, 2015 notified an order to make Universal Account Number (UAN) mandatory for all employers covered under the Employees Provident Number and Miscellaneous Provisions Act, 1952.  The UAN facility was launched by Prime Minister Narendra Modi in October 2014.

It is portable throughout the lifetime of an employee and removes the need for employees to apply for PF transfer claims while changing jobs.  It is even more beneficial for workers in the construction sector, who often change their contractor after short span of time and take up new jobs after fining one contract.

EPFO:

EPFO is a statutory body of Union Government under the Aegis of Ministry of Labour and Employment.  Headquarter of EPFO is new Delhi Administers a compulsory contributory Provident Fund Scheme (1952) and an Insurance Scheme (1976) one of the largest social security organizations in India in terms volume of Financial Transactions undertaken and number of covered Beneficiaries.

ABBREVIATIONS:

AFC                                        Automated Fare Collection

AIFI                                         All India Financial Institution

ALM                                       Asset Liability Management

BCSBI                                     Banking Codes and Standards Board of India

BFSI                                        Banking Financial Services and Insurance

CBDT                                      Central Board of Direct Taxes

CBEC                                      Central Board of Excise and Customs

CBS                                         Core Banking Solutions

CCRS                                      Currency Chest Reporting System

CSIR                                       Council of Scientific and Industrial Research

CSO                                        Central Statistical Organization

ECB                                        External Commercial Borrowing

EPFO                                      Employees Provident Fund Organization

IFI                                           International Financial Institution

IMT                                         Instant Money Transfer

MFSS                                      Mutual Fund Service System

NHB                                        National Housing Board

NPCI                                       National Payments Corporation of India

OTP                                         One Time Password

TFTA                                      Tripartite Free Trade Area

INDIA EMERGES AS THIRD LARGEST FDI SOURCE FOR UK

India has emerged as the third largest source of Foreign Direct Investment (FDI) for United Kingdom (UK) after the (USA) and France in terms of number of projects.  According to a recent report released on June 23, 2015 by UK Trade and Industry (UKTI), the US remained the largest source of inward investment, with a total of 564 projects in 2014-15, followed by France (124 projects) and India (122 projects).

INDIA TOPS WORLD HUNGER LIST

India is home to 194.6 million undernourished people, the highest in the world, according to the annual report by the Food and Agriculture Organization of the United Nations released on May 28, 2015.  This translates into over 15% of India’s population, exceeding China in both absolute numbers and  proportion of malnourished people in the country’s population.

Around the world, 795 million people (or around in nine)   are undernourished.  Asia and the Pacific account for almost 62% of this section.  Yet, the trends are positive, with a decrease in the prevalence of people with undernourishment – from 18.6% in 1990-92 to 10.9% in 2014-16 worldwide.

India too saw a reduction between 1990 and 2015.  In 1990-92, those who were starved of food in India numbered 210.1 million, which came down to 194.6 million in 2014-15.  China stood out as the reduction in the number of hungry people was much higher than in India, which came down to 133.8 million in 2014-15 from 289 million in 1990-92.

BANKING

PNB BAGGED `RAJBHASHA AWARD’

Punjab National Ban (PNB) has received four awards on June 26, 2015 in Rajbhasha Shield Competition for its outstanding performance in the use of Hindi Language.

Managing Director of CEO Gauri Shankar (PNB), received consolation shield and certificates for `A’ and `B’ Regions and also consolation Prizes for `PNB’ Staff journal bilingual magazine in RBI Rajbhasha Shield Competition for FY 2013-14 from the hands of Raghuram Rajan, Governor-RBI on June 27, 2015 at New Delhi.

10-SECOND PERSONAL LOAN DISBURSEMENT SCHEME

Country’s second-larger private sector lender, HDFC Bank on June 18,2015 launched a 10-second paperless instant loan plan for its existing customers.  The 10-second loan Scheme was launched as part of HDFC Bank’s digital banking platform GoDigital.

The entire process of availing the loan under this scheme will be completely paperless.  In this case, its customers by using net-banking or mobile banking avail of this loan.  HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (Visa Electron).  The bank issues the MasterCard Maestro Debit Card.

ODISHA STATE CO-OPERATIVE BANK LAUNCHED `BANK ON WHEELS’

Intervening directly the Odisha State Cooperative Bank is going to launch the `Bank on Wheels’ to help farmers get loans on their doorstep.  Twenty vans with ATM facility will move around 20 remote and tribal pockets in Keonjihar, Korapur, Kalahandi, Mayurbhanj, Sundargarh and Sambalpur districts for the purpose.

The Centre has provided  6 crore, at the rate of  30 lakh for each vehicle, to agriculture department for the scheme under Rashtriya Bikas Yojana on June 18, 2015.

The vehicles will be handed over to the Central cooperative banks (CCBs), which will run and maintain them, said Chief General Manager – Odisha State Cooperative Bank (OSCB) LD Mishra.  The Odisha State Cooperative Bank (OSCB) is one of the Scheduled State Cooperative Banks incorporated under the Orissa Cooperative Societies Act on April 2, 1948.

WORLD’S FIRST FACIAL-RECOGNITION ATM

Chinese researchers have successfully developed the world’s first Automated Teller Machine (ATM) with facial recognition technology that would help reduce the risk of theft.  The new machine was jointly developed by Tsinghua University and Tzekwan Technology, China Daily reported on June 2, 2015.

It is expected to connect with banks and public security networks and allows only cardholders to withdraw money, even if someone else knows the password.  In addition to facial recognition technology, the machine outperforms its counterparts in banknote handling, counterfeit-bill recognition and more.  The equipment has already passed certification and will soon be available for sale.

FIRST CURRENCY PAPER UNIT INAUGURATED

India will no longer require to import its currency paper from Australia and Japan.  On May 30, 2015, Union Finance Minister Arun Jaitley inaugurated the country’s first new pulp line unit for production of bank note paper at Hoshangabad in Madhya Pradesh.

In April, Prime Minister Narendra Modi had asked the Reserve Bank of India to go `swadeshi’ and use Indian ink and paper to print currency notes.  It was part of the Prime Minister’s ‘Make In India’ initiative.

This New Paper Line of 6600 MT capacity is part of the indigenization, of the Bank Note paper, under taken by Security Printing and Minting Corporation of India Limited (SPMCIL).

SPMCIL has also set-up another Joint Venture Company called Bank Note Paper Mill India Private Limited at Mysore is targeted to be commissioned by the year end.