Banking and Financial News – 12 May 2014

Banking and Financial News – 12 May 2014

Yes Bank-L&T  Finance deal : is it for real ? (The Mint) - The merger, if that happens, will also give stability to the bank and help it broadbase its loan book through L&T Finance’s exposure to retail loans. For professionally managed L&T, it will fulfil its dream of having a bank under its fold.
An entity’s unsuccessful attempt to get a banking licence will not come in the way if it plans to buy a stake in an existing bank, Reserve Bank of India (RBI) deputy governor R. Gandhi said last week. He doesn’t think that such a move would amount to back-door entry into banking. “They might have been rejected for bank licence but here they are going to come as a shareholder. It won’t be a bar just because their licence application was rejected,” he said. Although Gandhi did not name any company, his comments are keeping speculation on merger talks between L&T Finance Holdings Ltd, the non-banking financial arm of Larsen & Toubro Ltd (L&T), and Yes Bank Ltd alive for the time being.

Even though Gandhi has said RBI would have no objection if an unsuccessful banking applicant wants to buy a substantial stake in a bank, a question remains. How would an entity which was not considered fit and proper to set up a bank be allowed to acquire a bank? Besides, RBI has strong reservations about a non-banking finance company (NBFC) taking over a bank. There have been cases though where banks and financial institutions have taken over NBFCs.

New bad debt reporting norms reveal bigger issues (The Mint) - A change in the Reserve Bank of India’s (RBI) framework for reporting bad debt, or bad debt in the making, has underscored that at worst the problem is bigger than everyone believes it to be, and that at best most Indian companies are happy to stretch repayment schedules as far as they possibly can without being named defaulters.

The data is the outcome of following RBI’s new framework under which banks are now required to categories borrowers based on their repayment track record. The new rules came into effect from 1 April. The change is part of the central bank’s efforts to crack down on bad loans and get tough with serial defaulters.

Gross bad loans of 40 listed Indian banks grew to Rs.2.43 trillion at the end of December, a rise of about 36% from last year.

RBI’s framework for dealing with bad loans also requires banks to share the SMA status of loans with a central database on large loans that it maintains. This sharing of information is likely to put a stop to a practice called evergreening of loans—where a company borrows from one bank at the end of the quarter and repays the dues of others. This way the companies are simply juggling their liabilities, without actually are squaring off their loans.

Bond yields fall on optimism ahead of exit polls (Economic Times) - The benchmark 10-year bond yield fell 3 bps to 8.72 per cent on hopes that exit polls later in the day would show the Bharatiya Janata Party winning by a majority, as the opposition party is seen by markets as being more investor friendly.

Important Financial Terms in the News explained.

Non-banking financial company (NBFC) - is a company registered under the Companies Act, 1956 and engaged in the business of granting loans and advances. They require RBI Licence. But, they do not hold a banking license. NBFCs function like banks; however there are a few differences:

  • NBFC cannot accept demand deposits withdrawable by cheque.

  • It is not a part of the payment and settlement system and as such cannot issue cheques to its customers

  • Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

DICGC (Deposit Insurance and Credit Guarantee Corporation) – An RBI sponsored Corporation, that guarantees repayment of deposits up to one lakh rupees (Subject to conditions), in case of a bank failure.

Non-perfoming Assets (NPAs) - Also called non-performing loans, are loans,made by a bank or finance company, on which repayments or interest payments are not being made on time. A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time (At present 90 days). The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments.

Special Mention Accounts (SMAs) - According to the new stressed assets framework of RBI, all loans aboveRs.100 crore should be classified under three categories of so-called special mention accounts (SMA): SMA-0 for those where the borrowers pay up within 30 days of the deadline for payment; SMA-1, where the repayment is made between 30 days and 60 days; and SMA-2, where the repayment is made between 61 days and 180 days. The third category includes companies that have defaulted on repayments and those that potentially could, an indication that RBI wants to treat late payers as potential defaulters.

Evergreening of loans - refers to the practice of companies taking a fresh loan to pay up an old loan.

Basis Point: One hundredth of 1%. A measure normally used in the statement of interest rate e.g., a change from 5.75% to 5.81% is a change of 6 basis points.

Bonds and Debentures –

A debenture is a debt security issued by a corporation that is not secured by specific assets, but rather by the general credit of the corporation. Stated assets secure a corporate bond, unlike a debenture, but in India these are used interchangeably.

Bonds - Publicly traded long-term debt securities, issued by corporations and governments, whereby the issuer (Borrower) agrees to pay a fixed amount of interest over a specified period of time and to repay a fixed amount of principal at maturity to the Investor or buyer of the bond (Lender). The borrowers include public financial institutions and corporations. The lender is the investor when an individual buys a bond. In return for the loan, the issuer of the bond agrees to pay a specified rate of interest over a specified period of time. Typically bonds are issued by PSUs, public financial institutions and corporates. Another distinction is SLR (Statutory liquidity ratio) and non-SLR bonds. SLR bonds are those bonds which are approved securities by RBI which fall under the SLR limits of banks.

Yield (Internal rate of Return): – Rate of Return from a security

An investment in knowledge pays the best interest. - ~Benjamin Franklin

Courtesy : The Mint , Economic Times