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.
