RBI News

On 30 December, 2019, the Central Board of Direct Taxes (CBDT) issued a notification which ordered companies whose turnover exceeded 50 crore to include the Unified Payments Interface (UPI) and RuPay debit cards as payment methods. It was a welcome step to expand digital payments in India. Along with the Reserve Bank of India’s (RBI) decision to allow recurring payments through these instruments, this notification is expected to help expand India’s user base for digital transactions. More importantly, the CBDT’s notification was prescient because virtual payments have turned out to be lifesavers for consumers during the country’s 50-plus day covid-19 lockdown.

Amenities like pay-television, telecommunications, insurance, e-commerce and utilities form the bulk of cash and digital payments in India. The Boston Consulting Group estimates that only 20% of people in India pay their utility bills online, and the rest prefer to settle them through cash. The recent RBI circulars that allow recurring payments on cards, wallets and UPI are a sign that the central bank sees subscription payments as a vehicle to increase digital transactions.

However, a close examination of the CBDT guidelines suggests that they might make e-payment methods unviable. A primary concern is the absence of a recurring payments option. Imagine, for instance, the plight of a utility or subscription service customer who has to enter a one-time password (OTP) at each billing cycle. There’s a risk that he might pay the bill after the due date has passed. As a result, the customer will have to cough up a penalty fee or face service disruption, both of which are undesirable. Service disruption, particularly in subscription industries such as streaming, cloud services, insurance and food delivery, can lead to high customer churn. Even under normal circumstances, consumers should not have to encounter hurdles while using these services. To expect them to do so during a lockdown would be unfair. On the contrary, a smooth consumer experience at this time becomes paramount to preserve loyalty and boost spending.

People are relying on digital services to help them cope with this unprecedented lockdown. During this period, streaming platforms reported a 20% increase in viewership. Television viewership has also increased by 37%, reaching 1.2 trillion minutes in the first week of the lockdown, according to the Broadcast Audience Research Council. There is stress, uncertainty and a sense that the current situation will be prolonged. Such scenarios only reinforce the belief that consumers should not have to jump through unnecessary hoops to pay for utilities or subscription services. The hurdle of entering an OTP, or scanning a Quick Response (QR) code after each billing cycle, makes the UPI and RuPay payments experiences cumbersome.

Another cause of concern is that procedural delays prevent stakeholders in the ecosystem from adopting the UPI and RuPay recurring infrastructure. A high failure rate of digital transactions only exacerbates the situation. In its report on deepening digital payments, RBI acknowledged that there is scope to reduce failure rates and recommended that payment system operators bring the rate of declined transactions down by 25% every year.

Historical evidence shows that it can take close to a year for ecosystem stakeholders to implement new technical specifications. Given the current covid-19 situation, subscription services may need an additional six months to a year to integrate these payment services so that they work efficiently for consumers.

The execution of UPI 2.0 is a case in point. In 2018, the National Payments Corporation of India announced an updated payments interface that allowed consumers to pre-authorize money to be paid later. But it wasn’t until mid-2019 that specifications were released to payment service providers (PSPs). Nine months later, UPI 2.0’s certification is still underway and PSPs are yet to implement it. As a result, the interface is still not ready to go live.

For merchants and payment service providers, such a scenario is far from ideal. Every hurdle—particularly the prolonged rollout of technical specifications—can affect their daily operations. Technology tends to outpace policy mandates consistently, and it is rare for governments to keep up with them. Since the convenience and importance of recurring payments is well established, it’s unclear why there is a delay in this particular instance.

In this context, the government would be well advised to direct a faster rollout of technical specifications. Stakeholders such as the regulator, National Payments Corporation of India , banks and payment service providers should work towards speeding up the development of UPI and RuPay recurring payment functionality.

This acceleration will aid new payment systems to go live faster and drive higher rates of adoption by consumers. Consequently, the volume of digital transactions by Indians, which stood at 1.45 billion in January 2020, will increase, which was also the intention of the notification issued by the Central Board of Direct Taxes.

Uday Kotak had once moved before the Bombay High Court in December 2018 against RBI’s diktat on promoter holding in banks.

Kotak Mahindra Bank Ltd.’s promoter Uday Kotak on Tuesday sold 56 million shares held by him in the bank for at least Rs. 6,913.75 crore through a block deal in an effort to reduce his stake in the bank to 26.1%, close to the promoter holding level allowed by the Reserve Bank of India.

According to regulatory filings, buyers of the shares included The Regents of the University of California (Rs. 680.75 crore), Oppenheimer Developing Market Fund (Rs. 662.92 crore), SBI Mutual Fund (Rs. 408.46 crore), JP Morgan Securities Ltd. (Rs. 506.91 crore), Aditya Birla SUN Life Mutual Fund (Rs.385.77 crore), Canada Pension Plan Investment Board (Rs.378.33 crore), Fidelity-owned funds (Rs. 350.21 crore), Stitching Depository APG Emerging Markets Equity Pool (Rs. 297.95 crore), Aberdeen Asset Management Asia Ltd. (Rs.287.43 crore), T. Rowe Price International Inc. (Rs. 204.36 crore), Government of Singapore Investment Corp. Pte Ltd. (Rs.204.36 crore), Axis Mutual Fund (Rs. 204.23 crore), Europacific Growth Fund (Rs. 174.20 crore), ICICI Prudential Life Insurance Co. Ltd. (Rs. 151.28 crore) and so on.

Kotak, who had a prolonged disagreement with the central bank over his personal holding in the private lender, had moved the Bombay High Court in December 2018 against an RBI’s diktat on promoter holding in banks.

Tuesday’s block deal will help Kotak sell 2.83% stake in the bank in the secondary market, ending the stalemate between the central bank and the private bank’s promoter.

Even though the stake sale was supposed to happen at a price band of 1,215-1,240 per share, on Tuesday, the exchange data showed that all the shares of Kotak were sold at the upper end of the price band at Rs. 1240 each.

The placement agents for this deal are Kotak Securities Ltd, Morgan Stanley India Company Pvt Ltd and Goldman Sachs (India) Securities Pvt Ltd.

Kotak, the richest banker in Asia, is the managing director of Kotak Mahindra Bank, the fourth largest private sector lender in the country.

In February, the bank and RBI had reached an agreement under which Kotak had agreed to reduce his stake over a period of time. Under the agreement, the promoter stake was to be reduced to 26% by August end. The promoter stake in the bank stood at 28.93% before Tuesday’s block deal.

In February, the bank and RBI had reached an agreement under which Kotak had agreed to reduce his stake over a period of time. Under the agreement, the promoter stake was to be brought down to 26% by August end. The promoter stake in the bank stood at 28.93% before Tuesday’s block deal.

Uday Kotak will still have to trim another 0.1% in the bank to comply with RBI guidelines.

Earlier, RBI had asked the bank to cut its promoters’ shareholding to 20% by 31 December, 2018, and to 15% percent by 31 March, 2020. But, fresh negotiations with RBI in January made things easier for Uday Kotak.

“Further to our intimation dated 30 January 2020,…the Reserve Bank of India has granted its final approval vide its letter dated 18 February 2020 in the matter relating to dilution of promoters” shareholding in the bank,” said the bank in a regulatory filing.

Earlier, in August 2018, in order to dilute his promoter holding in the bank Kotak had proposed an issuance of perpetual non-cumulative preference shares (PNCPS) to cut promoter stake to 19.7%, which was disapproved by RBI.

The bank had then challenged the RBI’s contention in the Bombay High Court.

The RBI’s bank licensing rules mandate that a private bank’s promoter will need to pare holding to 40% within three years, 20% within 10 years and to 15% within 15 years.

On Tuesday, the bank’s stock closed up 7.52%, cheering the block deal carried out by the promoter. Shares of Kotak Mahindra Bank has been on a steady uptrend over the past fortnight. Since 18 May, the bank’s stock has been risen from Rs. 1,113.45 to Rs. 1343.20 per share on BSE.

Market resilience for the stock is evident from the past two deals involving the sale of Kotak Mahindra Bank’s shares. On Saturday, Kotak Mahindra raised at least Rs. 7,442.5 crore via issuance of 65 million shares in a qualified institutional placement (QIP).

Following a board meeting, the bank had said that shares have been offered to investors at Rs. 1145 apiece, which was at a discount of 6.43% to the market price of Rs. 1,223.70 then. Kotak Mahindra bank had said on 26 May that it had set a floor price of Rs1,147.75 per share for the offering. As per Sebi norms, the bank was allowed to offer a maximum discount of up to 5% on the floor price to investors.

Institutional investors including Invesco Oppenheimer Developing markets Fund, Canada Pension Plan Investment Board (CPPIB) and ICICI Prudential Asset Management Co. Ltd. have been allotted 8.02%, 7.12% and 6.30% of the total offer size respectively.

ICICI Mutual fund bought shares through 18 of its MF schemes in the QIP, which was opened on 26 May and closed on 29 May.

On 22 April, the bank had announced its plan raise capital by selling fresh equity shares through a QIP.

Like many other Indian banks, Kotak Mahindra Bank will use the proceeds of the QIP primarily to bolster its balance sheet and strengthen its capital buffers as the lockdown caused by covid-19 pandemic is expected to lead to potentially higher slippages in the coming quarters. The bank may also use the capital to tap opportunities arising out of the crisis.

The bank’s capital adequacy ratio is around 18% at present. Banks are currently required to maintain a capital adequacy ratio (CAR) of 9%. CAR is the ratio of a lender’s capital as compared to its risk weighted assets (cash, loans, investments etc.) and current liabilities (taxes, interests, expenses, deposits etc.)

RBI on 5 March placed Yes Bank under a moratorium sensing the bank’s near collapse and a systemic crisis

On 15 March, it had informed exchanges that the bank’s AT-1 bonds worth 8,415 crore will be written down to zero

MUMBAI: The controversy around the write-off of the additional tier-one bonds (AT-1) by Yes Bank Ltd during the March quarter has continued unabated. In fact, the rift between the bondholders and the lender has now widened.

Axis Trustee Services Ltd, which represents several direct and indirect retail bondholders, has issued a notice to Yes Bank, alleging that the failed to make adequate disclosures about the instrument when it sought shareholder nod to raise funds. Yes Bank in turn has said trustees were creating hurdles in fund raising and smooth functioning of the bank.

On 15 March, the cash-strapped private lender had informed that the exchanges the bank’s AT-1 bonds worth 8,415 crore will be written down to zero, in compliance globally accepted Basel-III norms that mandate writing down of such bonds in the wake of an emergency.

The bonds stand extinguished as on 14 March.

The move followed the Reserve Bank of India on 5 March placing Yes Bank under a moratorium sensing the bank’s near collapse and a systemic crisis.

Fund houses including Nippon India Asset Management Co., Baroda Asset Management India Ltd, UTI Asset Management Co. Ltd, Franklin Templeton Asset Management (India) Pvt. Ltd, PGIM India Asset Management Pvt. Ltd have side-pocketed their exposure to Yes Bank.

Axis Trustee Services, the debenture trustee for the AT1 bondholders, had filed a case challenging the write-down in the Bombay high court. It obtained an order that subsequent action by the bank will be subject to orders of the court.

Yes Bank on 22 April had informed bourses that it was issuing a postal ballot notice to its shareholders seeking their nod to raise funds worth 5,000 crore.

Following this, Axis Trustee alleged that in the postal ballot notice the bank has failed to make full disclosures with respect to AT-1 bonds. The lender did not disclose that the write-offs have been challenged at the Bombay high court and if it orders the reversal of the write-off it could have implications on the equity holders, Axis Trustee said.

It said that Yes Bank only mentions that AT1 bonds have been written off in postal ballot notice.

“The adjudication of the Hon’ble Court on the decision to write down the AT-1 Bonds may have a bearing on all subsequent actions of the board of directors including activities such as raising additional capital on the basis that the AT-1 bonds have been written down. The part disclosure of the fact of extinguishment of the AT-1 Bonds while omitting the mention of pendency of legal proceedings amounts to insufficient disclosure,” said Axis Trustee in the notice.

Yes Bank has countered this by saying the assertions are baseless and an attempt to create hurdles in the crucial fund raising exercise.

Despite no relief from the Bombay high court, trustees are engaging in this proxy correspondence to undermine and interfere in the smooth functioning of the bank, said Yes Bank.

Yes Bank further termed the petition filed by Axis Trustee as immaterial (under listing norms) as it is not-maintainable and devoid of any merit.

The matter did not end here, Axis Trustee in its final reply on 29 May said the bank has as an afterthought to rebut trustees’ grievance of insufficient disclosures has placed reliance on “so called wide publicity of the litigation in order to imply that there is therefore no necessity for the adequate disclosures.”

The writing down of Yes Bank AT-1 bonds has been a matter of litigation as it is seen to unfairly confers benefit and enriches on existing shareholders of the bank including erstwhile promoter Rana Kapoor, alleged to have indulged in fraudulent lending transactions.

Raising fresh equity is likely to enrich existing shareholders and is prejudicial to the interest of the bondholders, Axis Trustee has claimed.

Borrowers should remember that opting for moratorium doesn’t ease the cost of the loan and is just a deferment.

The adverse impact on the interest cost would be significant in case of big-ticket loans like loan against property or home loans.

The Reserve Bank of India (RBI) has extended the EMI moratorium period for three months from June to August in order to provide relief to those who are facing a liquidity crunch. Many customers have been anxiously waiting for the details on how they can avail of the extension on EMI moratorium. Will it be automatic for those who have already opted for EMI moratorium or they will have to apply for it again? Or those who haven’t applied for it earlier can they opt for it now? Most of the banks have come out with the details. Here is what you need to do in case you are a customer of any of these banks.

ICICI Bank

ICICI Bank customers can apply for the moratorium for June only right now. If you want to extend it further you will have to reapply for July and August. You need to apply five days before the date on which your EMI is due. If you apply within less than five days, your EMI may be deducted. However, you will be refunded the amount in the next seven working days if you apply for the moratorium in that month. The last day for applying for the moratorium for June is 24th. You can apply for the extension on the bank’s website or through links sent on email or SMS by the bank.

HDFC Bank

Even in the case of HDFC Bank, those who have opted for moratorium earlier will not get moratorium automatically, and will have to reapply for the extension on the bank’s website. You can choose for the moratorium for three months while the customers have been given the option to choose one month at a time. No action is required on the part of those who don’t want to apply for a moratorium. If the bank deducts the EMI before the person applies for a moratorium for the month of June, it will be refunded within five working days of acceptance of their moratorium request.

State Bank of India

SBI customers will receive an SMS from the bank on the registered number and they will have to reply ‘Yes’ within five days of receipt of the SMS.

However, borrowers should remember that opting for moratorium doesn’t ease the cost of the loan and is just a deferment.

“Borrowers availing of the moratorium will continue to incur interest cost during the moratorium, which will increase their overall interest cost. The adverse impact on the interest cost would be significant in case of big-ticket loans like loan against property or home loans with large loan outstanding and long residual tenure,” said Naveen Kukreja, CEO and co-founder, Paisabazaar.com.

“Hence, only those borrowers who are unable to service their existing loans due to liquidity or cash flow disruptions should opt for the loan moratorium. Others should continue to repay their loans as per their original schedule,” he added.

Most banks have come out with calculators, which can be used by borrowers to ascertain their cost before opting for it.

Though the details of the buyers and sellers were not known, the bank’s promoter Uday Kotak was expected to sell up to 56 million shares through a block deal today to reduce his stake in the bank to 26.1% to meet RBI regulations

MUMBAI: Shares of Kotak Mahindra Bank Ltd on Tuesday gained as much 5% after a huge block deal which saw around 56 million shares changing hands in bunched trade, Bloomberg reported.

Though the details of the buyers and sellers were not known, the bank’s promoter Uday Kotak was expected to sell up to 56 million shares through a block deal today to reduce his stake in the bank to 26.1% to meet RBI regulations.

At 9.20 am, the Kotak Mahindra Bank stock was at 1,312 on the BSE, up 4.9% from previous close.

Earlier, Mint reported that these shares will be priced between 1,215 and 1,240 and will constitute 2.83% of the total equity shares outstanding. Based on these share prices, the deal will be valued between 6,804-6,944 crore.

The placement agents for this deal are Kotak Securities Ltd, Morgan Stanley India Company Pvt Ltd and Goldman Sachs (India) Securities Pvt Ltd.

In January, Kotak Mahindra Bank and Reserve Bank of India (RBI) had reached an agreement under which Kotak agreed to reduce his stake over a period of time. Under the agreement, the promoter stake has to be brought down to 26% by August. The promoter stake in the bank now stands at 28.93%.

The promoter will still have to trim another 0.1% in the bank to comply with RBI guidelines and the person cited above said it would also be completed before the deadline.

Experts said smaller and weaker NBFCs have either not been able to raise money or have had to settle for less at higher rates

NBFC funding market has been improving since February but the covid-19 pandemic and Yes Bank bailout have raised costs for these firms

MUMBAI: Smaller and weaker non-bank financiers face more difficulty in raising debt compared to their peers with stronger parentage as risk aversion intensifies amid the covid-19 crisis.

The covid-19 pandemic has affected the funding of most non-banking financial companies (NBFCs) with bond spreads over the three-year government securities rising by another 50-70 basis points (bps), against the 250-300 bps existing spread.

Spreads indicate the difference between yield of a particular bond and yield on the government securities (Gsec), with same maturity.

Experts said smaller and weaker non-bank financiers have either not been able to raise money or have had to settle for less at a higher rate. For instance, Aadhar Housing Finance Ltd and IndoStar Capital Finance Ltd informally tested the waters in the last few months but decided against resorting to bond markets owing to tepid investor interest. IndoStar recently raised 1,225 crore from Brookfield, but in equity capital.

While IndoStar declined to comment, an email sent to Aadhar Housing remained unanswered till the time of press.

Ajay Manglunia, managing director (MD) and head at JM Financial Products Ltd said spreads have widened for all non-banks since the onset of the coronavirus-led national lockdown, instead of contracting despite the flow of liquidity.

“Although there has been a surge in liquidity after RBI’s (Reserve Bank of India) measures, the spreads have gone up for non-banks. Stronger ones are still being preferred by the bank and weaker NBFCs and housing finance companies (HFCs) where there has been rating downgrades, the scenario is worse. The market is fearful about leverage and unsure about how covid-19 is likely to impact cashflows,” said Manglunia.

According to a report by Credit Suisse, NBFC funding market has been improving since February but events like the covid-19 pandemic and Yes Bank bailout have again resulted in an increase in funding costs for the sector. The report pointed out that since the Yes Bank crisis, spreads for NBFCs in the bond market have gone up by at least 90-200 bps.

However, the increase in spread does not mean the cost of capital has gone up because the Gsec yield has also declined. It indicates the risk assessment of investors, still wary of these smaller lenders’ ability to repay. The yield on the 10-year benchmark bond has dropped by 45 bps since the beginning of the lockdown, closing at 5.77% on Monday. Similarly, the yield on the five-year government bond has fallen 91 bps in the same period.

The problem for NBFCs also rise from the fact that banks have been very selective in granting the three-six-month moratorium, though their customers have availed it. This has led to concerns over asset-liability problems for non-bank financiers who have not been granted the deferment.

“Some 10-23% of borrowings for NBFCs are due for maturity over the next six months (April-September 2020). With 30-75% of loans under moratorium, loan book repayments would now be sharply lower until 31 August,” said the Credit Suisse report. Consequently, NBFCs would have to dip into their cash balances (5-16% of their balance sheets) to meet repayment obligations and avoid defaults, it added.

Arvind Chari, head-fixed income and alternatives, Quantum Advisors Pvt Ltd said the market is clearly differentiating between well-run NBFCs, good promoter backing and safer segments.

“Weaker ones are either not able to raise money at all or are able to raise money at a higher rate and in small amounts. The covid-19 situation has just compounded all of this,” said Chari.

India’s long-term foreign-currency credit rating was cut to Baa3 from Baa2, Moody’s said in a late evening statement on Monday

Traders in India are yearning for the central bank to backstop the rupee and sovereign-bond markets after Moody’s Investors Service cut the credit rating to the lowest investment grade.

“This is definitely not welcome news and we could see some more foreign outflows,” said Ashish Vaidya, head of trading at DBS Bank Ltd. in Mumbai. “There will be a knee-jerk selloff in the rupee and bonds but we expect the RBI to jump in to curb any bouts of undue volatility.”

India’s long-term foreign-currency credit rating was cut to Baa3 from Baa2, Moody’s said in a late evening statement on Monday, citing policy challenges in addressing a prolonged slowdown and the deteriorating fiscal position. The outlook remains negative, it said.

The cut brings Moody’s rating on India on par with S&P Global Ratings and Fitch Ratings Ltd., both of which have a BBB- rating. Any downgrade by S&P and Fitch will hurt flows to a nation that relies on imported capital to fund investment. Already, global funds have yanked $14 billion from rupee bonds this year, the highest in emerging Asia.

An RBI spokesperson didn’t immediately respond to an email seeking comment.

“The RBI will have to come out with an explicit support for the bond market after this development, otherwise it’s going to be very tough,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. He expects benchmark yields to climb by 15-20 basis points on Tuesday, he said.