FINANCE CURRENT AFFAIRS

JANUARY WEEK I
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Contents
IndusInd Bank Partners with NPCI for cross-border payments ............................................................. 2
Bancassurance Agreement .................................................................................................................... 2
IPPB signs MoU with HDFC Bank ........................................................................................................... 2
SEBI Board Meeting Decisions ............................................................................................................... 3
Trend and Progress of Banking in India 2020-21 Report: An Overview ................................................ 6
Financial Stability Report-RBI............................................................................................................... 10
RBI Governor Viewpoint on financial system ................................................................................ 10
Macro-Financial Risks ...................................................................................................................... 11
Financial Institutions: Soundness and Resilience .......................................................................... 14
Regulatory Initiatives ...................................................................................................................... 18
Key Features of India’s BoP in Q2:2021-22.......................................................................................... 22
Framework for offline digital payments .............................................................................................. 23
RBI releases 2021 list of Domestic Systemically Important Banks (D-SIBs)......................................... 24
New Appointments .............................................................................................................................. 26

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IndusInd Bank Partners with NPCI for cross-border payments

 IndusInd Bank has signed an agreement with the National Payments Corporation of India
(NPCI) for offering real-time cross-border remittances through Unified Payments Interface
(UPI).
 IndusInd Bank has become the first Indian bank to
go live on UPI for cross-border payments/NRI
remittances.
 Under this arrangement, Money Transfer Operator
(MTO) partners of IndusInd Bank would use the
bank's channel to connect with NPCI's UPI payment
systems for validation and cross-border payment
settlement into beneficiary accounts.
 IndusInd Bank has started off with Thailand for Foreign Inward Remittance (FIR) through UPI.
The bank has started the service with DeeMoney, a Thailand-based financial solutions
provider offering money transfers and foreign currency exchange services. Customers using
DeeMoney website can easily transfer funds just by adding the beneficiary's UPI ID.
 IndusInd Bank also plans to add more partners in various other countries for cross border-
payments via UPI in the near future.
 UPI for cross border payments will enable remitters to send money in a safe, secure, and
convenient manner using only the UPI ID of their beneficiaries in India without having to
remember the beneficiary account details, IFSC, visiting the bank, filling lengthy forms, etc.

Bancassurance Agreement
 HDFC Life has announced a bancassurance tie-up with South Indian Bank that will enable
customers of the bank to avail a range of life insurance products of the insurer that include
solutions for protection, savings and investment, retirement and critical illness.
 This bancassurance partnership will strengthen HDFC Life’s business across India.
 The company is one of the largest life insurance players offering a wide range of products
which offer customers the dual benefits of protection as well long term savings based on
their life stage requirements.

IPPB signs MoU with HDFC Bank

 India's biggest private lender HDFC Bank has partnered with India Post Payments Bank (IPPB)
to offer its banking services in semi-urban and rural areas.
 Under the pact, HDFC will cater to over 4.7 crore customers of IPPB, most of which (around
90 per cent) reside in rural areas.
 HDFC Bank alliance will allow IPPB to provide affordable and diversified offerings to its
customers through its doorstep banking service.
 HDFC Bank also aims to boost its financial inclusion drive by leveraging IPPB’s network of
650 branches and over 136,000 banking access points.

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SEBI Board Meeting Decisions

1. IPO Related

 The markets regulator tightened rules for initial

public offerings

 Why
With an aim of tackling regulatory gaps and
extreme stock price volatility on their trading
debut, after a record year for IPOs that saw Indian
companies raise ₹1.19 trillion.

 The new rules address how companies set IPO price bands, when anchor investors can sell
their shares, disclosures about how the company can spend share sale proceeds, and how
much large shareholders can sell on listing day.

 SEBI addressed the ongoing trend of promoters selling their entire stake in the
company through IPO.
When promoters of companies or rather startups that are not doing well financially
sell their entire stake in the company, it is bound to shake investor confidence in the
IPO.
 The new rules bar large shareholders, with more than 20% stakes in the
company, from selling their entire holdings on listing day. However, they can
sell 50% of their shares on listing.

 Further, shares offered for sale by such selling stakeholders, holding less than
20 per cent of pre-issue shareholding of the issuer, should not exceed more
than 10 per cent of pre-issue shareholding of the issue.

 Currently, large shareholders can sell their entire holding through the offer-
for-sale (OFS) route. But with new-age companies having neither a profit
track record nor an identifiable promoter, a complete exit by prominent
shareholders may lead to a crisis of confidence among retail investors.

Offer for sale is the sale of existing shares of the company held by promoters
or major investors to the public.

 The regulator tightened disclosure norms around how companies can spend the
proceeds from public fundraising.

 Companies can only use 25% of the IPO proceeds for unidentified acquisitions
about which it has not been mentioned in the offer document.

 The board of Sebi cleared a proposal to prescribe a combined limit of up to 35

per cent of the fresh issue size for deployment on such objects of inorganic

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growth initiatives and general corporate purpose (GCP), where the intended
acquisition/strategic investment is unidentified in the objects of the offer.

 In addition, rating agencies will monitor how the funds are used.
 Lock-in for Anchor Investors- Anchor investors are institutional investors who are
allotted shares just before an IPO opens for subscription.

 Sebi increased the lock-in period for anchor investors from 30 days to 90 days
to prevent share-price volatility and losses for retail investors. This will apply
to only 50% of the allocation to anchor investors and will take effect in April.

 The regulator observed that the presence of institutional and anchor

investors offers confidence to the broader market. But when the anchor
investors exit as soon as the mandatory lock-in period of 30 days end, it turns
the stock price volatile.

 Shares of food delivery major Zomato sank 8.8% when anchor

investors exited their holding after the one-month lock-in.
 Shares of One97 Communications, Paytm’s parent, plunged as much
as 13% on 15 December as anchor investors sold their holdings.

 Price Band- Sebi also tweaked the price band norms. The difference between the
floor price and the upper price band shall be at least 5%.

The regulator also observed that the price band offered by companies was extremely
narrow.

 Currently, large, non-institutional investors have a quota of 15% of the issue size in
an IPO.
The regulator has bifurcated the quota by mandating that one-third of the retail
investor quota will be reserved for investors with an application size of more than ₹2
lakh and less than ₹10 lakh. The rest will be offered to investors with an application
size of more than ₹10 lakh.

 A preferential issue is an issue of securities by companies to a select group of

investors rather than public issue. A person holding preferential shares has the right
to be paid from company assets before common stockholders if the company goes
into bankruptcy.

Sebi also approved new measures that aim at reducing the holding period for
investors who participate in preferential issue of equity shares by a company.

 Promoters who will have allotment of up to 20 per cent of the post-issue

paid-up capital the lock-in period will be reduced to 18 months from the
current three years.

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 Similarly, for promoters whose allotment of shares will count for more than
20 per cent of post-issue paid-up capital, the lock-in period will now be six
months instead of 12 months.

 Lock-in period for non-promoter investors in a preferential issue of equity

shares will be reduced to six months from 12 months earlier.

2.Appointment or re-appointment of persons who fail to get elected as

directors

 Appointment or a re-appointment of any person, including as a managing director or

a whole-time director or a manager, who was earlier rejected by the shareholders at
a general meeting, shall be done only with the prior approval of the shareholders.

3.Amendment to SEBI (Alternative Investment Funds) Regulations, 2012 (AIF

Regulations)

 What is Alternative Investment Fund

 It is a privately pooled investment vehicle incorporated in India which collects
funds from sophisticated, high-net worth investors (Indian or foreign) and
invest the funds as per the investment policy for the benefit of investors.
 It is an unconventional financial asset. Conventional assets include stock and
bonds. It is more risky investment and is complex in nature.
 Examples are venture capital funds, private equity funds, hedge funds, angel
funds, infrastructure funds, etc.

 The Board approved amendment to AIF Regulations, to introduce Special Situation

Funds, a sub-category under Category I AIF, which shall invest only in ‘stressed
assets’ such as:
 Stressed loans available for acquisition in terms of Reserve Bank of India
(Transfer of Loan Exposures) Directions, 2021 or as part of a resolution plan
approved under Insolvency and Bankruptcy Code, 2016
 Security receipts issued by Asset Reconstruction Companies
 Securities of companies in distress.
 Any other asset/security as may be prescribed by the Board from time to
time

 Minimum investment by an investor to be INR 10 crore and INR 5

crore in case of an accredited investor
 Minimum corpus of INR 100 crore
Corpus is described as the total money invested in a particular scheme
by all investors.

Category I AIFs are funds with strategies to invest in start-up or early stage ventures or social ventures or
SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or
economically desirable

4.Amendments to SEBI (Mutual Funds) Regulations

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 As part of amending the mutual fund regulations, the market regulator will make it
mandatory for the funds to follow Indian Accounting Standards (Ind AS) from 2023-
24 onwards.

 Mutual fund trustees will need to seek the consent of unitholders when the majority
of trustees decide to wind up a scheme

5. Amendment to Securities and Exchange Board of India (Stock Brokers)

Regulations, 1992 and SEBI (Depositories and Participants) Regulations, 2018

 Amendment to provide for revised Networth requirement for Trading Members (TMs), Self-
Clearing Members (SCMs), Clearing Members (CMs), Professional Clearing Members (PCMs),
Depository Participants (DPs) and Deposit & Fees requirement for members in Electronic
Gold Receipt (EGR) segment

Trend and Progress of Banking in India 2020-21

Report: An Overview
The Reserve Bank of India released a report on "Trend and Progress of Banking in India 2020-21".
This Report presents the performance of the banking sector, including co-operative banks, and non-
banking financial institutions during 2020 and 2021

Highlights

 The banking sector remained resilient throughout the pandemic, aided by extraordinary
policy initiatives by central banks and governments.
 Higher capital, better liquidity buffers and lower leverage allowed them to cushion
the shock of the pandemic.
 Measures such as moratorium on payment of loan installments, asset classification
standstill, restructuring of loans and restrictions on dividend payouts alleviated the
stress, while helping banks to continue to provide credit to productive sectors.
 As vaccination drives gathered pace across jurisdictions and economic activity
hesitantly started turning around, time-bound and smooth unwinding of regulatory
forbearances assumed importance from the viewpoint of financial stability

 Decline in Credit growth

 In the wake of the pandemic-related lockdowns during 2020-21, supply chains froze,
and demand declined on economic agents trying to conserve cash with a
precautionary motive. This resulted in sharp decline in credit growth.
 Credit growth was muted, indicative of pandemic scarring on aggregate demand as
also risk aversion of banks. However, the nascent signs of recovery were visible in
credit growth during the year.

 Ratios and other indicators- Data available indicate that banks’

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 gross as well as net non-performing assets have moderated

 provision coverage ratios (PCRs), capital buffers as well as profitability indicators
have improved relative to pre-pandemic levels

 Resolution of Stressed Assets

 During the two waves of COVID-19, the Reserve Bank Announced Resolution
Frameworks (RF) 1.0 and 2.0 to provide relief to borrowers and lending institutions.
 With the expiry of the suspension on fresh proceedings under the Insolvency and
Bankruptcy Code (IBC) on March 24, 2021, creditors can again leverage on the IBC
mechanism for resolution of stressed assets.
 The setting up of the National Asset Reconstruction Company Limited (NARCL), to
consolidate and take over the stressed debt from banks, is a step forward for
resolution of large value legacy assets.

 Recapitalisation Requirements after COVID-19

 Based on the capital position as on September 30, 2021, all PSBs and PVBs
maintained the capital conservation buffer (CCB) well over 2.5 per cent.
 Going forward, however, banks would need a higher capital cushion to deal with
challenges on account of the ongoing stress experienced by borrowers as well as to
meet the economy’s potential credit requirements

 Climate Change
 In April 2021, RBI joined the Network for Greening of Financial System (NGFS)—a
group of central banks and supervisors willing to share best practices and contribute
to the development of environment and climate risk management in the financial
sector.
 RBI is actively engaged in conducting research on areas such as green finance and the
impact of climate change on various macroeconomic variables such as inflation and
growth
 A ‘Sustainable Finance Group’ (SFG) was set up in the Reserve Bank in May 2021
which coordinates with other national and international agencies on issues relating
to climate change.
The group would be instrumental in suggesting strategies and evolving a regulatory
framework, including appropriate environmental, social and governance (ESG)
disclosures, which could be prescribed for banks and other regulated entities (REs) to
propagate sustainable practices and mitigate climate related risks in the Indian
context.

 Open Banking
 Open banking frameworks allow authorised third parties to access customers’ data,
with the explicit consent of the latter.
 India has embraced an approach where both the regulator and the market
collaborated towards development of the open banking space.
 In India, under the guidance of the Reserve Bank, the National Payments Corporation
of India (NPCI) developed systems such as unified payments interface (UPI) and
released its application programming interface (API) for banks and third-party app
providers to build upon.

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 Market participants are also driving innovation and many banks are releasing their
own APIs and joining forces with FinTech companies.
 Moreover, with the launch of its regulatory sandbox and the Reserve Bank
Innovation Hub, the Reserve Bank has been guiding new vistas of development in
financial intermediation.
 At the same time, the importance of customer privacy and data protection cannot be
overemphasised. Going forward, the challenge is to generate and sustain trust
amongst customers about safety and security of the system while also nurturing
innovation.

 Digital Lending
 Banks and NBFCs too, have started lending directly through their own digital
platforms or indirectly through an outsourced platform.
 Many large multi-national corporations whose primary business is technology (e-
commerce, social media, payments enablers etc.), popularly known as BigTechs, have
started lending either directly or in partnership with regulated financial entities.
 While use of digital channels in financial services is a welcome move, the potential
downside risks embedded in such endeavours need to be addressed.
 Going forward, a balanced approach needs to be followed so that the regulatory
framework supports innovation while ensuring data security, privacy, confidentiality,
and consumer protection.

 Central Bank Digital Currency

 In its basic form, a central bank digital currency (CBDC), provides a safe, robust, and
convenient alternative to physical cash.
 Certain crucial questions about design elements of CBDC need to be navigated
before its introduction

 Payments Banks
 Payments banks offering basic banking services to the underserved segments of the
society by leveraging technology—are under constant pressure to innovate to
maintain competitiveness, especially against BigTech players.
 As a result, their operational costs and investment needs are higher than other
segments of the banking sector, affecting their profitability.
 Given the higher incidence of frauds and complaints about their operations, PBs
need to be vigilant on these fronts while addressing customer complaints efficiently

 Small Finance Banks

 The primary cashflows of SFBs were adversely affected during the first phase of the
pandemic. Even before, structural problems have beset the sector.
 From the perspective of sound risk management, SFBs need to diversify their assets
as well as their liability profiles.
 The governance culture in these banks needs improvement
 SFBs also need to strengthen their information technology (IT) infrastructure for
better customer experience and for cyber security resilience.

 Co-operative Banks

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 The co-operative banking sector in India emerged relatively unscathed from the first
wave of the pandemic, although structural issues continue to mar the sector.
 Capital Related Issues and issue on Amalgamation of District Central Co-operative
Banks (DCCBs) with State Co-operative Bank (StCB) still need to be addressed

 PCA
 The number of banks under the Reserve Banks’s prompt corrective action (PCA)
framework reduced from four at end-March 2020 to one at end-September 2021,
reflecting bank-level as well as overall improvement in SCBs’ soundness indicators.
 PCA framework introduced for NBFCs

 NBFC Sector
 The pandemic posed significant challenges to the NBFC sector during the first wave.
 Aided by various policy initiatives, NBFCs have emerged stronger, with reasonable
balance sheet growth, increased credit intermediation, higher capital and lower
delinquency ratio.
 Recognising the increasing importance of NBFCs in the financial ecosystem, the
Reserve Bank has implemented scale-based regulation to enhance the regulatory
oversight over the sector.
 Furthermore, NBFCs need to be better equipped and focused on cyber fraud
prevention as customers’ adoption of digital lending gathers pace.

Facts and Figures

 During 2020-21, the consolidated balance sheet of scheduled commercial banks (SCBs)
expanded in size, inspite of the pandemic.
In 2021-22 so far, nascent signs of recovery are visible in credit growth.
Deposits grew by 10.1 per cent at end-September 2021 as compared with 11.0 per cent a
year ago.

 Capital to risk weighted assets (CRAR) ratio of SCBs strengthened from 14.8 per cent at end-
March 2020 to 16.3 per cent at end-March 2021 and further to 16.6 per cent at end-
September 2021, partly aided by higher retained earnings, recapitalisation of public sector
banks (PSBs) and capital raising from the market by both PSBs and private sector banks
(PVBs).

 SCBs’ gross non-performing assets (GNPA) ratio declined from 8.2 per cent at end-March
2020 to 7.3 per cent at end-March 2021 and further to 6.9 per cent at end-September 2021.

 Return on assets (RoA) of SCBs improved from 0.2 per cent at end-March 2020 to 0.7 per
cent at end-March 2021, aided by stable income and decline in expenditure.

 The balance sheet growth of urban co-operatives banks (UCBs) in 2020-21 was driven by
deposits, while subdued credit growth led to acceleration in investments. Their financial
indicators, including capital position and profitability, improved.

 The profitability of state co-operative banks and district central co-operative banks
improved in 2019-20, while their asset quality deteriorated.

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 The consolidated balance sheet of NBFCs expanded during 2020-21, driven by credit and
investments of non-deposit taking systemically important NBFCs (NBFCs-ND-SI). Their asset
quality and capital buffers also improved.

Financial Stability Report-RBI

What is Financial Stability Report (FSR)?
 The Financial Stability Report (FSR) is published biannually.
 It reflects the collective assessment of the Sub-Committee of the Financial Stability and
Development Council (FSDC-SC) on risks to financial stability and resilience of financial
system.
 The Report discusses issues relating to development and regulation of the financial sector.

[The Financial Stability and Development Council (FSDC) is a non-statutory apex council
under the Ministry of Finance.
The objective of FSDC is to strengthen and institutionalize the mechanism for
maintaining financial stability, enhancing inter-regulatory coordination and promoting
financial sector development.]

FSR -24TH ISSUE

RBI Governor Viewpoint on financial system
 We are now nearing two years of living with the pandemic. Across the world, economic
activity has endured the waves of pandemic, buffered by exceptional policy support from
governments, central banks and financial regulators.

 After the destructive second wave of the pandemic in India in April-May 2021, which
interrupted an economic recovery that was gaining a foothold in the second half of 2020-21,
the Indian economy is regaining strength and resilience.

 Consumer confidence and business optimism are on the rise as the spread and scale of
vaccination expands.

 The outlook is progressively improving, though there are headwinds from global
developments and more recently from Omicron.

 Inflation remains a concern but Strong supply side measures to contain food and energy
prices have, however, worked towards moderating these risks.

 Financial institutions in India have remained resilient amidst the pandemic and stability
prevails in the financial markets, cushioned by policy and regulatory support.

 Balance sheets of banks remain strong and capital and liquidity buffers are being bolstered
to mitigate future shocks.

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 In the spectrum of financial markets that leverage on technology for their functioning, the
need for robustness of infrastructure, data security and the soundness of rules and
processes are of paramount importance, especially in the face of repeated and potentially
crippling cyber attacks.

 Indian financial system has stood up well and remains well prepared to meet the funding
requirements of the economy.

 The Reserve Bank of India remains resolute and committed in its endeavour to ensure a
robust and efficient financial system that supports strong, sustainable and inclusive growth
with macroeconomic and financial stability.

Macro-Financial Risks

 The global recovery has been losing momentum in the second half of 2021, impacted by
 resurgence of infections in several parts of the world
 supply disruptions and bottlenecks
 persistent inflationary pressures
 shifts in monetary policy stances and actions.

 The FSR details some key variables that capture this slip up.

 The Goods Trade Barometer combines a variety of trade-related component

indices into a single composite index that highlights turning points in world
merchandise trade and provides an indication of its likely trajectory in the
near future.

Goods Trade Barometer shows

that the World merchandise trade
volumes, which had risen 22.4 per
cent year-on-year in Q2 (April to
June) of the 2021 calendar year,
have been slowing in the second
half of the year.

The decline in the barometer

reflects a combination of tapering
import demand and disrupted
production and supply of widely
traded goods such as automobiles
and semiconductors.

 Another key index is the Baltic Dry Index, which is a measure of shipping
charges for dry bulk commodities.

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The BDI is often viewed as a leading indicator of economic activity because

changes in the index reflect supply and demand for important materials used
in manufacturing.

This index crossed its highest

mark in more than a decade in
October 2021, but it recorded a
sudden drop after that.

 Similarly, as the actual growth

data diverged from the previous
forecasts, the Global Economic
Surprise Index (GESI), which
compares incoming data with
economists’ forecasts to capture
the surprise element went into negative territory during July, August and
September (Q3:2021).

A negative reading of the surprise index suggests that economic releases have
on balance been lower than
consensus, meaning that agents
were more optimistic about the
economy.

 The slowdown in activity is occurring

even in countries with relatively high
vaccination rates that seemed to be
emerging as global growth drivers.

 For many Emerging Economies,

however, vaccine access remains a binding constraint and output and employment
remain below pre-pandemic levels.

 Tightening of global financial conditions, superimposed on elevated domestic inflation has

roiled Emerging Economies, in particular.

 With inflation persisting at unconscionable levels in Advanced economies, persistent

price pressures have induced some of them to raise policy rates and/or contemplate
hastening normalisation.
 Retrenchment in capital flows across most EMEs have amplified currency
depreciation among these.
 The US dollar posted large appreciations vis-a-vis EME currencies.

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 Capital flows to EME bond markets are showing signs of tapering off and flowing out,
while equity flows have turned volatile.

 More recently, Omicron has cast a shadow on global economic prospects.

 There are large pandemic-induced losses of gross domestic product (GDP) and jobs
that will take years to reclaim.
 Overall global demand has weakened, with world GDP growth estimated to have lost
a full percentage point in Q3:2021.
 Overall, the near-term outlook remains clouded, with global growth projections
being trimmed by multilateral agencies.

 Looking ahead, an important factor that is set to reshape the macroeconomic and financial
landscape is the impact of climate change. The changing climate is likely to trigger even
larger disasters.

 Overall, financial and business services seem to be weathering the pandemic, while
consumer services have weakened and manufacturing is facing headwinds from supply
disruptions. Global retail e-commerce sales are surging on pent up demand.

 Domestic Position

 Localised restrictions were eased and the engines of growth started revving up, aided
by the progress of vaccination.
 In the period following the release of the July 2021 FSR, the Indian economy
expanded by 8.4 per cent year-on-year (y-o-y) in July-September 2021, with the level
of GDP exceeding pre-pandemic levels (July-September 2019) for the first time since
the pandemic struck.
 More recent high-frequency indicators of economic activity suggest some loss of
momentum in the third quarter of 2021-22.
 The pace of the recovery remains uneven across sectors, inflation formation is being
subjected to repetitive supply shocks and the outlook is overcast with global risks.
 Disconnect between real economy and India’s equity markets
Lifted by the bull run in equity markets across the globe, the Indian equity market
surged on strong rallies with valuation metrics being above their historical averages
reflecting some disconnect between the real economy and equity markets.

High levels of divergence are a concern from the point of view of financial stability.

 Omicron haunts near-term prospects.

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Financial Institutions: Soundness and Resilience

 Scheduled Commercial Banks-Assessment of recent performance
 Credit Growth
 SCBs’ credit growth has been inching up during the current financial year.

 Industrial advances, personal

loans and service sector
advances - in that order -
accounted for the major
share of bank credit by the
end of H1:2021-22

 Deposits Growth
 Aggregate deposits growth
moderated from end-March 2021
to touch 9.3 per cent by December
3, 2021.
 Current account and savings
account (CASA) deposits continued
to outpace term deposits, reflecting
precautionary motives in the face of
uncertainty
 Asset Quality
 SCBs’ gross non-performing assets (GNPA) ratio stood at 6.9 per cent
at end-September 2021.
 The net NPA (NNPA) ratio declined by 10 bps during H1:2021-22

[GNPA stands for gross non-performing assets. It is an absolute

amount that tells you the total value of gross non-performing assets
for the bank in a particular quarter or financial year as the case may
be.

NNPA stands for net non-performing assets. NNPA subtracts the

provisions made by the bank from the gross NPA. Therefore net NPA

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gives you the exact value of non-performing assets after the bank
has made specific provisions for it.]

 The provisioning coverage ratio (PCR) moved up from 67.6 per cent in
March 2021 to 68.1 per cent in September 2021

[Provisioning Coverage Ratio (PCR) refers to the prescribed

percentage of funds to be set aside by the banks for covering
the prospective losses due to bad loans.]

 Capital Adequacy
 As in 2020-21, SCBs continued to bolster their capital having capital to
risk-weighted assets ratio (CRAR) rising to a new peak of 16.6 per cent
in September 2021.

 Earnings and Profitability

 The profits after tax (PAT) recorded a growth of 31 per cent. This was
primarily due to an increase in the PAT of PVBs and doubling of PSBs’
profits.
 The return on assets (RoA) and return on equity (RoE) maintained
their rising profile.

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 Macro Stress Test

 The resilience of SCBs’ balance sheets to unforeseen shocks emanating from the
macroeconomic environment has been assessed by using macro-stress tests through
which impairment and capital ratios are projected over a one-year horizon under a
baseline and two adverse (medium and severe) scenarios.

 What is a Stress Test?

o A bank stress test is an analysis conducted under hypothetical scenarios
designed to determine whether a bank has enough capital to withstand a
negative economic shock.
o These scenarios include unfavourable situations, such as a deep recession or a
financial market crash.
o Stress tests focus on a few key areas, such as credit risk, market risk, and
liquidity risk to measure the financial health of banks in a crisis.

 Rising NPA- Stress tests indicate that the GNPA ratio of all SCBs may increase to 8.1
per cent by September 2022 under the baseline scenario and further to 9.5 per cent
under severe stress.

[The baseline scenario is derived from the steady state values of macroeconomic
variables like GDP growth, combined fiscal deficit-to-GDP ratio, CPI inflation,
weighted average lending rate, exports-to-GDP ratio and current account balance-to
GDP ratio.]

 The common equity Tier I (CET 1) capital ratio of SCBs may reach 12.5 per cent by
September 2022 under the baseline scenario and decline to 11.9 per cent and 11.2
per cent under the medium and severe stress scenario.

Even under adverse scenarios, however, no bank is expected to face a decline of CET-
1 capital ratio below the regulatory minimum of 5.5%.

[CET 1capital includes the core capital that a bank holds in its capital structure.
CET1 ratio compares a bank’s capital against its risk-weighted assets to determine its
ability to withstand financial distress.
The core capital of a bank includes equity capital, disclosed reserves such as retained
earnings.]

 CRAR- Stress test results indicate that the system level CRAR may decline to 15.4 per
cent by September 2022 under the baseline scenario and to 14.7 per cent and 13.8
per cent under the medium and severe stress scenarios

Banks would be able to maintain CRAR well above the regulatory minimum of 9 per
cent as of March 2022 even in the worst case scenario.

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 Primary (Urban) Cooperative Banks

 Primary (urban) cooperative banks witnessed marginal credit growth as at the end of
September 2021
 The CRAR of UCBs deteriorated slightly from March 2021 to reach 12.9 per cent in
September 2021
 UCBs appear to have been particularly impacted by the second wave of COVID-19,
with the GNPA and NNPA ratios rising sharply.
 A select set of UCBs have been subjected to stress tests covering credit risk, market
risk and liquidity risk, based on their reported financial position as on March 31,
2021. The results show that in all the parameters tested, a few banks fail even in the
baseline scenario

 Non-banking Financial Companies (NBFCs)

 Aggregate credit extended by NBFCs as at the end of September 2021 stood at `27.4
lakh crore.
 Loans to industry constituted the largest segment of the credit portfolio, followed by
personal loans, services and agriculture.
 In terms of credit dispensation by category of NBFC, investment and credit
companies and infrastructure finance companies predominated, with a share of 52.2
per cent and 44.0 per cent, respectively, in gross advances as on September 30, 2021
 The CRAR of NBFCs stood at 26.3 per cent as at end-September 2021, a marginal
increase of 10 bps as compared to March 2021.
 The return on assets (RoA) improved to 1.7 per cent in September 2021 from 1.3 per
cent in March 2021
 The GNPA ratio of NBFCs, which had declined in September 2020 reflecting the
standstill on asset classification prevalent then, rose to reach 6.5 per cent as at the
end of September 2021.
 Stress tests indicate that a significant number of NBFCs would be adversely impacted
in the event of liquidity shocks.

 Network of the Financial System

 Interconnectedness

In a financial system network, the financial institutions have bilateral links amongst
themselves in the form of loans to, investments in, or deposits with each other.

These linkages act as a source of funding, liquidity, investment and risk

diversification, but they can also transform in adverse conditions into channels
through which shocks can spread, leading to contagion and amplification of systemic
shocks.

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 The total outstanding bilateral exposures among the entities in the financial system
have been on an upswing since H1:2020-21.
This was primarily due to increased exposures of SCBs to NBFCs and HFCs and of
asset management companies - mutual funds (AMC-MFs) to the financial system.

[Bilateral exposures Includes exposures between entities of the same sector. It

includes Fund based exposure includes money market instruments, deposits, loans
and advances, long term debt instruments and equity investments. Non-fund based
exposure includes letter of credit, bank guarantee and derivate instruments]

 SCBs had the largest bilateral exposures though it remained lower than prepandemic
levels.

 The shares of NBFCs and HFCs slipped marginally from their March 2021 levels.

 The share of AMC-MFs in bilateral exposures increased during 2020-21.

 In terms of inter-sectoral exposures, AMC MFs, followed by insurance companies,

were the biggest fund providers in the system, whereas NBFCs were the biggest
receiver of funds, followed by HFCs.

Thus
 SCBs have emerged more robust after the two waves of the pandemic, while UCBs
and NBFCs’ asset quality has been dented.
 Stress tests indicate that banks are generally well placed to weather credit related
shocks, while UCBs and NBFCs present a more varied picture.
 Going forward, as the economy recovers and credit demand rises, banks will need to
ensure availability of sufficient capital to support credit growth.
 Considering the significant share of funding absorbed by NBFCs at the system level,
continued attention to their financial health is warranted in the interest of financial
stability

Regulatory Initiatives
Financial sector regulators launched several initiatives for the development of the financial system
and enhancement of its robustness and resilience.
Have overtime been covered in FINANCE CURRENT AFFAIRS SESSIONS. Some of them include:
 Use of any alternative reference rate in place of LIBOR [July Day 5 session]
 Deposit Insurance- DICGC Act was amended in August 2021 to provide for time bound
payment [Aug day 1 session]
 Financial Inclusion Index: A Comprehensive Financial Inclusion Index (FI-Index) has been
introduced To measure the extent of financial inclusion across the country. [Aug day 9
session]
 Transfer of Loan Exposures- RBI issued directions governing transfer of loan exposures, both
stressed and those not in default, in September 2021 [Sep Day 12 session]

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 RBI issued revised guidelines on securitisation of standard assets in September 2021[Sep Day
12 session]
 Scale Based Regulation for NBFCs - The regulatory framework for NBFCs was revised in
October 2021 to introduce scale-based regulation. [Oct day 10 session]
 Opening of Current Accounts by Banks-In order to instil credit discipline and prevent
diversion of funds, RBI had issued instructions introducing restrictions on opening of current
accounts and cash credit (CC) / overdraft (OD) facilities. [Aug day 3 session, Nov week 1 doc]
 Retail Direct Scheme launched to facilitate investing in G-Secs, providing a safe, simple,
direct and secured platform to ease the access of G-Sec market to retail investors. [Nov day
5 session]
 Integrated Ombudsman Scheme, for providing cost free redress of customer complaints
involving deficiency in services rendered by entities regulated by the Reserve Bank. [Nov day
5 session]
 Fintech
 Fintech has accelerated transformation in the financial sector. India is amongst the
fastest growing fintech markets in the world.
 Several factors have contributed to the spectacular growth of fintech in India
 funding by venture capital, private equity and institutional investors driving
innovation
 increasing telecom, internet and smartphone penetration
 emergence of e-KYC, e-Sign, DigiLocker, and Unified Payments Interface (UPI)
that allows governments, businesses, startups and developers to utilise digital
infrastructure
 Swing Pricing Framework for Mutual Fund Schemes - to ensuring fairness in treatment of
incoming, existing and outgoing investors in mutual fund schemes [Oct day 2 session]
 Revised Prompt Corrective Action (PCA) Framework for Scheduled Commercial Banks [Nov
Day 2 session]
 Enforcement
During the period July-November 2021, the Reserve Bank undertook enforcement action
against public sector banks, private sector banks, co-operative banks, foreign banks, small
finance bank and nonbank finance companies) and imposed an aggregate penalty of `35.63
crore for non-compliance with / contravention of statutory provisions and directions issued
by the Reserve Bank from time to time.

Systemic Risk Survey

 Respondents to the 21st round of Systemic Risk Survey perceived all broad groups of
risks to the Indian financial system
 global spillovers
 macroeconomic uncertainty
 financial market volatility
 institutional vulnerability
 general risks

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 On the whole, the Systemic Risk Survey (SRS), “across all broad categories of risks to
the financial system – global; macroeconomic; financial market; institutional; and
general – were perceived as ‘medium’ in magnitude, but risks arising on account of
global and financial markets were rated higher than the rest”.

For India, the main sources of risks are commodity prices, domestic inflation, equity
price volatility, asset quality deterioration, credit growth and cyber disruptions.

 Banking prospects improve

There are two more interesting charts in the latest FSR.

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1. Chart 1 showing a considerable improvement in the sentiment among

respondents when asked about the prospects of banking in the year ahead.
In the previous round (Yellow bar), most believed prospects would worsen. In
the latest round (Purple bar), however, most expect prospects to improve.

2. Chart 2 asked respondents how long would it take for the Indian economy to
make a full recovery from the fallout of the Covid pandemic.

Almost 64% expect the economy to recover fully in the next 1 to 2 years
while 22% believe it may take up to 3 years to recover completely.

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Key Features of India’s BoP in Q2:2021-22

What
India’s current account balance

Q2:2021-22 Q1:2021-22 Q2:2020-21

Deficit - US$ 9.6 billion (1.3 per Surplus of US$ 6.6 billion (0.9 Surplus of US$ 15.3 billion
cent of GDP) per cent of GDP) (2.4 per cent of GDP)

Why
The deficit in the current account in Q2:2021-22 was mainly due to:
 Widening of trade deficit to US$ 44.4 billion from US$ 30.7 billion in the preceding quarter
 Net outgo from the primary income account, mainly reflecting net overseas investment
income payments increased

Tell me more
 Private Transfer receipts, mainly representing remittances by Indians employed overseas,
amounted to US$ 21.1 billion, an increase of 3.7 per cent from their level a year ago.

 Capital A/c
 net foreign direct investment recorded an inflow of US$ 9.5 billion, lower than US$
24.4 billion a year ago.
 Net foreign portfolio investment was US$ 3.9 billion as compared with US$ 7.0 billion
in Q2:2020-21
 Net external commercial borrowings to India recorded inflow of US$ 4.1 billion in
Q2:2021-22 as against an outflow of US$ 3.7 billion a year ago.
 Non-resident deposits recorded net outflow of US$ 0.8 billion as against an inflow of
US$ 1.9 billion in Q2:2020-21.

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 Forex Reserves
There was an accretion of US$ 31.2 billion (on a BoP basis) in Q2:2021-22 which also
included SDR allocation of US$ 17.86 billion by the International Monetary Fund on August
23, 2021.

 BoP During April-September 2021 (H1:2021-22)

 Current account deficit of 0.2 per cent of GDP in H1:2021-22 as against a surplus of
3.0 per cent in H1:2020-21 on the back of a sharp increase in the trade deficit.
 Net FDI inflows at US$ 21.2 billion in H1:2021-22 were lower than US$ 23.9 billion in
H1:2020-21.
Portfolio investment recorded a net inflow of US$ 4.3 billion in H1:2021-22 as
compared with US$ 7.6 billion a year ago.
 In H1:2021-22, there was an accretion of US$ 63.1 billion to the foreign exchange
reserves (on a BoP basis).

Framework for offline digital payments

What
RBI released the ‘Framework for facilitating small value digital payments in offline mode’.

An offline digital payment means a

transaction which does not require
internet or telecom connectivity.
Under this new framework, such
payments can be carried out face-to-
face using any channel or instrument
like cards, wallets, mobile devices, etc

Why
Offline transactions are expected to give a push to digital transactions in areas with poor or weak
internet or telecom connectivity, particularly in semi-urban and rural areas.

Tell me more
Authorised Payment System Operators and Participants – Acquirers and Issuers (banks and non-
banks) – desirous to provide / enable payment solutions that facilitate small value digital payments
in offline mode shall comply with the following requirements:
 Offline payments may be made using any channel or instrument like cards, wallets, mobile
devices, etc.

 Offline payments shall be made in proximity (face to face) mode only.

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 Offline payment transactions may be offered without Additional Factor of Authentication

(AFA). Since the transactions are offline, alerts (by way of SMS and / or e-mail) will be
received by the customer after a time lag.

 Payment instruments shall be enabled for offline transactions based on explicit consent of
the customer.

 The upper limit of an offline payment transaction shall be ₹200. The total limit for offline
transactions on a payment instrument shall be ₹2,000 at any point in time. Replenishment of
used limit shall be allowed only in online mode.

 The acquirer shall incur all liabilities arising out of technical or transaction security issues at
merchant’s end.

 The customers shall have recourse to the Reserve Bank – Integrated Ombudsman Scheme,
as applicable, for grievance redressal.

RBI releases 2021 list of Domestic

Systemically Important Banks (D-SIBs)
Systemically Important Banks (SIBs)
 Some banks, due to their size, cross-jurisdictional activities, complexity, lack of
substitutability and interconnectedness, become systemically important.
 SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. This perception of TBTF
creates an expectation of government support for these banks at the time of distress..
 The disorderly failure of these banks has the potential to cause significant disruption to the
essential services they provide to the banking system, and in turn, to the overall economic
activity.

Domestic Systemically Important Banks (D-SIBs)

 The D-SIB framework focuses on the impact that the distress or failure of banks will have on
the domestic economy.
 D-SIB framework is based on the assessment conducted by the national authorities, who are
best placed to evaluate the impact of failure on the local financial system and the local
economy.
 The RBI had issued the framework for dealing with D-SIB in 2014.
 The D-SIB framework requires the Reserve Bank to disclose the names of banks designated
as D-SIBs starting from 2015 and place these banks in appropriate buckets depending upon
their Systemic Importance Scores (SISs).
 The indicators which are used for assessment are: size, interconnectedness, substitutability
and complexity.
 Based on their systemic importance scores in ascending order, banks are plotted into four
different buckets and are required to have additional Common Equity Tier 1 Capital
(CET1) requirements ranging from 0.20% to 0.80% of risk weighted assets (RWA).

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Bucket Additional Common Equity Tier 1 requirement as

a percentage of Risk Weighted Assets (RWAs)

5 1%
4 0.80%
3 0.60%
2 0.40%
1 0.20%

[CET1 is the highest quality of regulatory capital, as it absorbs losses immediately when they
occur. It is a capital measure introduced as a precautionary means to protect the economy
from a financial crisis.
CET1 represents the bank’s core capital. It includes ordinary shares, retained earnings etc.
In the event of a crisis, equity is taken first from Tier 1.]

 In case a foreign bank having branch presence in India is a Global Systemically Important
Bank (G-SIB), it has to maintain additional CET1 capital surcharge in India as applicable to it
as a G-SIB, proportionate to its Risk Weighted Assets (RWAs) in India.

News Update
 SBI, ICICI Bank and HDFC Bank continue to be identified as Domestic Systemically Important
Banks (D-SIBs)
 While private sector lenders ICICI Bank and HDFC Bank fall under bucket 1, SBI falls under
bucket 3.

Bucket Banks Additional Common Equity Tier 1

requirement as a percentage of Risk
Weighted Assets (RWAs)

5 - 1%
4 - 0.80%
3 State Bank of India 0.60%
2 - 0.40%
1 ICICI Bank, HDFC Bank 0.20%

 This current classification of banks as domestic systemically important banks is based on the
data collected from banks as on March 31, 2021.
 Under bucket 1, banks require 0.2 per cent of additional common equity Tier 1 capital as a
percentage of risk weighted assets (RWAs), and under bucket 3, banks require 0.6 per cent
of additional common equity Tier 1 capital as a percentage of RWAs.

 Last year also, these three banks were identified as domestic systemically important banks
and were placed in the same buckets as this year.
 Earlier, in 2015 and 2016, RBI had classified SBI and ICICI Bank as D-SIBs. Further, based on
data collected from banks as on March 31, 2017, HDFC Bank was also classified as a D-SIB,
along with SBI and ICICI Bank.

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New Appointments
1. RBI has appointed Shri Ajay Kumar Choudhary as Executive Director (ED) with effect from
January 03, 2022.
 Prior to being promoted as ED, Shri Ajay Kumar Choudhary was Chief General
Manager-in-Charge, Department of Supervision.
 As Executive Director, Shri Choudhary will look after Fintech Department, Risk
Monitoring Department and Inspection Department.

2. RBI has also appointed Dr. Deepak Kumar as Executive Director (ED) with effect from January
03, 2022.
 Prior to being promoted as ED, Dr. Deepak Kumar was heading the Department of
Information Technology of the Reserve Bank of India.
 As Executive Director, Dr. Kumar will look after Foreign Exchange Department,
Department of Communication and Deposit Insurance and Credit Guarantee
Corporation, which is a wholly owned subsidiary of the RBI.

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