Banking Current Affairs 2017

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RBI allows multilateral FIs to invest in masala bonds

The Reserve Bank of India (RBI) has permitted multilateral and regional financial institutions (FIs) to invest in ‘masala bonds’, rupee denominated bonds issued by Indian entities.

This decision will allow multilateral agencies like Asian Development Bank (ADB) and BRICS led New Development Bank (NDB) to invest in these bonds. It also provides more choices of investors to Indian entities issuing rupee-denominated bonds abroad.

What are Masala bonds?

The Masala bonds refer to rupee-denominated bonds through which Indian entities can raise money from foreign markets in rupee, and not in foreign currency. Basically, they are debt instruments that are typically used by corporates to raise money from investors. The issuance of rupee denominated bonds, Indian entity is protected against the risk of currency fluctuation, typically associated with borrowing in foreign currency. Masala bonds also help in internationalization of the rupee and in expansion of the Indian bond markets. These bonds are usually traded on the London Stock Exchange (LSE) and not in India. 

Note

The first Masala bond was issued by the International Finance Corporation (IFC), the investment arm of the World Bank dubbed as Uridashi Masala Bonds in November 2014. The Housing Development Finance Corporation (HDFC) was the first Indian company to issue rupee-denominated bonds “masala bonds” on London Stock Exchange (LSE) in July 2016. International Financial Corporation was first time issued green masala bonds in August 2015 to raise private sector investments that address climate change in India. Canada’s British Columbia province was the first foreign government to issue of masala bonds.

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Union Cabinet approves merger of SBI, 5 associate banks

The Union Cabinet chaired by the Prime Minister Narendra Modi has approved the merger of State Bank of India (SBI) with five of its associate/subsidiary banks.

These five subsidiary banks are State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore.

The Union Cabinet also approved the introduction of a Bill in Parliament to repeal the State Bank of India (Subsidiary Banks) Act, 1959 and the State Bank of Hyderabad Act, 1956. 

Key Facts
  • The acquisition under Section 35 of the SBI Act, 1955 will result in the creation of a stronger merged entity. It will minimize vulnerability faced by subsidiary banks to any geographic concentration risks.
  • It will improve operational efficiency and economies of scale resulting into in improved risk management and unified treasury operations. Existing customers of associate banks will benefit from SBI’s global network.
  • The merger will lead to better management of high value credit exposures through focused monitoring and control over cash flows rather than separate monitoring by six different banks.
  • The merger will also result in recurring savings, estimated at more than Rs. 1,000 crore in first year, because of reduced cost of funds and enhanced operational efficiency.
Comment

The acquisition of subsidiary banks of SBI is considered an important step towards strengthening the banking sector through consolidation of public sector banks (PSBs). It is in pursuance of the Indradhanush action plan of the Central Government. In 2015, SBI was ranked 52 in the world in terms of assets, however the merger will allow its entry un top 50. The merger does not include Bharatiya Mahila Bank (BMB) and its proposal is still under consideration.

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Government to come out with 2nd PSB recapitalisation plan Indradhanush 2.0

The Union Government is planning to come out with ‘Indradhanush 2.0’, a comprehensive plan for recapitalisation of public sector lenders.

Indradhanush 2.0 will be finalised by Reserve Bank of India (RBI) after completion of Asset Quality Review (AQR) which is likely to be completed by end of March 2017.

It aims to clean up the balance sheets of PSBs to ensure banks remain solvent and fully comply with global capital adequacy norms, Basel-III. Besides, revised programme of capitalisation will be also issued as part of it.

Background
  • The RBI had embarked on the AQR exercise from December 2015 and had set a deadline of March 2017 to complete the exercise.
  • As part of it, RBI had asked banks to recognise some top defaulting accounts as non-performing assets (NPAs) and make adequate provisions for them.
  • Under ‘Indradhanush’ roadmap announced in 2015, the Union Government had announced an infusion of Rs. 70,000 crore in state-run banks over four years.
  • Banks also were allowed to raise a further Rs. 1.1 lakh crore from the markets to meet their capital requirement in line with global risk norms, Basel-III.
  • In line with the plan, PSBs were given Rs. 25,000 crore in 2015-16, and a similar amount was earmarked for the current fiscal 2016-17. Besides, Rs. 10,000 crore each will be infused in 2017-18 and 2018-19. 

About Basel III (Third Basel Accord)

  • Basel III is a global, voluntary regulatory framework on bank capital adequacy, market liquidity risk and stress testing. It was agreed by Basel Committee on Banking Supervision (BCBS) members in 2010–11.
  • It focuses primarily on the risk of a run on the bank, requiring differing levels of reserves for different forms of bank deposits and other borrowings.
  • It does not, supersedes the guidelines known as Basel I and Basel II for the most part, rather works alongside them. In March 2014, RBI had extended Basel III deadline up to March 31, 2019, instead of as on March 31, 2018.
  • Note: Basel series of norms are broad supervisory standards formulated by BCBS to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

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