Financial Sector Current Affairs

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Government proposes setting up Financial Data Management Centre

The Union Government has proposed setting up Financial Data Management Centre (FDMC) based on recommendation of a committee set up under the Department of Economic Affairs (DEC).

The Committee was headed by Ajay Tyagi, Additional Secretary in Union Finance Ministry and has submitted its report and a draft bill titled The Financial Data Management Centre Bill, 2016. 

Functions of FDMC
  • Standardise data from all financial sector regulators in a single database and provide analytical insights based on the data to ensure stability in the economy.
  • Take measures to standardise data from regulators, enable financial service providers to submit data in a standardised electronic format, analyse data and maintain a financial system database.
  • Establish, operate and maintain the financial system database along with collecting financial regulatory data and providing access to it.
  • Provide analytical support to the Financial Stability and Development Council (FSDC) on issues relating to financial stability.
Background

In 2015, FSDC first had suggested the creation of such a body, after Reserve Bank of India (RBI) had objected to share company-specific data with FSDC. RBI had given reason that FSDC is not a statutory bod in nature, and sharing such data would be a breach of confidentiality. To resolve this issue, Union Finance Minister Arun Jaitley in his 2016-17 Budget Speech announced setting up of statutory FDMC under the aegis of the FSDC to facilitate integrated data aggregation and analysis in the financial sector.

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Four PSBs may struggle to pay AT1 bond coupons

Four public sector banks (PSBs) may struggle to make coupon payments on their additional tier 1 (AT1) bond as they have reported heavy losses due to a surge in bad loans.

In this case coupon payment is an annual interest paid on the face value of a bond. It is expressed as a percentage. AT1 bond is issued under Basel III capital regulations.

Why  PSBs finding difficult to pay them? 

The main reasons that may affect ability of PSBs to pay coupon on AT1 bonds are decline in profitability and increasing losses that may wipe out their revenue reserves.

Government’s position

Union Government has committed capital support to these PSBs on the coupon on AT1 bonds. However, this support can only be serviced through PSBs current year’s profit or from revenue reserves. Thus, any capital infusion by the government alone cannot help the banks to service coupon on these bonds.

What are Additional Tier 1 (AT1) Bonds?

  • AT1 bonds are the hybrid bonds that combine debt and equity elements. They are also called as contingent convertible capital instruments (CoCos).
  • AT1 or Cocos bonds have their roots in financial crisis when governments were forced to bail out banks. They are the riskiest debt issued by banks and do not have any set maturity date.
  • The defining characteristic of AT1 or Cocos bond is that it may be converted into shares when certain conditions are met.
  • For example, when a company runs into trouble, the owners lose their stake and the debt becomes equity, lenders turns into owners. But in case of banks such negotiations are not possible. The coco bonds are designed to anticipate that process and transform automatically from debt to equity.

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