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IMPORTANT TOPIC FOR RBI GRADE B 2019 EXAM (NOTICE ALREADY OUT)
Prompt Corrective Action (PCA)
What is it?
Prompt Corrective Action or PCA is a framework under which banks with weak financial metrics are put under watch by the RBI. The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality and profitability.
It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios. Banks with a capital to risk-weighted assets ratio (CRAR) of less than 10.25 per cent but more than 7.75 per cent fall under threshold 1.
Those with CRAR of more than 6.25 per cent but less than 7.75 per cent fall in the second threshold. In case a bank’s common equity Tier 1 (the bare minimum capital under CRAR) falls below 3.625 per cent, it gets categorised under the third threshold level.
Banks that have a net NPA of 6 per cent or more but less than 9 per cent fall under threshold 1, and those with 12 per cent or more fall under the third threshold level.
On profitability, banks with negative return on assets for two, three and four consecutive years fall under threshold 1, threshold 2 and threshold 3, respectively.
When is PCA invoked?
The PCA is invoked when certain risk thresholds are breached. There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and the like. The third such threshold, which is maximum tolerance limit, sets net NPA at over 12% and negative return on assets for four consecutive years.
Why is it important?
As most bank activities are funded by deposits which need to be repaid, it is imperative that a bank carries a sufficient amount of capital to continue its activities. PCA is intended to help alert the regulator as well as investors and depositors if a bank is heading for trouble. The idea is to head off problems before they attain crisis proportions. Essentially PCA helps RBI monitor key performance indicators of banks, and taking corrective measures, to restore the financial health of a bank.
On breach of any of the risk thresholds mentioned above, the RBI can invoke a corrective action plan. Depending on the threshold levels, the RBI can place restrictions on dividend distribution, branch expansion, and management compensation. Only in an extreme situation, breach of the third threshold, would identify a bank as a likely candidate for resolution through amalgamation, reconstruction or winding up.
Owing to the sharp deterioration in finances of state-owned banks on the back of rising NPAs, 11 public sector banks were put under PCA last year. Based on FY18 financials of the 21 PSBs, 17 can fall under PCA based on net NPA threshold alone and nine on ROA alone (negative for two consecutive years).
Why should I care?
If a bank in which you hold deposits falls under PCA, don’t press the panic button. The RBI’s corrective measures may bode well for your bank. But do keep a watch on the RBI’s PCA announcements, as they can offer vital cues on the performance of your bank.
Contrary to the perception, PCA does not really limit the normal lending operations of banks. Arguments that so many banks slipping into PCA has stifled credit growth are overdone. While the RBI has placed restrictions on credit by PCA banks to unrated borrowers or those with high risks, it hasn’t invoked a complete ban on their lending.
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Swachhata Hi Seva (SHS) 2019
The Prime Minister, Shri Narendra Modi launched Swachhata Hi Seva (SHS) 2019, a massive countrywide awareness and mobilization campaign on Swachhata at Mathura today. SHS 2019, with special focus on ‘plastic waste awareness and management’ is being organized from 11th September to October 2nd 2019, as the Swachh Bharat Mission (SBM) is poised to dedicate an ODF India to Mahatma Gandhi on his 150th birth anniversary. The launch of SHS was organized jointly by the central Departments of Animal Husbandry and Dairying and Drinking Water and Sanitation and the Government of Uttar Pradesh.
The Prime Minister also visited the Pashudhan Arogya Vigyan Mela, where he saw cows being operated upon to remove plastic waste from their stomachs. He then interacted with a group of women from Uttar Pradesh who segregate plastic waste into recyclables and non-recyclables, and in a unique gesture, also participated in the segregation activity himself.
Addressing an audience of about 20,000 farmers, sarpanches, women groups and swachhagrahis, the Prime Minister urged all citizens to free their houses, offices and work space from single use plastic. Drawing people’s attention to the hazardous effects of such plastic for the environment, and for the health of animals and aquatic life, he reiterated his appeal to use cloth or jute bags while going out for shopping and to use metal or earthen glasses for serving water in offices. He asked people to collect all the plastic waste from their surroundings at an identified place and to ensure its safe disposal with the support of the local administration during the Swachhata Hi Seva.
Addressing the gathering, Chief Minister of Uttar Pradesh, Shri Yogi Adityanath applauded the positive impacts of the SBM and highlighted the contribution of SBM in dealing with the menace of deadly disease Encephalitis in eastern UP. He added that the significant increase in the sanitation coverage under SBM will now be leveraged for achieving the goal of plastic waste free India on the lines of ODF India.
Speaking on the occasion, Shri Gajendra Singh Shekhawat, Union Minister of Jal Shakti said that the entire world is eagerly waiting for the day when India becomes ODF. He said that the SHS 2019 campaign would give a big boost to generate mass awareness on plastic waste and its subsequent collection, recycling and disposal, and will be a new Jan Andolan for protecting environment under the inspiring leadership of the Prime Minister.
Union Minister of Fisheries, Animal Husbandry and Dairying, Shri Giriraj Singh, Minister of State, Jal Shakti, Shri Rattan Lal Kataria, other ministers from the State and local MP and MLAs also participated in the event.
This year’s Swachhata Hi Seva will see mass awareness generation activities on plastic waste management between 11th September to 1st October, nationwide Shramdaan for plastic waste collection and segregation on 2nd October, and recycling and effective disposal of the collected plastic waste from 3rd October to Diwali, 27th October 2019. The Prime Minister has also written personal letters to all Sarpanches and Swachhagrahis, motivating them make the Swachhata Hi Seva 2019 a grand success. These letters were read out today at special Gram Sabhas across the country.
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New scheme for exporters: NIRVIK
Export Credit Guarantee Corporation of India (ECGC) has introduced ‘NIRVIK’ scheme to ease the lending process and enhance loan availability for exporters.
- The details of the scheme were shared by Union Minister of Commerce and Industry and Railways, Piyush Goyal on September 16, 2019, during a press conference.
- The scheme was announced by the Finance Minister Nirmala Sitharaman on September 14 as a part of measures to boost exports.
Details
- The Export Credit Guarantee Corporation of India (ECGC) currently provides credit guarantee of up to 60 percent loss.
- The new Export Credit Insurance Scheme (ECIS) which has been named the NIRVIK scheme will raise the insurance cover guarantee to 90 percent coverage of the principal and interest.
- Half of the insurance cover will be provided within 30 days.
- The insurance cover will include both pre and post-shipment credit whereas in the present system two different documents are issued by the ECGC for both.
- Under the ‘NIRVIK’ scheme, gems, jewelry and diamond(GJD) sector borrowers with a limit of over Rs 80 crore will have a higher premium rate in comparison to the non-GJD sector borrowers of this category due to the higher loss ratio.
- The scheme is being introduced for a period of 5-years and when the time period is over, the standard ECGC covers will be made available to the Banks with its regular features.
- For accounts with limits below Rs 80 crore, the premium rates will be set at 60 per annum and for those exceeding Rs80 crore, the rates will be fixed at 0.72 per annum for the same enhanced cover.
- The inspection would be waived for up to ₹10 crore. But the inspection of bank documents and records by ECGC officials is mandatory in case of losses of more than Rs.10 crore as against the present Rs 1crore.
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VERY IMPORTANT TOPIC FOR RBI GRADE B 2019 EXAM
Transition from Libor to Sonia
The FCA has advised that LIBOR (the London Interbank Offered Rate) will end in 2021 and are encouraging the adoption of SONIA (the Sterling Overnight Index Average) as the alternative interest rate benchmark.
By some estimates, LIBOR determines rates on $350 trillion of financial products worldwide, so moving away from it is clearly a big change. Key businesses and functions that will be affected include commercial lending, retail banking and wealth management.
What is LIBOR?
LIBOR has been the UK’s standard benchmark interest rate for corporate lending, leasing and residential loans since the mid1980s, and has been adopted globally; set by a panel of international member banks, many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it.
LIBOR is currently determined by the ICE Benchmark Administration (IBA), which consults with a panel of banks to obtain estimates of the current costs of borrowing. Using this information, the IBA is able to provide a forward looking rate which is used to calculate interest rates on loans.
Why are we moving away from LIBOR?
Confidence in LIBOR has dropped due to the reliance on panel banks setting fair and accurate estimates of the cost of lending, which may not reflect the true market position and could be at risk of manipulation (the 2012 LIBOR rigging scandal often being quoted).
Despite recent reforms to LIBOR, the FCA considers that the lack of underlying transaction data means that the validity of the opinion based submissions of panel banks remains questionable. In June 2019, the Bank of England (BOE) and the FCA jointly hosted a panel-based titled “Last Orders: Calling Time on LIBOR.” LIBOR isn’t being eliminated however, and technically could still be available after 2021, but regulators will no longer force or encourage banks to continue supporting the benchmark after that date. The FCA has asked banks to voluntarily sustain LIBOR until 2021.
What is the alternative to LIBOR?
Whereas LIBOR was adopted globally, market developments suggest the transition is now towards different countries applying their own local reference rate. In the U.S., there is SOFR (Secured Overnight Financing Rate), Japan has TONA (Tokyo Overnight Average) and the European Bank has developed the Euro Short-Term Rate (ESTER). In April 2017, the Bank of England’s Working Group on Sterling Risk-Free Reference Rates adopted the SONIA benchmark as their preferred RFR and since then has been working with the FCA on how to transition to using SONIA across British Sterling markets, with a mandate to encourage a broad-based transition to using SONIA in bond, loan and derivatives markets.
SONIA, the Sterling Overnight Index Average, is the effective interest rate paid by banks for unsecured transactions taking place “overnight” (in off-market hours) in the British Sterling market. It is “risk free” or “nearly risk-free” and doesn’t factor in any credit risk taken by lenders. The advantage of SONIA is that it does not rely on submissions made by panel banks but is instead based on a weighted average of actual overnight funding on the wholesale money markets. SONIA is therefore much more in tune with actual market conditions. Regulators anticipate that the switch from LIBOR to SONIA will create more predictability in the UK debt market.
Challenges for Borrowers / Lenders
The main challenge with SONIA is that it is a “backward looking” screen rate (as are SOFRA, TONA and the others). Interest calculated using SONIA is only known once the rate has been applied. Furthermore, because it is an overnight rate this means it changes on a daily basis. Loan agreements using SONIA cannot set a fixed interest rate across the term of the loan (e.g. 3, 6 or 12 months). The loss of cash flow visibility will be a challenge for Borrowers. Also, using SONIA it may be more difficult for borrowers to prepay principal or refinance mid period, since calculations cannot be carried out in advance of the prepayment being made. Lenders will also need to factor in their credit risk if using SONIA.
In an attempt to resolve the above the Bank of England Working Group has held public consultations on the possibility of introducing a Term SONIA Reference Rate (TSRR) which could potentially be tested in 2019. If TSRR is adopted it will go a long way to maintaining the structure of the current drafting in current contracts and allow the final rate to be known in advance of repayment dates from the outset of each interest accrual period. However, its introduction is not a certainty at this juncture.
Action Points for Borrowers and Lenders
Whilst we anticipate LIBOR is unlikely to be widely used as a reference rate from the end of 2021, exactly how this will play out in the market is still uncertain, and we will continue to monitor the situation.
To best prepare for the transition we would advise Borrowers and Lenders to review their existing lending documentation. Well drafted contracts should include fall-back provisions specifying an alternative rate for when LIBOR becomes unavailable. Such provisions might say, for example, that if LIBOR is unavailable, the rate last used will continue unchanged. Whilst this may be acceptable in the short term, a party losing out on an unfavourable interest rate may seek to re-negotiate whilst the gaining party will want to retain existing terms. Borrowers should liaise with their bank relationship managers to discuss further.
Banks and other corporates with significant LIBOR exposure should start preparing for the change if they haven’t already done so, including contract analysis. It might also be reasonable to assume that month end processing and reconciliation will be more time consuming and complicated for Lenders and Borrowers alike, so this should be factored in to planning, as well as the potential for tax implications.
RBI Vision 2022 (Utkarsh 2022)
RBI released Utkarash 2022, its vision documentBANKING POLICYduring July 2019. It provides information about, what RBI's plans for future. A summary is provided.
Mission: To promote the economic and financial well-being of the people of India in terms of price and financial stability; fair
and universal access to financial services; and a robust, dynamic
and responsive financial intermediation infrastructure.
Core Purpose :
1. To foster confidence in the internal and external value of the
Rupee and contribute to macro-economic stability
2. To regulate markets and institutions under its ambit, to ensure
financial system stability and consumer protection
3. To promote the integrity, efficiency, inclusiveness and
competitiveness of the financial and payment systems
4. To ensure efficient management of currency as well as banking
services to the Government and banks
5. To support balanced, equitable and sustainable economic
development of the country
Values: RBI commits itself to the following shared values that
guide organisational decisions and employee actions in pursuit ofthe Bank’s core purpose:
Public Interest : RBI in its actions and policies, seeks to promote
public interest and the common goodResponsiveness and Innovation: RBI seeks to be a dynamicorganisation responsive to public needs.
Integrity and Independence: To maintain highest standards of
integrity through openness, trust and accountabilityIntrospection and pursuit of excellence: RBI is committed toself-appraisal, introspection and professional excellence
VISION 1: Excellence in performance of functions.
A: Furthering the monetary policy framework and operating
procedure; enriching statutory publications; and striving for a
‘state-of-the-art’ data-intensive policy research framework
B : Creating a resilient financial intermediation ecosystem; refining
the regulatory, supervisory and financial inclusion framework.
C : Strengthening resilience, integrity and efficiency of the financialmarkets infrastructure with a focus on deepening digital payments
D: Enhancing efficiency of the ‘Banker to Government’ function
E: Broadening and widening debt markets.
F: Revamping the currency management system through enhanced
efficiency in procurement and distribution.
VISION 2: Strengthened trust of citizens and other institutions.
A : Strengthening external communication framework.
B: Creating an enabling environment to develop consumer-friendly
financial services providers
C: Ensuring sound and comprehensive internal
and external RBI policies
D: Adopting a ‘less paper’ and virtual workflowfor external stakeholders
VISION 3: Enhanced relevance andsignificance in national and global roles
A: Intensifying presence in national forums to
improve domestic financial infrastructure
B: Enhancing RBI’s brand equity.
C: Amplifying international financial
engagement by articulating RBI’s stance and
views on major global economic and regulatory
policy issues.
D: Strengthening existing positions in
supranational institutions.
VISION 4: Transparent, accountable andethics-driven internal governance
A: Reinforcing governance and code of ethics
B: Upgrading internal controls through robust
risk management, auditing & compliance
functions through international best practices
C: Adopting ‘less paper’ & virtual internal
workflows.
VISION 5: Best-in-class and environment-friendly digital as well as physical infrastructure
A: Automating processes, achieving integration
of information and ensuring cyber security.
VISION 6: Innovative, dynamic & skilledHuman Resources
A: Reviewing and reframing the organisational
structure to effectively implement all strategies
B: Enhancing skills of human resources for
creating a suitable training framework
C: Establishing an objective performance
assessment system for efficient HRM.
D: Using technology and data analytics to
promote research-based decision making by
the workforce
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Corporate Tax Rate Cuts :How the decision will have an impact on the economy?
- More Money to the hands of Private players: Experts believe that lowering the tax rate will leave more money to the hands of the private sector which can offer people more incentive to produce and contribute to the economy.
- Widening the Economic Base: Corporate tax rate is the major determinant which defines the economic activity of the private sector. Thus, the present tax cut can help the wider economic growth.
- Capital Inflow to the Economy: Corporate tax rate is also a major determinant of how investors allocate capital across various economies. Offering a lower tax rate will attract more investors to the economy that will further raise capital inflow into the economy.
- Competitive Economy: The present cut in taxes can make India more competitive on the global stage by making Indian corporate tax rates comparable to that of rates in East Asia.
- Greater Tax Collections: At the same time, the present tax cut can help boost tax collections and compensate for the loss of revenue.
- Expansion of the Corporate Footnote: The benefit is immense as it might expand the corporate universe as new firms will now be taxed at 15 percent.
- More Employment to the Economy: Attracting investors by lowering the tax rate will generate more employment and will help increase the purchasing power of the people.
- Flip to the Government Programme: The move will also give thrust to government initiatives like Make in India, Startup India, etc. which had taken a hit in the past couple of years.
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India’s reasons for not joining RCEP:
- Changed scenario due to the China-US trade war:
China has been seeking to tie up the deal expeditiously as the country faces slowing growth from a trade war with the U.S.
This shifted the focus somewhat from crafting an agreement that worked for all to an early conclusion of agreement. - RCEP lacking balance and fairness:
India was not able to get several of its key concerns addressed.
The biggest concern in the bloc is still with China with whom the Indian bilateral trade deficits lurk around USD 55-60 billion.
There are too many non-tariff barriers in place in China which have to be removed.Otherwise, progressively low tariff rates which form the core of the RCEP treaty, will seriously hurt our dairy, steel, MSME and textile sectors. - Lopsided ‘Free Trade Agreements’:
India has already signed a host of free trade agreements (FTAs) and comprehensive economic cooperation agreements (CECAs) with the South-east Asian nations, with whom India’s trade deficit only increased after the agreements came to effect.
Even with other RCEP nations with whom India does not have trade agreements, namely, Australia, New Zealand, and China, India faces a massive and growing trade deficit.
Domestic opposition: Agricultural producers and farmers are fearing that cutting tariffs on dairy and other produce would open the door to cheap Chinese imports and threaten sectors that support a vast swathe of the population. - The economic slowdown: Indian industries facing consumption slowdown, would have been further hit by cheap imports.
- Stagnating Indian exports: India's exports have declined along with an increase in imports.
India’s main issues with RCEP:
- The main issues that need resolution include
e-commerce chapter
number of goods on which import duties should be completely eliminated
norms to relax services trade
investor-state dispute settlement
Rules of Origin (ROO)
- The e-commerce chapter & the issue of cross-border transfer of electronic information:
The e-commerce chapter contains clauses that, if India had agreed to them, would have prevented it from implementing data localisation rules on companies doing business in India.
- India has proposed locating computing facilities inside the country if it is meant to protect its essential security interests and national interests.
- Also Reserve Bank of India’s (RBI) in its April 2018 notification mandated “all system providers shall ensure that the entire data relating to payment systems operated by them are stored in a system only in India”.
RCEP does not want data localization. It said that these requirements raise costs for suppliers of data-intensive services by forcing the construction of unnecessary, redundant data centres.
- Number of goods on which import duties should be completely eliminated
- RCEP members want India to eliminate or significantly reduce customs duties on maximum number of goods it traded globally.
To protect domestic industry against surge in imports, India suggested an auto trigger method that would automatically increase import levies once shipments cross a given threshold limit.
India is negotiating ‘standstill’ and ‘ratchet’ clauses which mean that the governments have to freeze their current levels of market opening, and if they liberalise more they cannot go back.
Dairy Sector - New Zealand and Australia would gain significantly for commodities- Milk powder and fat. Already Malaysia and Indonesia have successfully exploited the Indian market in palm oil, as did Argentina and Brazil in soyabean oil and Ukraine in sunflower oil.
2. Norms to relax services trade
- Under services, India wants greater market access for its professionals in the proposed agreement.
But the RCEP grouping had earlier rejected India’s proposal for a visa fee waiver on a common reciprocal basis, fearing migration and subsequent loss of jobs.
Computer related services is a sector of India’s interest and in that Mode 4 is India’s main concern.
3. Proposed inclusion of the controversial investor-state dispute settlement (ISDS):
- This mechanism gives the exclusive right to bypass domestic legal systems and sue governments at international arbitration tribunals whenever they feel government regulation can limit their profits.
- India does not want an ISDS mechanism in RCEP as it does not want its domestic laws to be challenged in offshore arbitral tribunals.
4. Rules of Origin (ROO):
- Rules of origin are the criteria used to define where a product was made and are important for implementing other trade policy measures, including trade preferences, quotas, anti-dumping measures and countervailing duties.
- India wants strict rules of origin to prevent Chinese goods from flooding the country through member countries that may have lower or no duty levels.
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**5th bi-monthly monetary policy (MPC) review 2019-20**
Key highlights
1. MPC unanimously votes for status quo on repo rate (5.15%)
2. Stance to remain accomodative as long as required: MPC
3. FY20 real GDP growth projection lowered to 5% from 6.1%
4. MPC sees scope for rate easing in the future
5. MPC expects inflation to rise in the near term
6. Delay in demand revival is a key downside risk to GDP
7. MPC sees need to address impediments holding back investments
8. October CPI print was much higher than expected
9. Fall in deposit rate augurs well for loan rate transmission
10. October-March 2020 CPI inflation seen at 4.7-5.1%
11. April-Sept 2020 CPI inflation seen 3.8-4%
12. Oct-March GDP growth seen at 4.9-5.5%
13. Fall in deposit rate augurs well for rate transmission
SPECIAL NON-RESIDENT RUPEE ACCOUNT (SNRR ACCOUNT)
In a bid to boost internationalisation of the rupee, the RBI has relaxed norms for the opening of special non-resident rupee (SNRR) accounts and permitted direct remittance from India into these accounts.
Now, RBI has expanded the scope of SNRR Account by permitting person resident outside India to open such account for:
External Commercial Borrowings in INR;
Trade Credits in INR;
Trade (Export/ Import) Invoicing in INR; and
Business related transactions outside International Financial Service Centre (IFSC) by IFSC units at GIFT city like administrative expenses in INR outside IFSC, INR amount from sale of scrap, government incentives in INR, etc.
It has also been decided to rationalise certain other provisions for operation of the SNRR Account, as under:
Remove the restriction on the tenure of the SNRR account opened for the purposes given at paragraph 3 above as the proposed transactions are more enduring in nature.
Apart from Non-Resident Ordinary (NRO) Account, permit credit of amount due/ payable to non-resident nominee from account of a deceased account holder to Non-Resident External (NRE) Account or direct remittance outside India through normal banking channels.