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Government diluted IBC, its steps hurt RBI’s move on bad loans: Urjit Patel

In his new book Overdraft: Saving the Indian Saver, Patel has said that the Supreme Court’s April 2019 verdict had not found the RBI’s February 2018 one-day default regulation on the insolvency process “problematic”

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RBI Governor Urjit Patel

Former Reserve Bank of India Governor Urjit Patel has heavily criticised the government for diluting the Insolvency and Bankruptcy Code (IBC) and the powers of the central bank, saying this undermined efforts made since 2014 to clean up the bad loan mess.

In his new book Overdraft: Saving the Indian Saver, Patel has said that the Supreme Court’s April 2019 verdict had not found the RBI’s February 2018 one-day default regulation on the insolvency process “problematic” – however, the subsequent (June 7, 2019) circular issued by the central bank had diluted this aspect, making the insolvency regime “vulnerable and brittle”.

It had also delayed the process, helping many defaulters escape the bankruptcy court. The February 2018 circular, issued when Patel was Governor, had forced banks to classify borrowers as defaulters immediately, and had brought several large defaulters to the National Company Law Tribunal (NCLT).

Patel quit in December 2018 following a clash with the government.

“Lawyers who had agreed to represent the RBI in the Supreme Court (SC) dropped out at the eleventh hour, literally the night before the hearing,” Patel has written. “Striking down the February 2018 circular has made the insolvency regime vulnerable, possibly brittle.”

On his rift with the government, Patel has written that its disposition towards the IBC “perceptibly changed” in mid-2018 – instead of buttressing and future-proofing the gains that had been made, an atmosphere of going easy on the pedal ensued.

“Until then, for the most part, the finance minister and I were on the same page, with frequent conversations on enhancing the landmark legislation’s operational efficiency,” says the book. “There were requests for rolling back the February circular. A canard was spread that MSMEs would especially suffer, when, in fact, the previous dispensations for this class of borrowers had been explicitly protected in the new regulations.”

The asset quality review initiated by the RBI in 2015, when Raghuram Rajan was Governor, had revealed huge under-reporting and ever-greening of non-performing assets (NPAs). The recovery under IBC, however, slowed down since 2019. “We didn’t have to wait long for the camel’s nose to appear under the tent,” Patel has written.

The regulator’s de facto powers have been diluted on several subjects related to preserving financial stability, Patel has said. “Circulars were reversed and the PCA framework essentially ditched as these came in the way of stimulating the economy through higher credit growth.”

Various innovative “smoke-and-mirrors” schemes had been hatched, Patel has said. In 2019, government-owned LIC and State Bank of India (SBI) were directed by the Finance Ministry to “pony up” Rs 15,000 crore for a fund to provide financing to already over-leveraged, problematic real estate projects that were ‘close to completion’. The government also agreed to underwrite 10 per cent of banks’ purchase of up to Rs 1 lakh crore of NBFC debt. “Surely, this does not de-risk matters,” says the book.

According to Patel, the government uses “ownership of banks as a means for day-to-day macroeconomic management rather than primarily for efficient intermediation between savers and borrowers”. Even after three decades of banking sector reforms, including the entry of private banks, “state-sponsored credit creation” retains a majority share, he has said.

The government “encouraged GBs (government banks) to help stimulate the economy for higher growth under the guise of ‘capital deepening’, ‘sensitive’ sectors (for example, real estate/construction)”, Patel has said. This leads to higher NPAs over time, which requires equity infusion from the government – and this eventually adds to the fiscal deficit and sovereign liabilities, says the book.

The book does not mention the demonetisation of Rs 500 and Rs 1000 notes that happened soon after he took over as RBI Governor in September 2016. Patel was chosen to lead the central bank after his predecessor, Rajan, was denied a second term.

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Govt’s stake divestment to be credit negative for PSBs: ICRA

Furthermore, ICRA expects the deposit franchise for these banks will be monitorable as these deposits could be highly sensitive to their ownership.

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Centre proposes Disinvestment

New Delhi, Sep 17 : The proposed divestment of the Centre’s majority stake in certain PSBs will be credit negative for these lenders, ratings agency ICRA said on Thursday.

Citing recent reports which suggest a possible divestment of majority stake in few PSBs that were left out of the PSBs consolidation exercise announced last year, ICRA said that most of these PSBs have weak credit profile and their credit ratings are primarily supported by their sovereign ownership and a stable deposit base, which in turn is supported by their ownership.

“The existing ratings are also notched up from the standalone credit profile and going forward, the ratings on these PSBs would reflect their standalone credit profile depending on their new ownership of these banks,” it said in a statement.

Furthermore, ICRA expects the deposit franchise for these banks will be monitorable as these deposits could be highly sensitive to their ownership.

The ratings agency noted that the proposed divestment of these PSBs will require amendment to the Banking Companies (Acquisition And Transfer Of Undertakings) Act, 1970/1980, which mandates the Centre to hold no less than 51 per cent of the paid-up capital of these lenders.

Commenting on these developments, Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA said: “The financial profile of these PSBs is very weak and the standalone profiles of these banks could be low within investment grades rating given their weak asset quality, profitability, capital and solvency profile.”

“The liability profile for these banks will become a key monitorable in the immediate term.”

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Govt is amending Banking Regulation Act to benefit depositors: FM Sitharaman

The Finance Minister said the government is trying to bring amendments in order to protect the interest of depositors who in the last two years have been put to hardships.

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Nirmala Sitharaman

New Delhi: `The government has brought amendments to the Banking Regulation Act, 1949 in order to protect the interests of the depositors, Union Finance Minister Nirmala Sitharaman said in Parliament on Wednesday.

The Finance Minister said the government is trying to bring amendments in order to protect the interest of depositors who in the last two years have been put to hardships.

The depositors in some unfortunate situations in the banks or cooperative societies, which are also operating as banks, are put to hardship, the Minister said while moving the Banking Regulation (Amendment) Bill, 2020 to amend the Banking Regulation Act, 1949 in the Lok Sabha.

She said the government had introduced the Bill so that the depositors interests will be taken care of. But, the Minister said, unfortunately, during the Budget session the government could not have this Bill passed and had to bring in an ordinance. Sitharaman said the ordinance was brought in only because the financial health of many of these cooperatives, which were also performing as banks, was becoming very bad.

She informed the Lower House that the financial condition of 277 urban cooperative banks was very delicate and they were reporting losses, while 105 such banks were unable to fulfil their minimum regulatory capital requirement.

She said a total of 47 urban cooperative societies had a negative net worth and 328 urban cooperative banks were having more than 15 per cent gross NPA (Non Performing Assets).

Despite the Covid-19 pandemic, Sitharaman said the gross NPA ratio of urban cooperative banks increased from 7.27 in March 2019 to over 10 per cent in March 2020. Therefore, the Minister said, the government had to bring an ordinance in the interest of the depositors and now that ordinance has to be replaced.

She said her Ministry has brought in amendments in Section 3, Section 45 and Section 56. By amending Section 3 and 56, the government is making provisions applicable to banking companies applicable to cooperative banks also so that cooperative banks are equally subject to better governance and sound banking regulations through the Reserve Bank of India (RBI). Section 45 is being amended because it will enable the RBI to make a theme of reconstruction and amalgamation, she said.

Giving the example of the recent Yes Bank reconstitution scheme, she said it is to protect the interest of the public depositors without making the bank undergo a moratorium period. She also gave an example of BMC bank in which the depositors could not get a resolution till now.

The minister clarified that the Bill will not be applicable to the Primary Agricultural Credit Society and will also not be applicable to the cooperative society whose primary business is providing long term finance for agricultural development. “This will be applicable only on those who bank, banker and banking business in cooperative society.”

Mentioning that her government is not doing anything new, the Minister said Section 3 and 56 have also been amended earlier in 1965, 1984, 1987, 1989 and 2012.

On the first day of the session, Sitharaman had withdrawn the Bill saying “it is being withdrawn to add a few new things giving the Reserve Bank of India a chance to be able to restructure distressed cooperative banks, which are in serious need”. The Bill was not passed by Parliament during the Budget Session and subsequently an ordinance was issued.

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Telefonica partners with Japan’s Rakuten to develop open 5G network

The technology promises to radically cut costs for telecom operators as it uses cloud-based software and commoditized hardware instead of proprietary equipment supplied by companies such as Nokia, Ericsson and Huawei.

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Huawei Technologies

Stockholm: Spain’s Telefonica has signed a pact with Japan’s Rakuten to develop a 5G radio network system that uses an open platform and artificial intelligence, the companies said on Wednesday.

The Japanese firm has become the first mobile operator to deploy a network based on a technology called Open Radio Access Network (RAN) that uses software to run network functions on the cloud, which requires less physical equipment.

Rakuten plans to launch 5G services in Japan later this month, Rakuten Mobile’s Chief Technology Officer Tareq Amin said on a call with journalists, after it was forced to delay the introduction by months due to disruption from the coronavirus outbreak.

The technology promises to radically cut costs for telecom operators as it uses cloud-based software and commoditized hardware instead of proprietary equipment supplied by companies such as Nokia, Ericsson and Huawei.

The companies plan to develop a joint procurement scheme for Open RAN software and hardware that will increase volumes and reach economies of scale.

“We are not building a competitive tool with Open RAN. We are trying to build an ecosystem,” said Enrique Blanco, chief technology & information officer at Telefonica, adding that they are open to working with other operators.

Telefonica has been deploying Open RAN pilots in Brazil, Germany, Spain and Britain, and plans to ramp up deployments in 2021 and significant rollouts in 2022.

The Spanish group plans to phase Huawei equipment out of the sensitive core for its 5G network in order not to run the performance and data protection risks that come with relying on one sole supplier, although it has repeatedly said it has no evidence to support U.S. President Donald Trump’s accusations that the Chinese firm’s kit is unsafe.

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