Suman Chowdhury’s Post

Financial stress Today’s ET reiterates regulatory concern on the likely stress in the financial system on account of incessant growth in unsecured retail loans, portfolio of the banking industry. Report highlights that this portfolio has recorded a sharp growth of 10% - from 25% of the total loan book in 2007 to 35% in 2024. It’s surprising that how some of the large banks, who in the past experienced stress in the corporate loan book and infrastructure loans, have once again built up stress in the system on a new count - unsecured retail loans. And why risk departments have not been able to red flag growth in rather riskier unsecured retail loan portfolio, allowing it to become such a high proportion of the total loan book? Banks must play to their strengths and this propensity to join a bandwagon, without assessing the underlying risks and their own strengths and weaknesses in detail, could be detrimental to their medium and long term interests. Whether it’s credit cards or spends thereon, unsecured retail loans or consumer loans for white goods, top up loans etc., each bank and NBFC is trying to outsmart the competition through a mix of aggression, discounts and marketing blitzkrieg! Regulator has upped risk weight on unsecured retail loans. This will push up cost of such loans for banks, leading to the hike in interest rate on such loans. This can further increase the stress in the portfolio. Banks must strive for a balanced portfolio ( balanced between retail and corporate and secured and unsecured ) and play to their strengths rather than indulge in race for market share that can lead to stress in the system. Regulator on the other hand can prescribe guardrails for riskier exposures rather than acting in a knee jerk fashion once the stress is built up. #financialstress #bankingindustry#lipostingchallengeindia

RBI steps up scrutiny of retail lending, targets top-up home loans https://lnkd.in/gCrmX73h Download Economic Times App to stay updated with Business News - https://lnkd.in/gzT9Sxc4

RBI rings the alarm bells 🚨 for personal loan lending by Fintech!! RBI in it's Financial Stability report says "Delinquency levels among borrowers with personal loans below Rs 50,000 remain high. In particular, NBFC-Fintech lenders, which have the highest share in sanctioned and outstanding amounts, also have the second highest delinquency levels, only below that of small finance banks" Vintage delinquency, which is a measure of slippage, remained relatively high in personal loans at 8.2%. Little more than a half of the borrowers in this segment have three live loans at the time of origination and more than one-third of the borrowers have availed more than three loans in the last six months. The RBI noted that certain segments of consumer credit, esp. personal loans and credit cards pulled down the rate of growth in overall consumer credit. During April 2022 and March 2024, bank lending to the retail sector grew at a CAGR of 25.2% and lending to services - which includes bank lending to NBFCs - grew at 22.4%, far exceeding overall credit growth of 16.4%. The report elaborated on the red flags - rising stress in retail loans in private sector lenders.

Fixed And Floating Interest Rates In The Banking Sector Under the RBI’s extant instructions on interest rate on loans & advances, there are mainly three types of rates that the banks charged to their borrowers : 1. Base Rate 2. Marginal Cost Of Funds Based Lending Rate (MCLR) 3. External Benchmark Lending Rate (EBLR) 🟦 Base Rate The base rate is the minimum interest rate for loans enforced by the Reserve Bank of India before the emergence of the MCLR. The basis of the base rate depends on the average cost of funds. The operating expenses and the expenses to maintain cash reserve ratio are vital in determining the base rate. The base rate is not dependent on the changes made to the policy repo rate of the RBI. Banks can change the base rate on a quarterly basis. 🟦 Marginal Cost Based Lending Rate For all other types of loans (other than loans covered under EBLR), the banks are charging rate based on marginal cost of funds. The MCLR is the minimum interest rate a bank can charge for a loan. Banks are permitted to issue any category of loan on a fixed or floating interest rate under the MCLR regime. Therefore, for all loans linked to that benchmark, the bank will not lend at a rate that is lower than MCLR of that particular maturity. Cost of credit under MCLR comprises of following components : ▪️Marginal cost of funds : It shall comprise of marginal cost of borrowings and return on networth. ▪️Negative carry cost on account of cash reserve ratio (CRR) : Negative carry on the mandatory CRR [which arises due to return on CRR balances with the RBI by the banks being nil], is calculated as under : Required CRRx (marginal cost) /(1-CRR). ▪️Operative costs: All operating costs associated with providing the loan product including cost of raising funds shall be included under this head. ▪️Tenor Premium : These costs arise from loan commitments with longer tenor. The change in tenor premium should not be borrower specific or loan class specific. It should be uniform for all types of loans for a given residual tenor. ▪️Spread or Bank’s Margin ▪️Credit Risk Premium The interest rate given by a bank for deposits and borrowing are the decisive factors in the calculation of MCLR. 🟦External Benchmark Lending Rate Effective from Oct 1, 2019, the banks have been advised to charge EBLR (viz floating rate) for personal loan or retail loans ( housing, auto loans) and loans to micro and small enterprises. The EBLR can be linked to either of these rates : ➡️RBI’s policy repo rate (viz the rate on which the RBI lends funds to banks for overnight against collaterals), ➡️ 3months Treasury Bills Rate ➡️ 6 months Treasury Bills Rate ➡️ Any other rate published by Financial Benchmark India Pvt Ltd. EBLR = External Benchmark Rate+ Bank’s Spread or Margin + Credit Risk Premium + Billing and Settlement Plan (BSP) Current RBI Policy Repo Rate : 6.50% However, the banks are free to charge EBLR for other types of loans, if they so desire. Thanks for reading….

VR/14/2024-SC-MSMEs Vs Banks/NBFCs The Supreme Court has come to the rescue of MSMEs in its judgment of 01.08.2024. On 29.05.2015, Ministry of Micro, Small and Medium Enterprises issued a circular, containing the “Framework for Revival and Rehabilitation of MSMEs”. (“GOI Circular”). Under the Circular, Banks/Creditors of MSMEs are required to identify incipient stress in the loan accounts of MSMEs by creating three sub-categories of such stress loan accounts (Special Mention Accounts, i.e., SMA-0, SMA-1 and SMA-2, depending on the level of stress the borrower is facing.  The lenders are required to form a committee, which is accessible to the borrowers and can work along with them on a corrective action to improve their situation. By then, there were existing guidelines issued by RBI to banks titled “The Banks/Creditors Income Recognition, Asset Classification and Provisioning Pertaining to Advances”. (“RBI Guidelines”) In view of the GOI Circular, RBI sent a communication to all Scheduled Commercial Banks, making certain changes to RBI Guidelines, to ensure that they are compatible with the GOI Circular. Under GOI Circular, the Banks are required to identify stressed loan accounts and classify them as one of the three SMA categories. GOI Circular also allows the borrower to voluntarily apply for classification of its account as SMA. In such case, the account shall first be classified as SMA-0. In this scenario, some Banks have gone ahead and taken action against some MSME borrowers under SARFAESI Act, without following the GOI Circular or RBI Guidelines. This action was challenged by some borrowers in a batch of Writ Petitions before Bombay High Court. The High Court dismissed the Writ Petitions on the ground that the instructions contained in GOI Circular were not mandatory. The borrowers approached the Supreme Court and the Supreme Court has set aside the decision of Bombay High Court. Some of the findings of the Supreme Court are under: a)    RBI Guidelines have statutory force and compliance with them is mandatory and not optional for banks, in view of section 21 and 35A the Banking Regulation Act. (para 13 & 18) b)    The provisions of SARFAESI Act have overriding effect. However, SARFAESI Act would come into play, only after the borrowers’ accounts are declared NPAs, which shall be only after the GOI Circular and RBI Guidelines are followed. (para 14) c)    When Banks declare a borrower’s account as NPA, it is also the responsibility of borrowers to inform the Banks about the due process to be followed and question such action. In this case, the Banks have already completed the process under SARFAESI and taken possession of the properties. Therefore, the cases are not remanded back to High Court. However, as the High Court has not dealt with the factual issues, the borrowers are free to take recourse to any legal remedy. (para 19).

By way of an update, the Reserve Bank of India (RBI), on 26 April 2024, has issued the following notifications: a) Frequently asked questions on its Guidelines on Default Loss Guarantee (DLG) in Digital Lending dated 8 June 2023 (FAQs); and  b) Draft Guidelines on "Digital Lending - Transparency in Aggregation of Loan Products from Multiple Lenders" (Draft Loan Aggregation Guidelines). 1. Summary of FAQs: (a) The FAQs have now clarified that DLG cover can only consist of pre-identified and measurable loan assets that have been sanctioned by a lender (DLG Set). (b)The DLG cover should be specified upfront and remain fixed. (c)The DLG cover would be calculated on the amount of loans disbursed proportionally under a DLG Set at any given point of time. (d) No Replenishment of the DLG cover in case of subsequent recovery. (e) As per the FAQs, DLG is not permitted for revolving credit facilities.   (f) Miscellaneous: (i) DLG is not permitted for loans arranged on peer-to-peer lending platforms. (ii)The DLG guidelines would not be applicable on loans sourced outside the Digital Lending Guidelines. (iii)DLG arrangements cannot be entered into for financing availed through credit cards. (iv) Lending services providers (LSPs) must publish the total number of portfolios and respective amounts of each portfolio on which DLG has been offered. The FAQs have further clarified that the name of the RE can be omitted from such disclosure requirements.  (v) The DLG Guidelines require a declaration from the statutory auditor of the DLG provider every time they enter into an arrangement with an RE. The FAQs clarify that no such declaration is needed from the statutory auditor of the RE to whom the DLG is being provided. (vi) The RBI has also prescribed the below additional requirements to be followed by REs acting as DLG providers. This includes that the RE should deduct full amount of the outstanding DLG from its capital. REs acting as DLG providers should have a board-approved policy in place as a best practice.   2. Summary of the Draft Loan Aggregation Guidelines. The Guidelines have been issued to promote ‘customer centricity’ and ensuring ‘complete transparency’ to the borrowers in the credit intermediation process. In cases, where loan product aggregation services are offered by many LSPs through outsourcing arrangements with multiple lenders, and the digital lending application (DLA) of the LSP / RE for matching its customers to one of the lenders, REs are advised to ensure that its LSPs comply with the guidelines.The LSP should provide a digital view of all loan offers available to the borrower from willing lenders with whom the LSP has arrangements.   The aforesaid changes impact operations of LSPs who source borrowers for multiple REs as they will have to restructure their loan offering to ensure uniform treatment for all such REs. The Draft Loan Aggregation Guidelines are open for public comments till 31 May 2024. #fintech#digitallending#LSP#RBIupdate

Fixed And Floating Interest Rates In The Banking Sector Under the RBI’s extant instructions on interest rate on loans & advances, there are mainly three types of rates that the banks charged to their borrowers : 1. Base Rate 2. Marginal Cost Of Funds Based Lending Rate (MCLR) 3. External Benchmark Lending Rate (EBLR) 🟦 Base Rate The base rate is the minimum interest rate for loans enforced by the Reserve Bank of India before the emergence of the MCLR. The basis of the base rate depends on the average cost of funds. The operating expenses and the expenses to maintain cash reserve ratio are vital in determining the base rate. The base rate is not dependent on the changes made to the policy repo rate of the RBI. Banks can change the base rate on a quarterly basis. 🟦 Marginal Cost Based Lending Rate For all other types of loans (other than loans covered under EBLR), the banks are charging rate based on marginal cost of funds. The MCLR is the minimum interest rate a bank can charge for a loan. Banks are permitted to issue any category of loan on a fixed or floating interest rate under the MCLR regime. Therefore, for all loans linked to that benchmark, the bank will not lend at a rate that is lower than MCLR of that particular maturity. Cost of credit under MCLR comprises of following components : ▪️Marginal cost of funds : It shall comprise of marginal cost of borrowings and return on networth. ▪️Negative carry cost on account of cash reserve ratio (CRR) : Negative carry on the mandatory CRR [which arises due to return on CRR balances with the RBI by the banks being nil], is calculated as under : Required CRRx (marginal cost) /(1-CRR). ▪️Operative costs: All operating costs associated with providing the loan product including cost of raising funds shall be included under this head. ▪️Tenor Premium : These costs arise from loan commitments with longer tenor. The change in tenor premium should not be borrower specific or loan class specific. It should be uniform for all types of loans for a given residual tenor. ▪️Spread or Bank’s Margin ▪️Credit Risk Premium The interest rate given by a bank for deposits and borrowing are the decisive factors in the calculation of MCLR. 🟦External Benchmark Lending Rate Effective from Oct 1, 2019, the banks have been advised to charge EBLR (viz floating rate) for personal loan or retail loans ( housing, auto loans) and loans to micro and small enterprises. The EBLR can be linked to either of these rates : ➡️RBI’s policy repo rate (viz the rate on which the RBI lends funds to banks for overnight against collaterals), ➡️ 3months Treasury Bills Rate ➡️ 6 months Treasury Bills Rate ➡️ Any other rate published by Financial Benchmark India Pvt Ltd. EBLR = External Benchmark Rate+ Bank’s Spread or Margin + Credit Risk Premium + Billing and Settlement Plan (BSP) Current RBI Policy Repo Rate : 6.50% However, the banks are free to charge EBLR for other types of loans, if they so desire. Thanks for reading….

Fixed And Floating Interest Rates In The Banking Sector Under the RBI’s extant instructions on interest rate on loans & advances, there are mainly three types of rates that the banks charged to their borrowers : 1. Base Rate 2. Marginal Cost Of Funds Based Lending Rate (MCLR) 3. External Benchmark Lending Rate (EBLR) 🟦 Base Rate The base rate is the minimum interest rate for loans enforced by the Reserve Bank of India before the emergence of the MCLR. The basis of the base rate depends on the average cost of funds. The operating expenses and the expenses to maintain cash reserve ratio are vital in determining the base rate. The base rate is not dependent on the changes made to the policy repo rate of the RBI. Banks can change the base rate on a quarterly basis. 🟦 Marginal Cost Based Lending Rate For all other types of loans (other than loans covered under EBLR), the banks are charging rate based on marginal cost of funds. The MCLR is the minimum interest rate a bank can charge for a loan. Banks are permitted to issue any category of loan on a fixed or floating interest rate under the MCLR regime. Therefore, for all loans linked to that benchmark, the bank will not lend at a rate that is lower than MCLR of that particular maturity. Cost of credit under MCLR comprises of following components : ▪️Marginal cost of funds : It shall comprise of marginal cost of borrowings and return on networth. ▪️Negative carry cost on account of cash reserve ratio (CRR) : Negative carry on the mandatory CRR [which arises due to return on CRR balances with the RBI by the banks being nil], is calculated as under : Required CRRx (marginal cost) /(1-CRR). ▪️Operative costs: All operating costs associated with providing the loan product including cost of raising funds shall be included under this head. ▪️Tenor Premium : These costs arise from loan commitments with longer tenor. The change in tenor premium should not be borrower specific or loan class specific. It should be uniform for all types of loans for a given residual tenor. ▪️Spread or Bank’s Margin ▪️Credit Risk Premium The interest rate given by a bank for deposits and borrowing are the decisive factors in the calculation of MCLR. 🟦External Benchmark Lending Rate Effective from Oct 1, 2019, the banks have been advised to charge EBLR (viz floating rate) for personal loan or retail loans ( housing, auto loans) and loans to micro and small enterprises. The EBLR can be linked to either of these rates : ➡️RBI’s policy repo rate (viz the rate on which the RBI lends funds to banks for overnight against collaterals), ➡️ 3months Treasury Bills Rate ➡️ 6 months Treasury Bills Rate ➡️ Any other rate published by Financial Benchmark India Pvt Ltd. EBLR = External Benchmark Rate+ Bank’s Spread or Margin + Credit Risk Premium + Billing and Settlement Plan (BSP) Current RBI Policy Repo Rate : 6.50% However, the banks are free to charge EBLR for other types of loans, if they so desire. Thanks for reading….

Sluggish Paying Ability and Purchasing Power, KPR NPL Increases JAKARTA. Credit quality the property sector is still bad and casts a shadow over the industry banking. Credit ratio stuck, aka non-performing loan (NPL) in the property segment ti who crawled back increases from month to month. Data from Bank Indonesia (BI) records that the NPL for property loans as of July 2024 was at the level of 2.68%. This figure rose slightly from the previous month at 2.64%. The banking industry has actually recorded a decline in property credit NPLs since April 2024. At that time, property credit NPLs were at 2.72%. However, if you look at it on an annual basis, property NPLs are still down from July 2023 at 2.81%. EVP Consumer Loans Bank Central Asia (BCA) Welly Yandoko admitted that property NPLs had increased. However, his position is still within safe limits. Welly explained that the cause of the decline in credit quality was due to people's weakening purchasing power. Automatically, the payment process, aka repayment capacity, of creditors becomes weaker. Moreover, the credit restructuring period is starting to end. For this reason, Welly said, BCA will always be disciplined in implementing the principle of prudence in credit management. "Every KPR application that comes to BCA has gone through a very in-depth and careful screening process," he said, Friday (13/9). Welly explained that he could not yet project how long the trend of increasing NPLs in KPR would end. He admitted that he would still see how the economic situation would develop in the future. "Hopefully conditions will get better, so that purchasing power will rise again. We at BCA still do sure the NPL will fall back to the range of 1.5%-1.6%, even down more than that," explained Welly. As of the first semester, BCA's NPL was at 1.72%. President Director of the Regional Development Bank of West Java and Banten Tbk, Yuddy Renaldi, explained that the lower middle class segment has indeed experienced a decline in the ability to pay property loans. He revealed that BJB's KPR NPL rose 0.5%. However, overall the NPL of the issuer coded BJBR is still maintained at the level of 1.5%. To prevent the NPL in the KPR segment from continuing to creep up, Bank BJB claims to be more selective in disbursing credit. This can be seen from BJBR's property credit growth which is not as fast as last year. As of July 2024, Bank BJB's KPR will only increase by 9.8% on an annual basis. This is different from the previous year which always grew double digits. "We tend to be more conservative and careful in disbursing property credit," said Yuddy. Peluang #investasi dan pengembangan #properti yang saling menguntungkan: Hubungi kami : +62 811-8506-660 project@nusadev.com https://lnkd.in/g3KdMqT #propertybusiness #propertydevelopment #propertyinvesting #NusantaraDᴇᴠᴇʟᴏᴩᴍᴇɴᴛs #renovasiproperti #properti #renovasigudang #kontraktor #gudang #pergudangan #konstruksi 

Unsecured Retail loans....the story so far (Part 3) - continuation of Part 1 and 2 8) Refinancing is at the heart of the unsecured loan mania. This has led to a paradox - banks are reporting lower level of stress in their unsecured portfolio than their secured loan portfolio. Is it not funny that a bank should have lower level of SMA1, SMA2 and NPA in its unsecured portfolio than its home loan portfolio? 9) Though delayed, the RBI's December 2023 strictures brought some sanity to the retail unsecured loan market. To summarise: a) RBI increased the risk weight for retail unsecured lending b) RBI has discouraged bank lending to NBFCs/Fintechs by linking risk weight of such lending to the credit rating of those companies 10) There has been some effort by some NBFCs/Fintechs to pass off quasi unsecured loans as fake gold loans. Fortunately the RBI has been at the top of its game and has come heavily on some rogue NBFCs. .....to be continued