Page 10 - Banking Finance October 2020
P. 10
RBI CORNER
can also impact credit behaviour of The violation is in relation to provisions ance with the aforesaid directions, the
borrowers and increase the risks of of directions issued by RBI on 'Exposure central bank said.
delinquencies post resumption of Norms', 'Prudential Norms on Income
scheduled payments. It may result in Recognition, Asset Classification and Equity returns in India
vitiating the overall credit discipline Provisioning pertaining to Advances'
which will have a debilitating impact on among others, the RBI said. more due to falling Equity
the process of credit creation in the Risk Premium
Also, the bank was found violating
economy. It will be the small borrow-
'SPARC - Monitoring of Information According to an article written by RBI
ers which may end up bearing the
Submission by bank', 'Creation of a officials from the Division of Financial
brunt of the impact as their access to Central Repository of Large Common Markets returns in Indian stocks over
formal lending channels is critically Exposures - Across Banks' read with the past few years came from a fall in
dependent on the credit culture". directions on 'Central Repository of equity risk premium (ERP) rather than
Information on Large Credits (CRILC) - earnings.
RBI infuses Rs. 20,000 Revision in Reporting', and 'Disclosure The paper, published in the monthly
crore into banking system in Financial Statements- Notes to Ac- bulletin for October, provides insight
counts', the RBI said.. into the puzzle of rising stock prices
via OMO
This penalty has been imposed in ex- despite sluggish earnings growth.
RBI infused Rs 20,000 crore into the
ercise of powers vested in RBI under However it also highlights the risks
banking system through an open mar- the provisions of section 47 A (1) (c) posed by the rally driven by lower risk
ket operation (OMO) purchase of gov- read with section 46 (4) (i) of the Bank- perceptions among investors rather
ernment securities (G-Secs) worth an ing Regulation Act, 1949 (the Act). than fundamental changes in earnings.
equal amount, the first under the en- The paper is written by RBI employees
hanced limit announced recently. This action is based on the deficiencies but does not necessarily represent the
in regulatory compliance and is not
This liquidity infusion measure will intended to pronounce upon the valid- views of the central bank.
mainly help in checking the current The paper focuses on estimating ERP
ity of any transaction or agreement
trend of rising yields, market players entered into by the bank with its cus- which is the extra return that investors
said. demand in return for holding a risky
tomers, the RBI said.
Data from the central bank showed The statutory inspection of the bank asset. A fall in ERP denotes that inves-
that it has bought G-Secs of six-year with reference to its financial position tors have become more confident
tenure worth Rs 6,600 crore, of eight- as on March 31, 2019 and the Risk about the asset in question.
year tenure worth Rs 5,177 crore, of "Decomposition of changes in equity
10-year tenure (the old benchmark) Assessment Report (RAR) pertaining prices indicate that the rise in equity
worth Rs 3,475 crore and of 13-year thereto revealed non-compliance with prices during 2016 to early 2020 was
the above-mentioned directions issued
tenure worth Rs 4,748 crore. mainly supported by decrease in inter-
by RBI, the central bank said.
The RBI bought the 10-year papers at est rates and Equity Risk Premium
a yield of 5.86%. After the OMO, the "In furtherance to the same, a notice (ERP), with increase in forward earn-
was issued to the bank advising it to ings expectations contributing to a
benchmark yield closed at 5.9%, not
far from its previous close. show cause as to why penalty should lesser extent," the paper says.
not be imposed for its failure to com- It goes on to estimate a long run ERP
RBI fines IndusInd Bank Rs ply with the directions issued by RBI," of 4.7% for Indian stocks from 2005 to
the RBI said.
4.50 crore for violation of 2020. The paper contrasts the ERP led
After considering the bank's reply to rally of 2016-2020 with the 2005-2008
rules the notice, oral submissions made dur- market which led by earnings expecta-
RBI has imposed a monetary penalty of ing the personal hearing and examina- tions. Turning its attention to the
Rs 4.50 crore on IndusInd Bank Limited tion of additional submissions, RBI de- covid-19 related crash and subsequent
for non-compliance with certain pru- cided to impose monetary penalty on recovery, the paper attributes both to
dential norms, the central bank said. the bank, to the extent of non-compli- ERP rather than earnings expectations.
10 | 2020 | OCTOBER | BANKING FINANCE