The week that was.

On-Tap Banking Licenses

Lok Sabha clears bankruptcy code

The Amid a surge in bad loans, the Lok Sabha has
approved a Bill to overhaul century-old laws that
regulate insolvency.
The proposed Insolvency and Bankruptcy Code aims
to slash the time it takes to wind up a company or
recover dues from a defaulter. The Bill will become a
law once the Rajya Sabha clears it.
The proposed uniform law will streamline the existing insolvency process which depends on 11 separate laws
FLIPs View: I n line w ith international practices, this law will go a long way in debt recovery, and
reducing the stress in the banking system.
-----------------------------------------------------Rich will have to disclose acquisition cost of assets
In Those with annual income above Rs.50 lakh will
have to disclose the acquisition cost of their assets
such as land, building and jewellery in their income
tax return (ITR) for assessment year 2016-17, the
Central Board of Direct Taxes (CBDT) has said.
They will be required to disclose items including
utensils, apparel and furniture studded with precious
stones and ornaments made of gold, silver, platinum
or any other precious metal or alloy.
In case the precious items had been received as
gifts, the taxpayer will have to declare the cost of
acquisition by the previous owner, along with value
additions.
FLIPs View: P ainful, but another good w ay, to
discourage black money purchases.
---------------------------------------------------
SEBI to approve most of Murthy panel recommendations
The SEBI is likely to relax rules for investing in alternative investment funds (AIFs) on the suggestions of
an expert panel headed by Infosys founder NR Narayana Murthy.
AIFs are funds established or incorporated in India
for the purpose of pooling capital by Indian and foreign investors for predetermined investing.
The minimum ticket size for investing in AIFs is Rs. 1
crore. Individuals with an annual income of Rs 50
lakh are allowed to invest in these vehicles.
The SEBI board is likely to lower these criteria.

The RBI has released draft guidelines for issuing on

-tap universal bank licenses. The proposed licensing policy is a change from the current policy
where RBI opens the window for bank licenses periodically but rarely.
Going forward, it intends to keep the window always open for banking aspirants to apply. It will
not be easy to get a license, though. The conditions are daunting.

READ MORE

FLIPs View: The large scale benefits/ impact of

this is not clear, and I don't see any jubilant response
to this.
---------------------------------------------------
FinMin blinks on PF decision
The In a third flip-flop, the government has decided to
reverse its earlier decision of reducing the interest rate
on Employees Provident Fund deposits for 2015-16
and instead keep it at 8.8%, in line with the stand of
the Central Board of Trustees (CBT) of the EPF Organisation (EPFO).
There have been other retreats in recent days on EPF
decisions. Such as on the earlier decision to tax 60 per
cent of PF money on withdrawal and also on the stringent conditions decided for premature withdrawal. .
FLIPs View: The This is one area w here the government has been unable to remain firm. This seems
more of an ego battle, with the EPF winning at the moment.

www.learnwithflip.com

FLIP Rocks!!!

www.learnwithflip.com

DRTs to go online!
In a bid to expedite non-performing assets (NPAs) recovery, the government is trying to make debt recovery
tribunals online and enable non-institutional investors to buy asset reconstruction companies security receipts.
The government will introduce two Bills to amend:
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002, and
The Recovery of Debts Due to Banks and Financial Institutions (DRT) Act, 1993
The amendment to the DRT Act will focus on improving the existing infrastructure, including the computerised
processing of court cases to support reduction in the number of hearings and faster disposal of cases.
Changes in the SARFAESI law will enable non-institutional investors to invest in security receipts issued by asset reconstruction companies (ARCs,) which buy bad loans from banks at a discount.
In case of corporate bond defaults, the changes will allow bond and debenture trustees to use provisions of
SARFAESI Act as well. So far only banks and financial institutions can use these rules in bond default cases.
Well, this should help!

Marginal Cost of Funds based Lending Rate (MCLR)

Marginal Cost of Funds based Lending Rate (MCLR) has replaced the existing base rate system of lending from April 2016.
Base rate system was introduced by RBI in July 2010 to ensure that banks can not lend below a certain
benchmark. Also, to ensure that the changes in interest rate policy is effectively transmitted to the bank
customers.
However, policy transmission could not become very effective as banks adopted various methods in calculating their cost of funds. So, the base rate system has not been effective in this regard.
Why did the base rate system hinder monetary policy transmission?
The main components of the base rate are:

Cost of funds (interest rates offered by banks on deposits)

Operating expenses to run the bank.
Minimum Rate of return i.e. margin or profit

As you can see, the banks do not consider repo rate in their calculations. They primarily depend on
the composition of deposits to calculate the lending rate. So, any cut or increase in rates (especially key
rate like Repo Rate) by the RBI is not getting transmitted to the bank customers immediately.
How does MCLR work?
As per RBIs guidelines, it is mandatory for the banks to consider the repo rate while calculating
MCLR. The main components of MCLR calculation are:

Operating Expenses

Return on Net-worth

Cost of maintaining CRR

Marginal Cost of funds after considering interest rates offered on savings / current / term deposit
accounts. Based on cost of borrowings i.e., short term borrowing rate which is repo rate & also on longterm borrowing rates.
Tenor Premium

Any change in key rates like repo rate brings changes in marginal cost of funds and hence the MCLR
should also be changed by the banks immediately.

www.learnwithflip.com

RBIs key guidelines on MCLR:

All loans sanctioned and credit limits renewed w.e.f April 1, 2016 will be priced based on the Marginal Cost of Funds based Lending Rate.

MCLR will be a tenor-based benchmark instead of a single rate. This allows banks to more efficiently
price loans at different tenors based on different MCLRs, according to their funding composition and
strategies.

Banks have to review and publish their MCLR of different maturities every month on a preannounced date.

The final lending rates offered by the banks will be based on by adding the spread to the MCLR
rate.

Banks may specify interest reset dates on their floating rate loans. They will have the option to offer
loans with reset dates linked either to the date of sanction of the loan/credit limits or to the date of review of MCLR.

The periodicity of reset can be one year or lower.

The MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date.

Existing borrowers with loans linked to Base Rate can continue with base rate system till repayment
of loan (maturity). An option to switch to new MCLR system will also be provided to the existing borrowers.

Once a borrower opts for MCLR, switching back to base rate system is not allowed.

Like base rate, banks are not allowed to lend below MCLR, except for few categories like loans
against deposits, and loans to banks own employees.

www.learnwithflip.com