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This article is more than 4 month old.

Banking weekly wrap: Sumitomo Mitsui to buy $2-billion stake in Fullerton, PNB advises PNB Housing to rejig Carlyle deal

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There were several important developments in the banking space during this week. Here's a wrap of all the important news from the banking universe.

Banking weekly wrap: Sumitomo Mitsui to buy $2-billion stake in Fullerton, PNB advises PNB Housing to rejig Carlyle deal
From the introduction of a brand new 10-year government security, RBI's advisory to banks to stop LIBOR linked contracts, or the penalties it imposed on over a dozen banks, the ongoing PNB Housing saga, to a Japanese lender foraying into the retail finance businesses in India through Fullteron, there was plenty to occupy the pink pages and 24-hour news-channels this week.
Here's quick catchup. Earlier this week, Punjab National Bank wrote (PNB) to PNB Housing, asking it to reconsider restructuring the Rs 4,000 crores fundraising plan, which would have resulted in PNB's stake falling to 20 percent from 32.6 percent currently, and Aditya Puri advised private equity firm Carlyle’s stake rising to over 50 percent. Sebi had asked PNB Housing to undertake a revaluation of the issue price for the preference shares and warrants after a proxy advisory firm raised questions on the structure of the deal, especially its valuation. It sure isn’t turning out to be a smooth ride for Puri. PNB too seems to be buckling under pressure. More action on this front next week.
Banking ain’t easy. And is especially hasn’t been easy for foreign banks competing with large domestic banks with significant market share and branch networks to cater to the masses. While some marquee foreign lenders have stayed in India, and continue to focus on the HNI category with wealth and asset management solutions, few have ventured into the retail business. Citi, most notably and most recently, announced its exit from the retail banking business- and it's not for no reason.
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Now, one of the world’s largest financial groups- Japan's Sumitomo Mitsui Financial Group (SMFG) has announced it will make its retail banking foray in India by acquiring a large stake in domestic NBFC, Fullerton India. Business back home has been slow for the Japanese major, and it has been eyeing acquisitions in countries like India, Vietnam, etc. Fullerton is focused on the high-margin unsecured lending business, from personal loans to MSME and vehicle lending, and more recently, loans against shares and developer funding. In the current environment, other established players are shrinking their unsecured business to protect their balance sheets. 10 percent of Fullerton's loans are bad. It also reported a loss of Rs 1,157 crore for FY21. Will SMFG succeed where others have failed? Does it have a radical new idea up its sleeve?
LIBOR or London Interbank Offered Rate has been manipulated for years. The 2014 Financial Stability Board report says cases of attempted market manipulation and false reporting of global reference rates- together with the post-2008 crisis decline in liquidity in interbank unsecured funding markets- have dented confidence in the reliability of the existing interbank benchmark interest rates. In this context, RBI issued a notice this week, asking banks and financial institutions to stop entering into new financial contracts that reference LIBOR as a benchmark as soon as possible and in any case by December 31, 2021. Axis Bank on Friday announced its first derivative transaction linked to SOFR (Secured Overnight Financing Rate). SOFR is the recommended US Dollar interest rate benchmark, which is expected to replace LIBOR at the end of 2021. More banks are expected to follow suit.
The RBI also introduced a new 10-year Government Security (G-Sec), which will become the benchmark paper now. This comes after the outstanding limit in the current 10-year G-Sec with the coupon rate of 5.85 percent reached about Rs 1.20-lakh crore, the level at which usually a new 10-year GSec is issued. RBI has also bought most of the older 10-year government papers, and the trading volume in those has also dried up.
Several banks have also disclosed their pre-quarter updates on advances, deposits, etc. HDFC Bank posted a strong loan growth, while Yes Bank was relatively weaker in comparison. Deposits momentum was the best for IndusInd Bank and Federal Bank reported the highest quarterly decline in business in almost two years.
Finally, RBI imposed a monetary penalty aggregating Rs 14.5 crore on 14 banks for contravention of various norms relating to consortium lending to a large undisclosed non-bank finance group. These banks failed to create a central repository of large common exposure, violated rules that say banks cannot hold over 30 percent stake in a company, pledged or otherwise, and also broke rules which prohibit banks from lending to companies in which their own directors have an interest. I’ll leave the guesswork to you, good fellows!
Happy weekend!
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