Wednesday, February 29, 2012

ICRA says "Bank Asset Quality to Worsen further"

Banks asset quality to worsen further: Icra
Press Trust of India / Mumbai Mar 01, 2012, 19:53 IST
Rating agency Icra today said it expects the asset quality of banks to deteriorate further, given the rising proportion of restructured loans and fundamental issues in certain sectors.

"Icra anticipates a further deterioration in the quality of banks' credit portfolio due to structural weaknesses in certain sectors and an increasing proportion of restructured loans," the agency said in a report.

A slew of lenders, including State Bank of India, have seen considerable spike in their non-performing assets (NPA) or restructured books on the back of high interest rates, coupled with slackening economic growth.

The Reserve Bank, which has been maintaining that it is not a systemic issue, has made its concerns clear and had a meeting with top bankers yesterday on the NPA issue.

According to Icra, the gross NPA ratios of state-run banks was stable at 2.4% for the first half of the fiscal, while the same number for the SBI Group rose to 4.3% from 4%.

Meanwhile, Icra said banks are unlikely to cut lending rates soon as their cost of funds will continue to be elevated over the next two quarters given the significant share of fixed-rate, medium-term resources they have mobilised in the recent past.

"Elevated level of loan loss provisions would also constrain banks from reducing the lending yields without unduly impacting their profitability," 

CEO of Banks are not right in saying that rise in NPA is due to rise in interest rates. All accounts or I may say  ninety nine percent of NPA accounts in public sector banks which have been declared as Non Performing Assets upto the quarter ended December 2011 are older than one year when interest rates used to be  very low, you may say critically low . In fact , the impact of rise in interest rate during last fifteen months will surface in coming quarters.

It is traditional lame excuse given by bankers that interest rate has spoilt the quality of assets. In fact contribution of interest in the balance sheet of businessmen or that of a farmer or service men is a very very small and more specifically the impact of rise in interest rate is microscopically small. In case of advances more than one crores , borrowers are projecting not less than 3 percent return on equity and any educated person can assess the impact on net profit, sustainability, repayment capacity or economic feasibility  of such business projects due to  rise in interest rate. 

A person who borrows money for a car or for a house from a bank has at least number one annual income of more than five lacs and the burden caused due to rise in interest is hardly a few hundred in a month, at least less than the impact of rise in prices of fuel and other essential commodities. In face most of house loan seekers have at least equal amount of black money and they take loan to convert their black money into white money.

When disturbance occurs in USA or other European Countries, bankers get an additional excuse of global recession or that of financial crisis looming large on other countries of international communities. When Obama tightens the economy, India says that Indian economy is stable and growing despite all adverse situations. When Subprime crisis erupted in USA India was said to be decoupled from world economy, by our learned prime minister and finance minister.

But when Obama provided the stimulus package during Sub Prime crisis India did not hesitate to provide stimulus package in India too, consequences of which is being faced by now Finance Minister. Obama comes to India  for  employment creation in USA and for hardening the condition of VISA  India do not understand the importance of employment in India and without hesitation allows big corporate to invest in other countries.

 When there is earthquake or flood in any part of the country, crop loan of Indian banks go bad all over the country and government do not hesitate in announcement of waiver of bank loan. Even during ongoing elections in five states all advertisement of Congress party speaks of further waiver of loan if it comes to power.

Our Finance Ministers also make many lame excuses like CEOS of Banks when economists of India and politicians of opposition parties talk of Fiscal deficit or current account deficit or Falling GDP growth or erosion IIP figures or rise in Inflation and relentless price rise. But when FM is in group of diplomat MPs of his own party he talks of Food Security Bill or waiver of loan or free house or free laptops to voters. 

In fact none is bothered of health of economy of the country but most of them all bothered of wealth of their own families, relatives and friends. If property of to CEOs and politicians are checked by CBI, CVc,IT, ED and other anti corruption wings, bitter truth will precipitate. Unfortunately and traditionally even such agencies are used by ruling parties to torture members of opposition parties.

Culture of manipulation, false excuses for non performance or reason for rise in corruption starts from top ranked politicians, ministers and government officials and then the same dirty water percolates down the bottom.

In India such low level politics is very common. During last six decades of freedom , these politicians could do nothing for reformation in judiciary and this is the reason the common men are taking it easy to bear with injustice than to go court to seek justice and wait for two or three decades. This is the reason that corrupt persons are not punished and they continue their ill motivated mischievous activities. Similarly bankers earn illegal money in wrong lending in the name of credit growth and then shed crocodile tears when the borrowers do not repay the loan in time.

There is a proverb “Old wine in new bottle” One after other laws are enacted , one after other reformatory committees are formed to bring about reformation , but the prime guilty which are human work force do not change their culture and attitude for their organization and towards their country..

It is remarkable to say that our Finance Minister for survival of economy and for execution of economic plans has to sell equities of public sector profit making companies like ONGC whereas CEOs of public sector banks are standing in the que before LIC headquarters to sell their equities so that they may comply Basel recommendation due to the fact that FM, already in begging mode has expressed its incapacity to provide capital infusion and hence  left sick banks on the mercy of LIC for capital infusion.

Though volume of NPA in Public sector banks has been rising quarter after quarter ,RBI may be right in saying that volume of NPA in PSBs is not alarming as of now because in case of any eventuality PSBs can meet the crisis by their own capital which is at least 9% as per Bale committee recommendation. 

But the matter of real concern is that most of banks are facing liquidity crisis , borrowing money in lacs of crores from RBI and where scope of lending is very much reduced due to inaction of government on needs of corporate sector , it is unavoidable that in near future quantum of bad assets will grow at faster rate whereas lending at lower rate which will result in rise in Gross NPA  to total Advances Ratio .

Days are not far when even capital of banks will face sharp erosion and government will also fail to protect the real interest of depositors, investors and shareholders.

To add fuel to fire , corrupt officials are busy in bad lending and corrupt legal system is unable to recover the money from will defaulters of public sector banks. 

Read the news published in Economic Times Today on 1st of March 2012

NPA levels not alarming, banks to RBI

Moody's lowers Central Bank's rating to ‘negative'

Moody's Investors Service has revised Central Bank of India's ratings outlook to ‘negative' from ‘stable' due to the bank's modest capital, weak asset quality and large exposure to troubled industries.
“We view the bank as being more vulnerable than its similarly-rated peers (D-), given its relatively riskier loan book, which includes a high proportion of loans to troubled industries, such as the power sector,” says Ms Beatrice Woo, Vice-President and Senior Credit Officer, Moody's, in a statement.
Central Bank reported a Tier 1 capital ratio of 7.77 per cent as of December 31, 2011, below the 8 per cent Tier 1 ratio that the Government wants public sector banks to maintain, said a Moody's statement.
The public sector bank's Tier 1 is lower than its peers; the system Tier 1 ratio average reaching 9.60 per cent, it added.
On the asset quality front, the bank's non-performing assets (NPA), as of December 31, 2011, reached a two-year high of 3.7 per cent of loans, and Rs 4,920 crore on an absolute basis.
In addition, restructured assets accounted for 7.4 per cent of loans, significantly above the estimated system average of 4.2 per cent, said Moody's.


The rating agency has assessed that the country's sixth largest public sector bank has larger exposures to stressed sectors than the system average.
For example, infrastructure loans represented 21 per cent of loans against 15 per cent for the system. Within infrastructure, loans to the power sector accounted for 14 per cent.
The agency noted that the bank's provision coverage declined to 48.1 per cent in December 2011 from 70.3 per cent a year earlier.

Finmin asks PSU banks not to overstate profit

New Delhi, Thu Feb 16 2012, 19:09 hrs
The Finance Ministry has written to all public sector banks asking them to ensure profits are not overstated and to make appropriate provisions for bad loans.
In a letter to heads of public sector banks, the Finance Ministry said "instances of over-reporting of profit have been continuing year after year and no corrective action seems to have been taken to stop the recurrence".
The letter assumes significance in the light of rising bad debts in the banking sector.
According to a senior official of a public sector bank, the letter has been issued recently by the Finance Ministry.
Sometimes there could be a difference of opinion about the classification of NPA which gets sorted out at the time of external audit or Annual Financial Inspection (AFI) by the Reserve Bank of India (RBI), the official said.
If the bank is unable to convince the RBI for not classifying some loans as NPA and subsequently not making provisions, then the bank has to make provision after AFI, the official said.
To that extent the profit is depressed later, the official said.
Banks have been trying to follow prudential guidelines of RBI on NPA in letter and spirit but there could be differences of opinion which gets resolved after AFI and reconciliation of accounts takes place, the official added.
During the third quarter of the current fiscal, banks profitability was hit due to jump in bad loans and restructured loans.
There has been about 19 per cent rise in restructured loan against the previous quarter as textiles, steel and infrastructure companies have suffered due to lower output and higher cost of funds.
Besides, there is NPA pressure for banks from the aviation and power sectors. They are struggling to recover Rs 19,000 crore from the ailing national carrier Air India.
Worried over rising bad loans in certain sectors, RBI is expected to meet banks to take stock of the NPA situation soon.
"Stress sectors are well known, the issues which are there. But we don't think there is a great concern as of now," RBI Deputy Governor K C Chakrabarty had said earlier this week.
"But any how we are going to discuss it (NPA issue) with the banks in the coming days. We are going to meet banks during this month or first week of March," he had said.

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