Thursday, May 10, 2012

All is Not Well In Government Banks

IOB Q1 net down 46% at Rs 125.8 cr-Business Line 25th July 2013

Indian Overseas Bank (IOB) today reported 46.1 per cent decline in net profit at Rs 125.8 crore for the first quarter ended June, 2013.
The bank had earned net profit of Rs 233.4 crore in the April-June quarter of 2011-12, IOB informed the BSE.
However, the total income of the bank rose to Rs 6,187.15 crore in the April-June quarter from Rs 5,402.85 crore in the same period last year.
As of June 30, 2013, the bank’s portfolio quality deteriorated, with gross non-performing assets (NPAs) rising to 4.45 per cent of gross advances as against 2.97 per cent in the same quarter of the previous fiscal.
Its net non-performing assets also rose to 2.81 per cent from 1.48 per cent.
The bank’s Capital Adequacy Ratio (CAR) as of June 30 stood at 11.28 per cent.
Shares of IOB closed at Rs 45.60 apiece on the BSE, down 3.59 per cent from their previous close.

Central Bank Q1 net plummets 94% on higher provisioning, depreciation

A sharp jump in provisions towards bad loans and depreciation in investments dragged down Central Bank of India’s net profit in the April-June quarter. Net profit dropped 94 per cent to Rs 22 crore in the April-June quarter against Rs 336 crore in the year-ago period.
In the reporting quarter, the public sector bank made bad loan provisions of Rs 825 crore, including Rs 189 crore towards restructured assets, against Rs 382 crore (including Rs 196 crore towards restructured assets) in the year-ago period.
Provision towards investment depreciation was at Rs 170 crore against a write-back of Rs 39 crore.
The incremental increase in bad loans and restructured loans during the quarter was at Rs 2,073 crore and Rs 3,024 crore, respectively.


As per the notes to the bank’s accounts, it had to make provisions for the standby letters of credit extended to certain merchant exporters and manufacturers of diamond jewellery, including Winsome Diamonds and Jewellery, getting devolved as funded exposure aggregating Rs 956.33 crore. Further, an outstanding advance of Rs 370 crore to a marketing federation under the Agriculture Ministry became doubtful and provision had to be made.
The bank’s net interest income (difference between interest earned and interest paid) increased by 11.54 per cent to Rs 1,537 crore (Rs 1,378 crore in Q1FY2013). Non-interest income grew 86 per cent at Rs 598 crore (Rs 322 crore).
Net interest margin (net interest income/ average total assets) improved a tad to 2.68 per cent in the reporting April-June quarter against 2.64 per cent in the year-ago period.
According to Chairman and Managing Director M.V. Tanksale, the bank will increase the spread (over the base rate) on large corporate loans to protect the net interest margin.
Given the downturn in the economy, the bank will revise downwards the projected credit growth target of 17-18 per cent for FY2014, he said. However, the deposit growth target of 16 per cent remains.
Tanksale said once the economic environment improves, the bank’s inherent strengths will show up.
Central Bank of India will aim to bring down gross non-performing assets and net non-performing assets in percentage terms to 5 per cent (6.03 per cent as at June-end 2013) and 3 per cent (3.85 per cent) by March-end 2014.
The Central Bank of India share closed at Rs 62.05, down 3.8 per cent on the BSE.


The corporate debt restructuring cell will consider the banking system’s Rs 4,000-crore exposure to Winsome Diamonds for possible restructuring on Thursday, said Tanksale.
The outcome of the forensic audit conducted by banks on Winsome will decide whether the loan can be restructured.

Delays seen in repayment of commercial vehicle loans: Crisil--Business Line 9th Aril 2013

For the first time in three years signs of weakness are emerging in the performance of commercial vehicle (CV) loans, according to Crisil Ratings.
Delinquencies in CV loans are increasing, with monthly collection ratio (MCR) of Crisil-rated CV pools dropping below 95 per cent for the first time since 2009, as per the portfolio analysis of non-banking financial companies (NBFCs).
This decline in collection efficiency indicates that borrowers are increasingly delaying repayments. There is, therefore, a likelihood of increase in non-performing assets (NPAs) over the next few quarters.


Says Pawan Agrawal, Senior Director, Crisil Ratings, “The performance of heavy CV loans is the weakest, because of a sluggish economy, industry overcapacity, and increasing input costs.”
The sub-par collection levels may continue over the next few quarters, reflecting the adverse impact of reduced freight demand on CV owners and their inability to pass on increases in fuel and labour costs.
Transport operators’ earnings and debt-servicing capability has been eroded substantially. Hence, the delinquencies are likely to gradually deepen and move beyond 180 days, leading to a potential rise in NPA levels, said Crisil in its report.
The report said that the 90-plus days-past-due levels, an indicator of loans not repaid for more than 90 days, has increased by about 100 basis points over the last nine months ended December 2012.
The NBFCs, under the aegis of the Finance Industry Development Council, had made a plea to the Reserve Bank of India that since they largely cater to the “un-banked” segments of society, it would be imprudent to bring the asset classification norms of NBFCs (a loan becomes non-performing if interest/principal is unpaid for 180 days) at par with banks.
The Usha Thorat committee on issues and concerns in the NBFC sector had recommended the switch from 90-days past due to 180-days.

UP, Rajasthan to rejig Rs 65,000-cr bad loans of power utilities (Business Line ) 


Six months after the Centre offered restructuring packages for State Electricity Distribution Companies (discoms), Uttar Pradesh and Rajasthan are ready to implement the plan.
The Centre had unveiled the package to improve the deteriorating financial health of the State utilities. Together, the discoms of UP and Rajasthan have bad debts of around Rs 65,000 crore.
According to the Centre’s package, States have to bear half the burden by issuing bonds in phases, the rest has to be provided for by the discoms over five to seven years. The financial re-structuring package will be implemented from April 1.
Uttar Pradesh discoms have run up bad loans of around Rs 30,000 crore. This will be equally split between the State Government and the discoms, said S. K. Agrawal, Director (F&A), UP Power Corporation Ltd.
The State has five discoms — Poorvanchal, Madhyanchal, Paschimanchal, Dakshinanchal and KESCo. The financial rejig would cover all of them.
“The State Cabinet has given its go-ahead to take up the scheme. Punjab National Bank is the lead banker,” Agrawal told Business Line.
In the case of Rajasthan, the discoms would take up debts of around Rs 19,200 crore while a similar amount would be handled by the State Government, said Kunji Lal Meena, Chairman and Managing Director, Jaipur Vidyut Vitran Nigam Ltd.
The State has three distribution utilities — Ajmer Vidyut Vitran Nigam Ltd, Jodhpur Vidyut Vitran Nigam Ltd and Jaipur Vidyut Vitran Nigam Ltd.
“The State Government has given its permission. I have spoken to the banks. They would be meeting on March 19 to finalise the scheme,” Meena told Business Line.
The banks involved with the Rajasthan discoms are Punjab National Bank, Bank of Baroda and Central Bank of India.
On March 19, Jyotiraditya Scindia, Minister of State for Power (Independent Charge), is to meet heads of all discoms to finetune issues before the scheme is implemented, from April 1.
The Finance Ministry and the Reserve Bank of India will decide on the interest rate for these bonds shortly. The Government has already decided not to give these bonds the statutory liquidity ratio (SLR) status, that is, acceptable to the RBI. Banks prefer bonds with SLR status as they are more liquid compared to securities without the privilege.
Credit rating discoms is also likely to be discussed in the meeting. This is expected to be in place from the new financial year. CARE and ICRA will assess the discoms.

Loans to pharma companies turn bitter pill for banks
Loans of more than Rs 2,000 cr to Surya Pharma, Orchid Chem need restructuring
Manojit Saha / Mumbai Aug 15, 2012, 00:50 IST ( taken from newspaper Business Standard )

Loans to mid-sized pharmaceutical companies have turned bad for a slew of top public sector banks in the first quarter of this financial year. Some of the large lenders are set to restructure some of these, to avoid more slippage.

North India-based Surya Pharmaceutical Ltd, flagship company of the Rs 1,700-crore Surya Corp, defaulted to State Bank of India, Punjab National Bank, Bank of India and Oriental Bank of Commerce in the quarter.
 While SBI had an exposure of Rs 460 crore, the total in this account that has become a non-performing asset (NPA) is close to Rs 1,000 crore.

Surya Pharmaceutical
Failed to pay State Bank of India, Punjab National Bank, Bank of India and Oriental Bank of Commerce 
Orchid Pharmaceutical
and Chemicals - Failed to pay Union Bank of India and Andhra Bank
  • SBI saw fresh slippage of Rs 11,000 crore in quarter ended June
  • Accounts in power, road sector and pharmaceutical sectors responsible
  • Bank says environmental clearances could help power, road sector accounts 
  • But no such hope for the pharma company

In the quarter ended June, SBI saw fresh slippage to the tune of Rs 11,000 crore and closed the quarter with an NPA ratio of 4.99 per cent of gross advances.

It has pointed to three accounts, one each in the power, road sector and pharmaceutical sectors, as having contributed significantly to its deteriorating asset quality.

SBI says the power and road sector accounts have a chance of getting upgraded once environmental clearances are in place but they are not sure about the pharma company's turnaround.

Loans to another firm, Orchid Pharmaceutical and Chemicals, also become an NPA for Union Bank of India and Andhra Bank. These banks have an exposure of around Rs 500 crore in all.

While SBI loans to Orchid Chem did not slip to the NPA category in the first quarter, sources indicate the lender might restructure these loans to avoid fresh slippage.

SBI’s total exposure to Orchid is Rs 750 crore, including a foreign currency loan.

A loan, if restructured while the asset is classified as standard, can remain in the latter category but the provisioning requirement rises from 0.4 per cent to two per cent. However, if an NPA is restructured, the asset needs to be further downgraded and provisioning requirements increase sharply.

Bankers say the management of Orchid has told them they’re planning to raise funds from private equity entities to repay part of its debt.

When asked about fund raising plans, Orchid’s chairman and managing director, K Raghavendra Rao, told Business Standard he didn’t want to comment on market speculation.

The sharp decline in the rupee in the past year has resulted in higher costs for Orchid while repaying their foreign currency convertible bonds.

Bankers say the company had raised short-term funds to repay its long-term debt.

Poor loan quality, a major worry for public sector banks

Banking business in India grew by a smaller 15 per cent in 2011-12 compared with 18.3 per cent in 2010-11 as the real GDP growth decelerated from 8.5 per cent to 6.5 per cent.

The growth deceleration, coupled with migration to system driven recognition of non-performing assets (NPAs), has led to the steep rise in bad loans.

The mainstream banking system consists of different categories of banks such as State Bank of India (SBI) and its subsidiaries, nationalised banks(NBs), new private sector banks (NPBs), old private sector banks(OPBs). The various categories of banks differ in their ownership structure, business philosophy, geographical presence, customer base, technology adoption, manpower profile and governance practices. How far these differences have influenced the performance of different categories of banks? We consider all the banks in each category except only 8 out of 14 old private banks and examine their performance across five dimensions — business growth, interest margin (NIM), asset quality (GNPA), operating efficiency (Cost to Income ratio) and profitability (RoA).

Business growth: Business growth for all categories of banks remained subdued in 2011-12 over 2010-11. The OPBs had the highest business growth followed by NPBs, NBs and SBI. The business growth was propelled by credit growth for all categories of banks. Thus, all categories of banks were affected by the liquidity shortage in the system.

NIM: NIMs declined in 2011-12 over 2010-11 for all categories of banks except SBI. Except for three banks each in the NB and NPB category, two banks in the OPB category, all other banks have a witnessed a deterioration in their NIMs. NIMs depend on the maturity profile of deposits and the bank’s ability to pass on the increased cost of funds to the borrowers. The fall in the NIM for majority of the banks possibly have been driven by the high cost of deposits in view of the liquidity shortage and inability to pass on the increased cost of funds fully to the borrowers in view of subdued credit growth.

GNPA: While both the NPBs and OPBS improved their asset quality in percentage terms, SBI and the NBs witnessed significant deterioration. However, as the loan portfolio grows, it is possible that the absolute amount of bad assets might increase. As such, the bad assets have to be seen relative to the loan portfolio. In absolute terms, GNPA in 2011-12 increased by 36 per cent for the NBs and SBI, by only 8 per cent for OPBs over 2010-11. For NPBs, GNPAs were maintained in 2011-12 at the same level in 2010-11. Growth of Advances was much higher than growth in GNPAs for all categories of banks except SBI in 2010-11. However, in 2011-12 in addition to SBI, NBs have witnessed a much higher growth in GNPA than growth in advances in 2011-12. As NBs and SBI account for more than 70 per cent of the banking assets of the system, the high levels of NPAs has drawn serious attention from the government and the RBI.

Cost to Income Ratio: Efficiency represented through cost to income takes into account the interplay of a bank’s interest bearing operations, non-interest income and operating expenses. Both the NBs and SBI improved their efficiency in 2011-12, where as NPBs witnessed a marginal decline and OPBs a significant decline. In terms of levels, NBs and SBI have similar cost to income ratios followed by NPBs and OPBs.

While for the SBI, the improvement in cost to income ratio is guided by a sharp rise of 33 per cent in net interest income, for NBs, it is a combination of reasonable growth in other income and containment in operating expenses. For NPBs, despite high growth in NII and other income, it is the increase in operating expenses by 22 per cent, which has pushed up this ratio. For OPBs, it is the subdued growth in other income and relatively higher growth in operating expenses which has kept their cost to income at relatively higher levels.

RoA: The interplay of NIMs, GNPAs and efficiency of operations was reflected in the profitability of different categories of banks. Both NPBs and SBI improved, OPBs maintained and NBs witnessed a decline in ROAs in 2011-12 compared to 2010-11.In terms of levels, NPBs had the highest RoA followed by OPBs, SBI and NBs.

Asset quality and lower operating efficiency have been the chief concerns of for NBs and OPBs respectively in 2011-12. Improving the RoA in a difficult operating environment is a commendable performance for the NPBs in 2011-12. SBI had seen a major blip in its performance in 2010-11. The asset quality further deteriorated in 2011-12.

As such, the improvement in RoA in 2011-12 is attributable to its pricing advantage and partly to the base effect. Many of the NBs have migrated to the system recognition of NPAs and have used 2011-12 to consolidate their balance sheets. This was a long pending house cleaning exercise which will add to their strength. If the growth scenario improves, they should be able to reap the benefits of their hard work.
(The author is Associate Dean, Xavier Institute of Management, Bhubaneswar. Views are personal)

Restructured assets a bigger worry for banks
While slippages are likely to plateau in FY13, CDRs will continue to rise
Malini Bhupta / Mumbai Jun 30, 2012, 00:25 IST
Thanks to rising bad loans, bank stocks (especially public sector banks) have remained the ugly ducklings all through FY12. Gross non-performing assets (GNPAs) of the sector rose by 46 per cent in FY12 at Rs 1,32,100 crore. This sharp jump in the sector’s bad loans was driven largely by the country’s largest lender, State Bank of India (SBI), which accounts for 30 per cent of the sector’s GNPAs. Not surprising, then, that after SBI reported a record quarterly profit after tax of Rs 4,050 crore and reported lower slippages (Rs 4,300 crore) in Q4 FY12, the perception was that the worst was over for the banking sector. However, as reiterated by the central bank, deteriorating macros, sharp slowdown in industrial activity and asset quality challenges will continue to haunt banks in FY13, too.

This Analysts say looking only at fresh slippages is not the best way to assess whether the worst is over. A big threat to credit quality also comes from a sharp rise in corporate debt restructuring referrals. Bank of America Merrill Lynch Global Research is estimating a 46 per cent year-on-year jump in restructured book in FY13 — restructured book at 6.2 per cent in FY13 vs 4.9 per cent in FY12. While many analysts are expecting a substantial portion of the restructured debt to turn into bad loans, Bank of America Merrill Lynch’s discussions with banks indicate that, “most of the restructuring this time around is ‘deep’ restructuring on capital expenditure/infrastructure projects versus the ‘shallow’ restructuring done by banks three years ago. 

Hence, post-restructuring, the projects should commission and the chance of non-performing loans in this restructuring phase is lower than the last time around”. Additionally, the provisioning for restructured assets is lower (10-12 per cent) compared to non-performing loans (15-25 per cent), so CDRs have a lower impact on earnings spells trouble for banks. Credit quality trends are unlikely to improve in FY13, as industrial production is particularly weak, corporate leverage is high and the power sector will require restructuring, says Anish Tawakley of Barclays. Given that the industrial sector accounts for 45 per cent of bank credit, a protracted slowdown in the sector spells difficult times for banks in FY13. Interestingly, while credit quality will remain under stress, quarterly trends suggest that fresh accretion of bad loans has peaked and that new slippages will plateau in FY13 at 1.7-1.8 per cent of loans.

RBI says banks mislead investors on bad loans, calls for Sebi action
Deputy Governor K C Chakrabarty says monetary policy to ease once inflation comes down
BS Reporter / Mumbai Jun 29, 2012, 00:59 IST
The Reserve Bank of India (RBI) has lashed out at banks for attributing their higher bad loans to a fallout of the automated bad loan recognition system, and said the capital market regulator should look into the issue.
“This means the banks were misguiding the investors by showing improper figures in the past,” said RBI Deputy Governor K C Chakrabarty.

 Last year, the government had mandated all public sector banks to migrate to the core banking solution and eradicate manual intervention in the process of detecting non-performing assets (NPAs) in their books. This had resulted in a surge in banks' bad assets.

Chakrabarty, the most senior deputy governor of the central bank, wondered on how an inanimate object like the ‘system’ can generate NPAs, and said the Securities and Exchange Board of India (Sebi) should look into this issue. “Should not the (markets) regulator, which is dealing with listing, should take action against the banks?” he asked.

“I do not want to negate what he (Chakrabarty) said. But it is not that on a very big scale the bankers have all of a sudden come out with this situation,” Central Bank Chairman and Managing Director M V Tanksale told reporters on the sidelines of the same event.

Tanksale explained his bank, which ended the last quarter in the red due to higher NPAs and restructuring due to exposure to power distribution companies, showed a spurt in NPAs because other banks got two to three years to migrate, while his bank got only nine months. Union Bank of India CMD D Sarkar said in the manual system of NPA recognition, some liberty was taken during external or internal audits, while the new system-based approach takes a methodological view.

During his speech, the deputy governor also said the central bank did not expect banks to provide service of electronic transactions free of charge, instead banks should make it viable with the help of technology. He said free services were not viable, could be misused and hence could not be scaled up.

Chakrabarty said the apex bank would ease its monetary policy once inflation came down. “Headroom to cut rates is always available, but it will come down only when inflation comes down.” It was also important for inflation to come down so that savers can enjoy positive returns on their investments

Banks' power sector exposure may touch Rs 9 lakh cr by FY15

Published on Tue, Jun 26, 2012 at 16:55 |  Source : PTI
Updated at Tue, Jun 26, 2012 at 19:14  
Power sector woes might result in significant bad loans in the Indian banking system, whose exposure to this segment is projected to touch Rs 9 lakh crore in next three years, says a report.
Acute shortage of coal for power projects as well as worsening health of distribution companies (discoms) remain major worries for the sector.
"The government's and companies' continued inability to address the challenges in the power sector may result in significant NPLs (Non Performing Loans) in banking sector over the next 2-3 years," brokerage firm Kotak Securities has said.
In a recent report, the entity noted that new power projects having a total capacity of 40-50 GW could be in danger of defaulting on their debt obligations.
"We estimate the banking system's exposure (including loans from PFC and REC) to the power sector will rise to Rs 9 trillion (Rs 9 lakh crore) by the end of FY 2015 from Rs 5.3 trillion (Rs 5.3 lakh crore) at the end of FY 2012 (19% CAGR in FY 2012-15E)," the report noted. PFC and REC are leading state-run lenders to the power sector.
Pointing out that the central government's effort to address coal-supply and pricing challenges "is quite timid," it said that a sharp rise is expected in NPLs in power generation sector as well as increase in SEB (State Electricity Board) losses over the next 2-3 years.
"We see several new power generation projects as being unable to meet their debt obligations. Banks may not recognise them as NPLs under various guises but the magnitude of the problem is too large for any quick-fix solution," it said.
Even though, the government is taking initiatives to ease fuel supply scenario for the power sector, many existing and upcoming projects are faced with severe coal shortage. Amid rising concerns about defaults in the banking system, the government is working on plans to restructure the debt
burden of state discoms.
The precarious health of discoms has been mainly blamed on lower tariff realisation and efficiency issues.

If you are a banker or an official to regulate and monitor banks  or an auditing or inspecting official or an investor in bank shares ,you must read the article which follows below to know the hidden facts and to understand the bitter truth before it is too late. 

There is an established practice in almost all coooperative banks to keep the loan account EVERGREEN. To Illustrate and to make it more clear :   say a bank  disburse a loan of  Rs10000 to a farmer and the account become overdue after a year or two , the same bank sanction a loan of Rs20000 or Rs.30000 which enable farmer to repay first loan and avail only extra loan . In the same way bank use to sanction inflated loan year after year which keeps the account always standard.

During the course  of time , public sector banks have also learnt the art of keeping  the loan account evergreen. They have many tools in their clever brain to keep assets of bank always standard . 

First and foremost is the  restructuring or rephasing of loan on flimsy ground and second to give additional loan to repay overdue loan.

If even after such self deceptive acts ,banks fail to keep the account in standard category they feed wrong information in CBS system so that such accounts may not be identified as NON performing asset the exercise of identification of the system driven NPA.

Then they try to prevail upon team of auditors to help them in hiding bad assets from the balance sheet.

Next better  option is to sell the bad loan to ASSET RECONSTRUCTION COMPANY known as ARCs at discounted rate without caring for loss bank has to suffer and ultimately investor has to suffer by such unhealthy actions.

Lastly they have option to write off the loan or sacrifice major portion of overdue loan which again adversely affects the bottomline of the bank and is indirectly a cheating treatment with investors and employees whose earnings depend on health of bank.

Prudent bankers who are apt in art of keeping assets evergreen and standard , who know the art of managing auditors and concerned officials at various offices may only become ED or CMD of a bank .One who preach sermons to others but do not follow, one who can deliver good speech , who can manage boss and keep him happy by hook or by crook may only get the chance in promotion.

In our country none is bothered of real health of the system, real health of the organisation and real welfare of common men ,but everyone is busy is dressing and decorating the outer appearance attractive .And this is the root cause that an institution or a country all of a sudden lands in unmanageable crisis.

Evergreening’ of loans is a major ill of the Indian banking system 

Swati Pandey and Aditi Shah,June 24,2012 Reuters

Lenders to India’s Hotel Leela, a 5-star chain that is more than two months behind in payments on $700 million of debt, are likely to bite the bullet and amend the loan terms rather than declare it in default, say bankers involved in the talks.

Restructuring corporate loans - allowing banks to dilute payment terms without classifying loans as bad - is on the rise in Asia’s third-largest economy, providing a lifeline to borrowers struggling in a sharp economic slowdown, but piling more stress on bank balance sheets.

Hidden weaknesses in bank balance sheets are a greater risk as Indian banks’ reserve coverage ratio - the buffer a bank has to set off against loan losses - is among the lowest in Asia.

Officially, 3 per cent of loans in India are bad. Including restructured or “impaired” loans, for which banks don’t have to set aside heavy provisions in case of default, the figure is about 7 per cent, according to analysts.

The reality is worse, say some bankers and industry experts, who say many loans are restructured outside official channels, with some banks and borrowers taking advantage of harder-to-track “evergreening” of loans to avoid declaring default.

Under evergreening, banks provide additional loans to stressed borrowers, often indirectly, to enable them to repay existing loans. That can keep a loan from going sour, but it ratchets up a bank’s exposure to a troubled credit.

It’s estimated that at least a tenth of loans to the real estate sector - where restructuring rules are stringent - are stressed, as against the 3-4 per cent cited by banks, said Amit Goenka, head of capital markets at UK-based Knight Frank.

“There’s a certain amount of under-reporting arising out of evergreening of loans, which can never be precisely derived,” said A S V Krishnan, banking analyst at Mumbai brokerage Ambit Capital.

Lenders are also staring at the prospect of more bad loans as the economy shudders. Standard & Poor’s has warned that India could become the first of the so-called BRIC economies to lose its investment-grade status on slowing growth and political roadblocks to economic policymaking.

In the year to end-March, Indian banks sought to restructure a record $12 billion in corporate loans through the CK(CDR), a central bank-approved consortium of lenders - an increase of 156 per cent on the year before. 

And that excludes billions of dollars in loans restructured outside the official channel, including $4 billion of Air India debt and about $5.5 billion of loans at loss-making state electricity boards. “Going to CDR has almost become fashionable these days. Borrowers are exploiting the CDR mechanism without exhausting other genuine avenues of redressing their problems around over-leverage,” Ambit’s Krishnan said.

The recent surge in loan restructuring may just be putting off the inevitable, though. Ratings agency CRISIL expects new loan restructuring over fiscal year 2012 and 2013 to hit $36 billion, and analysts warn that 25-50 per cent of such loans are likely to turn bad and hit banks’ profitability. Fresh restructuring of loans in the year to March 2011 was negligible.

“Restructuring helps the company sometimes, but if you step back and see it leads to ‘evergreening’ of loans which can cause problems going forward,” said Vikram Bajaj, director at Renaissance Capital Advisors, which advises companies on debt restructuring.

“Basically, what you’re doing is taking a call that the borrower may come out of the situation and you’re giving him more money, but the odds, in most cases, are against it. Kingfisher Airlines is the biggest example of that.” In the best-known recent example of a restructured loan turning sour, liquor baron Vijay Mallya’s Kingfisher Airlines defaulted to most banks on a $1.4 billion loan.

Perilous practice

Bankers defend the practice of restructuring loans, which typically entails extending tenure on the loan, easing interest rates or even converting debt into equity.

“Actively restructuring loans has helped us in controlling slippage,” said Pratip Chaudhuri, chairman of State Bank of India, the country's biggest lender. “We have to live with high restructurings now and look for recoveries tomorrow.”

The problem is that many such loans are never recovered and turn non-performing, adding to the challenge of collecting on bad loans in a country where there is no bankruptcy law - the absence of which makes banks more inclined to help borrowers rather than declare a loan to be in default and receive nothing. At SBI, 43 per cent of loans restructured in the year to March 2010 were declared non-performing within two years, said Soundara Kumar, a deputy managing director at the bank.

Central Bank of India, a mid-sized state lender, learned the hard way how quickly a restructured loan can go bad. In November, it agreed to restructure an $80 million loan to steelmaker Electrotherm, which was having difficulty with an order for a client in Tanzania. Within months of giving a breather to a long-time customer, Central Bank downgraded the loan to non-performing, and was the only listed bank to report a net loss for the March quarter.

“They weren’t able to execute the order. So they asked us to restructure the loan, and, in the March quarter, the account slipped. It happened very quickly,” said a senior executive at Central Bank of India, who did not want to be identified.

Another state-run lender, UCO Bank, ended its ties with Electrotherm when the steelmaker failed to make timely payments even when it was able to, a bank official told Reuters.

“Electrotherm did not pay us the dues even when they had the liquidity and were still making profits,” said UCO Bank Chairman Arun Kaul. UCO has classified the account as non-performing and is in the process of recovering the loan, he said.

Electrotherm’s investor relations officers could not be reached for a comment for this article. In another case, lenders including SBI, Power Finance Corp and Rural Electrification Corp restructured loans to a hydropower project, which was mired in environmental clearances. The account turned bad within two years of being restructured, said a senior bank executive involved with the loan.

Morgan Stanley expects “impaired loans” - bad and restructured loans put together - for all Indian banks to double to 10 per cent of total debt within 18 months.

Although the Reserve Bank of India is concerned about banks’ rising bad loans, it does not see a risk due to aggressive debt restructuring. “I believe banks are doing it with understanding, with discretion,” said RBI Deputy Governor K C Chakrabarty. “If they are not doing, we need to pull them up.”

While restructuring is allowed by the central bank, the murkier “evergreening” of loans is frowned upon. Several bankers said it is widespread, but declined to give details. The practice is said to be particularly common in commercial real estate, where tougher restructuring guidelines require banks to classify a loan as non-performing and set aside more funds as provisions - effectively removing any official middle ground between a performing loan and a default.

“Banks have been working actively to avoid such provisioning and classification,” said Knight Frank’s Goenka. “Real estate provisioning is seen adversely by the regulator and pushes up the cost of lending. This may have led to some evergreening-like measures within the financial institutions.”

Hotel Leela, which borrowed heavily for projects in Delhi and Chennai and recently sold a property to raise money, is seeking additional bank loans to pay its debt, said two sources directly involved in the restructuring.

One of its lenders, Syndicate Bank, wants Leela’s controlling shareholder to put in another 3-4 billion rupees in equity from the sale of a hotel in the southern state of Kerala before it agrees to restructure the loan, a stance most of its lenders support, said an executive at another bank who has loans to Leela and is involved in the discussions.

Hotel Leela Vice-Chairman Vivek Nair did not respond to several calls from Reuters seeking comment for this article.

“Leela is asking for about 600 crore more (6 billion rupees) ($107 million). Banks aren’t willing to give as they want this to pay off some debt. That’s evergreening. Banks want promoters to get more contribution, equity upfront,” said another lender, who asked not to be named given the sensitivity of the matter.

Fitch downgrades SBI, 8 more banks to negative

Published on Wed, Jun 20, 2012 at 12:00 |  Source : Reuters
Updated at Wed, Jun 20, 2012 at 17:04  
Fitch Ratings has revised the Outlook on the 'BBB-' Long-Term (LT) Foreign Currency (FC) Issuer Default Rating (IDR) of India-based financial institutions to Negative from Stable, while affirming the rating.
These include six government banks (including an international banking subsidiary of a government bank), two private banks, two wholly owned government institutions and one infrastructure finance company.
A list of affected entities is as follows:- State Bank of India (SBI), Punjab National Bank ( PNB ), Bank of Baroda ( BOB ), Bank of Baroda (New Zealand) Limited (BOBNZ), Canara Bank ( Canara ), IDBI Bank Ltd. ( IDBI ), ICICI Bank Ltd. ( ICICI ), Axis Bank ( Axis ), Export-Import Bank of India (EXIM), Housing and Urban Development Corporation Ltd. (HUDCO), Infrastructure Development Finance Company Ltd. ( IDFC ).
The rating action follows Fitch's revision of the Outlook on India's LT Foreign- and Local-Currency IDRs to Negative from Stable (please see rating action commentary dated 18 June 2012 at The Outlook revision of the financial institutions reflects their close linkages with the sovereign by virtue of their high exposure to domestic counterparties and holdings of domestic sovereign debt.
Should the Sovereign Long-Term IDR be downgraded, the banks with Viability Ratings (VR) of 'bbb-' would also be affected given the previously mentioned linkages. Separately, Fitch is also of the opinion that pressures are building generally on the stand-alone credit profile of these institutions which will negatively impact VRs, given India's weakening economic and fiscal outlook, slowing business reforms and inflationary pressures that in turn could put further pressure on their future asset quality. VRs of banks with concentrated exposures to problematic sectors could be impacted more.
Fitch derives some comfort from the banks' reasonable customer deposit base, established domestic franchises and adequate capitalisation. The non-banks, however, lack the funding advantage, which puts them more at risk during times of increased market volatility. In the agency's opinion, sovereign support for both the large banks and policy-type institutions is expected to remain strong, with the former benefiting from their large share of system assets and deposits and the latter from their association with the government. Consequently, Fitch expects the LT IDRs for the above two categories to be aligned to the sovereign's rating and also provide a Support Rating Floor close to, or at, the sovereign rating.

New risk-based supervision for banks in the works 
Analysis of probability of failure of a bank and the likely impact of its failure on the banking/financial system will form the basis of the Reserve Bank of India’s proposed risk-based supervision (RBS) regime.
A committee on RBS for commercial banks has suggested that the regime will be based on evaluating both present and future risks, identifying incipient problems, and will facilitate prompt intervention/early corrective action.
The present compliance-based and transaction-testing approach (CAMELS) is more in the nature of a point-in-time assessment.
As per the recommendations of the High Level Steering Committee (HLSC) for Review of Supervisory Processes for Commercial Banks, the periodicity/intensity of on-site inspection of a bank would depend on its position on the Risk-Impact Index Matrix rather than its volume of business.
Under the proposed RBS, the supervisory rating would be a reflection on the risk elements (inherent business risks and effectiveness of control).
The supervisory rating exercise would aim at determining the overall probability of failure of the bank in light of risks to which the bank is exposed, strength of control/governance and oversight framework in place and available capital.
The bank would be apprised of the direction/trend of key risk groups along with overall risk faced by it.

Banks' arms may come under RBI purview
BS Reporter / Mumbai Jun 20, 2012, 00:52 IST
The joint ventures (JVs) and subsidiaries of banks might come under the Reserve Bank of India’s purview if a high-level committee’s recommendations are implemented. At present, the central bank can only monitor banks’ subsidiaries and JVs, but it does not have supervisory power.

The committee, chaired by RBI Deputy Governor K C Chakrabarty, said: “Along with focus on supervision of banks on a solo basis, RBI should also focus on consolidated supervision of banking groups.”

It has proposed RBI enter into memoranda of understanding with other sectoral regulators to smoothen the process of supervision. Through subsidiaries and JVs, banks have forayed into various financial segments such as insurance, mutual funds, private equity and stock broking.

The committee also proposed to form a single-point contact in the form of a ‘supervisory relationship manager’ within the department of banking supervision to ensure effective communication with the supervised entities, and to aid the process. This was suggested in view of the fragmented set-up within RBI for supervising different entities belonging to the same banking group.

The panel has also recommended: “In view of the emerging challenges and ensuring optimisation of supervisory resources, a risk-based approach for supervision for commercial banks in India is recommended. It is imperative that each bank has a certain basic risk management framework in place before the RBS can be rolled out.” Regarding off-site supervision and to ensure quality and integrity of data, the committee recommended manual intervention in the flow of data to RBI from supervised entities be eliminated and penal provisions be invoked for deliberate filing of wrong data.

It has also proposed the present system of quarterly discussion with the top management of banks replaced with formal interactions, the periodicity of which may be determined by the supervisor, based on its risk assessment for a particular bank or the banking group.

Also suggested for a complete overhaul is RBI’s internal rating system, known as CAMELS and based on capital adequacy, asset quality, management, earnings, liquidity and systems. “The existing CAMELS-based rating system would not be appropriate under the risk-based approach. Under the RBS, the focus of the rating framework should be to measure the riskiness of a bank and not to evaluate its performance,” it has said.

Under the risk-focused rating framework, the riskiness of a bank will be computed using a risk template for identifying the inherent prudential risk and the risk control elements for various risk groups. The report has also suggested separation of the posts of chairman of the board and the chief executive officer in all public banks.

Private sector banks are already following the system of having separate posts for chairman and CEO.

PSBs unamortised pension bill pegged at Rs 14,000 cr
Provision must by January 2013 under Basel-III, notes CARE, pointing to P&L implications now
BS Reporter / Mumbai Jun 06, 2012, 00:09 IST

Improving asset quality is a challenge for banking sector amid macro woes

Though there has been a slight improvement since the December 2011 quarter, asset quality remains the biggest concern for the banking sector given the worsening macro economic indicators - slowing industrial production, high inflation and the rupee at record lows.

March 2012 data show that asset quality, as measured by the change in the percentage of gross non performing assets (NPAs) to gross advances, has deteriorated for 9 of the 15 banks in the ET Banks index.

The majority of these are public sector banks as they have a greater exposure to stressed sectors like aviation, infrastructure and mining sectors as well as to state electricity boards. The gross NPA ratio of public sector banks as of March 2012 stood at 3% of gross advances as compared to 2.25% a year ago.

For State Bank of India, the country's largest lender, the percentage of gross NPAs to gross advances increased by 116 basis points to 4.44%, amongst the biggest jumps in the industry. Other banks which reported a significantly high increase in bad loans include Oriental Bank of Commerce, and Punjab National Bank, the second largest state-run lender.

Tight liquidity and a slowdown in deposit growth through the fiscal resulted in a sharp rise in the cost of funds. As a result, net interest margin (NIM), or the difference between the yield on advances and the cost of deposits, declined for 8 of the 15 banks in the ET Banks index. SBI, Karnataka BankAxis Bank and ICICI Bank were the only entities to report an improvement in NIM.

The largest rise in total income was from Yes Bank at 54%, followed by IndusInd Bank at 48% and Kotak Mahindra Bank at 44%. In terms of rise in profit, Development Credit Bank and SBI reported the highest growth of 157% and 42%, respectively. But this was largely on account of the low-base effect of the previous year.

Over the next few quarters, improving asset quality will continue to remain a challenge for most banks as domestic economic growth continues at a sluggish pace. In an environment of slowing industrial growth, rising inflation and a depreciating rupee, a significant and sustained improvement in asset quality cannot be expected.

With the exception of IndusInd Bank, which trades at 3.76 times its book value per share, most banks in the index are currently trading below their historical three-year price to book value multiples. At the current market price of Rs 138 and a price to book value multiple of 0.64 times, Allahabad Bank is the cheapest banking stock, while IndusInd Bank is the most expensive, followed by Kotak Mahindra Bank which trades at 3.66 times.

Tread cautiously on risks, Pranab tells banks

The Finance Minister, Mr Pranab Mukherjee, expressed hope that banks identified by the Reserve Bank of India for appropriate NPA management would take the advice and act accordingly.
The central bank had recently advised “select banks” to take necessary steps to address the deteriorating asset quality and arrest non-performing assets, Mr Mukherjee said in his address at a Bank of India event here on Monday.
Mr Mukherjee said that banks have to tread cautiously on the risks confronting the banking sector, especially risks arising out of asset quality, market volatility and global downturn. “Bank of India needs to tighten its belt not only to arrest NPA but also to reverse the trend of asset quality deterioration through better professional supervision”, a written speech later circulated by the Finance Ministry quoted Mr Mukherjee as saying.
Meanwhile, the Financial Services Secretary, Mr D.K.Mittal, later told reporters that the current gross NPA level of over 3 per cent for 2011-12 was a matter of concern, but there was no need to panic. “Indian banking system is much sounder than the European system,” he said.
Mr Mittal highlighted that there was continued efforts to address the NPA issues in the Indian banking system. Asked whether the Government, in consultation with the RBI, was contemplating a special dispensation for asset recognition in the wake of the current difficult economic environment, he replied in the negative. “There is no need for separate dispensation. Banking system has to face the challenge,” he said.

Banks' net interest margins to remain under pressure
Private banks do better, manage to maintain it through a business mix
B G Shirsat & Abhijit Lele / Mumbai May 29, 2012, 00:14 IST

A rise in cost of deposits has resulted in a significant drop in net interest margin (NIMs) of banks in consecutive quarters. They expect NIMs to fall in the current financial year, too.

NIMs of 32 public and private banks have declined by 13 basis points (bps) over year-before levels and 26 bps over the highest average margins of 3.42 per cent recorded in December 2010. In the fourth quarter, the 32 banks’ interest income rose 30.2 per cent while interest cost rose 36.9 per cent.

IDBI Bank Chief Financial Officer P Sitaram said, “Difficult times will continue, due to tepid offtake in credit.”
Year-on-year basis point change in net interest margin for quarter ended
State Bank44364482
Central Bank13-14-9278
ICICI Bank101627
Syndicate Bank7-11-1317
J & K Bank123-614
Dena Bank8-30612
Axis Bank-4310-611
HDFC Bank-10-10-100
Canara Bank-59-64-69-62
Kotak Mah. Bank-40-40-30-40
Bank of Baroda-35-21-49
Punjab Natl.Bank-7-11-25-41
Corporation Bank210-45-30-36
Andhra Bank5-9-10-35
Oriental Bank-40-66-20-30
Allahabad Bank303429-26
IndusInd Bank9-6-36-21
Union Bank (I)7-14-13-18
United Bank (I)41117-13
Bank of India-70-37-54-8
For 32 banks-5-10-16-14
Source: Banks

With a falling currency, inflation will be a bigger concern than growth for Reserve Bank of India (RBI). This could further limit growth in lending.

Banks have already started cutting lending rates without altering deposit rates. Tight liquidity is keeping interest rates for liabilities high. Plus, business volumes are low, which would impact interest income in the first quarter of this financial year.

Ananda Bhoumik, senior director in Fitch Ratings’ financial institutions group, said, “As lending rates have started coming down, with banks holding on to high deposit rates, net interest margins will continue to remain under pressure.”

Freeing of interest rates for deposits by non-resident Indians will further drive up deposit costs, while possible RBI intervention in the currency market will keep rupee liquidity tight.

Bhoumik said this would keep interest rates for deposits on the higher side, by putting pressure on banks’ margins.
The fall in NIM has been significantly high for public sector banks. Private banks have managed to maintain it through a thoughtful business mix. Of the 32 banks studied , only 10 have recorded improvement; 19 reported a decline.

Three banks — HDFC, IDBI and YES Bank — have maintained their NIMs. State Bank of India showed a big jump in NIM, up 82 bps, while private sector leader ICICI Bank improved NIM by 27 bps, after maintaining it for three quarters.
Saday Sinha, banking analyst at Kotak Securities, said, “NIM in the banking sector, on an average, is estimated to fall further by 15-20 basis points.”

He said banks were planning to improve their Casa (current account-savings account), allowing them access to higher deposits at lower cost. But this would not be easy.

Inflationary pressure and competition from tax-free bonds, among others, will not let banks reduce interest rates of deposits, while lending rates will come under pressure due to lower demand for credit in case overall growth does not happen. According to Sinha, this will result in lower NIM for the sector.

For State Bank, a cut in the cash reserve ratio by 125 bps in the fourth quarter improved liquidity, helping the bank improve domestic NIM by 95 bps to 4.28 per cent.

However, with the lowest base rate at 10 per cent and expectations of further rate cuts in the current financial year, the management expects NIM to be under some pressure but says it expects to maintain it above 3.5 per cent for 2012-13.
ICICI Bank benefited by repricing loans on the new base rate, increase in yield on investments and nearly zero loss on securitisation against a huge loss in the corresponding previous quarter.

The management expects NIM to be higher by 10-15 bps for FY13. HDFC Bank maintained the NIM through increasing the share of retail loans, runoff of old wholesale loans and also certificates of deposit. The management says it will maintain NIM in the range of 3.9-4.2 per cent for FY13.

My Views Expressed on the Subject are Given Below

Punjab National Bank considered to be one of the best and large banks hitherto in India , But the financial results published for the year ended March 12 exposes the reality of big banks. We have seen last year how SBI suffered huge loss due to sharp increase in Non Performing Assets and provisions. The largest bank was showing false profit before March 11 by not making adequate provisions and by concealing bad assets.

One can very well imagine the factual positions of other banks in public sector. Almost all banks have shown decline in their performance and increase in based assets. The only difference is that some banks are truely and honestly depicting the real picture and on the contrary some other banks still resort to manipulation in figures to book better results fraudulently. Banks are exposing their malady in phases and piecemeal taking concurrence of regulating agencies. Volume of hidden malady is much more dangerous and alarming. Rating agencies, intelligence agencies, ministry of finance and various senior officers of RBI have also accepted this bitter truth and slowly they are taking steps to bring about turn around in performance of banking and for changing the bad culture prevailing in the system. They have to do a lot to curb the corrupt culture and make the laws more stringent, transparent, and effective and fast to punish the real guilty and stop making low level officials as scapegoat.

It is just like the case of state of Madhya Pradesh where Lokayukta and police officers who are now-a-days performing a little bit honestly and seriously and this a why many persons right from peon to top IAS officers have been booked under corruption charges and crores of rupees have been unearthed which were found to be earned by them through illegal sources.

Some media people are saying and blaming BJP that government of Madhya Pradesh has got no control on corruption. It is laughing to observe that important person belonging to Congress party while participating in debate take credit for their government for lesser number of cases related to corruption. This is called "Chori Upar Sinachori".

It is bitter truth that police forces and Lokayukata working in other states are not registering FIR, are not working honestly to catch the real culprit and rather they are promoting corrupt culture. If any government does not want to take action against corrupt people, it does not mean that they are not corrupt. I therefore salute to Chief Minister of MP who has given free hand to police and Lokayuka and this is why lot of cases involving illegally earned money accumulated by corrupt persons have been exposed and the real culprit have been booked to task.

Similarly in public sector bank, management of some banks have honestly depicted the true health of their bank to some extent while some other banks are cleverly manipulating their data in their favour to earn name and fame in Ministry of Finance, to earn public appreciation and to stop share price of their bank falling.

Bitter truth is that no power in India can cure the health of public sector bank and no power can stop rise in bad assets and further deterioration in quality of lending unless and until government removes and punish guilty officers sitting at top post  who promoted bad culture , who discarded good officers in promotion processes and who posted good officers at bad places to generate anti-work but pro-flattery culture in banks. 

Government will have to strike at the root cause of the cancer of corruption sooner or the later and they cannot escape people’s anger when their money invested in these banks either through shares or through deposits is endangered

Punjab National Bank: Margins may dip further
Deteriorating asset quality & concerns on margin pressure cloud FY13 outlook
Malini Bhupta / Mumbai May 11, 2012, 00:39 IST

Given that the banking sector is a proxy for India’s economic growth, the fourth quarter performance of India’s second-largest PSU lender, Punjab National Bank, becomes important. The performance has been marred by across-the-board deterioration in asset quality. Fresh slippages grew 4.3 per cent to Rs 2,800 crore.

Analysts say this is a substantial increase from the two per cent growth witnessed in the first nine months of FY12. The bank’s net restructured book stands at 8.5 per cent of loans. Its gross non-performing loans (NPL), combined with the restructured assets, now stand at 11.4 per cent of total loans, claim analysts.

This deterioration in asset quality has affected operational performance too, even though loan growth for the year has been 22 per cent. Sequentially, the bank has grown its loan book by 12 per cent, which is much ahead of the system. However, HSBC Global Research says: “The 12 per cent quarter-on-quarter growth in loans was meaningless as margins crashed 38 basis points QoQ, due to interest reversal from NPL recognition, rising funding cost and a surprising decline in yields on loans.” Also, most of the quarter’s loan growth was driven by the overseas book and other riskier segments like agriculture and small and medium enterprises.

Another disappointment has been the compression in margin due to elevated cost of deposits. Net interest income has dropped six per cent sequentially, even though advances have grown 12 per cent. Deposits have grown by a much slower six per cent q-o-q. According to Edelweiss, “Yields on advances saw 57 basis points compression to 11.4 per cent, partially due to Rs 125 crore of interest income reversal (impacting net interest margin by 13 basis points). This, coupled with marginally higher cost of deposits, led to margin compression.” The quarter has seen net interest margin (NIM) decline by 38 basis points to 3.5 per cent.

Earlier in the financial year, the bank was able to sustain higher margins as interest rates were high. But with rates coming down and cost of deposits staying high, NIM will come under pressure in FY13 and FY14. Analysts say what can impact the performance is improved recovery and upgradation of bad loans. Emka

Basel-III could trigger recession


Before the formal beginning of the Twelfth Plan, ambitions about growth prospects of the Indian economy were set to double-digits.
This was based on the the economy recording a growth of around 9 per cent during 2004 to 2008 and a strong rebound post-global financial crisis during 2009 and 2010. The draft Plan document, however, set the growth targets at a less ambitious 9-9.5 per cent.
After continued inflationary pressures and an underperforming industrial sector, doubts are being expressed about the economy's potential growth rate. The RBI's macroeconomic review for 2011-12 acknowledged this and indicated that “recent experience suggest that the non-inflationary growth rate for India may have somewhat declined from the pre-Lehman crisis period”. The first two years of the Twelfth Plan may not see an average growth exceeding 7.5 per cent.
Therefore, the final Plan document is likely to scale down growth projections to around 8 per cent and, that too, will require achieving growth rates of around 9 per cent in the later years.


The financing of this effort has to come from increase in domestic and foreign savings. Since a widening current account deficit poses a serious challenge to the sustainability of the external sector, financing has to come more from domestic sources. But, there are some discouraging trends here. The domestic savings rate declined in 2010-11 to 32.3 per cent, from 33.8 per cent in 2009-10.
The decrease in 2010-11 was due to both household and the private corporate sector savings, which more than offset the improvement in the public sector savings rate. The household sector savings rate declined to 22.8 per cent in 2010-11, after touching a record high of 25.4 per cent in 2009-10.
Within household savings, the financial savings rate declined sharply from 12.9 per cent to 10 per cent during the same period. The decline in the net financial savings rate was further explained by the slower growth in households' savings in bank deposits and life insurance, as well as an absolute decline in investment in shares and debentures, mainly driven by redemption of mutual fund units.
The declining trend in savings in financial assets, in general, and bank deposits, in particular, shows that the household sector has shifted to inflation-hedging assets such as real estate, which shows up in increased savings in the form of physical assets, and diversion to gold, which does not show up as savings.
This may also be partly due to dissaving and increase in household debt to meet the needs of consumption on the face of higher cost of living. The prospects for improving household savings in the coming years will hinge on control over inflation rate and strengthening the process of bank as also non-bank intermediation through capital market instruments. In particular, strengthening of the bond market would be a prerequisite.


Basel standards for capital requirements of banks starting from the late 1980s were an outcome of international cooperation among central banks on the face of indiscriminate cross-border bank lending and debt repudiation from certain debtor countries. India had always set an example in implementing these standards, but the compliance was gradual and easy-paced, so as not to disrupt the banking system.
The compliance levels were relaxed from time to time to accommodate even the weakest link in the banking chain. The idea was to enable the entire system to adapt to these standards. The pace of implementation of Basel-II was an example.
But even before full compliance with Basel-II, in all its dimensions, now there is a jump over to Basel-III.
Before the onslaught of the global financial crisis originating from the West, even the US never bothered about compliance with Basel norms. Now, the US and Europe are forced to do so due to international pressure.
The compliance guidelines in Europe and the US are still under debate. There is a widespread view that Western banks will see their balance-sheets shrinking and margins getting compressed. Hence, the implementation is over a very long period extending up to 2019, with country-specific flexibilities.
In this environment, it is rather surprising that India has ventured into over-compliance with Basel III with higher and more stringent requirements(see table). The implementation of new liquidity standards may follow the same strategy.
The guidelines released on May 2 do not yet provide for a counter-cyclical capital buffer or additional capital for systemically important banks.


The Indian banking system has switched between risk-averse and risk-appetite situations. With the commencement of Basel implementation in the late 1990s and till early last decade up to 2003, banks preferred to increase their investment deposit ratio, by reducing credit deposit ratio, which led former RBI Deputy Governor, Dr Rakesh Mohan, to dub the practice as ‘lazy banking'.
This was simply because SLR investments did not require additional capital. Once the satisfactory level of compliance was reached, the trend reversed and credit growth touched peaks of around 30 per cent per annum, which also coincided with huge assets build-up in the corporate sector and India touching growth levels of around 9 per cent. This was also the period of fiscal consolidation and moderation in government borrowings.
The trend has rather reversed in the last two years. Credit growth has become sluggish and investment deposit ratio of banks has increased along with burgeoning government borrowings and fiscal laxity (Graphs A and B). If this continues, the growth ambitions of industry will be thwarted.
Last week, Moody's Indian subsidiary, ICRA, said banks in the country will require Rs 3.9- 5 lakh crore as capital to comply with Basel-III requirements, most of which will fall on the public sector. Since the government's ability to meet matching requirements will be limited, as per the second Tarapore Committee's recommendations, the government holding in public sector banks will have to be diluted to around one-third, from 51 per cent.
Alternatively, if new bank licences are issued to industrial houses, then the public sector banks' share in the total banking system assets will further shrink to the gain of private and foreign banks. If new licences are not issued, it will be a recipe for industrial recession in the coming years.
(The author is Director, EPW Research Foundation. The views are personal.)

Global is factoring in slippages of two per cent over FY13 a
Go slow in imposing new norms: N R Bhusnurmath

N R Bhusnurmath 
Professor (Finance), MDI 

The introduction of Basel-III norms has raised capital requirements for all banks. They will have to bring in more capital even to support the existing loan portfolio and other risky assets. The new norms have been framed to prevent banks from getting into situations of the kind that had triggered the banking crisis of 2008 in the West. Whether this objective will be achieved is debatable.

Just because there is more capital, it does not mean a bank will not get into trouble. The crisis will at best be postponed. How banks are run and the extent of public confidence in them is no less important. As Walter Bagehot, the former editor of The Economist, had famously said, "No capital is required for a well-run bank and no amount of capital can save a badly-run bank!" The Indian banking system has proved robust thanks to constant monitoring by the RBI. So, is there is any need for Basel III, especially for public sector banks (PSBs)? Remember, Indian Bank had carried a huge negative net worth for three years without a problem.

So, there is merit in the argument that PSBs do not need more capital. Perhaps! Except that when it is an international norm, Indian banks, including PSBs with international presence, will find it a handicap if they are non-compliant . One half-way-house solution could be to go slow in imposing new capital adequacy norms for PSBs as all of them do not have a foreign presence. However, the difficulty in increasing the capital of PSBs is not because of their inability to attract investors.

It is only because the government is unwilling to let go its majority stake in these banks. If fresh equity is to be raised without diluting the government's share, huge budget allocations are required . In the current situation, it is near impossible. The government, thus, has two options . One, ask PSB's to keep their loan portfolios at current levels or even shrink them. This is a retrograde step and will affect the funds available to industry adversely. The other is to accept a dilution of its stake, even up to 26%. This is not a catastrophe. It is time the government moved on and relaxed its hold on what are, in the ultimate analysis , commercial ventures.

It's a must for a resilient system: M D Mallya

M D Mallya 
CMD, Bank of Baroda 

There is enough evidence that the most severe economic crises are associated with banking sector distress and huge public sector interventions. The Basel Committee's long-term impact study of crises shows that banking crises typically result in losses in economic output equal to about 60% of pre-crisis GDP. Moreover, there is a significant spillover of risk between the banking sector and governments. The recent experience of industrialised nations shows that to save the banking sector, governments of these nations had to increase their debt to such an extent that their debt-to-GDP ratios have risen by 10-25 percentage points.

So, people who worry that tighter norms under Basel III would impose a heavy burden on Indian governmentin terms of infusion of capital in public sector banks (PSBs) should also understand that the costs associated with the failure of PSBs will be much higher in dimension and their eventual impact. We need to understand that the economic benefits of making banks more resilient to shocks are immense. There is also a concern that a higher capital requirement under Basel III would dent the profitability of PSBs and make loans more expensive. According to RBI's estimates, there could be a marginal dip in GDP growth in the short term.

This may be true. But given that the banking sector stability is a precondition of sustainable economic growth, a short-term sacrifice of growth has to be tolerated in the interest of long-term sustainable growth. This is a typical policy dilemma that an emerging economy faces. The features of Basel III like higher risk coverage, thrust on loss-absorbing capital in periods of stress, improved liquidity standards, creation of capital buffers in good times and prevention of excess build up of debt during boom times would help create a resilient banking system. Given the current environment, the RBI has extended the final date for Basel III to 2018. This is positive as PSBs will get more time for preparation . Also, capital deduction now starts at 20% against 40% stipulated earlier. This move is encouraging and should ensure smoother migration to the new framework.

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