Wednesday, August 15, 2012

Restructured Loan Growth is More Than Credit Growth

Restructured loans grow at faster pace than credit growth: Chakrabarty Growth of over 40% seen between March 2009 and March 2012  

Collected from The news paper Business Standard

The rate of growth in restructured advances of banks has been faster than the growth in total gross advances between March 2009 and March 2012, according to a top Reserve Bank of India official.

In the said period while total gross advances of the banking system grew at a compound annual growth rate of less than 20 per cent, restructured standard advances grew over 40 per cent, said K.C. Chakrabarty at a recent seminar on corporate debt restructuring.

The proportion of restructured standard advances to gross total advances increased from 3.45 per cent in March 2011 to 4.68 per cent in March 2012  (MY Comments  In fact it is much more if the accounts which are restructure but not reported are also added to it  provided CBI or SIT look into it vary deeply and seriously and honestly ).

Chakrabarty said the increase in restructuring can be partially attributed to excessive leveraging by some borrowers during boom period. An analysis of the trends in leverage of the larger borrowers in the country during the first decade of this century certainly seems to suggest this.


“There are deficiencies in the manner in which project appraisal is conducted especially with regard to cash flow analysis and determination of the date of completion of projects. When commercial operations are delayed, a host of factors, including the uncertainties surrounding the project, are cited as the reason,” said the Deputy Governor.

But, when there are uncertainties surrounding a project, Chakrabarty felt that these have to be accounted for during the appraisal of the project and a proper cushion needs to be built to take care of uncertainties.

Instead, the effort is to appraise a project keeping in view an aggressive repayment schedule resulting in a very short term focus of borrowers, banks and financial analysts who appraise the project. This short term focus, in many cases, is the reason for the need for successive restructuring, observed the Deputy Governor.


Chakrabarty said the bank-wide Corporate Debt Restructuring (CDR) mechanism has come under the RBI attention because of the extraordinary rise in the number and volume of advances being restructured under the scheme in recent times.

Questions are being raised as to whether this indicates a general downturn or gross misuse of the CDR mechanism by banks and corporate borrowers.

According to the RBI data, restructured accounts have grown at a compound annual growth rate of 47.86 per cent in public sector banks (PSBs) as against a growth rate of credit of 19.57 per cent.

The corresponding figures for private sector and foreign banks are 8.12 per cent (restructured advances) and 19.88 per cent (credit growth) and (-) 25.48 per cent (restructured advances) and 10.96 per cent (credit growth) respectively.

Further, as on March 2012, the ratio of restructured standard advances to total gross advances is highest for PSBs at 5.73 per cent, while the ratio is significantly lower for private and foreign banks at 1.61 per cent and 0.22 per cent, respectively.

Chakrabarty said it is clearly observed that public sector banks share a disproportionate burden of restructured accounts.

Banks look at paring interest rates on bulk deposits

Ministry had directed them to reduce share of such deposits

Customers may now have to be content with a lower rate of return on bulk deposits parked with banks.
Faced with a daunting task of scaling down the share of bulk deposits (including certificate of deposits) to 15 per cent of total deposits by March 2013, banks are planning to lower interest rates on such deposits.
Banks also plan to approach the Union Government to seek an extended time period to comply with the norms. In a recent move, the Finance Ministry has directed public sector banks to bring down the share of bulk deposits to 15 per cent of their total deposits by March 2013.
The move was taken primarily to improve the banks' profitability and improve their asset-liability management.
According to D. Sarkar, Chairman and Managing Director, Union Bank of India, banks will lower interest rates on bulk deposits, which are quoted 40-50 basis points over the card rate, to bring down the share of such deposits.
The government’s move comes at a time when the credit demand is not very high, said S.L. Bansal, Chairman and Managing Director, Oriental Bank of Commerce. ( MY Comment:  It is therefore easy to reduce bulk deposit now and thus reduce surplus high cost deposit and increase profitability of the bank)


“Fortunately there is not too much of a credit demand. So unless a bank is very crazy about growing its balance sheet, then it will refrain from raising such deposits. Rates on bulk deposits will automatically come down,” he said.
Drastic reduction in bulk deposits will lead to asset-liability mismatch.
“Some banks have taken high cost deposits and have created assets in appropriate time buckets. If they do not renew these deposits then it will affect their growth,” a senior bank official said.
Bulk deposits account for close to 40 per cent of Corporation Bank’s total deposits as on March 31, 2012. According to Ajai Kumar, Chairman and Managing Director, the bank plans to seek relaxation in timeline from government for scaling down the share of bulk deposits.( MY comments: These banks appear to have focused on bulk deposits only in their recent past and paid higher interest rate and they have to face music now. they have to learn how to respect retail depositors and CASA only to increase real profit )


The share of bulk deposits stands at 39 per cent of Central Bank of India’s total deposits, said its Chairman and Managing Director, M.V. Tanksale. “We want to shed these deposits, but it might not be possible by the end of this fiscal. We hope to do it by next fiscal,” he said.
((MY Comments:RBI and MOF have to ponder over the culture of officials belonging to the  banks where from they were picked up by MOF for the post of ED and CMD of other banks. They have to investigate why asset quality and human resource  in banks have faced so much deterioration))

My opinion on above two articles is given below

Future of State Run Bank:  

Bulk Deposit down, Focus on Retail Deposit, Cost of Deposit will come down and Profitability will increase and finally core value of bank will go up.

Credit Growth will be poorer: Deposit growth lower, Liquidity will shrink, focus more on Recovery than on Fresh credit, Recovery of Bad loans will increase and hence Quality of Asset will improve.

Gross NPA: Ratio will go up for a few coming quarters because of poor Credit growth. Banks could show less Gross NPA ratio in the past either by concealment of bad assets or due to bulk lending to big corporate which helped in reduction of Gross NPA to Gross Credit ratio. Now the position of these banks will turn pathetic when Ministry of Finance and RBI have advised them to refrain from indulging in mobilization of bulk deposit and sanction of short term lending.

Downtrend in Overall Business will be visible. But after a year or two the real growth will precipitate and the real purpose of banks will be served.


Field officials are not well experienced and well trained. They will adopt defensive strategy to survive. Banks will have to remove ninety percent of Branch Managers and Regional Heads who are of poor quality. It is painful that during last four decades after nationalization of bank or during last two decades of reformation era , banks have not yet framed any policy for picking up officers to Head a Branch. This is why there are hundreds of such branches in each bank where ratio of bad asset is more than 50 percent of their total credit. There are many branches where Gross NPA is more than 10 percent.

Officers who flatter bosses are picked for the post of Branch Head as also for promotion to higher scale whereas Officers who are really matured, skilled, experienced and talented enough to identify good customers and who have the potential  and who have grown capacity to read the credit worthiness of credit seekers are languishing in non-serious, non-critical and at less potential places and leading a life in frustration due to their non promotion and due to inefficient and ill management of their bosses .

If banks have to improve their bottom line they have to revisit and replan their policy of promotion and posting. They have to encourage good Branch Manager and understand the family problems of officers and bank staff .They have to refrain from making policy only to please the leaders of majority trade unions of officers or bank employees. They have to learn how to punish bad officers and encourage good officers and prove their knowledge by their actions.

Qualities of bank employees have to be judged not by their qualification or by achievement of targets or their closeness with executives but with the quality of business they mobilize.

It not enough to preach these sermons in business plan meeting only. Top executives have to exhibit by their actions that they are real lovers of good workers. They have to prove that they do what they say.

 What I feel is that policy of recruitment and that of promotion and transfer was much better in seventies and to some extent in eighties i.e. before the introduction and piecemeal implementation of of Pillai Committee Report or Khandelwal Committee report.

It is astonishing that banks recruit officer directly in scale II, scale III or IV from education campus and post them as Credit Officer or Risk Officer or Auditors.

How can a direct officer ascertain credit worthiness of a loan seeker or the inherent risk in a credit decision until he or she is aware of the intricacies of credit decisions and the credit worthiness, integrity, capacity and character of the loan seekers?

Bank management have to learn the value of senior officers , the value of experience and the value of character of an officer .Banks have to learn how to recognize the good officers and save them from frustration. Top officials have to learn that whimsical promotion and arbitrary transfers kills the working spirit of the officers at least those who are sincere and devoted performer. When good officers are not respected, officers in general tend to ignore the quality and tempted to apply all easy tools to keep their bosses in good spirit mostly at the cost of their organization. This trend has to be revered if state run banks desire to survive and prosper like private banks.

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