Whitewashing the banking sector
Collected from Indian Express , Written by Gorge Mathew ---Sat Sep 08 2012, 01:40 hrs
What’s the real level of non-performing assets (NPAs) in the Indian banking system? NPAs, or loans defaulted by borrowers for a period of 90 days, could be more than double of what has been already announced by the banks as they have found a way out to repackage the problematic loan accounts and brush them under the carpet.
The government and the Reserve Bank of India had announced that total NPAs work out to Rs 1,23,462 crore, or 3.48 per cent of the total advances, as of June 2012. This could be just the tip of the iceberg. Estimates are that loans of Rs 1,60,000 crore have already been restructured in 2011-12 and in the first quarter of 2012-13. Herein lies the catch.
If bankers are to be believed, loans restructured by banks were potential non-performing assets, and if these loans were not restructured they could have been classified as NPAs. Bankers call this process evergreening of loan accounts, which is nothing but understating of NPAs.
Taken together (NPAs already announced and restructured loans), the real NPA could be anywhere near Rs 3,00,000 crore, or 60 per cent of India’s fiscal deficit of Rs 5,00,000 crore or 7 per cent of total bank advances. A sizeable chunk of the restructured loans belongs to big corporate houses, which stand to gain by concealing the negative impact of their overleveraged positions and financial profligacies. These big corporate houses rush to the CDR (corporate debt restructuring) cell of banks when their loans are about to be classified as NPAs. Once a loan is admitted into the CDR cell, the list of sops includes a moratorium on repayment of principal and cuts in interest rates, along with fresh loans conversion of existing loans into equity.
The RBI has now stepped up the vigil. On the issue, RBI Deputy Governor KC Chakrabarty, at a recent Corporate Debt Restructuring Conference in Mumbai said, “Provisions of the CDR mechanism have not been used very ethically and judiciously, giving rise to the unprecedented increase in cases under CDR.” He also said that when it comes to restructuring, our banks have a substantial bias towards more privileged borrowers vis-a-vis small borrowers.
In simple words, if you approach the bank for restructuring of your Rs 5 lakh home loan, it will make you run around and finally reject your request. It’s no wonder that the ratio of restructured accounts to gross advances is the highest for the industries sector at 8.24 per cent (with medium and large industries sector being at 9.34 per cent). The ratio for agriculture stood at 1.45 per cent, while that for services stood at 3.99 per cent (with micro and small services being 0.94 per cent).
The problem could intensify. Rating agencies estimate that more loans worth Rs 1,65,000 crore are likely to seek restructuring in the next fiscal. This effectively means problematic loans can hit Rs 500,000 crore if the economy doesn’t pick up in the coming months. This leads to a big question: Did banks conduct a proper appraisal and due diligence before extending loans to big corporates?
|Sinha backs call for higher NPA provisioning|
|BS Reporter / Mumbai Sep 07, 2012, 00:40 IST|
Reserve Bank of India (RBI) Deputy Governor Anand Sinha has backed the Mahapatra committee’s recommendation of higher provisioning for restructured assets. Banks, however, had opposed the proposal, saying this would lead to a sharp rise in bad assets.
Earlier, the central bank had set up a working group under the chairmanship of RBI Executive Director B Mahapatra to review the guidelines on restructured advances of banks and financial institutions. In its report released in July, the committee had suggested the regulatory forbearance while recasting debt be done away with after two years.
In the interim, for fresh loan recasts, it had sought an increase in standard asset provisioning to five per cent, against the current two per cent. Currently, banks can classify a restructured standard asset as standard debt by increasing the provisioning requirement. Apart from standard asset provisioning of two per cent, banks also have to ensure provisioning for diminution in the net present value of the asset, following the debt recast.
Sinha said it was found banks had not been provisioning enough for diminution in net present value. The Mahapatra panel’s recommendation of increasing the standard asset provisioning requirement to five per cent would help address this. “The Mahapatra committee suggested the two per cent provisioning norm be raised to five per cent. What this would do is close the gap between sub-standard assets and restructured standard assets…there is a lot of criticism or feeling that people get away with inadequate provisioning,” Sinha said at the sidelines of a seminar.
He cited the example of assets referred for corporate debt restructuring. He said for these, it was found the loss (arising from diminution in net present value) was 11-12 per cent.
“So, if you add the two per cent to the 12 per cent, it becomes 13 or 14, and 15 is substandard (for secured loans),” he said, indicating banks wouldn’t face too many hurdles in adapting to the new norms, if case these were implemented.
Sinha said a decision on when the norms would be implemented would only be taken after a detailed analysis of the feedback from stakeholders.
Bankers felt if regulatory forbearance was done away with (which would mean all restructured loans being classified as non-performing assets, or NPAs), it would lead to an increase in NPAs. This would also affect banks’ profitability and ratings. The Indian Banks’ Association, the industry body of lenders, has communicated its views to the central bank.
Sinha, however, defended the committee’s suggestion to increase the standard asset provisioning requirement to five per cent, saying this would act as a buffer if a significant part of restructured assets became NPAs.
“So far, the anecdotal evidence is it is in the range of 15 per cent for the overall system, though for some banks, it may be lower. If you look at the Mahapatra committee’s suggestions, these have built a stress situation and said it could be 30 per cent. Now, it is not that they have come to the conclusion it would be 30 per cent; they have said if this becomes 30 per cent, more provisioning is required. So, they have suggested increasing the standard asset provisioning to five per cent,” he said.
|Reserve Bank of India only deferring the inevitable|
|Central bank might cut CRR by 25 bps this month as economy hits a trough|
|Malini Bhupta / Mumbai Sep 08, 2012, 00:02 IST|
So far, the Reserve Bank of India (RBI) has primarily had to worry about high inflation. With GDP growth averaging 5.4 per cent in the first half of 2012, it will also have to worry about flagging growth. Most economists believe the economy has bottomed out but recovery isn’t likely before next year. Elevated interest rates will only delay recovery.
Economists believe RBI will have to factor in other indicators while deciding on lending rates. For starters, the European Central Bank’s move on Thursday will help dissipate some of the fears of a contagion spreading from the Euro zone. The other data points that could influence the central bank’s decision would be continued contraction in industrial production. Economists expect the IIP in July to grow at zero per cent or contract. Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, expects July industrial growth to report ‘another abysmally weak zero per cent, atop June’s 1.8 per cent contraction, with high lending rates hurting demand’.
The power grid failure in July and slowing exports are likely to be a drag on industrial production. Siddhartha Sanyal, India economist at Barclays also expects industrial production to contract marginally. Deutsche Bank, however, expects July industrial production growth to improve to one per cent year-on-year from -1.8 per cent in the previous month. Most economists are unanimous when it comes to their expectations for August inflation numbers, which is likely to be in the seven per cent region.
Though the central bank has been trying to fight inflation by holding on to rates, it's becoming apparent that the real reason for inflation might lie elsewhere. In fact, high rates are putting pressure elsewhere (read growth). Going by the high levels of stress building in the economy thanks to high interest rates (rising NPA levels for banks and slowing investments), the RBI might cut 25 basis points in September, says Bank of America Merrill Lynch. Sanyal says: “We feel that RBI is delaying the inevitable, as eventually interest rates will have to be lowered in the coming months. We expect another 100 bps of repo rate cut before the fiscal ends. A favourable inflation number and steps towards fiscal consolidation, if any, will increase chances of RBI bringing forward interest rate cuts.”
Wed, Sep 05, 2012 at 17:45
India's banks face tough period
India's struggling banking sector will face a period of lower profitability as it seeks to raise at least Rs5,000bn (USD 90bn) in extra capital to meet the new Basel III international banking standards, the head of the nation's central bank has warned.
India's struggling banking sector will face a period of lower profitability as it seeks to raise at least Rs 5,00,000 crore (USD 90bn) in extra capital to meet the new Basel III international banking standards, the head of the nation's central bank has warned.
Duvvuri Subbarao, governor of the Reserve Bank of India, also suggested that prime minister Manmohan Singh's government could consider reducing its majority stakes in a variety of state-owned banks, as it attempts to cut the Rs 90,000 crore (USD 16bn) in recapitalisation needed to maintain present shareholding levels.
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The warning comes at a time of rising concerns over the health of India's banking system, and the state-backed institutions that make up over three-quarters of lending in particular, given sharp recent rises in non-performing and restructured assets against a backdrop of slowing economic growth.
"Implementation of Basel III is expected to result in a decline in Indian banks' Roe [return on equity] in the short term," Governor Subbarao said, speaking at a banking conference in Mumbai, while stressing that the reforms would benefit India's overall financial system in the longer term.
The global Basel III requirements, which require all banks to hold top quality capital equal to 7% of their assets, adjusted for risk, are aimed at improving financial stability and avoiding a repeat of the crisis of 2008. But the sharply higher capital requirements have drawn warnings from analysts and financiers about their impact on banking lending rates and wider economic growth across the developing world.
Governor Subbarao said the new norms, which will be phased in between 2013 and 2019, would also increase the cost of capital for banks, while placing a particular strain on government finances, given India's widening fiscal deficit.
"Clearly, providing equity capital of this size in the face of fiscal constraints poses significant challenges," he said, suggesting that Mr Singh's administration could save Rs 20,000 crore (USD 3.4bn) in recapitalisation costs if it reduced its stakes in all state-owned banks to just 51%.
India's government has so far rejected suggestions that it might reduce its shareholding in more than two dozen public sector banks, including a stake of approximately 60% in the State Bank of India , the nation's largest lender by market share.
Facing a declining national saving rate and wary equity markets, however, analysts questioned whether policy makers or banking leaders would be able to raise the level of funds indicated by Governor Subbarao's remarks without selling larger stakes, potentially to foreign investors.
"To my mind this is the single most vexing challenge for the government and the banking industry in India, because I don't think they have a clue where these funds will come from over the next decade," says Ravi Trivedy, an independent banking analyst and former executive director at KPMG India.
In addition to fresh infusions from government, India's state-backed banks will need to raise at least USD 20 billion from equity markets to meet the Basel requirements, creating the risk of a capital shortfall in coming years, according to Fitch, the rating agency.
"With its back to the wall and few other sources of capital available, the government may not have a choice but to lower its stake in these banks," Mr Trivedy says, "and this could well mean allowing foreign investors to buy a strategic stake."
A taskforce of leading bankers warned in June that the Basel III rules were too focused on problems that occurred in Europe and the US. They argued the standards unfairly penalise trade finance and project finance, two forms of credit that are particularly important in developing nations.
But Governor Subbarao said India, which is a member of the global standard setting body, needed to conform to the rules. "The 'perception' of a lower standard regulatory regime will put Indian banks at a disadvantage in global competition," he said.
RBI slams 'discrimination' in bank rates
Mumbai: Reserve Bank (RBI) deputy governor K C Chakrabarty today berated banks' tendency to offer better interest rates to high-value deposits.
"I don't understand why banks treat poor customers badly by offering lower rates on their deposits and reward the rich with higher prices. I am not saying both should be at par, but the prevailing different rates are bit too high.
"We at RBI would want banks to offer more or less similar rates to all depositors, although a reasonable difference is fine," the seniormost deputy governor told a gathering at the MR Pai memorial award function (the award was given to women's self-help group Sewa).
The late MR Pai was a crusader for the rights of bank depositors.
Referring to the minimum balance requirement for savings accounts which currently varies from Rs 500 to 50,000 for a quarter, and also the varying penalties for not maintaining the required balance, Chakrabarty said, "In fact banks are charging this fee without giving any service to the customer."
Therefore, he said, RBI has made it mandatory for banks not to turn down anyone who wants to open a basic bank account, if he/she can provide the KYC documents.
On the service charges which banks make customers pay, Chakrabarty (who looks after customer service and banking operations at RBI among other things) said these charges are in fact "survival charges and not service charges".
On the need to discourage gold consumption, he said there is a crying need to raise the awareness among the people especially the poor that investment in gold is not productive, and a poor man can never make money by investing in gold.
When asked later if RBI is planning to disallow banks from selling gold coins, he said it was not an illegal activity and "hence we cannot do anything".
Gold imports touched USD 60.6 billion last fiscal, which also pushed down trade balance, widening the current account deficit which hit a 30-year high of 4.3 percent.