Sunday, September 23, 2012

Guilty Bankers AND Ministry of Finance Are Now In Mood To RELAX NPA Norms To Conceal Bad Assets

Banks want NPA norms relaxed for housing project loans
Seek easing of asset classification guidelines for better credit flow
Manojit Saha / Mumbai Sep 24, 2012, 00:13 IST (Business Standard )

Banks want the Reserve Bank of India (RBI) to relax the norms on asset classification in the real estate sector to facilitate credit flow.

The request comes after the finance ministry had asked banks to increase lending to residential housing projects.

 In a meeting last week with bankers and the Confederation of Real Estate Developer’s Associations of India (Credai), D K Mittal, secretary, financial services, had reviewed the issues pertaining to credit flow to the housing sector and discussed remedies.

Credai representatives told the ministry many projects could not be completed due to lack of funds. Most of these unfinished projects were in Tier-II and Tier-III cities.

  • Finance ministry had asked banks to increase lending to residential housing projects
  • Bank wants relaxed asset classification norms in the sector 
  • Ministry has asked CREDAI to survey unsold housing stock to take remedial steps
  • CREDAI says projects could not be completed due to lack of funds
  • Most such projects in tier-II and tier-III cities

“We have noted that a developer starts the project by availing finance from non-banking sources, mainly non-banking housing companies, at a high interest. Later, they realise that servicing such loans become unviable,” said a senior executive of a public sector bank.

To add to the woes of real estate developers, RBI guidelines do not allow banks to take out that exposure from the non-banking finance company (NBFC) if the project has not commenced.

Now, bankers have requested the finance ministry to take up the matter with the banking regulator so that favourable policies could be framed to boost bank loans to real estate projects.

Banks also want asset classification norms to be relaxed on real estate projects.

According to RBI norms, if a project fails to be operational two years after the commercial operation date (as scheduled while loan sanctioning), banks have to classify the project as non-perfoming. “We have noticed there are issues beyond the control of the developer, like land acquisition and other clearances. These are genuine issues and the developer cannot do much in such a case. As a result, the commercial operation date of the project is delayed,” said a banker who attended the meeting.

Banks have requested the finance ministry to take up the matter with the central bank, so that there could be some relaxation in terms of extending the asset classification norms over two years.

The finance ministry has also asked Credai to conduct a survey of unsold housing stock so that a decision could be taken on unlocking its value.

RBI Deputy Governor Anand Sinha had on Friday said banks' asset quality had deteriorated due to the gloomy economic conditions but noted that there was enough capital with the lenders to take care of the situation.

Loan book quality of banks deteriorates


Not only is the NPA picture for public sector banks looking bad, the restructured asset proportion is also on the rise.
Moderating economic activity and high interest rates have eroded the ability of borrowers to service debt. This has resulted in mounting non-performing assets (NPAs) and restructured assets.
NPAs, as a proportion of advances, was the highest in six years towards the end of March 2012.
This is expected to worsen further by the end of this fiscal year. The NPA ratio (the ratio of loans accounts which have defaulted on interest or principle beyond 90 days to the total bank loans) of Indian banks, as of March 2012, was at 2.94 per cent.
After provisioning for some of these bad loans, the net NPA ratio works out to 1.24 per cent of the total loans.
The actual NPA picture would have been worse had banks not resorted to major loan restructuring and loan write-offs.


While the larger companies managed to restructure their borrowings by projecting improved prospects in the long-run, the SME and agriculture segments could not do the same. Therefore, their NPA ratios witnessed a sharp jump, rising by 1.2-1.3 percentage points in the year ended March 2012.
On the other hand, the restructured loans of large accounts rose by 2.7 percentage points, thereby managing to avert loans from falling into the NPA category. Aviation, State electricity boards, textiles, telecom, shipping, power and steel were the top sectors that had higher proportion of restructured loans, according to the RBI.


Cumulatively, the standard restructured loans and NPAs of the banking system, as of March 2012, account for 7.6 per cent of the total advances. This proportion is rising at a faster pace as the system’s loan growth is moderating, but problem loans continue to be on the rise.
Even during the earlier periods when the NPA ratio moderated, aggressive growth in loan book led to fall in NPA ratio rather than absolute fall in NPAs.
Public sector banks, which account for close to three-fourth share in advances, have seen their bad loans proportion rising sharply last year. The gross NPA ratio, as of March 2012, was at 3.2 per cent, up from 2.3 per cent in the preceding year. New private banks and old private banks, on the other hand, have seen their NPA ratios moderating during this period.
Not only is the NPA picture for public sector banks looking bad, the restructured asset proportion is also on the rise. As of March 2012-end, the standard restructured loans for the public sector was at 5.9 per cent of the standard advances (up from 4.3 per cent the preceding year). The stressed assets, therefore, in the case of public sector banks is 9.1 per cent of the total advances.


Given the RBI’s estimate that 15 per cent of restructured assets may actually slip into bad loans, the NPAs from restructured loans may add another 90 basis points to the gross NPA of public sector banks. This would take the NPAs to more than 4.1 per cent for public sector banks. The provision coverage (the provisions set aside to minimise the impact on earning in case the NPAs are completely written-off) of public sector banks would, thus, fall from 53 per cent to 44 per cent of gross NPAs, increasing the vulnerability of public sector banks.


The NPA ratios of public sector banks have risen by another 35 basis points in the first quarter of June 2012. Given that the restructuring pipeline hasn’t ended, there may be higher stressed loan assets .
The RBI’s annual report points out that if GDP growth falls below 6 per cent, inflation remains above 9 per cent and gross fiscal deficit rises to 6.5 per cent in 2012-13, gross NPA ratios are expected to increase to 3.7-4.1 per cent at the end of the year. Added to this, Crisil estimates that restructured assets may rise to Rs 3.25 lakh crore by March 2013 from the Rs 2.18 lakh crore as of March 2012.
Assuming credit growth of 17 per cent, the restructured loans, as a proportion of total loans, will go up to 5.9 per cent. With 4.1 per cent gross NPAs and 5.9 per cent in restructured assets, the overall stressed loans may reach 10 per cent. Public sector banks may continue to be worse-off.

RBI mulls relaxing norms for microlenders

Collected from India Express Chennai, Thu Jul 05 2012, 01:19 hrs
The Reserve Bank of India is contemplating to bring in some relief to the beleaguered microfinance sector. The apex bank is likely to relax some of the norms pertaining to their net worth, capital adequacy and provisioning needs. The relaxations are expected to help troubled microlenders emerge out of the crisis.
“The rollout of the new regulatory regime has run into some bottlenecks. Some MFIs are unable to comply with the qualifying asset criterion for registering as NBFC-MFI, and therefore banks are reluctant to make fresh loans to them as such loans do not qualify as priority sector lending,” RBI governor D Subbarao said at a Indian Overseas Bank platinum jubilee event here, on Wednesday.
"Small MFIs are also not able to meet the Rs 5 crore entry point capital to be eligible to register as NBFC-MFI. In particular, the Andhra Pradesh-based MFIs, saddled with huge losses, large NPAs (non-performing assets) and eroded capital, are facing acute problem in complying with the capital and provisioning norms. RBI is working on resolving these issues so that MFI operations can get back on track," he added.
The banking regulator had on December 2, 2011 created a new category of finance company, NBFC-MFI, and released operational guidelines for these firms. As per the new guidelines, NBFC-MFIs must make 100 per cent provisions on aggregate loan installments that are overdue for 180 days or more. MFIs were so far maintaining 10 per cent provisions on the loan amount, where the repayment is due for more than 180 days.
Subbarao, however, noted that investors' sentiment towards the MFI sector has improved in the past few months as some of the micro-lenders have been able to raise money from venture capital funds.
Calling on the banks to look upon financial inclusion not as an obligation but as an opportunity to build fortune at the bottom of the pyramid, he said that one of the issues that comes up in financial inclusion was the deployment of BCs. Since the operation of a brick and mortar branch was expensive, banks have found the BC model to be a cost-effective way of expanding access to the formal financial sector.
"One of the challenges lies in moving beyond numbers and looking at how we actually make a difference. There is a disappointingly large number of cases of bank branches with low customer footfalls; BCs will drift off after a few months and ‘no frills accounts’ which remain largely inoperative”,he said
The Reserve Bank looks forward to competition among banks to develop business models for such small, low staff and low cost branches, said Subbarao.
Latest figures indicate that there were over 110,000 BCs deployed across the country as of now. Benefitting from accumulated experience, the the apex bank has liberalised the eligibility norms for appointment as BCs by including retired employees, kirana shops, NGOs, societies, post offices, Section 25 companies and also large corporates who have a marketing penetration.
"Recently, we have allowed interoperability of BCs to enable remittance and electronic benefit transfers. Even as the BC model has consolidated by now, two caveats are in order. First, banks should not neglect the importance of brick and mortar branches, and in their financial inclusion plans, should maintain a fair ratio between brick and mortar branches and BCs” he said.

Window-dressing of deposits by banks: Some truths

Hindu Business Line

Window-dressing is one of the uncomfortable phenomena in the Indian banking system. The financial status of banks is evaluated every quarter (March-end, June-end, September-end and December-end).
At these points of evaluation, banks try to boost their deposit figures through artificial means. However, the make-up does not last long. The deposit figures start dropping in the ensuing weeks till the attainment of a natural height. The paradox to be noted is that window-dressing is artificial, whereas window-undressing is quite natural.
In spite of being transitory, window-dressing has become a common and normal practice among bankers and an integrated feature of the system so much so that the quarterly figures of deposits are always accepted with a pinch of salt.
All banks window-dress; only the degree differs.


The phenomenon of window-dressing continues despite the RBI’s warningsand suasion. The RBI’s concern is evident from its Business Season Credit Policy, 1995.
To quote, “Banks have been repeatedly warned to eschew window-dressing and it is unfortunate that despite strong suasion this warning has been ignored. Banks are cautioned once again against the recurrence of such a phenomenon and I am constrained to say that we may have to evolve certain arrangements, including punitive action, to prevent the recurrence of such a phenomenon.” (Paragraph 5 of the RBI Governor’s letter to SCBs on September 29, 1995 detailing the Busy Season Credit Policy)
The RBI Annual Report 1998-99 cited window-dressing of deposits as one of the factors contributing to the “hardening of call rates”.
The RBI Bulletin of May 2000 refers to window-dressing causing “year-end bulge”. In his speech titled, “The Evolution of Banking Regulations in India – A Retrospect”, one of the then RBI Deputy Governors, V. Leeladhar, characterised window-dressing as “prudentially undesirable.” (RBI Bulletin, May, 2007)


Window-dressing is undesirable because it introduces distortions in monetary and banking aggregates and, thereby, affects the process of monetary and banking policy and planning adversely.
Moreover, it makes the bank officials concerned complacent about making real efforts to mobilise ‘stable’ deposits. Of late, it is being realised that deposit mobilisation is often more effort-elastic than anything else. Window-dressed deposits are rather fickle.


Over time, the Indian banking system has become more competitive. Not only there is stiff competition among banks to grab public deposits but also they have to compete against non-banks offering attractive returns. In contrast, the savings potential of the country has been varying in a limited range. The following graph illustrates that the country’s financial savings as a percentage of GDP at CMP has been hovering around 10-13 for the past seven years. (Source: Economic Survey 2011-12, pp.5, Table 1.4). A roller-coaster ride, indeed!
Thus, there is a classical economic problem: Limited resources and unlimited competitors. The demand for of the latter is not only high but urgent and swift as well. In such a situation, those who can plan and execute the plans effectively to get a major chunk of savings can actually increase deposits; but those ‘career-conscious’ aspirants who fall short resort to window-dressing.
In the above framework, one pertinent question arises. Why do bankers aspire for deposits and deposits alone, when there exist so many other performance indicators? Even if banking has come a long way, still the emphasis is on ‘growth’ and within ‘growth’, deposit figures are being focussed first because banks are basically ‘special’ financial intermediaries, and deposits are their raw materials for credit creation. This stark reality cannot be just wished away.
Banks sign a memorandum of understanding with the Finance Ministry, Government of India that benchmarks the performance of bank Chairman and Managing Directors (CMDs) against certain parameters, within which ‘growth in business (deposits and loans)’ figures prominently. If banks attain their targets agreed upon, CMDs get a bonus. This is the starting line for hounding ‘growth’.
The process is replicated at the micro-levels of the hierarchy where first and foremost, growth in deposits shown by incumbents at various levels is taken as a significant performance indicator.
In view of this, a blanket target-oriented approach is followed in mobilising deposits. The targets are fixed from the top on an increasing trend basis irrespective of various endogenous and exogenous changes the operating area might have undergone or might be experiencing during the time interval of the last and forthcoming evaluation points.
Generally speaking, there is a lack of gradual, continuous and systematic efforts to mobilise deposits because of stationary nature of the evaluation points.
Towards the evaluation points of time bankers receive a spur and run around to get deposits. And haste makes waste.


Like risk, window-dressing can only be minimised, but not eliminated. Let us accept the reality that so long as ‘growth’ is focussed in evaluation of financial status of banks, window-dressing will continue. All the stakeholders in the process of evaluation should be ‘deprogrammed’ from their obsession with ‘growth’.
Evaluation should include other parameters pertaining to a bank’s efficiency, safety and soundness, staff productivity, financial inclusion, technology and the like as determinants of achievements and a simple, weighted index needs to be developed to calibrate a bank chief’s performance. This is a challenge for the Finance Ministry which should constitute a committee with representations from stakeholders to devise the index.
(The author is a former commercial bank economist)

Mon, Jul 09, 2012 at 16:46

RBI not to relax NPA norms for textile companies

There is some bad news for textile companies. The Reserve Bank of India (RBI) has struck down a proposal to relax NPA norms for textile companies, even after it was announced as a part of the much publicised debt restructuring package sector.

There is some bad news for textile companies. The Reserve Bank of India (RBI) has struck down a proposal to relax NPA norms for textile companies, even after it was announced as a part of the much publicised debt restructuring package sector.

The RBI has intimated the finance and textile ministries about its decision, who in turn have convened a meeting on July 13 to asses the RBI's stand. The only silver lining is that the central bank has given its nod for a 2 year moratorium on term loans and converting eroded working capital into term loans of 3 to 5 year period.

Till now, the textile ministry has got debt restructuring applications worth Rs 10,000 crore, out of which applications worth Rs 2,000 crore have been filed for NPA relaxation.
Mr Deepak Parekh, a senior statesman of Indian finance and chairman of HDFC, has warned that the wholesale cancellation of coal blocks would cause further damage to India's international reputation and endanger the banking system as loans of INR 100,000 crore would turn sticky. 

He spoke to MC Govardhana Rangan and Bodhisatva Ganguli. 

Edited excerpts:

Q - What are your views on the demand that coal blocks allocated be cancelled?

A - It will be a blow to the country. The opposition parties may take joy in reversing the policies of the ruling party. But do we know that this is the ruination of India? What are we trying to do? You give licenses, you cancel it. You give coal blocks, you cancel it. Tomorrow, a new party will come to power and will undo everything what the earlier government has done.

Is this the democracy that India wants? Is this what we want to see in India? I am not saying nothing wrong has been done. Whether it's telecom licences or coal. If coal block has been given to an industrial group and they have done nothing about it for five years (then cancellation is justified). We are importing coal, we desperately need coal for our industries. We desperately need power for our households and industries. There are massive power cuts across the country. And you are sitting on a coal block, which is not going to run away. You have not made any efforts all these years to evacuate coal and use it for public purpose. Then you should take it away. Then you look at those who got coal blocks (and are using it) and now you are (talking of) re-allocating them. These reallocations, according to me, would be a big disaster. Power companies have borrowed money, put massive amount of equity and debt, domestic and international, to put up power plants. Power plants are ready or power plants are 50% ready and coal is not there. Money has been drawn from the banks and the institutions, which happens to be over Rs 1 lakh crore... Over Rs 1 lakh crore of loans, which have been disbursed, goods ordered, turbines ordered, (projects) completed or nearly completed. Now, if you take away the coal, what do you expect these people to do?

Q - So, what is the way out?

A - What you have to do is (deal with these) on a case-by-case basis in an impartial and transparent process. If you have power plant and coal next to it and you are going to take it away, it's not going to help you. You fine them, charge them more. So, there are different solutions for different projects.

What I feel is you cannot reverse all economic policies. Reversing every economic policy is the beginning of the end of the country. A new government will come in and they will reverse all the decisions of the previous government. Have we done this in the past? Why are we doing this now? In coal we should look at (it) case by case and form a three-member committee of senior people in government and give them enough authority and make that the final decision.

Q - So, you are saying don't cancel across the board?

A - No, you have to take a practical view. I think we have a major issue on power. Re-allocation will take years and tariffs will increase, power cuts will increase, blackouts will increase. 

Source - Economic Times

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