Tuesday, September 11, 2012

Large Scale Restructuring Of Loans By Banks May Only Delay Impairment AND Collapse of Banks

CCEA approved Financial Restructuring of State Distribution Companies

Report by OD bureau, New Delhi: 

The Cabinet Committee on Economic Affairs today approved the scheme for Financial Restructuring of State Distribution Companies (Discoms).

The scheme contains various measures required to be taken by State Discoms and State Governments for achieving the financial turnaround of the Discoms by restructuring their debt with support through a transitional finance mechanism by the Central Government. The scheme is effective as soon as notified and will remain open upto 31st Dec 2012 unless extended by the GOI. Support under the scheme will be available for all participating State owned Discoms on fulfilling certain mandatory conditions as outlined in Part C of the Scheme.
The salient features of the scheme are as follows:

a. 50 percent of the outstanding short term liabilities upto March 31, 2012 to be taken over by State Governments. This shall be first converted into bonds to be issued by Discoms to participating lenders, duly backed by State Governments guarantee.

b. Takeover of liability by State Governments from Discoms in the next 2-5 years by way of special securities and repayment and interest payment to be done by State Governments till the date of takeover.

c. Restructuring the balance 50 percent Short Term Loan by rescheduling loans and providing moratorium on principal and the best possible terms for this restructuring to ensure viability of this effort.

d. The restructuring/reschedulement of loan is to be accompanied by concrete and measurable action by the Discoms/States to improve the operational performance of the distribution utilities.

e. For monitoring the progress of the turnaround plan, two committees at State and Central levels respectively are proposed to be formed.

f. Central Government will provide incentive by way of grant equal to the value of the additional energy saved by way of accelerated AT&C loss reduction beyond the loss trajectory specified under RAPDRP and capital reimbursement support of 25 percent of principal repayment by the State Governments on the liability taken over by the State Governments under the scheme.

The accumulated losses of the state power distribution companies (Discoms) are estimated to be about Rs 1.9 Lakh crore as on 31st March, 2011. In order to look into the issues of State Discoms and to suggest a strategy for the turnaround of the distribution sector, Planning Commission constituted an Expert Group under the chairmanship of Sh. B K Chaturvedi, Member (Energy), Planning Commission. The approved scheme is formulated based on the report of the Expert Group and deliberations in the PMO and Ministry of Finance

Good news for power sector: Government to revive bleeding state electricity boards

NPA of nationalised banks rises to Rs 73,038 crore in June Friday, Sep 07, 2012 at 0211 hrs IST                                             Collected from Financial Express

New Delhi: The government today said the gross Non-Performing Assets (NPAs) of nationalised banks have increased to Rs 73,038 crore in June.

The gross NPAs for nationalised bank stood at Rs 66,795 crore at the end of March 2012 against Rs 73,038 crore in June 2012, Minister of State for Finance Namo Narain Meena said in a written reply in the Rajya Sabha.

The nationalised banks include 20 banks excluding State Bank of India and its five associate banks.
"Banks are required to monitor their NPAs and take steps to bring them down through recovery or other channels," he said.

RBI also monitors the NPA levels in banks, he said, adding the aspect is reviewed during Annual Financial Inspections of banks and monitored on an ongoing basis through regulatory returns submitted by banks and periodical meetings with banks.

The channels of recovery available to banks include recourse to Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Debt Recovery Tribunals, Lok Adalats etc., he added.

The government has advised public sector banks to take a number of new initiatives to increase the pace of recovery and manage NPAs, he added.

The new initiatives included appointment of nodal officers for recovery, to conduct special drives for recovery of loss assets, to put in place early warning system, to replace system of post dated cheques with Electronic Clearance System and to proactively pursue the loan issues with state governments, he added.

Moody's Warns on Greek Loan-Restructuring Proposal

Tuesday, 11 September 2012 | 00:00

A proposal by one of Greece's governing coalition parties for banks to restructure loans of households and companies in financial straits would be credit negative for the country's banks, Moody's Investors Service said Monday. 

The proposal by the Pasok party, contained in a letter last week to the head of the Hellenic Banking Association, could create moral hazard for borrowers and hide the real extent of banks' asset quality deterioration, Moody's said in its Weekly Credit Outlook. 

The proposal highlights Greek borrowers' weakening payment capacity, Moody's said. 

The Bank of Greece has said that the reported level of nonperforming loans in the system increased to 18.7% of total loans in the first quarter of 2012. 

"However, the regulator's official NPL numbers and those of individual banks underestimate the full extent of the asset quality deterioration because they do not capture the surge in the number of restructured loans," Moody's wrote. 

Pasok's recommendation would give extended loan maturities and lower monthly loan installments to borrowers with reduced incomes, "but would also create moral hazard among wilful defaulters, further compromising Greek banks' already poor asset quality," Moody's wrote. 

It said the proposal would delay banks' recognition of impairments, as Moody's "view[s] restructured loans as harbingers of future loan losses."
S&P says SEB loan recast not to hit sovereign rating, banks
Monday, September 10, 2012, 18:17
Mumbai: Leading rating agency Standard & Poor's on Monday said the proposed Rs 1.2 lakh crore restructuring of the debt of struggling state electricity boards (SEBs), which it termed as a "short-term solution," will neither impact the sovereign rating of the country nor banks.
( MY Observation : Some officials of government of India under the directions of FM have managed rating agency favourable report to change public image and to artificially boost up credit sanctioning  will of reluctant bankers)

The observation is likely to offer a big breathing space to the government as global rating agencies are set to visit the finance ministry mandarins this month to review the country's sovereign rating.

S&P had spooked the government and markets in April when it lowered the sovereign outlook to negative while retaining the BBB- rating.

"The proposed debt recast does not significantly affect our sovereign rating on India, instead it could be positive in the medium-to-long term," S&P credit analyst Rajiv Vishwanathan told reporters in a conference call.

Positive, he said, because the Corporate Debt Restructuring (CDR) proposal also seeks to reform the troubled power sector that will give some breathing space to the SEBs.

In June, the government, in a bid to help the struggling power sector, especially the state-run SEBs, and improve capacity, had cleared a plan to recast Rs 1.2 trillion working capital debt of the SEBs to long-term loans.

Under this half of the loans will be transferred to the respective states which in turn will provide guarantees to bonds that the SEBs will issue to banks. The proposal is awaiting the Reserve Bank nod.

The power sector, both generation as well as distribution companies in the public and private sectors, together have a debt pile of Rs 3.3 trillion or 7.2 percent of the total bank credit, S&P said. Out of this total, according to S&P, 25 percent are with SEBs, which are into both generation and distribution.

As of FY12, the banking system as a whole had an exposure of 7.5 percent to the power sector, which by the end of the June quarter came down to 7.2 percent. As of the June quarter, the bank credit stood at a tad over Rs 45 trillion, says S&P Ratings Services.

Releasing the report, titled 'Indian power sector debt restructuring proposal: A salve, not a cure,' Vishwanathan said, "the recent government proposal to restructure debt of SEBs will provide them only a temporary reprieve from weakening finances. The proposal is in itself unlikely to adequately speed up the growth in the power capacity to meet snowballing demand.

"We believe a sustained improvement in the credit quality of distribution companies and greater private sector participation can provide a long-term solution to the power sector woes," added Vishwanathan.

The report also warned that the CDR proposal will resolve the underlying debt burden of discoms, not the fundamental flaws in their business model-high leveraging, low tariffs and abnormally high T&D losses which is highest in Asia at around 30 percent.

The report further said the country urgently needs to provide more lasting solutions to its power problems as the proposed restructuring at best could provide the loss-making discoms a reprieve and help them to cover costs only in the short-term.

On the impact of the July 30-31 outage in the Northern and Eastern states, which saw nearly 700 million living in the dark for two consecutive days, S&P said, "the grid failure though affected 20 of the 28 states, had little impact on industry as several companies have broken away from state-supplied electricity, and now depend on their own captive power plants.

"However, we believe that such a practice reduces the competitiveness of businesses and deters investments by overseas companies," Vishwanathan said.

He further said the CDR will not help bring in investments into the sector, if this is not accompanied by transparent tariff regulations and reliable fuel supply apart from hiking tariffs that can meet the cost of fuel as raw material cost is going up.

"A reliable fuel supply, in turn, hinges on availability of timely clearances and a transparent framework for producing fuel, and the presence of adequate infrastructure for transporting fuel," he said.

The report also called for the urgent need to improve the credit quality of the discoms and allow greater private sector participation in power transmission and distribution to provide a long-term solution to power shortages.

Noting the country has still one of the lowest power tariffs in the Asia, it said the country has the highest transmission and distribution losses, which stands at around 30 percent against a global average of 5 to 10 percent.

"The cost of doing business here could increase if the cycle of high system inefficiencies, technical and commercial losses, and under investment in capacity continues," S&P said, adding "this could in turn affect the growth prospects in the long run and weigh on the sovereign rating". 

$100m for bank fraud whistleblower

A FORMER UBS banker has won a $US104 million ($100 million) reward for blowing the whistle on tax fraud.
"This is believed to be the largest reward ever given to an individual whistleblower in the United States and the first major reward issued under the IRS tax whistleblower law," the US National Whistleblowers Centre said in a statement.

Bradley Birkenfeld earned the reward from the Internal Revenue Service for providing the US government with "insider information on Swiss bank UBS's illegal offshore banking scheme", said the Washington-based nonprofit organisation.

National Whistleblowers said his disclosures directly resulted in UBS paying a $US780 million fine to the US.
"Mr Birkenfeld's disclosures also forced the Swiss government to change its tax treaty with the United States, resulting in UBS turning over the names of over 4900 US taxpayers who held illegal offshore accounts. These 'taxpayers' are now being investigated and prosecuted," the centre said.

The UBS case was part of a broad push by US tax authorities to gain information on accounts held overseas by Americans allowing them to avoid US taxation.

According to National Whistleblowers, more than 35,000 taxpayers have come forward to participate in so-called amnesty programs to voluntarily repatriate their illegal offshore accounts and the US has collected over $US5 billion in back taxes, fines and penalties.

Mr Birkenfeld's lawyers hailed the IRS payout as an important step in prompting people to come forward in reporting crime.

"The IRS today sent 104 million messages to whistleblowers around the world - that there is now a safe and secure way to report tax fraud and that the IRS is now paying awards," they said.

"The IRS also sent 104 million messages to banks around the world - stop enabling tax cheats or you will get caught."

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