Global regulators agree on bank asset rules
Banks will hold more cash, assets in hopes of lessening impact of future financial crises
International banking regulators agreed Sunday on global rules meant to ensure banks keep enough cash in hand to survive future market crises, and gave banks until 2019 to comply fully.
The rules will require banks in future to hold enough cash, and assets such as equities, corporate and government bonds that can easily be sold, to tide them over during an acute 30-day crisis.
The body that oversees the Basel Committee on Banking Supervision, which sets international rules, said Sunday that they will have to hold 60 per cent of that amount when the rules start being phased in on Jan. 1, 2015; that will increase by 10 percentage points every year until the standards take full effect at the beginning of 2019.
The oversight body’s head, Bank of England governor Mervyn King, said after regulators met in Basel, Switzerland, that the timeframe ensures the new standards “will in no way hinder the ability of the global banking system to finance the recovery.”
The hope is that it will prevent lenders from becoming over-reliant in future on help from central banks, which have stepped in over recent years to keep the financial system flush with cash.
King said that “the vast majority” of the world’s biggest banks “already hold liquid assets well above the minimum required by this standard.”
The rules are part of wider efforts to prevent another shock to the financial system like that prompted by Lehman Brothers’ 2008 collapse, which led to taxpayer-funded bailouts of banks in the U.S. and Europe.
They are part of the so-called Basel III package of reforms. That package will require lenders to increase their highest-quality capital — such as equity and cash reserves — gradually from 2 per cent of the risky assets they hold to 7 per cent by 2019.
Public sector banks should monitor resolution of NPAs in a time-bound manner
The total stressed assets in our banking system today, including the ghost of 'restructured standard' loans, are as high as Rs 3.60 lakh crore, or seven times the gross non-performing assets (NPAs) level recorded five years ago (Rs 50,486 crore). Clearly, the situation is far grimmer than is being acknowledged.
The Reserve Bank of India's ( RBI) latest annual report points the finger at the 'cyclicality factor', and an address by its deputy governor at errors of omission and commission: from restructuring loans in order to hide NPAs, to inadequate due diligence, to a bias towards privileged borrowers and so on.
(Corporate Debt Restructuring: Issues and Way Forward, address by K C Chakrabarty, deputy governor, Reserve Bank of India, at the Corporate Debt Restructuring Conference, August 11, 2012). However, there is another problem at the root.
Over the period 2002-03 to 2005-06, for every year, the total reduction in all banks' gross NPAs during the year was higher than the total addition. The numbers got levelled in 2006-07 and, from the next year, total reduction during the year has been lower than total addition. How did this happen?
This happened on the back of two transformational changes: one, enactment of Sarfaesi Act — and spawning of the new institution of asset reconstruction company (ARC) to whom banks could sell their NPAs — and, two, a steady growth in the share of 'retail' loans: simplistically defined as all loans below Rs 10 lakh which, incidentally, is at variance with banks' definition, in total bank credit, from 8.3% in 1992-93 to about 40% (estimated), now.
Since small borrowers feel the threat of bank action, recovery from 'retail' NPAs is better than that from 'non-retail'/corporate NPAs and, therefore, the NPA position of public sector banks (PSBs) kept improving so long as the cascading positive effect of increase in share of 'retail' NPAs overshadowed the negative effect on account of the stock of 'non-retail' NPAs.
Since 2007-08, PSBs have virtually shut the door on the first remedy: sale of NPAs to ARC on security-receipts (SR) basis. And, the second one, steady growth in share of 'retail' loans, is not a feasible option any more. Hence, the steady deterioration in PSBs' NPA position, and the clamour for subterfuges. The ostensible reason for the logjam in sale of NPAs to ARCs — 'low price offered' — is a mere ruse.
For, a compilation of the cumulative all ARCs' recovery figures, since inception, shows that all ARCs put together have, over the seven years up to March 31, 2011, been able to recover only 86% of their own investment. Of this, as much as 45% is on account of an extraordinary fee income that could be earned because, in the initial few years of ARC's existence, one ARC that enjoyed a monopoly status then, could dictate terms for non-cash, SR-based deals, which is not feasible any more.
The real reason why PSBs are not able to sell their NPAs to ARCs is the 'system trap' they are caught in: a trap that forces them to lose money by allowing their NPAs to rot. (In two representative cases of NPA sale by banks, the weighted average age worked out to 8.61 years and 12.52 years, which meant a loss of as much as 52% and 75%, respectively, to the selling bank on account of time value of money.)
The three pillars of this 'system trap' are: 'going concern' valuation (totally inappropriate for sick unit cases), 'fear of vigilance' and 'no accountability for not doing'. Together, these ensure that sitting on the NPAs is a better option than resolving them. Since PSBs do not have a system, either to monitor resolution category-wise or for time-bound resolution of NPAs, they remain hidden under the carpet.
Assets vs Risks: Banks walk red-eyed into 2013
S V Krishnamachari, Jan 7, 2013, DHNS
Risk taking may be the theme song of the banking sector, but banks were bogged down by the flip side of it last year. Non-performing assets, better known as NPAs, dominated the banking narrative for much of the last six months of 2012.
The much awaited passage of the Banking Regulation (Amendment) Bill expected to be issued by the Reserve Bank of India -- which will pave the way for new banking licences --, afforded some reprieve towards the end, along with rumours of takeover bids on old private sector banks by new private sector banks.
A senior analyst says that banks are mainly to be blamed for the NPA problem. "No doubt, the problem arose out of the macro-economic environment in the country and beyond," says Shinjini Kumar, Director, PricewaterhouseCoopers Pvt Ltd. It brought about greater focus on governance issues, both within borrowers and lenders.
"Weaknesses in processes such as appraisal of loans, selection of borrowers and ongoing monitoring of loans may not show up when the economy is booming and the rising tide effect persists. But when the economy is in a downturn, these things are accentuated and that’s what happened." Another industry expert at KPMG has a similar view. “Banks obsessed with topline growth do well when there is a boom, but when the slowdown sets in, such banks are hit hard,” says Narayanan Ramaswamy, Partner, KPMG Advisory Services Pvt Ltd. He adds that bankers with “banking instinct”, who can protect their capital and invest their assets wisely wouldn't encounter such problems.
With the economy showing no decisive signs of recovery as indicated by core sector numbers for the April-November 2012 period, NPAs will continue to stress banks in 2013 as well, though managing director of public sector lender State Bank of Mysore, Sharad Sharma, disagrees: "NPAs won't be as bad a story as in 2012. At our bank, we saw significant reductions in the last two quarters of calendar 2012." The MD and CEO of Karur-based private sector lender Lakshmi Vilas Bank, K S R Anjaneyulu, says that banks with a legacy of stressed assetes will find the going tough in 2013 and fiscal 2013-14.
According to him, growth prospects for such banks would be bleak, while the rest will do well. “I feel that overall growth for the banking sector will be in the region of 17-20 per cent in 2013-14.” He adds that given the easing of the fiscal cliff challenge in the US and the Eurozone crisis, the global economic situation augurs well for banks and that by March this year, the “difficult phase” for the sector should be over.
Deposits Growth Likely
According to Sharma, the mismatch between credit growth at around 16 per cent and deposit growth of about 13 per cent in calendar 2012, is bound to see improvement in 2013. "Deposit growth will be around 16 per cent this year led by retail deposits, even as we phase out bulk deposits. This will improve liquidity, which gave bankers a tough time in 2012." On the credit growth front, Sharma notes that with interest differentials being what they are, corporates will continue to prefer external borrowings.
"To that extent, there won't be significant pickup in corporate credit." He is optimistic on the retail side.
While the clutch of new players entering the banking space is perceived as a positive development for the sector, Shinjini says this will come with its own set of challenges.
"The competition landscape in the banking sector may change in the medium to long term, primarily in response to the changing economy. Post-liberalization growth in India received a boost from services and IT/ITES, while private sector banks licensed post-liberalization particularly benefited from the emergence of the middle class and the aggressive growth strategies of large corporates."
Private sector banks, including HDFC Bank, Global Trust Bank (GTB), ICICI Bank and Axis Bank took advantage of the first phase of relaxation in banking licence norms, followed by Yes Bank and Kotak Mahindra Bank in 2003-04. However, GTB was forced to merge with public sector lender Oriental Bank of Commerce after unduly high exposure to the stock markets led to its fall. Others managed to leverage the India growth story well to drive growth and business.
However, this will be hardly the case for new players, as and when they come, Shinjini says. "New banks will have to contend with the slowdown in these sectors and can no longer bank on the same theme to drive growth. They will have to build successful business models by driving entrepreneurship, and focusing on the 'emerging middle class', especially in Tier II and III towns and cities. Financial inclusion will also provide them opportunities if they can build a sound business case around it." Ramaswamy feels that going forward, banks that focus on SME lending will fare well without having to bother much about NPAs. According to him, the ability to keep down transaction costs will hold the key to driving bottomline growth for banks.
More Players
On new players entering the banking sector, Sharma says that given the long gestation process, any possibility of a new player entering the banking sector this year is unlikely. It's a view shared by Ramaswamy as well.
Mergers and acquisitions (M&As) will be a recurring theme in 2013, according to Shinjini and Sharma. "I do expect M&As to happen in a calibrated way in the long term, but no quick consolidation," says Shinjini. The rumours won't die down, but there won't be M&As as such, says Anjaneyulu. “Old private sector banks want to grow on their own strength.
They have been playing a vital role in their own way,” he says. The macro-economic situation is bright, according to Shinjini, given the demand for goods and services which is not adequately backed by supply. “This is a country where there are queues for everything. So demand is there. If we can address policy issues, the supply side will pick up and thus lead to buoyancy in growth.” Anjaneyulu says that given the empirical evidence that corporate credit grows at 2.5 times the GDP growth of a country, the credit growth rate should hover around 15 per cent.
On the possibility of a rate cut by the central bank this month, the bankers say this could indeed be expected. Anjaneyulu notes that after the Centre's positive moves on reforms and fiscal management, the Reserve Bank of India is likely to reciprocate favourably with a repo rate cut. Shinjini also wants to be in sync in with such a possibility, saying, “I have no reason to be a contrarian.”
The much awaited passage of the Banking Regulation (Amendment) Bill expected to be issued by the Reserve Bank of India -- which will pave the way for new banking licences --, afforded some reprieve towards the end, along with rumours of takeover bids on old private sector banks by new private sector banks.
A senior analyst says that banks are mainly to be blamed for the NPA problem. "No doubt, the problem arose out of the macro-economic environment in the country and beyond," says Shinjini Kumar, Director, PricewaterhouseCoopers Pvt Ltd. It brought about greater focus on governance issues, both within borrowers and lenders.
"Weaknesses in processes such as appraisal of loans, selection of borrowers and ongoing monitoring of loans may not show up when the economy is booming and the rising tide effect persists. But when the economy is in a downturn, these things are accentuated and that’s what happened." Another industry expert at KPMG has a similar view. “Banks obsessed with topline growth do well when there is a boom, but when the slowdown sets in, such banks are hit hard,” says Narayanan Ramaswamy, Partner, KPMG Advisory Services Pvt Ltd. He adds that bankers with “banking instinct”, who can protect their capital and invest their assets wisely wouldn't encounter such problems.
With the economy showing no decisive signs of recovery as indicated by core sector numbers for the April-November 2012 period, NPAs will continue to stress banks in 2013 as well, though managing director of public sector lender State Bank of Mysore, Sharad Sharma, disagrees: "NPAs won't be as bad a story as in 2012. At our bank, we saw significant reductions in the last two quarters of calendar 2012." The MD and CEO of Karur-based private sector lender Lakshmi Vilas Bank, K S R Anjaneyulu, says that banks with a legacy of stressed assetes will find the going tough in 2013 and fiscal 2013-14.
According to him, growth prospects for such banks would be bleak, while the rest will do well. “I feel that overall growth for the banking sector will be in the region of 17-20 per cent in 2013-14.” He adds that given the easing of the fiscal cliff challenge in the US and the Eurozone crisis, the global economic situation augurs well for banks and that by March this year, the “difficult phase” for the sector should be over.
Deposits Growth Likely
According to Sharma, the mismatch between credit growth at around 16 per cent and deposit growth of about 13 per cent in calendar 2012, is bound to see improvement in 2013. "Deposit growth will be around 16 per cent this year led by retail deposits, even as we phase out bulk deposits. This will improve liquidity, which gave bankers a tough time in 2012." On the credit growth front, Sharma notes that with interest differentials being what they are, corporates will continue to prefer external borrowings.
"To that extent, there won't be significant pickup in corporate credit." He is optimistic on the retail side.
While the clutch of new players entering the banking space is perceived as a positive development for the sector, Shinjini says this will come with its own set of challenges.
"The competition landscape in the banking sector may change in the medium to long term, primarily in response to the changing economy. Post-liberalization growth in India received a boost from services and IT/ITES, while private sector banks licensed post-liberalization particularly benefited from the emergence of the middle class and the aggressive growth strategies of large corporates."
Private sector banks, including HDFC Bank, Global Trust Bank (GTB), ICICI Bank and Axis Bank took advantage of the first phase of relaxation in banking licence norms, followed by Yes Bank and Kotak Mahindra Bank in 2003-04. However, GTB was forced to merge with public sector lender Oriental Bank of Commerce after unduly high exposure to the stock markets led to its fall. Others managed to leverage the India growth story well to drive growth and business.
However, this will be hardly the case for new players, as and when they come, Shinjini says. "New banks will have to contend with the slowdown in these sectors and can no longer bank on the same theme to drive growth. They will have to build successful business models by driving entrepreneurship, and focusing on the 'emerging middle class', especially in Tier II and III towns and cities. Financial inclusion will also provide them opportunities if they can build a sound business case around it." Ramaswamy feels that going forward, banks that focus on SME lending will fare well without having to bother much about NPAs. According to him, the ability to keep down transaction costs will hold the key to driving bottomline growth for banks.
More Players
On new players entering the banking sector, Sharma says that given the long gestation process, any possibility of a new player entering the banking sector this year is unlikely. It's a view shared by Ramaswamy as well.
Mergers and acquisitions (M&As) will be a recurring theme in 2013, according to Shinjini and Sharma. "I do expect M&As to happen in a calibrated way in the long term, but no quick consolidation," says Shinjini. The rumours won't die down, but there won't be M&As as such, says Anjaneyulu. “Old private sector banks want to grow on their own strength.
They have been playing a vital role in their own way,” he says. The macro-economic situation is bright, according to Shinjini, given the demand for goods and services which is not adequately backed by supply. “This is a country where there are queues for everything. So demand is there. If we can address policy issues, the supply side will pick up and thus lead to buoyancy in growth.” Anjaneyulu says that given the empirical evidence that corporate credit grows at 2.5 times the GDP growth of a country, the credit growth rate should hover around 15 per cent.
On the possibility of a rate cut by the central bank this month, the bankers say this could indeed be expected. Anjaneyulu notes that after the Centre's positive moves on reforms and fiscal management, the Reserve Bank of India is likely to reciprocate favourably with a repo rate cut. Shinjini also wants to be in sync in with such a possibility, saying, “I have no reason to be a contrarian.”
1 comment:
It shows prudence on the part of those international regulators. I t is better to keep assets in cash than their hasty and impromptu deployments which adds to NPAs as have been happening in India's banking sector. Moreover, if cash position of banks remain good, they have to compromise a little bit on return but can help each other, through inter bank call market, to tide over liquidity glitches.
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