RBI gives more powers to tackle NPAs: Arun Jaitley
The Reserve Bank of India sprang into action as soon as the government notified the ordinance on bad loans, with the regulator offering more teeth to groups of lenders to deal with recovery proceedings and telling banks to stick to majority-agreed plans or face a penalty.
Any resolution plan agreed to by 60% of members in a joint lenders’ forum is binding on everyone in the group and no bank board will have the power to overrule the decision, the central bank said. Banks will have to implement the plan agreed upon without any additional conditions and there would be a monetary penalty on those who veer away from the decision.
“Delays have been observed in finalising and implementation of the CAP (corrective action plan), leading to delays in resolution of stressed assets in the banking system,” RBI said in a notification.
“It is reiterated that lenders must scrupulously adhere to the timelines prescribed in the framework for finalising and implementing the CAP.”
RBI’s strong measures come on a day when the regulator was empowered by law to direct banks to take action against bad loans which have been plaguing the sector for the better part of the last decade. Banks, because of differences between them over the recovery procedures, had often failed to resolve the problem.
In new timelines released on Friday, the RBI said henceforth decisions agreed to by a minimum of 60% creditors by value and 50% by number in the forum would be enough to approve a restructuring plan for the loans. The earlier rule required approval of 75% creditors by value and 60% by number.
The new corrective action plan covers restructuring of project loans, change in ownership under strategic debt restructuring and the scheme for sustainable structuring of stressed assets.
The RBI will embark on its biggest banking clean-up exercise after President Pranab Mukherjee promulgated an ordinance authorising it to issue directions to banks to initiate insolvency resolution process in the case of loan default.
The tweak in the rules will help the Modi government tackle toxic loans that have crossed the Rs 6 lakh crore mark.
So, what does this mean?
1) The ordinance promulgated by the government on bad loans has now empowered the RBI to issue directions to banks for resolution of stressed assets. This basically implies the central bank can issue directions to any banking company or banking firms to initiate insolvency resolution process with respect to a default under the provisions of the Insolvency and Bankruptcy Code, 2016.
2) It has also empowered RBI to issue directions to banks for resolution of stressed assets.
3) The law will also empower RBI to set up sector related oversight panels that will shield bankers from later action by probe agencies looking into loan recasts.
4) RBI will be able to give specific solutions with regard to hair cut for specific cases and also, if required, look at providing relaxation in terms of current guidelines.
What is RBI’s target?
The central bank wants to resolve 60 largest delinquent-loan cases in nine months, a person familiar with the matter told Bloomberg.
Why is it being done now?
Ridding bank balance sheets of stressed assets is key to reviving credit growth and furthering Prime Minister Narendra Modi’s goal of creating more jobs in the $2 trillion economy.Various schemes proposed by RBI to resolve the problem have been unsuccessful, with lenders reluctant to write down assets sufficiently and company owners unwilling to negotiate repayment plans.
Stressed assets — bad loans, restructured debt and advances to companies that can’t meet servicing requirements — have risen to about 17 percent of total loans, the highest level among major economies, data compiled by the government shows.
Bandhan Bank’s net interest income stood at Rs 2,403.50 crore in the financial year 2017
Bandhan Bank on Thursday reported a net profit of Rs1,111.95 crore for the financial year that ended on 31 March. A comparable year-ago figure wasn’t available because the lender started operations only in August 2015.
Net interest income, or the core income a bank earns by giving loans, was Rs2,403.50 crore. Gross advances were Rs23,543.29 crore and deposits stood at Rs23,229 crore.
Current and savings accounts at the end of the March quarter made up 29.43% of deposits. Bandhan Bank’s capital adequacy ratio, an indicator of financial strength expressed as a ratio of capital to risk-weighted assets, was 26.36%. The bank has 840 branches and 10.5 million customers.
Bandhan Bank, which converted from a microfinance institution to a full-fledged lender, kept its focus on borrowers who make up more than 90% of its loan book. Going forward, the bank intends to diversify into affordable housing and loans to micro enterprises.
According to Chandra Shekhar Ghosh, founding managing director and chief executive officer of Bandhan Bank, deposit and credit growth for the bank will continue to grow at 30%.
In the financial year 2016-17, the bank sold inter-bank participatory certificates worth Rs6,704.21 crore, which helped the bank boost its net interest margin.
The net interest margin, the difference between the rate a bank charges for loans and pays for deposits, for the year was close to 10%.
Under the inter-bank participatory certificates arrangement, banks can sell a part of their portfolio to other banks that are short of their targets for lending to the priority sector that includes agriculture and small businesses.
Home service startup UrbanClap has raised Rs.20 Crore of debt funding from California-Based Trifecta Capital through Non-Convertible Debentures.
A Non – Convertible debenture or NCD do not have the option of conversion into shares and on maturity, the principal amount along with accumulated interest is paid to the holder of the instrument. There are two types of NCDs-secured and unsecured.
Previously, UrbanClap raised an undisclosed amount funding from Ratan TATA in December 2015. The total equity funding from UrbanClap is about $36.6 Millions. The startup investors base include SAIF Capitals, Rohit Bhansal, Accel Partners, Bessemer Venture Capital and others.
The startup has also acquired similar startups like GoodServices and Mumbai-Based HandyHome.
The Delhi-Based startup was founded in October 2014 by Varun Khaitan, Raghav Chandra and Abhiraj Bhal. UrbanClap is the simplest way to hire trusted services. The startup helps their customers to find the right service professionals for activities important house works. Their vision is to use technology and smart processes to structure the highly unorganised services market in India and emerging markets.
Trifecta Capital is an early stage technology fund that invests in the best start-ups. Current portfolio companies include Equipment Share, Second Spectrum, Moltin and others. Trifecta Capital is a top quartile Silicon Valley-based seed fund. The venture capitalist is industry agnostic and look to support companies starting at seed stage but continue our support until IPO.
Commenting on the funding Rahul Khanna, managing partner at Trifecta Capital, said: “We are very focused on identifying category leaders. The venture debt firm has so far committed Rs 300 crore to 21 startups in the last 18 months through its Trifecta Venture Debt Fund I, the target corpus for which is Rs 500 crore.”
The venture debt firm has invested in several startups such as BigBasket, Rivigo and Urban Ladder.
Non-banking finance companies could well outpace commercial banks, struggling to grow amid muted loan expansion and bad loan burden, said global rating company Moody’s.
But, NBFCs too are exposed to certain risks emanating from their fast-faced growth in loan against properties, which they are in a position to mitigate with larger share in mortgaged loans.
Non-bank financial companies (NBFCs) in India (Baa3 positive) will demonstrate broadly stable asset quality, but delinquencies will likely rise over the next 1-2 quarters, as demonetisation adversely affects collections across asset classes, said Moody’s Investors Service in a note.
“While the 90+days delinquency rate in the commercial vehicle (CV) loan segment largely stabilized in the first half of the fiscal year ending 31 March 2017, such delinquencies should build up in the near term due to the adverse impact of demonetisation and tighter recognition norms for non-performing assets (NPAs),” said Alka Anbarasu, a Moody’s Vice President and Senior Analyst.
Moody’s also notes that the growth in loans against property (LAP) has outpaced overall retail credit growth in recent years, but relatively loose underwriting practices–combined with intensifying competition – will translate into higher asset quality risk for this segment.
Furthermore, over the past 3 years, NBFCs have gained some market share in the origination of retail lending, on the back of the faster growth exhibited by such entities when compared to the banks.
This is particularly the case when compared to public sector banks, which face significant challenges on their asset quality and overall solvency profiles.
“Nevertheless, we expect that competitive pressures from the banking sector will remain intense as banks are increasing targeting of the retail segment to offset weakness in their corporate lending. In addition, retail lending, particularly housing loans, is more capital efficient for the banks,” said Anbarasu.
And, while the NBFCs’ capitalization levels are adequate, with average Tier 1 ratios in excess of 14%, capital generation will lag credit growth. Access to external capital will therefore be key in sustaining the NBFCs’ growth momentum.
On funding, Moody’s expects that the NBFCs’ funding profiles will broadly remain stable, and funding costs should moderate gradually, given the reduction in systemic rates.
In addition, the NBFCs’ profitability and capital, as well as funding and liquidity levels, will stay broadly stable.
The NBFCs are growing at a fast pace, and have gained market share in the origination of retail credit. And, their share of LAP pose a potential source of risk, with such loans growing at a rapid compound annual growth rate of about 25% over the last four years compared to 17% for overall retail credit.
Moody’s says that the NBFCs’ exposure to potential risks from LAP is broadly offset by their share of stable mortgage loans, because favorable demographics and economics, tax incentives for home loans and an increasingly affordable housing segment support asset quality.
Moody’s expects that the loss given default for both home loans and LAP will be limited, in light of the underlying collateral.
There are a few aspects that are common to Indian organisations that have a successful analytics strategy in place.
Non-banking finance companies could well outpace commercial banks, struggling to grow amid muted loan expansion and bad loan burden, said global rating company Moody’s.
But, NBFCs too are exposed to certain risks emanating from their fast-faced growth in loan against properties, which they are in a position to mitigate with larger share in mortgaged loans.
Non-bank financial companies (NBFCs) in India (Baa3 positive) will demonstrate broadly stable asset quality, but delinquencies will likely rise over the next 1-2 quarters, as demonetisation adversely affects collections across asset classes, said Moody’s Investors Service in a note.
“While the 90+days delinquency rate in the commercial vehicle (CV) loan segment largely stabilized in the first half of the fiscal year ending 31 March 2017, such delinquencies should build up in the near term due to the adverse impact of demonetisation and tighter recognition norms for non-performing assets (NPAs),” said Alka Anbarasu, a Moody’s Vice President and Senior Analyst.
Moody’s also notes that the growth in loans against property (LAP) has outpaced overall retail credit growth in recent years, but relatively loose underwriting practices–combined with intensifying competition – will translate into higher asset quality risk for this segment.
Furthermore, over the past 3 years, NBFCs have gained some market share in the origination of retail lending, on the back of the faster growth exhibited by such entities when compared to the banks.
This is particularly the case when compared to public sector banks, which face significant challenges on their asset quality and overall solvency profiles.
“Nevertheless, we expect that competitive pressures from the banking sector will remain intense as banks are increasing targeting of the retail segment to offset weakness in their corporate lending. In addition, retail lending, particularly housing loans, is more capital efficient for the banks,” said Anbarasu.
And, while the NBFCs’ capitalization levels are adequate, with average Tier 1 ratios in excess of 14%, capital generation will lag credit growth. Access to external capital will therefore be key in sustaining the NBFCs’ growth momentum.
On funding, Moody’s expects that the NBFCs’ funding profiles will broadly remain stable, and funding costs should moderate gradually, given the reduction in systemic rates.
In addition, the NBFCs’ profitability and capital, as well as funding and liquidity levels, will stay broadly stable.
The NBFCs are growing at a fast pace, and have gained market share in the origination of retail credit. And, their share of LAP pose a potential source of risk, with such loans growing at a rapid compound annual growth rate of about 25% over the last four years compared to 17% for overall retail credit.
Moody’s says that the NBFCs’ exposure to potential risks from LAP is broadly offset by their share of stable mortgage loans, because favorable demographics and economics, tax incentives for home loans and an increasingly affordable housing segment support asset quality.
Moody’s expects that the loss given default for both home loans and LAP will be limited, in light of the underlying collateral.
Official data released on Tuesday showed that demonetisation hasn’t pushed the economy into a retreat as most feared, with its short-term adverse impact. (Source: Reuters)
Official data released on Tuesday showed that demonetisation hasn’t pushed the economy into a retreat as most feared, with its short-term adverse impact to a large extent restricted to construction and financial services. Real GDP growth in the December quarter, in the midst of which the note ban came into effect, came in at a respectable 7% (though lower than 7.4% in the previous quarter) and the gross value added (GVA) was 6.6%, with the difference explained by robust indirect taxes and reining in of subsidies.
Upward revision of GVA estimates for 2015-16 led to downward corrections in GVA for Q1 and Q2 of the current fiscal but despite this, there were marginal upward revisions in the rates of GDP expansion in these quarters, thanks to a surge in indirect taxes.
Solid performance by the “agriculture and allied sectors”, pump-priming by the government on the consumption side, better-than-expected performance by mining and manufacturing sectors and a seasonal — though larger-than-usual — pick-up in private consumption masked whatever negative effect the note swap exercise had on the economy, going by the Central Statistics Office’s data.
However, as the GDP was slowing even before demonetisation and the note swap has indeed had an incremental adverse effect on it, both GDP and GVA growth for 2016-17 have been projected to be much lower than in the previous year. In the second advance estimate, the CSO has kept the GDP growth estimate for the current financial year at 7.1%, the same as in the first advance estimate released in early January, and GVA growth at 6.7%. But given that 2015-16 GDP growth, which was seen at 7.6% at the time of the first advance estimate, was subsequently revised to 7.9%, the CSO’s latest take on 2016-17 growth is virtually more sanguine than its previous estimate.
While the CSO’s GDP estimate for 2016-17 is evidently higher than that of most others, many analysts said the growth assumed by it for the second half (6.8%) was optimistic. “Given the fact that the fall from H1 to Q3 is not much, I don’t think that we should then necessarily assume that the rebound in Q4 is going to be very sharp,” said Aditi Nayar, economist at Icra. Stating that the GDP number is better than expected, Saugata Bhattacharya, chief economist at Axis Bank, said, “Since growth slowdown (due to demonetisation) has been shallower than expected, and in line with the RBI’s projections, the probability of rate cuts going ahead has come down.”
The minutes of the monetary policy committee’s meeting released last week indicated that it changed its stance from “accommodative” to “neutral” because the growth drag from demonetisation is expected to fade soon. India Ratings reiterated its view that “much of the impact of demonetisation will be visible in Q4FY17 leading to an overall GDP growth of 6.8% in 2016-17”.
Economic affairs secretary Shaktikanta Das said: “This year’s GDP (growth) is around 7%, based on available numbers. Nothing can be deciphered on anecdotal evidence. Demonetisation only impacted consumption in some cities, since most purchases happened on credit or debit cards. The so-called negative impact, if relevant, was only temporary.”
The 7% GDP growth forecast for the third quarter helped India maintain the coveted tag of the world’s fastest-growing major economy despite demonetisation, better than China’s 6.8% in the December quarter.
While analysts pointed out the lack of congruity between the CSO’s estimate and other high-frequency data and corporate results, chief statistician TCA Anant said all available data have been made use of in the second advance estimate, including corporate performance up to the December quarter, sales of commercial vehicles, railway freight, etc, for the first “9/10 months of the financial year”.
According to the CSO, with production growth of foodgrains during 2016-17 kharif and rabi seasons being 9.9% and 6.3%, respectively, the farm sector grew a robust 6% in Q3 from 3.8% in the previous quarter and compared with a 2.2% contraction in the year-ago quarter. Despite the anecdotes of industrial clusters hit by the note ban during the period, manufacturing grew a healthy 8.3% in Q3 on a robust base of 12.8% in the year-ago quarter and compared with 6.9% in Q2 this fiscal. Mining also posted a smart recovery from a fall of 1.3% in Q2 to a robust expansion of 7.5% in Q3. The bad performers on the output side was “financial services, etc”, which posted a modest 3.1% growth in Q3 compared with 7.6% in the previous month, and construction which grew just 2.7% in the December quarter.
Government final consumption expenditure (GFCE) posted a 19.9% growth in Q3 against 15.2% in the previous quarter, the CSO said. Given that 17% growth in GFCE is estimated for the whole of 2016-17, it needs to grow at 17.4% in Q4. Considering that the Centre, as is seen from the April-January fiscal data separately released by the Controller General of Accounts, has slowed down spending in the later months of the year, the spending boost must come from PSUs.
Although both Dussehra and Diwali fell in the December quarter, the 10.1% growth reported by CSO in the private consumption expenditure looked puzzling to most analysts (but some said use of old notes for consumption might have contributed to the rise). So was the 3.5% growth in gross fixed capital formation, which was declining for the previous three quarters.
Given that nominal GDP growth has been projected at 11.5% for 2016-17, compared with 10% in the last fiscal, it may offer more leeway to the government to improve spending in the next fiscal and yet contain fiscal deficit, which is expressed as a ratio of the nominal GDP, at the targeted 3.2%.
Discrepancies — the difference between the supply and demand side of GDP — turned negative after a gap of four quarters (-Rs 6,767 crore) in the December quarter, compared with Rs 45,378 crore in the second quarter and Rs 30,645 crore in the first quarter. In the last quarter of 2015-16, discrepancies touched a massive Rs 1,43,210 crore, causing a flutter then and raising doubts about the credibility of the country’s data collection mechanism. When private final consumption expenditure, gross fixed capital formation, government final consumption expenditure, change in stocks, valuables, and net exports exceed the overall GDP (based on the supply side data), discrepancies turn negative.
Analysts expect the exports sector to contribute more to GDP growth in the coming quarters, despite the demonetisation blues, thanks primarily to a favourable base. In real terms, the export growth for 2016-17 has been projected at 2.3%, compared with -5.4% in the last fiscal. Despite demonetisation, merchandise exports rose 2.3% in November, 5.7% in December and 4.3% in January.
