NBFCs will show up better asset quality: Moody’s

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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.

Source: http://economictimes.indiatimes.com/articleshow/57749011.cms

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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.

Source: http://economictimes.indiatimes.com/articleshow/57749011.cms

 

Bankruptcy and Insolvency Code will drive creation of a new debt market

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The Bankruptcy and Insolvency Code will drive growth of debt market in India, which hardly exists in corporate and business financing, Dr. MS Sahoo, Chairman, Bankruptcy Board of India

The Bankruptcy and Insolvency Code will drive growth of debt market in India, which hardly exists in corporate and business financing, Dr. MS Sahoo, Chairman, Bankruptcy Board of India told Fe. While the country has a matured and bullish equity market, the debt market in India was yet to develop. The board was not concerned with default in bank credits or about the rising NPAs. It would mainly look into private creditors interest if their money got locked.

“Banks have some protection in the areas of corporate financing but non banking debt is non existent. Bankruptcy and Insolvency Code would be instrumental in the growth of non bank debt financing, which would lead to reduce dominance of banks in areas of credit.

With a debt market created, debt supplies would ease out and lending rates both for the non banking creditors as well as for the banks would be market driven. “At present demand is chasing supplies but it will be other way round with supplies chasing demand,” Mamata Binani, chairperson, Institute of Company Secretaries of India (ICSI) said at an interactive session organised by the MCC Chamber of Commerce.

She said the code will enable to solve problems of many assets lying dead for years in dispute. Such assets could be quickly liquidated without the judiciary’s intervention and unsecured creditors will always have the first chance to realize its money from the business. The board has estimated that Rs 25,000 crore, which is locked in dead assets, is going to get unlocked in next five years.

While Sahoo made clear that the Bankruptcy and Insolvency Board would not deal with corporate frauds and inter managerial disputes, a creditor who has given unsecured loans should trigger the first available opportunity if he sees his credit at risk.

It will be a creditors committee, which will work on a strict time line, to resolve insolvency. The creditors will not be bound by any set rules to resolve insolvency or debtors problem. They will have flexibility to take their own decision and find a way out and that might come in the form debt restructuring or liquidation. However, if liquidation is unable to recover a debt, it may be a loss for both the creditor and the debtor, Alok Dhir, founder and and managing partner of Dhir & Dhir Associates said.

“But working with this code will gradually prove what is the right approach and there may be changes brought in the law,” Sahoo said adding that the board was also working on a framework for direct liquidation by passing insolvency resolution and the framework would be ready by February- March. But to begin the process on code a company has to address to the National Company Law Tribunal (NCLT), while for personal insolvency, a claimant will have to go to the Debt Recovery Tribunal (DRT). But the framework for personal insolvency was not yet ready and it would take some time before a party could move the DRT, Sahoo said.

However, the NCLT with 11 benches across the country was already functional with the code and there were chances that 93,000 pending BIFR cases could be referred to the board, many of which might not have to begin the process on code but through pre- pack solutions, Sahoo felt. He said the board has selected 974 insolvency professionals on a temporary basis and would begin certification through tests for inducting regular professionals.

Source: http://www.financialexpress.com/market/bankruptcy-and-insolvency-code-will-drive-creation-of-a-new-debt-market/506028/

NPA woes to spill over into next fiscal, says Moody’s

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Weak asset quality will continue to plague credit profile of banks, with their profitability remaining under pressure till the next fiscal, says a report.

“Asset quality will remain a negative driver of the credit profiles of most rated banks in the country and the stock of impaired loans. Non-performing loans and standard restructured loans will still rise during the horizon of our outlook that lasts till the next financial year,” Alka Anbarasu, a vice-president and senior analyst at Moody’s, said in a report today.

The report is jointly penned by Moody’s and its domestic arm ICRA Ratings.

The report said the pressure on asset quality largely reflects the system’s legacy problems, as relating to the strong credit growth seen in 2009-12, when corporate investments rose significantly.

It, however, said aside from the legacy issues, the underlying asset trend for banks will be stable because of a generally supportive operating environment.

“While corporate balance sheets stay weak, a further deterioration in key credit metrics such as debt/equity and interest coverage ratios has been arrested,” the report said.

As per Karthik Srinivasan, a senior vice-president at ICRA, “while bank profitability is not expected to be as weak as the levels seen in the financial year 2015-16, the weakness in asset quality will continue to drag on profitability indicators, with return on equity remaining in the single digits for the financial years 2016-17 and 2017-18.”

Anbarasu said the pace of asset quality deterioration over the next 12-18 months should be lower than what was seen over the last five years, and especially compared to the financial year 2015-16.

She considers the Reserve Bank’s asset quality review in December 2015 as an important catalyst in pushing banks to recognise some large accounts as being impaired.

“We now estimate the ‘true’ level of impaired loans for Indian banks to be around 1-1.5 percentage points higher than the latest reported numbers,” Anbarasu said.

The latest Financial Stability Report by the RBI had said the gross non-performing advances ratio increased to 9.1 per cent from 7.8 per cent between March and September 2016, pushing the overall stressed advances ratio to 12.3 per cent from 11.5 per cent.
Moody’s said given the magnitude of stressed assets in the system, it expects the banks to increase their focus on resolving some of the large problem accounts.

“We expect an increased pace of debt restructuring under various schemes offered by RBI, including the scheme for sustainable structuring of stressed assets (S4A), strategic debt restructuring (SDR) and the 5:25 scheme,” the report said.

“Nevertheless, weak reserving levels and continued pressure on profitability will limit the ability of the banks to proactively resolve problem assets under these schemes,” Anbarasu said.

Icra said a muted level of credit off-take — on the back of weak demand, increasing competition and greater disintermediation — will continue to exert downward pressure on lending rates.

It said the overall capitalisation levels of most of the public sector banks remain moderate to weak, given that they need to attain the regulatory minimum tier-I requirement of 9.5 per cent by March 2019.

The current plan of infusing Rs 45,000 crore during 2016-17 and 2018-19, of which Rs 16,414 crore have already been infused in the current year, is below ICRA’s estimate of capital requirements of Rs 1,50,000-1,80,000 crore.

Source: http://www.business-standard.com/article/finance/npa-woes-to-spill-over-into-next-fiscal-says-moody-s-117010900510_1.html

Over 8,100 wilful defaulters owe Rs 76,685 crore to banks

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Public sector banks (PSBs) have reported 16 per cent rise in number of wilful defaulters at 8,167 who collectively owe them Rs 76,685 crore at the end of March 2016.

Public sector banks (PSBs) have reported 16 per cent rise in number of wilful defaulters at 8,167 who collectively owe them Rs 76,685 crore at the end of March 2016.

As against the previous year, there is 16 per cent rise in wilful defaulters owing over Rs 25 lakh each to 8,167 from 7,031 at the end of March 2015. However, dues to the bank have increased to 28.5 per cent to Rs 76,685 crore in 2015-16 from the earlier Rs 59,656 crore.

To recover loans from such defaulters, banks have filed 1,724 FIRs with a total outstanding of Rs 21,509 crore in 2015-16. The conviction rate in all these cases was only 1.14 per cent.

Last fiscal, banks recovery efforts in such cases yielded Rs 3,498 crore.

There were 129 wilful defaulters who borrowed loans in excess of Rs 100 crore amounting to Rs 28,525 crore from PSBs as on June 30, 2016, Minister of State for Finance Santosh Kumar Gangwar told the Lok Sabha in a written reply.

To bring down NPAs, he said, RBI has formulated guidelines for early recognition of financial distress for recovery from borrowers.

“Before a loan account turns NPA, banks are required to identify stress in the account under three sub-categories of Special Mention Account (SMA),” he said.

Banks are required to report credit information on borrowers having aggregate exposure of more than Rs 5 crore to Central Repository of Information of Large Credits (CRILC), he said.

“As soon as an account is reported by any of the lenders to CRILC as SMA-2, Joint Lenders’ Forum (JLF) is to be mandatorily formed if the aggregate exposure of lenders is more than 100 crore,” he said.

In a separate reply, Gangwar said banks have seized property worth Rs 64,519 crore during 2015-16 as against Rs 54,060 crore in the previous fiscal.

These properties were seized by invoking the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.

Source: http://www.financialexpress.com/industry/banking-finance/over-8100-wilful-defaulters-owe-rs-76685-crore-to-banks/449342/

India’s banking outlook stable, worst asset quality cycle almost over: Moody’s

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India’s banking system outlook is likely to be stable over the next 12-18 months as the pace of formation of bad loans is expected to decrease compared to last five years, global rating agency Moody’s said today. Under the asset quality recognition (AQR) of the Reserve Bank, lenders have recognised a major portion of their non-performing assets (NPAs) or bad loans, it said. “The pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years, especially compared to the fiscal 2015-16, even as we take into account some remaining problem loan under -recognition in a handful of large accounts,” said Moody’s Vice- President and Senior Credit Officer Srikanth Vadlamani.

Aside from these legacy issues, the underlying asset trend for Indian banks will be stable because of a generally supportive operating environment, he added. Moody’s said the stable outlook for the banks over the next 12-18 months reflects its assessment that the system is moving past the worst of its asset quality down cycle. The credit rating firm today released a report — ‘Banking System Outlook — India: Bottoming Asset Cycle, Strong Liquidity Support Stable Outlook’. The agency rates 15 banks in the country that together account for around 70 per cent of system assets. The ratings outlook on 11 of the banks is positive. Vadlamani expects net interest margins (NIMs) of banks to stabilise, given the expectation of limited policy rate cuts over the next 12 months, with an upside risk coming from current changes in portfolio mixes in favour of higher yielding retail loans.

“Credit costs will also remain high for the sector, including for some private sector banks, but will be no higher than in recent years for the industry overall.” Indian banks’ capital strength will continue to show divergence between the weak public banks and the far stronger private lenders, he said. State-owned banks will require significant external infusions of equity capital over the next three years. “For state-run banks to have a credit growth of 12-15 per cent over the next three years, equity capital requirement will be of USD 1.2 trillion,” he said.

The PSU banks have not been able to demonstrate access to the equity capital markets, while the announced capital infusion plans of the Government fall short of the amount required for full recapitalisation, Vadlamani said. “A potential way to bridge this capital shortfall would be to slow loan growth to the low single digits over the next three years,” he said.

Source: http://indianexpress.com/article/business/banking-and-finance/indias-banking-system-outlook-stable-worst-asset-quality-cycle-almost-over-moodys-3039297/

Reserve Bank widens market for sale of stressed assets

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In a bid to improve the sale of bad loans by lenders, the Reserve Bank of India has allowed banks to sell these assets to other banks, non-banking financial companies (NBFCs) or financial institutions. It has also made banks’ boards more accountable for stress resolution.

“Prospective buyers need not be restricted to SCs/RCs (securitisation companies/reconstruction companies). Banks may also offer the assets to other banks/NBFCs/FIs, etc, who have the necessary capital and expertise in resolving stressed assets,” said RBI.

The RBI believes this will lead to better price discovery, and to attract more buyers lenders have been asked to follow the e-auction process. Prospective buyers should also be given a minimum of two weeks for due-diligence and in case the exposure is above Rs 50 crore, then banks need to get at least two external valuation reports.

The head of banking and finance practice with an international advisory firm said while the intent was good, it was more an effort to regularise the process by specifying rules for asset sale. But, instead of leaving it to bank boards to decide on the valuation framework, the regulator could specify the standard policy for asset sale.

To expedite the process, RBI has nudged banks to use the “Swiss challenge method” to sell non-performing loans of recent vintage. Under this method, an entity (bank or lender) that receives an unsolicited bid for an asset or project has to publish the bid and invite third parties to match or exceed it. The entity that submits the unsolicited bid will be allowed to match or better the ensuing best bid.

RBI has decided to restrict banks’ investment in security receipts (SRs) backed by their own stressed assets. This is being done to ensure that there is “true sale of assets,” said RBI.  The central bank has said from April 1, 2017, when SRs’ value is above 50 per cent of the amount of assets sold, banks need to make higher provisioning that should either be the net asset value declared by the SCs/RCs or provisioning as if it was a direct loan. However, from April 1, 2018, the threshold will be reduced to 10 per cent.

These ARCs or SCs will also have the first right of refusal in case they have already acquired a significant share, 25-30 per cent, of the asset.

Lenders have been asked to set up a board for early recognition and sale of assets, which must conduct periodic review at least once a year, and the board needs to be involved in the entire sale process, RBI said.

According to the norms, banks need to adopt a “top-down” process, which means their head offices will be involved in identification of the assets. This is in line with several steps taken by RBI to tackle rising stressed loans, which at the end of the quarter ended June stood at 12 per cent of the total advances.

Source: http://www.business-standard.com/article/finance/reserve-bank-widens-market-for-sale-of-stressed-assets-116090101033_1.html