Pace of new bad loan formation has decelerated: RBI

by | posted in: Corporate Updates, Economy, Business Updates, Corporate Affairs | 0

RBI Deputy Governor S S Mundra today said the pace of formation of new non-performing assets (NPAs) or bad loans has decelerated although some banks have posted losses for the first quarter of the current financial year due to higher provisioning.

He also said most of the banks are adequately capitalised and the government has promised additional capital if they require.

In a bid to shore up cash-strapped public sector banks, the government last month announced infusion of Rs 22,915 crore capital in 13 lenders including SBI and Indian Overseas Bank to revive loan growth that has hit a two-decade low.

As far as bad loans are concerned, he said, they are showing a mixed trend.

“When I look at individual results, there are number of banks for whom it appears that the worst is over but then there are other banks…still they are in middle of it and they would need to do some work before they get out of it,” he said.

“It would be naive to believe that there won’t be any NPA formation but the pace of new NPA formation has clearly decelerated, that is what the major trend is,” he added.

Gross NPAs of the public sector banks had surged from 5.43 per cent (Rs 2.67 lakh crore) of advances in 2014-15 to 9.32 per cent (Rs 4.76 lakh crore) in 2015-16.

As per the latest Financial Stability Report by RBI, the Gross NPA ratio for public sector banks may go up to 10.1 per cent by March 2017 under the baseline scenario.

Many banks including Bank of India, Dena Bank, and Central Bank of India, reported losses for the quarter ended June 30, due to a sharp jump in provisions for NPAs on account of an asset quality review mandated by the RBI in December.

Talking about the recapitalisation, Mundra said the Finance Minister has indicated that if there is a need the government would be ready to provide additional capital.

“So, as far as the present situation is concerned I think most of the banks are adequately capitalised to take care of minimum regulatory requirements. We will keep a watch. As we move into the year we will see how things pan out,” he said.

On controversial virtual currency bitcoin, Mundra said: “This entire area fintech as we mentioned…you should not be stifling the innovation. Be mindful and what they call as regulator sand marks means you allow some of the experiments to happen under the control conditions so that the positive or the negative fallouts can be well understood and calibrated.”

Source: http://economictimes.indiatimes.com/articleshow/53825048.cms

 

Parliament passes bill for easier debt recovery

by | posted in: Corporate & Business Advisory Services, Corporate Updates, Economy, Business Updates, Corporate Affairs | 0
Parliament today passed a bill which empowers banks to confiscate security in the case of loan default, a development that assumes significance in view of the episode surrounding industrialist Vijay Mallya.
The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, will not, however, apply to loans for agricultural land as well as student loans.
The bill, approved by Lok Sabha last week and cleared by Rajya Sabha today, amends four laws — Sarfaesi Act, DRT Act, Indian Stamp Act and Depositories Act. Replying to a debate on the bill, Finance Minister Arun Jaitley emphasised the need for “firmness coupled with fairness” in recovering bad loans. He said the banks must be empowered to take effective legal action against defaulters and the insolvency law, securitisation law and DRT law are steps in that direction.
“So far the laws were in favour of the defaulters. We tried to correct the balance. There should be firmness, coupled with fairness in recovery of loans,” he said. He said banks should take a “compassionate view” on education loan defaults but there will be no waiver and somebody will have to pay. The Minister further said that fears regarding farm and education loans are “exaggerated”.
Jaitley said banks are supposed to give loans and “if banks start squeezing loans”, there will be no economic growth.
“The cause of worry is when loan becomes either NPA or stressed asset or the activity in which the loans are invested is not generating money,” he said adding in some cases there will be willful default.
The development assumes significance as it comes against the backdrop of the episode involving Mallya, who owes Rs 9,000 crore to banks, but has left the country to take refuge in England.
Jaitley said if loan has been taken it must be repaid. The Minister said stressed assets were mostly in sectors such as steel, power and textile.
The law simplifies the procedure which ensures quick disposal of pending cases of banks and financial institutions by Debt Recovery Tribunal (DRT). DRTs will have to dispose a case in 180 days and the affected party will have to deposit 25 per cent of the amount if he or she chooses to appeal against the order.

There are around 70,000 loan related cases pending in the DRTs. To further stress his point, he said 20 people sitting on bank money prevent the lender from giving credit to another 20,000 people. It should not happen that a bank manager has to keep awake all night after he clears a loan, he said.

Source : http://www.moneycontrol.com/news/economy/parliament-passes-bill-for-easier-debt-recovery_7238101.html?utm_source=ref_article

Stressed asset business ready to take off

by | posted in: Corporate & Business Advisory Services, Corporate Updates, Economy, Business Updates, Corporate Affairs, India & International - Corporate updates | 0

Companies in the distressed assets business have patiently waited for close to a decade to strike gold but got regularly sidestepped by banks that won’t part with their lemons at a reasonable rate.

The wait could come to an end soon, as the burgeoning bad debt burden and their humongous provisioning requirement is putting capital-starved banks in serious jeopardy, with no resolution in sight. The word has spread, bringing in its wake an army of globally savvy vulture funds that are sweeping down to get a chunk of the share.

These investors have ready cash and the government is on their side, allowing the sponsors to hold 100 per cent in a fund, and arming them with the Bankruptcy Code that would give the firms and banks power to wind down a company in mere 180 days, say sector watchers.
Banks, though, are still resisting, sometimes with such unreasonable demands like asking for 100 per cent of the principal amount or more, to offload the bad debt. But, experts say, unless banks become experts in recovering their dues themselves, the lenders won’t be able to hold for long.

“Banks have to offload the bad debts in the market but it remains to be seen how the market emerges,” said Birendra Kumar, managing director (MD) of International Asset Reconstruction Co.

Following the Reserve Bank’s (RBI’s) asset classification norm, a bank has to categorise a stressed loan as a loss and provide an amount equal to it on their books if it remains so for more than three years (provisions increase progressively from 15 per cent to 25 per cent, 40 per cent and then 100 per cent, depending on the age of the bad debt).

“Banks know they can hold the assets for one or two years only. After three-four years, they will have to get rid of it anyway. Otherwise, they not only incur heavy provisions; the assets also lose their viability,” said Siby Antony, MD at Edelweiss ARC.

Bad debts in Indian banks have worsened progressively in the past few years and are now at about Rs 6 lakh crore, up from Rs 4.5 lakh crore in December 2015 and Rs 2.52 lakh crore in December 2013. In the interim, the minimum provisioning requirement has gone up from five per cent to 15 per cent, and capital infusion by the government is not even enough to cover the total capital erosion that banks have witnessed.

TIME TO CLEAR DEBTS
  • Banking sector NPA stood at Rs 5.94 lakh crore in March 2016
  • There are 15 asset reconstruction companies in India; 10, or more  applications awaiting approval
  • RBI directed asset reconstruction companies to pay 15% in cash and rest in security receipts
  • Experts predict emergence of  cash deals
  • Recently, Brookfield and SBI floated $1-billion stressed funds
  • The govt has also directed banks to float distressed funds
  • Bankruptcy Code will give more teeth to recovery

While it is true that Indian banks have managed to recover and upgrade some of the loans, this is not even 15 per cent of the total stress. And, much of the book clean-up has been done by selling the assets to asset reconstruction companies (ARCs).

Typically, ARCs issue security receipts (SRs) to banks and pay about 15 per cent of the asset price upfront. They then act as an agent for banks to recover the dues, earning a spread. ARCs can also buy assets upfront and recover the dues for themselves but that is hardly followed in India. However, this practice could change, with distress funds from round the world setting up shop in India with a deep pocket, ready to buy assets in all-cash deals. According to Birendra Kumar, banks are now reluctant on selling assets on SR basis, as it takes years to recover the due, but the cash discounts offered by the banks is not good enough to attract buyers of stressed assets.

“It would continue to be a mix of SRs and cash. Global players would generally prefer to buy on cash basis, and banks in such situations will have to offer a higher discount,” said Kumar.

According to various estimates, in India, banks sell stressed assets at not more than a 40-45 per cent discount. In the case of a cash deal, globally the practice is to sell assets at not more than 25-30 per cent of the value. “The current size of the ARC industry is a matter of conjecture, given the lack of authoritative data. However, based on the agency’s discussions with market participants, it is understood that SRs are outstanding to the tune of Rs 60,000 crore, backed by NPAs (non-performing assets) close to Rs 1 lakh crore as at end-March 2016,” says a report from India Ratings (Ind-Ra).

About 71.4 per cent of the SRs rated by Ind-Ra belong to the small and medium enterprises segment. Large corporates constitute 9.6 per cent and retail (individuals) account for 19 per cent.So far, 15 ARCs have been given a licence by RBI and at least 10 more are pending with the central bank. Global vulture funds and stressed fund specialists like JC Flowers & Co, Eight Capital Management LLC, SSG and KKR are partnering with domestic firms such as Ambit Holdings, Piramal, etc, for the ARC business. Besides, Brookfield Asset Management, a stressed funds specialist, in partnership with the country’s largest lender, State Bank of India (SBI), is floating a fund to take advantage of the distressed market. The Brookfield-SBI venture has committed $1 billion to start with, underscoring the market’s potential.

Meanwhile, the existing ARCs continue to suffer from lack of capital and the stipulation that assets can be purchased only after paying up at least 15 per cent upfront. This has limited their ability to take large exposure.

“The challenges the older ARCs face are inadequate capital and specialist management expertise to drive turnarounds of acquired stressed assets. The ARC industry has capital of $400-500 million, with the total of stressed assets in the banking sector estimated to be $130 billion,” said Nikhil Shah, the MD at Alvarez & Marsal India, a turnaround specialist. Shah says the new funds that are coming to India will change the game in favour of asset resolution.

“The older ARCs have not demonstrated capability in reviving acquired stressed businesses. The new entrants are expected to be more aggressive in implementing measures like management changes and deploying significant primary capital in the businesses to improve value,” he added.

“The Bankruptcy Code, with its time-bound resolution, will provide ARCs and stressed assets funds more teeth to execute changes in a shorter time frame.”

However, Antony of Edelweiss ARC does not believe the new stressed fund managers would do something drastically different. “With the new relaxation in the Budget, where the government allowed sponsors to hold up to 100 per cent stake in an ARC and allowing 100 per cent foreign direct investment in ARCs via automatic route, the capital issue of ARCs have been addressed,” said Siby of Edelweiss, adding the legal structure is also getting fixed and that will allow stressed funds to grow exponentially. Now, if only banks would listen to reason and lower their prices for stressed funds, a flurry of activity in India’s stressed assets market would become the norm.

 

Source: http://www.business-standard.com/article/finance/stressed-asset-business-ready-to-take-off-116072801716_1.html

India must activate ‘stalled engines’ to sustain 7.6% growth: World Bank

by | posted in: Corporate Updates, Economy, Business Updates, Corporate Affairs, India & International - Corporate updates | 0

India will maintain its growth rate of 7.6 per cent GDP growth in 2016-17, which would accelerate to 7.7 per cent in 2017-18 and 7.8 per cent in 2018-19, the World Bank said on Monday.

 

But for this, India will need to “activate the stalled engines”, including agricultural growth and rural demand, trade and private investment, while ensuring demand from urban households and public investments.

 

In its report ‘India Development Update- Financing Double Digit Growth’, the World Bank said the economy’s potential growth rate is about 7.4 per cent to 7.5 per cent.

 

“The outlook for the coming year is favourable and robust,” said Frederico Gil Sander, Senior Country Economist, World Bank, and main author of the report.

 

The report, also prescribed means for India to attain the elusive double-digit growth. This would depend on various factors, including higher participation of women in the labour force, productivity growth such as business environment reform agenda and GST as well as a pick-up in private investment.

 

The World Bank’s forecast is however, not as optimistic as the Finance Ministry that is eyeing 8 per cent growth this fiscal after 7.6 per cent growth last fiscal.

 

However, Onno Ruhl, Country Director, World Bank (India), said improved global prospects would also be necessary for double-digit growth in the domestic economy.

 

The report also warned that near-and medium-term risks stem from the banking sector and “its ability to finance private investment which continues to face several impediments in the form of excess global capacity, regulatory and policy challenges, in addition to corporate debt overhang”.

 

It has also suggested two key reforms in the financial sector — accelerating the ongoing transformation of banks to become more market oriented and competitive; and also to address the problem of non-performing assets (NPAs).

 

“India’s financial sector has performed well on many dimensions and can be a reliable pillar of future economic growth,” said Sander.

 

RBI top-level changes

 

While urging for more reforms in the banking sector such as giving fresh capital to banks for governance reforms or giving them tools to manage stress in their balance sheets, the World Bank declined to comment on the impact the top-level change at the Reserve Bank of India (RBI) will have on these measures.

 

“We respect the RBI Governor’s decision to return to academia. India has a long history of sound macro-economic policy making and effective and conservative supervisor. There is no reason to expect that it will change,” said Ruhl when asked whether the decision by RBI Governor Raghuram Rajan to not seek a second term would impact banking reforms.

 

Source: http://www.thehindubusinessline.com/todays-paper/tp-news/india-must-activate-stalled-engines-to-sustain-76-growth-world-bank/article8753219.ece

Cash crunch: How customers came to owe banks more than what they were loaned

by | posted in: Corporate & Business Advisory Services, Corporate Updates, Economy, Business Updates, Corporate Affairs | 0

More than a thousand borrowers have outstandings that are substantially larger than the amounts sanctioned to them by banks, data sourced from Reserve Bank of India (RBI) shows. The total outstandings of 1,131 borrowers, at Rs 1,09,909 crore, were 150% more than the amount sanctioned, as on March 2016, data accessed by FE reveal. At the end of December 2015, the outstandings were Rs 90,235 crore.

Bankers and ex-bankers that FE reached out to attributed the pile-up in outstandings to short-term requirements of borrowers that were met by banks to help them tide over a cash crunch. Overdue interest, they said, could be another cause for the high outstandings. One senior banker observed that there were occasions when the capacity of the borrower to repay the additional amount was not assessed properly. “At times, limits get exceeded without a proper assessment of the customer’s ability to service the loan,” he said.

A former executive director of a public sector bank said one reason for the actual outstanding exceeding the permitted limits was that lenders tended to sanction ad hoc non-funded letters of credit (LC) even before the limits were okayed by the consortium. “Sometimes ad hoc LCs are opened for amounts which are bigger than those agreed to by the consortium. Since consortiums take anywhere between six months and a year to sanction limits, the money is disbursed since business cannot wait,” he explained, adding that such loans serve as working capital.

A former chairman of a state-owned bank said if the customer was unable to service the loan, the interest piled up pushing up the outstanding amount. “If the interest hasn’t been paid for three or four years, the amounts can become large,” he pointed out.

An RBI document on the Central Repository of Information on Large Credits notes that if outstanding loans exceed 150% of the limit, a “warning message should be displayed to the user on generation of the instance document”.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, observed the main reason for the outstandings surpassing the sanctions was “temporary accommodation and loans against receivables”.

Parekh explained that at times borrowers approached banks for funds to be able to take delivery of imports. “The customer promises to pay back the amount from receivables so bankers do accommodate such requests,” he said.
Total non-performing assets (NPAs) of the banking system stood at Rs 5.8 lakh crore at the end of March 2016 and total provisions were Rs 1.43 lakh crore.

The central bank has been trying to help banks tackle bad loans by allowing them to convert debt into equity and more recently into convertible redeemable preference shares. However, banks have not been able to find buyers for any of the assets under strategic debt restructuring scheme.

FE had earlier reported that bank loans that aren’t NPAs just yet but could turn toxic amount to over Rs 6 lakh crore or close to 9% of total advances, citing RBI data. The total troubled loans of Rs 6,24,119 crore at the end of December 2015 were 9% higher than the Rs 5, 73,381 crore at the end of June 2015.

While Rs 3,06,180 crore worth of loans were classified in the SMA-1 category where repayments are overdue between 30 and 60 days, another Rs 3,17,939 crore was in the SMA-2 category where repayments are overdue between 60 and 90 days. These Special Mention Accounts follow a fiat from the RBI in 2014 asking banks to put in place a mechanism to red-flag troubled loan accounts early in the day so that these could be dealt with speedily. If the loan is not serviced after 90 days it must be classified as an NPA.

 

Source: http://www.financialexpress.com/article/industry/banking-finance/cash-crunch-how-customers-came-to-owe-banks-more-than-what-they-were-loaned/285239/

Indian private bank new loans outpace state-owned rivals for first time

by | posted in: Corporate Updates, Economy, Business Updates, Corporate Affairs | 0

India’s privately owned banks are extending new loans faster than their state-run rivals for the first time ever, as government lenders struggle to bring surging bad loans under control.

New credit from private lenders amounted to Rs.3,50,000 crore ($52.4 billion) in the year to 31 March, taking their outstanding advances to Rs.17,90,000 crore, while state banks’ loans grew Rs.2,00,000 crore to Rs.51,20,000 crore, according to a finance ministry document, a copy of which was reviewed by Bloomberg News. Finance ministry spokesman D.S. Malik didn’t respond to two calls to his mobile phone on Tuesday seeking comment.

The stressed-loan ratio for state banks climbed to a 16-year high of 14.34% in the year through March, according to the document. Surging delinquent loans and inadequate risk buffers at India’s government-controlled lenders, which account for more than 70% of loans in the nation’s banking system, have been hindering Prime Minister Narendra Modi’s attempts to revive credit growth in Asia’s third-largest economy.

“Private sector banks will continue to take away market share from state-run banks in coming years,” Siddharth Purohit, a Mumbai-based analyst at Angel Broking Ltd., said by phone. “With limited capital and high bad loans, most state-run banks are not in a position to focus on loan growth.”

The private-sector banks’ faster loan growth is in line with a May 2014 estimate from a central bank-appointed committee, which predicted that the lenders’ share of total Indian banking assets will rise to 32% by 2025, from 12.3% in 2000.

Capital constraints.

Modi needs to revive bank lending as he strives to maintain the fastest growth rate among the world’s major economies. Indian credit grew 9.8% in the 12 months through 13 May, compared with an average of about 14% over the last five years, fortnightly central bank data compiled by Bloomberg show.

Timely capital infusions into constrained public sector banks will aid credit flow, the Reserve Bank of India (RBI) said in its monetary policy statement on Tuesday. Rules requiring government stakes of at least 51% have curtailed state banks’ ability to sell shares, while an audit of loan books by the RBI uncovered more soured debt, making them less capitalized than privately-owned lenders.

While some investors had anticipated the six-month-long central-bank audit, which ended on 31 March, to result in higher non-performing-asset (NPA) disclosures, the scale of losses and statements from bank executives highlighting the uncertain outlook for bad debt have surprised analysts. Thirteen state-owned lenders reported combined losses of Rs.18,000 crore for the year to March, finance ministry data shows.

Government lenders are the worst performers this year on the S&P BSE India Bankex Index, led by Punjab National Bank’s 32% slump and State Bank of India’s 6.4% drop. The gauge has gained 6.1% this year. Bloomberg

Source:  http://www.livemint.com/Industry/a9wEXC7uUXU0HpWgGYJEJM/Indian-private-bank-new-loans-outpace-stateowned-rivals-for.html

To de-stress banks, Modi govt plans ‘significant’ stressed assets fund

by | posted in: Corporate & Business Advisory Services, Corporate Updates, Economy, Business Updates, Corporate Affairs, India & International - Corporate updates | 0

Given the need for large chunks of equity capital to infuse new life into banks’ stressed assets, the government plans a new fund of “significant size” with this mandate, minister of state for finance Jayant Sinha said on Tuesday. A variety of other funds including the proposed National Infrastructure Investment Fund (NIIF) could help bolster the planned stressed assets fund, he added.

“We need an efficient resolution (of the issue of rising stressed assets) and recovery process for our banks,” Sinha said on the sidelines of a conference organised by rating agency Crisil on the deepening of corporate bond markets. He said a committee might be set up to take a look at what kind of haircuts would need to be taken by banks and what their sustainable levels of debt could be. While these could be commercial decisions taken by banks, the government would ensure the process is carried out with integrity, he emphasised.

Many state-owned lenders are facing a tough situation, having reported large losses owing to assets turning sour. Gross non-performing assets in the banking system at the end of March are estimated at Rs 5.7 lakh crore while the provisions set aside by banks in FY16 was Rs 1.43 lakh crore. Total losses of PSBs in FY16 was Rs 17,022 crore.

“We expect a variety of funds — distressed debt funds, special situations fund and NIIF — to participate in the equity investments in these stressed assets,” the minister said. The NIIF, intended to give a leg-up to the country’s efforts to find the elusive equity capital for its huge plans for infrastructure creation, is being set up with an initial corpus of Rs 40,000 crore, half of that from the government, which will remain a minority partner.

The NIIF, which will have several sector-specific sub-funds, is expected to catalyse financing of infrastructure projects by leveraging the corpus multiple times. Many global sovereign wealth funds including the Abu Dhabi Investment Authority, Singapore’s Temasek and Russian Direct Investment Fund have evinced interest in investing in the NIIF. The search for the CEO of the fund has reached the final stage, the minister indicated.

jayant

 

Sinha said: “There are also many other players who are looking to invest in the stressed assets of Indian banks. So we expect that there will be a vibrant market to be able to take these assets that are in need of equity capital right now.” On Tuesday, finance minister Arun Jaitley, on a visit to Japan, pitched for investments in the NIIF to Japanese investors.

While Sinha has indicated the NIIF’s participation in the proposed stressed assets fund, the former’s stated objective has been to maximise economic impact mainly through infrastructure development in commercially viable projects, both greenfield and brownfield, including stalled projects. It could also consider other nationally important projects if commercially viable.

 

Source: http://www.financialexpress.com/article/industry/banking-finance/bank-npas-centre-turns-to-stressed-assets-fund-to-cap-crisis/270598/