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Bad loan crisis continues: 56.4 per cent rise in NPAs of banks
George Mathew The Indian Express Published on February 20, 2017
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Bad loans have now shot up by 135 per cent from Rs 261,843 crore in the last two years, despite the Reserve Bank of India announcing a host of restructuring schemes.
Mumbai, February 19: Gross non-performing assets (NPAs), or bad loans, of state owned banks surged 56.4 per cent to Rs 614,872 crore during the 12-month period ended December 2016, and appear set to rise further in the next two quarters with many units, especially in the small and medium sectors, struggling to repay after being hit by the government’s decision to withdraw currency notes of Rs 500 and Rs 1,000 denomination.
Bad loans have now shot up by 135 per cent from Rs 261,843 crore in the last two years, despite the Reserve Bank of India announcing a host of restructuring schemes. Bad loans now constitute 11 per cent of the gross advances of PSU banks, while total NPAs, including those for public and private banks, were Rs 697,409 crore as of December 2016, according to figures compiled by Care Ratings for The Indian Express.
At least five banks have reported gross NPA ratios (ratio of bad loans to total loans) of over 15 per cent. Indian Overseas Bank’s gross NPA ratio is 22.42 per cent, which means Rs 22.42 out of every Rs 100 lent by the bank is classified as a bad loan. UCO Bank has posted an NPA ratio of 17.18 per cent, United Bank of India 15.98 per cent, IDBI Bank 15.16 per cent and Bank of Maharashtra 15.08 per cent, the Care analysis reveals.
“The government needs to chalk out a plan for such banks. Obviously, schemes to tackle stressed assets haven’t worked well. Many banks will miss the RBI deadline to clean up balance sheets by March 2017, with demonetisation now adding to the pressure,” a former chairman of a nationalised bank said.
Efforts of banks to recover bad loans were hamstrung by the redeployment of many staffers to branches in November and December after high-value notes were scrapped.
State Bank of India managed to restrict NPAs to Rs 1.08 lakh crore for the December quarter as compared to Rs 1.06 lakh crore for the September quarter, but the numbers still showed a 48.6 per cent jump from Rs 72,791.73 crore a year ago. However, the bank posted a 134 per cent rise in Q3 net profit. Punjab National Bank and Bank of Baroda reported a decline in NPAs on a sequential quarter basis, but posted a year-on-year rise in bad loans to Rs 55,627 crore (from Rs 34,338 crore) and Rs 42,642 crore (from Rs 38,934 crore) respectively.
SBI, which accounts for almost half of the banking sector’s SME portfolio, said it was working on a scheme to support good small and medium units which were facing problems arising out of demonetisation and the slowdown in the economy. “We are working on the modalities of a scheme for SMEs with turnover up to Rs 25 crore. The scheme will be applicable to SMEs which were making profits, and are now finding it difficult to service their loan repayment or payment schedules,” SBI Managing Director Rajnish Kumar said.
The Reserve Bank has warned that public sector banks may continue to register the highest GNPA ratio and the system-level profit after tax (PAT) contracted on a y-o-y basis in the first half of 2016-17. “Under baseline scenario, the PSBs’ GNPA ratio may increase to 12.5 per cent in March 2017 and then to 12.9 per cent in March 2018 from 11.8 per cent in September 2016, which could increase further under a severe stress scenario,” the RBI’s Financial Stability Report said.
Various schemes announced by the RBI have remained largely on paper. Under the Strategic Debt Restructuring (SDR) scheme, banks were given an opportunity to convert the loan amount into 51 pc equity that was supposed to be sold to the highest bidders, once the firm became viable. “This measure was unable to help banks resolve their bad loan problem, as only two sales have taken place through this measure due to viability issues. It was observed that difficulties in finding buyers and disagreement over valuations were challenges in implementation,” said Care Ratings.
In the case of Sustainable Structuring of Stressed Assets (S4A) scheme, banks were unwilling to grant write-downs as there were no incentives to do so, and write-downs of large debtors could quickly exhaust banks’ capital cushions. The 5/25 scheme was derailed because the refinancing was done at a higher rate of interest so that banks could preserve the net present value (NPV) of the loan amount. There were few disclosures of the accounts getting refinanced under the scheme, and it was perceived that this was a tool deployed by banks to cover NPAs.
In the asset reconstruction scheme, the major problem was that asset reconstruction companies (ARCs) found it difficult to resolve the assets they had purchased from the banks and, therefore, wanted to purchase the loans only at low prices. Consequently, banks were reluctant to sell them loans on a large scale.
The RBI discontinued fresh corporate debt restructuring (CDR) with effect from April 1, 2016. Here, promoters’ equity was financed by the borrowed amount, that added the burden of debt servicing on banks. The CDR cell faced problems on account of delay in the sale of unproductive assets due to various legalities that were involved.
However, a section of experts say banks have reduced NPA levels through write-offs and restructuring, and no clear picture of bad loans emerges if all financial sector players are included.
“If you include Rs 4,00,000 crore write-offs since 2000, then I will say Rs 10 lakh crore is the real NPA,” said K C Chakrabarty, former Deputy Governor, RBI.
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From E-Group, Banking-News
SBI merger may be delayed as banks yet to seek CCI approval
The Moneycontrol Online Published on February 20, 2017
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New Delhi, February 20: The merger of State Bank of India and its associate banks is likely to be delayed further as the PSUs are yet to receive approval from the Competition Commission of India (CCI). While the Union Cabinet had approved the merger last week, an RTI query by The Hindu revealed that the mandatory CCI clearance is yet to come.
Finance Minister Arun Jaitley on Wednesday said the Cabinet has approved the merger of the SBI and its five associate banks: State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT).
“The commission has not given permission for the takeover of subsidiary banks,” the paper reported on Wednesday quoting CCI’s reply to its RTI query.
It also said that these “five subsidiary banks have not sought permission from the CCI either individually or collectively for the takeover.”
When the government had first approved the merger plan in June last year, SBI had hoped that it would complete the merger process in FY17 though last week, SBI Chairman Arundhati Bhattacharya had said the merger is likely to be completed in FY18. She refrained from being more specific.
The merged entity will create a banking behemoth, one-fourth of market share in India’s banking sector (in terms of loans and deposits), with an asset base of about Rs 32 lakh crore from about Rs 23 lakh crore. This is one-fifth the size of India’s gross domestic product (GDP) and more than five times the balance sheet size of ICICI Bank — India’s largest private lender.
“The merger is likely to result in recurring savings, estimated at more than Rs 1,000 crore in the first year, through a combination of enhanced operational efficiency and reduced cost of funds,” Union Cabinet said in its notification.
The merger will boost the number of employees by further 64,000 employees of the subsidiaries making total employee strength of nearly 2.71 lakh from 2 lakh people across 23,899 branches. At present, SBI has about 18,000 branches, including 200 foreign offices spread across 36 countries, and about 62,900 ATMs.
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From E-Group, Banking-News
SBI Group finalises plans for voluntary retirement scheme
George Mathew The Indian Express Published on February 20, 2017
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Mumbai, February 19: With State Bank of India (SBI) in the last lap of merging five associate banks with itself, SBI Group has finalised plans to launch a voluntary retirement scheme (VRS) which could lead to a lower headcount in the number of employees from the total employee base of 73,000 in the associate banks.
The Union Cabinet had last week cleared the merger of five associate banks — State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT) — with SBI. While SBI is yet to provide details of the branch rationalisation plan, an official of SBT has claimed that the merger plan could lead to closure of SBT’s 30 per cent of branches. While the five associate banks have 6,717 branches, SBT has 1,117 branches. “We have information that 204 branches have been identified in Kerala and 59 in Tamil Nadu,” an official said.
In a statement last week, SBI said, “The merger will result in creation of a stronger entity. This will minimise vulnerability to any geographic concentration risks faced by associate banks. This merger is an important step towards strengthening the banking sector.” A formal notification in this regard is awaited from the government wherein the effective date of merger will be indicated, SBI said.
The five associate banks have a total deposit base of over Rs 5 lakh crore and 8,964 ATMs across India.
The boards of associate banks have already approved the VRS plan, but they are yet to notify the number of employees eligible for the VRS, said an SBI official. “In view of the impending acquisition, your bank may consider implementing a VRS for employees as an employment-friendly initiative. The scheme would provide a good opportunity to employees who may genuinely want to retire voluntarily on account of the uncertainties related to possible relocation of job profile post acquisition,” SBI said in a letter to the MD of State Bank of Travancore.
The VRS scheme is open to those staffers who have put in 20 years or have completed 55 years as on September 30, 2016. It has offered ex-gratia amounting to 50 per cent of salary for residual period of service subject to a maximum of 30 months salary.
However, bank unions have said “closure of associate banks by mergers is unwarranted as these banks are in existence for very long in various states” and they have “sound financial fundamentals, commendable financial ratios, well-established branches and serving the people at large in rural, semi-urban and urban centres”. “Associate banks are premier banks in the respective states with sizeable market share and credit deployment to productive sectors. They are immensely financing agriculture, micro-small-medium-large industry, trade, service sectors at the regions and states,” said K S Krishna, general secretary, State Sector Bank Employees’ Association.
He said associate banks have been forced to give excessive provisions for the reason that those loan accounts with the associate banks — even though are standard assets — may be considered as NPA if the same group’s account with SBI is NPA. “When the associate banks made a net profit of Rs 1,700 crore in the half year of FY16, now the banks have been forced to show a loss of Rs 5,100 crore in FY17 half year. The operating profit has risen from Rs 5,000 crore in FY16 to Rs 5,600 crore in FY 17. With the announcement of merger, work in the associate banks has come to a standstill,” Krishna said.
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From E-Group, Banking-News
Banks look for insurance as cyber threats increase
The Press Trust of India Published on February 19, 2017
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The country lost a whopping USD 4 billion in fiscal 2016 to cyber crimes, while globally, the economic loss due to cyber crimes stood at USD 455 billion in 2016.
Mumbai, February 19 (PTI): With instances of cyber threats increasing, the banks, which are increasingly going digital prodded by government and regulators following note-ban, are looking for cyber insurance — a fledgling industry vertical for general insurers but having large growth potential. The country reportedly lost a whopping USD 4 billion in fiscal 2016 to cyber crimes, while globally, the economic loss due to cyber crimes stood at USD 455 billion in 2016.
According to insurance industry reports, cyber crimes are growing at 40-50 per cent annually globally. Similarly, global cyber risk insurance premium stood at USD 3.5 billion in 2016, which was only USD 2.5 billion in 2015, amply indicating growing incidents of cyber crimes across the world. The country’s largest lender, State Bank of India, which fell victim to cyber frauds late last year, is now considering insurance to protect its over 30 crore customers.
“As we are now planning to take cyber covers for our customers, we have already asked one of the companies which are on the bank’s panel of insurance advisers to prepare a report for us in this direction,” SBI Managing Director Rajnish Kumar told PTI.
Similarly, Bank of Baroda, which had seen about 1 lakh of its debit cards being compromised in the recent episode, is also keen to go for such insurance covers in future. “We are here to ensure protection of our customers and hence we will definitely go for cyber insurance cover as and when it was required for the bank,” BoB Managing Director P S Jayakumar said.
While private sector lender Axis Bank is reported to have taken cyber insurance cover from HDFC Ergo, as many as 20 state-owned lenders are seriously in talks with insurers to get cyber insurance cover. The city-based private lender did not respond to text messages seeking for confirmation. General insurers also see a rise in demand for cyber risk insurance.
“We are in talks with quite a few banks to provide cyber insurance cover to them,” New India Assurance Chairman G Srinivasan said without divulging any details. “Cyber threat is on the rise in recent times for the banks and therefore they must go for cyber insurance cover,” Srinivasan said.
Bajaj Allianz General Insurance Chief Technical Officer for non-motor business, Sasikumar Adidamu, said cyber insurance has seen close to 20 per cent rise at Bajaj Allianz in the current fiscal. He also said that in-line with rising incidents of cyber threats, the industry has seen a 10-15 per cent uptake of cyber liability covers. Insurance brokers are sensing good business here too.
“We are in talks with around 20 state-owned banks which are seriously looking for cyber insurance cover. But no deal has been materialised so far,” Anand Rathi Insurance Brokers Director Supriya Rathi said. “We are looking for completing the cyber insurance deal at around Rs 20-25 crore by the next fiscal year and Rs 50 crore within next couple of years,” she added.
Apart from Anand Rathi Insurance Brokers, Aon Global and Marsh are the two insurance brokers which are also active on the space in the domestic market. The insurance brokerage charge for cyber cover for banks may go as high as up to 12.5 per cent of the premium underwritten. Surprisingly, the industry base for cyber insurance in the country is currently at Rs 60 crore only. Non-life insurers that provide cyber insurance cover include New India Assurance, National Insurance, ICICI Lombard, Tata AIG, HDFC Ergo and Bajaj Allianz.
Notably, between September and October last year, the domestic banks faced their worst breaches of financial data, as 3.2 million debit card customers of leading banks were hit by data theft where their debit card details were compromised. Several victims had even reported unauthorised use of their card from far away locations in China.
The worst-hit banks were SBI, HDFC Bank, ICICI Bank, Yes Bank and Axis Bank, which originated with data theft from Yes Bank machines. Banks either had to replace or ask users to change the security codes of many customers. Even though SBI didn’t suffer any big financial losses due to the data compromise episode, still as a precautionary measure, it had blocked 6 lakh debit cards.
Some of the features covered by cyber insurance include data loss, business interruption due to data loss, notification cost, regulatory penalties, forensic investigation and audit costs. Globally there are three main reinsurers active on the space for cyber insurance.
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From E-Group, Banking-News
Banks refuse to accept scribbled currency
Manish M, The Times of India Published on February 20, 2017
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Visakhapatnam, February 19: Having borne the brunt of cashless days during November and December, Ramana Murthy, a resident of Siripuram, was a happy man to have received the Rs 2,000 notes without much hassle from ATMs during the last one month. However, his happiness didn't last much long as he unfortunately received a Rs 2,000 note, which had a scribbling on it. Murthy said he hasn't been able to exchange that currency note as neither banks nor any vendors are accepting it.
Even the vendor, with whom he was arguing at Siripuram said, "We are not taking any currency notes with scribbling on them as banks are not accepting such currency notes. Even the distributors of goods are not taking them from us." According to bank sources, the menace of scribbled notes has been continuing for a long time. However, an official said, "It has reduced a lot since the new notes were released into the market. But, it may return after some more time."
Ramana Murthy's is not the only case. According to bank sources, several people have been turned away with notes, which have scribbling on them. Incidentally, even a whatsapp forward has been doing the rounds stating that scribbled notes will not be taken by bank officials. Two bank officials, who requested anonymity, however confirmed that many of the banks were turning away customers, who were handing them notes with marks on them. "The RBI has a clean note policy and it is being enforced strictly by banks ever since the new notes of Rs 500 and Rs 2,000 were introduced. There is no official instruction that we have received to reject such notes," a senior bank official said, who however added that customers should prefer to keep the notes clean.
"Earlier, we used to accept notes with writing on them, but we are not taking them now because of instructions, which have said that only clean notes have to be accepted," said another banker. However, according to a press release issued by the Reserve Bank of India (RBI) on December 14, 2015, "The Reserve Bank of India has today denied having issued a communication circulating on social media alerting members of public that banks will not accept currency notes with scribbling on them from January 1, 2016."
It further states, "The Reserve Bank has reiterated that all currency notes issued by it are legal tender and banks and members can freely and without fear accept them in exchange for goods and services." However, the release also said, "The Reserve Bank has stated that in pursuance of its clean note policy, it keeps requesting banks and members of public not to write on the currency notes as writing defaces them and reduces their life."
The Reserve Bank of India has denied having issued a communication circulating on social media alerting members of public that banks will not accept currency notes with scribbling on them from January 1, 2016
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From E-Group, Banking-News
Sale of bad loans to ARCs hit for second year running
Radhika Merwin The Business Line Published on February 20, 2017
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But lifting the cap on single ownership is likely to improve sale in the coming years
Mumbai, February 19: Sale of bad loans to Asset Reconstruction Companies (ARCs) that had gained considerable momentum four years ago has halved over the past two years. From about Rs. 50,000 crore in 2013-14 and 2014-15, bad loans sold by banks to ARCs have fallen to Rs. 20,000 crore in 2015-16 and slipped further to Rs. 15,000 crore in 2016-17.
The RBI demanding a higher down payment and the ARCs stretching themselves thin on capital have been the main reasons.
Pricing logjam
The primary task of the ARCs is to acquire, manage and recover bad loans. After a lacklustre beginning, banks started aggressively offloading their bad loans to these companies in 2013-14, lured by better pricing. This was thanks to deals done through the ‘security receipts’ (SR) route. Instead of taking an upfront cash payment, banks were willing to accept delayed payment in the form of SRs. ARCs made a down payment of a minimum 5 per cent of the agreed value and the balance 95 per cent was redeemed against the SR, when the amount was finally recovered.
In August 2014, the RBI tweaked the rules and increased the upfront payment to be made by ARCs from 5 per cent to 15 per cent. This has impacted the returns for ARCs, which until then were able to make an internal rate of return (IRR) of 20-22 per cent on their investment.
The issue of insufficient capital also became more pronounced after the RBI’s directive on higher down payment. Being a capital intensive business, ARCs have not been able to take on bad loans from banks at an aggressive pace.
There are about 21 ARCs currently with an aggregate capital of just around Rs. 4,000 crore. The bad loans in the banking system, on the other hand, are over Rs. 6.5 lakh crore.
On the mend?
But, one of the proposals in the 2016-17 Budget that recently came into effect seeks to ease capital raising for ARCs.
One of the main reasons for investors shying away from infusing capital into ARCs was the cap on single ownership. Earlier, no single investor could hold more than 49 per cent. Inability to have a controlling stake in the business led to tepid investor interest.
But, the recent amendments, which allow a sponsor or promoter to hold up to 100 per cent have offered some respite to the ARCs.
“Edelweiss ARC has increased its capital from about Rs. 200 crore to over Rs. 800 crore. We have also tied up with CDPQ, one of the large pension funds in Canada for investment in stressed/distressed assets in India. Aggregate funds available for investment will be about Rs. 12,000-14,000 crore over the next 3-4 years,” says Siby Antony, MD & CEO, Edelweiss ARC.
PARA quick fix
The Economic Survey highlighted that the ARCs have found it difficult to recover much from debtors and the issue can be resolved by creating a ‘Public Sector Asset Rehabilitation Agency’ (PARA). The new entity can eliminate most of the obstacles currently plaguing loan resolution.
But industry players disagree. “I don’t think a public sector ARC can improve the recovery process substantially. But given that the Centre does not have sufficient funds to recapitalise PSU banks, its choices are limited,” says Nirmal Gangwal, Managing Director, Brescon Corporate Advisors, a corporate debt restructuring advisory firm.
He adds that allowing banks a second time restructuring for the next two to three years may be a better option. But economic recovery will be critical for this to work.
Antony feels that things could change for the better for ARCs soon. “It is wrong to gauge the success of ARCs based on past data, when dead assets were sold to ARCs as a last resort of recovery. Besides, pricing of such assets was not given due importance. With significant skin in the business by ARCs, pricing is critical, “ he adds.
Further, with the Bankruptcy Code in place, the resolution process is expected to smoothen. “I believe SR redemption for new assets will be more than 100 per cent,” says Antony.
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From E-Group, Banking-News
Urjit Patel takes fresh guard, changes stance
Manojit Saha, The Hindu Published on February 20, 2017
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The RBI’s latest bimonthly policy saw its Governor reassert the central bank’s monetary independence
Mumbai, February 19: “Urjit is his own man,” former Reserve Bank of India (RBI) Governor Raghuram Rajan once said of his successor. Dr. Rajan had entrusted Urjit Patel, who was a Deputy Governor then, with the task of devising a framework to make the monetary policy a lot more transparent and modern.
While Dr. Rajan impressed everyone from the word go, things were different for Dr. Patel. Within two months of his taking charge as the 24th Governor of the RBI in September, the government stumped everyone by announcing the withdrawal of the ₹500 and ₹1,000 notes. It was an exercise where the decision was taken in New Delhi but its implementation fell on mandarins at Mint Road – where the RBI’s Mumbai headquarters is located. It was a mammoth exercise – as more than 86% of the total currency in circulation was rendered invalid at one go.
Dr. Patel drew flak from all quarters over the poor implementation of the entire demonetisation exercise. Also, Dr. Patel came under intense criticism for his perceived silence.
Former Finance Minister P. Chidambaram said at the time that Dr. Patel had failed to handle the demonetisation exercise well. He had opined that the Governor of RBI did not handle the issue as an independent autonomous institution ought to have.
During the first 50 days of the demonetisation drive, it was fairly routine for the finance ministry officials to brief reporters on the upcoming norms in the morning, circulars for which were subsequently issued by the RBI late in the evening.
In January, the association representing employees and officers of the RBI wrote to Dr. Patel urging him to uphold the central bank’s autonomy amid allegations that the government was undermining it. Former central bankers also joined the chorus. Y.V. Reddy, who headed the RBI between 2003 and 2008 and had since largely avoided any public comment on the central bank’s affairs, told a private television channel that he would have resigned had he been overruled and asked to implement demonetisation against his advice.
Boosting morale
At stake was the central bank’s pride of being an independent and autonomous institution. Dr. Patel, appears to have opted to use the February bimonthly monetary policy review as the opportunity to set the record straight.
This the RBI did, surprising most market participants, by changing the rate action narrative for good by explicitly stating that monetary policy no longer remained ‘accommodative’ and that the stance had now become ‘neutral’. This means the RBI is now open to raising interest rates.
With retail inflation slowing to its lowest level in more than two years and the Finance Minister ’s Budget resolve to maintain fiscal discipline, many saw a rate cut as a done deal. However, Dr. Patel and other members of the Monetary Policy Committee thought otherwise.
The bond market reacted with the yield on the 10-year benchmark sovereign paper shooting up 32 basis points after the policy was announced and the narrative changed. (100 basis points make 1 percentage point.)
“We expect January inflation to mark the trough,” Sonal Verma, research analyst with Nomura, wrote in a report. The RBI is clearly looking beyond just the short-term inflation trajectory and taking into account what could happen 6-8 months down the road.
Dr. Patel also acted to silence criticism over the charge of lack of planning on the part of RBI. With remonetisation well under way, RBI gave specific timelines in advance as to when the cash withdrawal limits would be eased and when they would be completely lifted.
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From E-Group, Banking-News
E-payments, digitisation: Why is the govt muddying the waters once again?
R N Bhaskar The Firstpost Online Published on February 20, 2017
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E-payment and digitisation are good concepts to be pursued. But they require clear and long-term policy planning. Duplication of authority should be avoided. And the simpler and more straightforward the norms, the better.
The government appears to have thrown all these principles to the winds.
A couple of days ago, the Reserve Bank of India (RBI) released draft norms seeking to overhaul the merchant discount rates (MDRs) for e-payment players. The idea is laudable. It wants to make such transactions cheaper and more popular among smaller merchants.
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