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Banking News 21.07.2017

Currency Circulation post Demonetisation

now reaches 84%: SBI report


Komal Gupta, The Mint

Published on July 21, 2017



New Delhi, July 20: Eight months since the shock demonetisation of high-value currency notes, the new printed currency in circulation has reached close to pre-demonetisation levels at 84%, State Bank of India (SBI) said in a research report on Wednesday.


“As on July 7, 2017, the newly printed currency in circulation (CIC) has reached 84% of the extinguished one (CIC at 86% of pre-demonetised levels).


In addition, cash on hand with banks, a CIC component has now declined to 5.4% of the former (from the peak level of 23.2% in Nov’16),” said the report titled ‘Demonetisation and Cash efficiency’, authored by Soumya Kanti Ghosh, group chief economic adviser, SBI.


Currency in circulation consists of two components, currency with public and cash on hand with banks. With the decline in cash in hand with banks, the currency with public has been showing a steady increase, said the report.


The report states that the non-availability of lower denomination notes in ATMs might be due to the cash on hand with banks.


“Historical trends suggest that cash on hand with banks is roughly 3.8% of CIC and currently it is at 5.4%. This means at least an additional amount of 1.6%/ Rs25,000 crore of excess currency may be currently lying in ATMs, and these could be precisely because of such reasons, like non-availability of Rs100 notes,” added the report.


It thus highlights the importance of new Rs200 notes which could serve as the missing middle. An incremental Rs2.5 trillion of notes in value terms are still to be replenished (3 -4 billion pieces of Rs500 notes have not been printed) if we replenish the entire demonetised stock.


Herein lies the importance of new Rs200 notes for which the Reserve Bank of India (RBI) has recently put orders, said the report. The RBI is expected to introduce Rs200 notes in the coming months to ease pressure on lower-denomination currencies that are in short supply.


The new notes of Rs200 should be out before the end of 2017 and will greatly help in narrowing the demand and supply gap in smaller-denomination currency bills, said a Press Trust of India story. Last year in November, the government had demonetised the old Rs500 and Rs1,000 notes.



From E-Group, Banking-News



Fake notes worth Rs 11.23 crore detected since

demonetisation, Arun Jaitley tells Parliament


The Scroll Online

Published on July 20, 2017



New Delhi, July 19: Finance Minister Arun Jaitley on Tuesday said fake currency worth Rs 11.23 crore had been detected since demonetisation, PTI reported.


Citing data from the National Crime Records Bureau, the minister said in Parliament that 1,57,797 fake currency notes had been detected from 29 states.


Jaitley also said that the Reserve Bank of India had issued circulars regarding the detection of fake currency, to help banks detect and report such notes.


He also stated that banks have been instructed to display design and security features of all bank notes prominently at branches, to educate the public.


In his written reply to a query, the finance minister said the RBI has launched a mobile application that allows users to see the features of the new Rs 500 and Rs 2,000 notes. Users can also check the authenticity of these notes, using this app.


The government, in a surprise move, had scrapped currency notes of Rs 500 and Rs 1,000 denomination on November 8, 2016.



From E-Group, Banking-News



Jaitley to launch pension scheme

for senior citizens today


The Business Line

Published on July 21, 2017



New Delhi, July 20:  Finance Minister Arun Jaitley will, on Friday, launch the Pradhan Mantri Vaya Vandana Yojana (PMVVY), a pension scheme exclusively for senior citizens aged 60 years and above.


The PMVVY, which is available from May 4, 2017 to May 3, 2018, can be purchased offline as well as online through Life Insurance Corporation of India.


The scheme provides an assured return of 8 per cent per annum payable monthly (equivalent to 8.30 per cent per annum effective) for 10 years. It is exempt from service tax/GST.


LIC has been given the sole privilege to operate the scheme.


Under the PMVVY, pension is payable at the end of each period, during the policy term of 10 years, as per the frequency — monthly, quarterly, half-yearly or yearly — chosen by the pensioner at the time of purchase.


On survival of the pensioner at the end of the policy term of 10 years,the purchase price along with the final pension instalment will be payable, an official release said.


Loan up to 75 per cent of the purchase price will be allowed after three policy years (to meet the liquidity needs). Loan interest would be recovered from the pension instalments and loan to be recovered from claim proceeds, the release added.


Also, the scheme allows for premature exit for treatment of any critical terminal illness of self or spouse. On such premature exit, 98 per cent of the purchase price would be refunded. On death of the pensioner during the policy term of 10 years , the purchase price will be paid to the beneficiary.



From E-Group, Banking-News



Reliance Jio to lose Rs 7000 crore if IUC not

 replaced by BAK; Bharti Airtel 40 pct of profits


Editorial: The Financial Express

Published on July 21, 2017



Even though RJio offers voice calls to its customers for free, it pays around Rs 6,000-7,000 crore a year to other telcos for this. Since it costs telcos money to set up and run a network, each incoming call pays an Interconnect Usage Charge (IUC), currently 14 paise per minute, for using this. Over time, if Operator A and B have as many calls going to each other’s networks, the IUC becomes zero. That is the genesis of Bill and Keep (BAK) and while RJio wants BAK, incumbent telcos like Airtel and Vodafone say that even when Trai had talked of BAK in 2011 and 2015, it has said this would happen only when traffic was roughly symmetric.


In FY17, market leader Airtel earned a pre-tax profit of around Rs 7,700 crore—BAK would mean this falling by around Rs 2,300 crore from RJio and around Rs 1,000 crore from other players; on the other hand, BAK would lower RJio’s costs by Rs 6,000-7,000 crore. Since no operator is going to sit by and see revenues collapse, BAK means Airtel/Vodafone/Idea must either start charging customers for incoming calls or hike rates for outgoing ones—either will spell disaster in a market as competitive as it is today.


Not surprisingly, the battle between the two sides is quite bitter. RJio has accused the incumbents of taking an extra Rs 1 lakh crore from subscribers over the last five years— and that’s the present value of the money. RJio’s presentation says ‘Operator 1’, presumably Airtel, took Rs 9,378 crore extra from subscribers in FY17— that’s significantly greater than its pre-tax profits of Rs 7,723 crore, suggesting the incumbents’ already poor RoCE would collapse if BAK was introduced.


RJio’s maths assumes the IUC should be zero, based on Trai saying, in 2011, that it felt traffic would be fairly symmetric in two years, at which point BAK could be introduced. But, the incumbents argue, with RJio’s free calls, the asymmetry has only risen. While the regulator needs to take a call on whether to use IUC or BAK—or what the IUC should be—this can only be done with a cool head, not by competing power-points; the two sides are making such diametrically different points, it is difficult to believe they are describing the same universe. In order to do that, SC must clear all cases pertaining to IUC—some go back to 2006—and decide whether TDSAT can even examine Trai’s IUC ruling; in 2010, TDSAT had said IUC had to take into account capex costs but Trai had challenged its jurisdiction. And while RJio talks of needing to move to BAK, Airtel’s presentation talks of it spending over Rs 40,000 crore in just buying voice spectrum—if you assume a 15% interest plus amortisation, based on the number of minutes an Airtel gets on its network, that means a 4.5 paise IUC needs to be allocated for spectrum costs alone; in 2015, Trai had allocated 0.79 paise for this. Given the amazing complexity, and sensitivity to even one number going a bit wrong, Trai has to make public its model for determining IUC so that telcos can argue it threadbare. The exercise also requires a discussion on whether BAK will hurt, as the incumbents argue, rollout in rural and other areas/segments that have more incoming than outgoing calls.



From E-Group, Banking-News



The debt threat lurking behind

India's zombie power plants


The Economic Times

Published on July 21, 2017



Mumbai, July 20 (Reuters): In the central Indian village of Raikheda, the construction of a thermal coal power plant once promised jobs and economic progress.


Years after its completion though, the debt-saddled project that promised power supply to hundreds of thousands of homes, sits mostly idle. It is unable to buy coal to power the plant or sell electricity to utilities. Dozens of nearby stores that were reliant on the project's success have shut down.


Raikheda is not alone.


A Reuters analysis of India's power output data shows over 50 coal- and gas-fired power plants in India are largely mothballed, or operating at a bare minimum.


They are symbolic of a broader power sector struggling to service and pay off billions of dollars in loans, a major debt risk for the banking sector that could come to a head in coming months and ultimately leave tax payers picking up the bill.


After steel, power firms make up the second-biggest portion of India's $150 billion mountain of bad debts. Steel made up roughly a fifth of the bad debts and power more than 12 percent.


Last month, the central bank ordered commercial banks- the main financiers of infrastructure projects in India, including the semi-complete, or largely mothballed power plants - to resolve non-performing debt problems in six months, or push defaulters into bankruptcy.


That could leave the state-dominated banking sector with the bad debts and hasten a government recapitalisation of the sector. "These loans aren't going anywhere," said Supratim Sarkar, group head of structured finance at SBI Capital Markets in Mumbai. "The government will have to take care of the banking sector."


GMR Infrastructure, which also operates the New Delhi airport, built the Raikheda plant in the central state of Chhattisgarh with around 80 billion rupees ($1.24 billion) in loans. GMR did not respond to multiple requests for comment, although earlier this year it announced a debt restructuring for the Raikheda plant.


GMR commissioned the first phase of the 1.4 giga watt Raikheda station in 2014 and its second in 2016, but they are fired up only occasionally to keep the power systems operable.


During construction thousands were employed at the site and the local economy was bustling. Many farmers sold land in exchange for jobs at the plant.


Next Domino to Fall


India's stalled or stranded power projects account for nearly 50 giga-watts of electricity production capacity, or roughly 15 percent of India's total of more than 300 giga-watts.


That is potentially critical output in a fast-growing economy where total power-supply capacity is, on paper, sufficient to meet demand. But blackouts are not unusual during peak hours.


Several stranded projects are owned by the likes of Essar Power, GVK Power and Reliance Power, who rushed to set up power projects in the past decade when tariffs were rising.


But the plans came unstuck as the financial health of government-owned, state-level power distributors weakened, leaving them unwilling to meet the prices demanded by power plants, while coal and gas supplies failed to keep up with the needs of the newly opened power plants.


After heavy investment to construct the plants but no sales to generate income, many of these plants are now weighed down with debt.


Brokerage CLSA estimates the power generation sector accounts for 43 percent of the debt on domestic bank watchlists, which represent credit deemed at risk of going sour but not yet classified as a non-performing loans.


In 2015, India budgeted about $11 billion for a four-year bank bailout programme, although analysts say this amount falls woefully short of requirements given Basel III norms and the provisioning needed for bad loans.


Indeed, S&P Global Ratings analyst Deepali Seth-Chhabria estimates Indian banks will need 2.5 trillion rupees ($39 billion) for recapitalisation.


Policy Missteps


Compounding the risks for the coal and gas-fired power sector, India's most-populous state of Uttar Pradesh recently rescinded eight power purchase deals the prior government had inked, deeming them too costly.


And a shift in government policy in favour of clean energy further undermines the prospects of power plants reliant on coal. Earlier this year, GMR said it had agreed with banks to a strategic debt restructuring (SDR) for its Raikheda plant, giving lenders an equity stake in the asset and the ability to force a sale. At a conference in June, GMR said banks are still looking for potential buyers.


So far, the use of SDRs have seen little success, analysts said.


"Valuations of projects are the main reasons why SDRs have not yielded the desired results," said R. Venkataraman, senior director at business consultancy Alvarez & Marsal in Mumbai.


With promoters of these projects also not keen to give away control, many of these cases will go to the bankruptcy court, he said



From E-Group, Banking-News



Bad loan resolution: Fixing a hole


Alekh Archana, Jayshree P. Upadhyay &

 Gopika Gopakumar, The Mint

Published on July 21, 2017



Banks target 12 defaulters for bankruptcy proceedings at the start of a clean-up of bad loans in India’s banking system; Mint looks at how the process will pan out


The battle lines are drawn. On one side are the Reserve Bank of India (RBI) and state-owned lenders that have borne the brunt of India’s bad-loan problem. On the other are 12 big defaulters who owe the banks a collective Rs1.78 trillion—about a quarter of the bad loans choking the Indian banking system. The arena is the National Company Law Tribunal (NCLT), where India’s newest bad loan resolution tool— the Insolvency and Bankruptcy Code (IBC)— is being put to the test.


The process of resolving the bad loan problem gained impetus on 5 May when the Indian government notified an ordinance empowering the central bank to intervene directly to coax banks into resolving bad-loan cases. Previously, RBI had no role to play in resolving individual bad-loan cases.


RBI followed it up by forming an internal advisory panel that analysed the top 500 defaulters and winnowed the list down to 12 large ones that should be hauled to the bankruptcy court first. RBI applied an objective criterion: Companies to which banks had a total exposure of at least Rs5,000 crore, and where 60% had turned into bad loans as of 31 March 2016, were the chosen dozen. Banks were given six months to resolve the loans owed by the remaining 488 defaulters through other means; if they failed, these, too, would be dragged to the NCLT.


Nine out of 12 cases are already being heard at the company law tribunal. All 12 firms didn’t respond to emails and text messages seeking comment.


The Rs10 trillion problem


RBI’s directive to cut the Gordian knot of bad loans has been a long time in coming. The Indian banking system has been crumbling under the weight of Rs10 trillion in stressed assets (including Rs7.8 trillion of bad loans and Rs2.2 trillion of restructured loans) that have piled up over almost half a decade. After the 2008-09 global financial crisis, there was a push in lending to infrastructure and capital goods sectors. But as economic growth faltered, demand slowed and capacity idled, crimping the ability of firms to service their debt. Indeed, most of the big 12 defaulters belong to the metals sector, particularly iron and steel, or infrastructure and capital goods, as the chart alongside shows.


“So many things happened—dumping took place, global economic slowdown, there were interventions of courts, agitation against land acquisition. These issues accumulated into a bigger problem,” said R. Subramaniakumar, managing director and chief executive officer at Indian Overseas Bank.


For the banking system, the rise in bad loans led to higher provisions, which wiped away profits and necessitated more capital infusion. But fresh capital hasn’t been forthcoming for state-owned banks, with the government on a fiscal consolidation path and trying to control its deficits. With many state-owned lenders’ capital barely able to cover for these loans and provisioning, lending has slowed to a trickle. In 2016-17, banks’ share in the flow of funds to the commercial sector dipped to 38%, according to RBI’s June financial stability report. While economic growth has picked up, investment demand is yet to recover and the bad loan additions are likely to continue, albeit at a slower pace. The International Monetary Fund estimates Indian banks need another three years to complete provisioning.


In this backdrop, RBI devised many mechanisms over the years to solve the bad loan problem. Initially, it allowed forbearance on loans, resuscitating a tool first used in 2001 called corporate debt restructuring. Then it unveiled something called strategic debt restructuring (SDR) wherein banks were allowed to convert debt into equity and change the management of defaulting firms. For infrastructure firms in particular, a so-called 5/25 scheme allowed banks to extend long-term loans of 20-25 years to match the cash flow of projects, while refinancing them every five or seven years. Then, it introduced the scheme for sustainable structuring of stressed assets (S4A) which allowed banks to bifurcate debt into sustainable and unsustainable parts; the first part would be serviced by current cash flows and the remaining restructured. But all these failed to make a dent in the bad loan problem. At the same time, help arrived in the form of IBC, which had just been notified.


The bankruptcy law


India has had a plethora of laws and institutions to enable creditors to recover loans. But the multiplicity of loans meant that these often came in the way of each other as defaulters filed multiple petitions in different judicial bodies such as the company law board, debt recovery tribunals and high courts. It can be summed up in one damning statistic from a 2014 World Bank report; it took an average four years to resolve a bad loan case in India compared with 10 months in Singapore and one year in the UK.


The bankruptcy law, which was passed by Parliament in May 2016, kicked in from December, superseding other existing laws. It came as a shot in the arm for creditors. An important aspect of the new law is that unlike the earlier ones, it leaves the creditors in control of a company, lawyers say. It also lays down a strict timeline for resolving stressed assets, thus preventing a deterioration in the economic value of these assets.


“It was a much awaited reform that we needed. This was a demand from bankers for a long time that we need a bankruptcy law and it is in the best interest of lenders, borrowers and the economy as a whole. In any capitalist society, it is the survival of the fittest and you have to find ways and means,” said Rajnish Kumar, managing director of State Bank of India (SBI).


NCLT, the judicial body overseeing the entire process, will take 14 days to either reject or accept an insolvency plea filed by financial or operational creditors. After an application is admitted, the tribunal will appoint an insolvency resolution professional (IRP)to come up with a resolution plan within 180 days, extendable by 90 days. During this time, the board of the company would be suspended, the promoters would not have a say in functioning of the company, but the IRP would be supported by the management for day-to-day operations. If a case cannot be resolved in 270 days, the firm would go for liquidation.


NCLT currently has 14 benches in 11 locations with 25 members. Its mandate includes hearing cases earlier dealt with by the Company Law Board (CLB) under the Companies Act 2013, in addition to cases under IBC, with a proposal to add pleas against the Competition Commission of India (CCI), the antitrust regulator. A 6 April dated National Institute of Public Finance and Policy report says NCLT needs 69 benches to deal with its existing case load and 80 benches in the next five years. Currently, the Ahmedabad bench in the western Indian state of Gujarat is hearing petitions against Essar Steel Ltd and Alok Industries Ltd, a textile company. Creditors have taken auto parts maker Amtek Auto Ltd to the Chandigarh bench and Electrosteel Steels Ltd to Kolkata. In many of these cases, at the time of writing, NCLT is still deciding whether to admit the petition or not. “This move definitely gives an even playing field for discussions between bankers and promoters but it is not a panacea for the NPA (non-performing asset) issue for banks,” said Manisha Shroff, a partner at law firm Khaitan and Co. “NCLT may not have enough manpower or infrastructure to deal with the mountain of already identified cases and the hopes of a fast resolution are not realistic. Effective implementation is key to the success of IBC.”


Teething problems


Apart from infrastructure, the second concern relates to the case law that develops under IBC. Within six months of the code being operational, cases have emerged which have either expanded the scope of the bankruptcy code or given new interpretations to provisions covering issues such as what constitutes a dispute, how are principles of natural justice applied, and the applicability of timelines.


For instance, the National Company Law Appellate Tribunal (NCLAT) in one case ruled that the 14-day timeline for rejecting or admitting a case under the IBC was directive: that means courts do not have to necessarily adhere to this timeline. In another case, it directed that NCLT “adopt a cautious approach in admitting insolvency application by ensuring adherence to the principles of natural justice”.


In the six months since IBC came into force, financial institutions have been just testing the waters with smaller cases. Ahead of the government’s ordinance, only about 100 cases were being heard under IBC and they were mainly petitions by operational creditors (such as suppliers).


“Largely I believe banks are going about it the right way—preparing internal policies and procedures; training and awareness sessions for relevant staff; and creating panels of insolvency professionals, etc. The low number of filings made by financial institutions to NCLT till date indicate banks are not jumping into this without a plan,” said Ashish Chhawchharia, a partner at Grant Thornton Advisory Pvt. Ltd.


“IBC is a tool, not a solution and has to be used wisely to procure the best results. Though not the intended objective, we understand there are large numbers of cases where operational creditors are using IBC as a debt recovery tool,” he added.


The Essar case


Indeed, the first big challenge among the 12 defaulters’ list came not at NCLT but at the Gujarat high court when Essar Steel challenged RBI’s authority to direct banks.


In early July, Essar filed a petition objecting to RBI classifying it with the 11 other defaulters and called the central bank’s decision arbitrary and discriminatory. Essar’s contention was that the firm had been discussing a debt restructuring plan with its lenders for at least six months. It said the firm had paid Rs3,400-odd crore of dues to banks in the year to March 2017 and added that ceding control of the firm to an insolvency resolution professional could result in deterioration of its operations. In particular, it pointed to an RBI press statement that said these dozen cases “will be accorded priority at NCLT”.


On Monday, 17 July, the court refused to grant relief to the steel maker. In an 83-page order, justice S.G. Shah said a bank can initiate proceedings under IBC even without a direction from RBI. The order said concerns raised by Essar should be heard by NCLT. However, the court also rapped RBI on the knuckles, noting that it “has to be careful while issuing press releases; it must be in consonance with the constitutional mandates, based upon sound principles of law, but in any case should not be in the form of advice, guidelines or directions to judicial or quasi judicial authorities in any manner whatsoever.”


Nevertheless, that clears the deck for banks to go ahead with the bankruptcy process. “Chances of resolution become dim if we delay,” said Kumar of SBI. “As bankers, we would love it if 180 days is the outer limit (for bad-loan resolution). It is in everybody's interest that resolution happens faster. Otherwise, there is a loss of economic value.”


The road ahead


Once petitions are admitted under IBC, the firm comes under the control of an IRP. As a class, IRPs are largely untested. With IBC in full swing, chartered accountants and company secretaries are rushing to get themselves certified as IRPs, but the experience of dealing with, say, a large infrastructure firm, is different.


Secondly, promoters are also stepping down from board roles, or adding management roles to stay close to the action once the insolvency resolution process kicks off. In the past month, board members from Amtek Auto, Bhushan Steel Ltd and Era Infra Engineering Ltd have all added management roles. “ IRPs are not equipped to run firms and businesses and while the resolution process is ongoing, a complete change in management of the firm would have the opposite effect. It is being seen that CEOs and IRPs in this interim period are working together so that there is no further depletion of value of the company during the resolution process,” said Shroff of Khaitan.


Another concern for banks is the so-called hair-cuts, or sacrifices they would need to make on amounts due to them, and losses they will need to bear during resolution at a time when they are starved of capital.


“Resolving these large accounts in 6-9 months will entail high provisions. Currently, banks have not made adequate provisions on these accounts. High provisions and interest rate reversal will, therefore, have an impact on banks' profitability going forward,” said Karthik Srinivasan, senior vice-president at rating agency ICRA Ltd.


Ratings agency India Ratings and Research estimates Indian banks need to provide a bare minimum Rs18,000 crore additionally to meet provisioning for these 12 accounts. This accounts for about 25% of estimated profits of the banking industry in the current fiscal, the ratings agency said on Tuesday, 18 July.


Leave aside these problems, what’s on test is the Indian banking system’s ability to arrive at a successful resolution of bad loans, as opposed to liquidation of defaulters.


“The proof of concept (of IBC) is when you are able to get a resolution plan, not if the process results in only liquidation. That has to happen in 270 days; there’s no choice,” said Shardul Shroff, executive chairman of law firm Shardul Amarchand Mangaldas, which is representing SBI against Essar Steel.



From E-Group, Banking-News



Non-performing assets: ‘Actions by RBI,

government to mitigate bad loans by 2019’


Rashesh Shah

The Indian Express

Published on July 21, 2017



Steps like asset quality review, restructuring and RBI’s direction to refer companies to NCLT will potentially ease stressed assets situation for the banking system


The stressed assets problem plaguing Indian banking system is well documented. Gross non-performing asset (NPA) ratio for banks is at their peak and the problem seems to show no signs of abating. The question to ask in such a scenario is how big the actual problem is and what does it entail for the banks? To give an estimate, there are nearly Rs 12 lakh crore of stressed assets in the country’s banking system.


These constitute nearly 15 per cent of the outstanding loan books of these banks. Of this, banks have already sold around Rs 2 lakh crore worth of such loans to asset reconstruction companies (ARCs), leaving about Rs 10 lakh crore on their own books. Taking the past experience into account, nearly 35 per cent or Rs 3.5 lakh crore of the Rs 10 lakh crore will eventually need to be marked down by banks in the form of provisions and write-offs.


These numbers reflect a massive problem which requires a concerted and strong response. The Reserve Bank of India (RBI) and the government have gone about solving this in a very phased and planned manner. They have identified that the problem is of gigantic proportions and a one-shot resolution would serve no purpose and could potentially yield disastrous consequences. The

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