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Banking News 22.02.16



Banking News: February 22, 2016


Here is an endeavour to bring you in one folder all banking related unedited news/columns/articles/opinions/analysis etc appearing in major business dailies The compiler assumes no responsibility for the authenticity and reliability of the news. Readers are requested to go through the official instructions before acting upon any news articles and views appearing herein.


Compiled by: Anup Sen

 Salt Lake City, Kolkata 700 064


 From E-Group, Banking-News



Public Sector Banks asked to draw up a

paper on NPAs; is a ‘bad bank’ coming?


Sapna Das, The CNBC-TV18

Published on February 20, 2016



Mumbai, February 20: Concerned about the bulging non-performing assets (NPA) situation, the government has decided to act fast to tackle the menace. CNBC-TV18 learns that that public sector unit (PSU) banks have been asked to draw up a working paper, which could pave the way for them to dispose of a whopping 40-50 percent of their bad loans.


The paper is expected to be in place in a week.


Sources say that PSU banks are likely to propose an initiative, in which they will identify select bad assets on their books, ascertain a fair value for such assets using some price discovery mechanism and dispose them to an external institution.


Separately, CNBC-TV18 also learns that the government, at its level, is also taking a holistic view of the NPA situation and is actively considering several options, one of which could be spinning off assets to a sort of asset reconstruction company -- an idea discussed above.


The other option that the government is actively considering is creating a "bad bank".


A bad bank will buy up all bad assets of banks, a move that will cleanse the remaining banking system of the rot and will allow it to start afresh.


However, sources say that the Reserve Bank of India is opposed to the creation of a bad bank, an idea has been tried in the West in several countries, including the US following the subprime crisis.


The central bank believes that while the cost of creating a bad bank will be the same, or perhaps more, there are questions over how those assets will be valued, who will manage the bad bank and whether it would encourage moral hazard.


The Reserve Bank, it is learnt, believes that a bank has created the bad asset may have greater resolve -- or wherewithal -- to try and recover the loan, as opposed to an external institution on which such assets are foisted.


The government is already meeting officials from the IMF to understand the nuances of how a bad bank may work. Separately, the ARC option mentioned above is also on the table, while the NIIF is also said to be considering creating a stressed assets fund.


The final solution could be one or a hybrid of each of these options.



From E-Group, Banking-News



Interview: Arundhati Bhattacharya, SBI

‘Financing is not a problem as long as

the projects are viable and doable’


The Economic Times

Published on February 21, 2016



New Delhi, February 20: Talking to Bodhishatva Ganguly, Executive Editor, The Economic Times, at the ET Markets Pre-Budget Meet on Friday, Arundhati Bhattacharya, Chairman, State Bank of India, said there was need for a clear roadmap on bank recaptalisation.


Bodhishatva Ganguly: What needs to be done to kick-start the economy?


Arundhati Bhattacharya: Government has to take steps that will create the knock-on effect which will bring back private sector investment. That's why I think the government is working in a very concentrated manner on three or four very large initiatives.


For instance, they are working on the dedicated freight corridor. They are working on the Sagar Mala Ports. They are working on bifurcation of the rural feeders in every state that is the transmission lines. They are working on the Diamond Quadrilateral for the train lines. They are working on the bullet train projects. They are working on smart cities.


For many of these projects, the government is also lining up multilateral agencies to help them finance those projects along side the money that will come from the government. Now this is precisely what is needed in order to kick start the economy.


Once these bids get out over there and they are allocated and if we find that the bid details are proper, I am sure financing will come in. I do not think financing is a problem as long as the project is viable and doable.


However, having said that, I can also say that the banking system has indeed learnt its lessons. It will not give money to projects which are not properly conceived. It will not give money to say road projects if you do not have 80 per cent contiguous land and all approvals in place. It will not give money only on a piece of paper saying that you will get approval. Until and unless we see those approvals, money will not come.


So I think people are aware of this. Similarly, I think the equity component will also have to be ensured by the people who are bringing in the projects for the banks to be comfortable to lend. So I do not really think it is a question of banks not wanting to lend, it is a question of how viable are the projects.


Corporates having that appetite and the government if it is the one that is putting out those projects, should make the parameters or rather the governance conducive enough for banks to be comfortable about lending.


Corporates or government have to ensure that once the banks lend money, the project will happen, happen on time and will not lead to further issues down the line.


Bodhishatva Ganguly: Will you have higher provisioning for Q4 than Q3, higher provisioning, higher NPAs?


Arundhati Bhattacharya: That is a price sensitive information. I am sorry I would not be able to give it to you.


Bodhishatva Ganguly: What will be the trend - up or down?


Arundhati Bhattacharya: Again, as I said these are all price sensitive matters and there is no way that I am going to comment on it.


Bodhishatva Ganguly: In your remarks, you have referred to the so called policy paralysis, the forest clearances, mining licenses being cancelled and so on as the main cause of the NPA problem and I think that is well taken. One can deny that. But in your speech and also in your remarks, you called for the amendment through the Sarfaesi Act. You made a suggestion that wilful default should be criminalized to some extent. To what extent have promoters gamed the system? Is it policy paralysis? Promoters seem to be a common issue.


Arundhati Bhattacharya: Every community has its bad apples. Can you tell me that the media does not have its bad apples? Every single community has its bad apples and therefore enforcement has to be quick and proper. If you do that, only then does the society operate in a proper manner. But to use a broad brush and say all these guys are the same, will b edoing your country and the entire entrepreneur class a disservice. That is not true at all. There are a lot of guys over there who are working day and night and they have put their skin in the game. They have actually created a lot of employment in this country not only directly but even knock on and if those entrepreneurs had not taken the risk, many of us who are salary earners would not be earning anything. We have not taken that risk. They have. They need to be respected for it. But there are always bad apples in any bunch, and something has to be done to keep them from vitiating the entire atmosphere.



 From E-Group, Banking-News



At Rs 4 lakh crore, NPAs exceed

 market value of PSU banks


The Press Trust of India

Published on February 21, 2016



Mumbai, February 21 (PTI): For every Rs 100 parked in shares of public sector banks, investors carry the burden of Rs 150 as bad loans, which have cumulatively ballooned to Rs 4 lakh crore or 1.5 times the market value of these lenders.


In comparison, bad loans of private sector banks are just about 6.6 per cent of their total valuation. In case of PSU banks, if loans that face the risk of being declared NPAs (Non Performing Assets) going ahead are also taken into account, their overall stressed advances are estimated to be almost double at over Rs 8 lakh crore.


The problem appears less acute at private sector banks as their gross NPAs are only about one-eighth at about Rs 46,000 crore, which is also well below their total market value. The Reserve Bank has set March 2017 as deadline for banks to clean up their balance sheets, forcing them to promptly disclose NPAs, take remedial measures and also make adequate provisions in their financial statements. The banks have began complying with effect from their latest set of financial results, which are for the quarter ended December 31, 2015.


The gross NPAs of banking sector are estimated at over 5 per cent of total loans, while overall stressed assets (including declared and potential bad loans) are at about 11 per cent. An analysis of their latest quarter results shows that the cumulative gross NPAs of 24 listed public sector banks, including market leader SBI and its associates, stood at Rs 3,93,035 crore as on December 31, 2015. This is nearly 1.5-times of their total market value, which currently stands at Rs 2,62,955 crore.


This also marks a rise of over 50 per cent from their gross NPAs totalling Rs 2,61,918 crore a year ago. As per RBI, an asset becomes non-performing when it ceases to generate income for the bank. The banks need to declare a loan as NPA which remains overdue for more than 90 days.


Except for State Bank of India (SBI), and a few smaller ones, all listed public sector banks have gross NPAs in excess of their market capitalisation. In most cases, the quantum of bad loans is more than double the market value, while some lenders have gross NPAs as high as four or five-times of their respective market valuations. In comparison, most private sector banks have gross NPAs well below their market values, although the quantum of bad loans have risen for them as well in a big way.


The gross NPA of 16 listed private sector lenders stood at Rs 46,271 crore as on December 30, 2015. This compares with their total market value of over Rs 7 lakh crore. Taken together, the cumulative gross NPAs of all listed banks - public and private - has risen to Rs 4.4 lakh crore, while their total market value stands at Rs 9.6 lakh crore.



From E-Group, Banking-News



MSMEs Cry for Attention


Dr B Yerram Raju

The Moneylife Online

Published on February 19, 2016



RBI data reveals that less than 5% of potentially viable units in the MSME sector were revived during the past decade compared with the huge corporate debt restructuring that went bust. Time to rethink?


While stories of tens of thousands of crores of bad loans from big corporates hog the headlines, not many, including lenders, regulators or even the government are even looking at the Micro, Small and Medium Enterprises (MSME) segment. What is more shocking is despite having a good record, very few of these MSMEs are provided the greening or corporate debt restructuring (CDR) facility. Consider these two real life stories…


An innovative entrepreneur manufacturing edible cutlery financed by one of the public sector banks in 2013, almost close to going into commercial production, was declared as non-performing asset (NPA). During the two years, not even once did the bank officials visit the unit – not even when it shifted the machinery to a different location under advice to the bank. The State Level Inter-Institutional Committee (SLIIC) directed the bank to offer six months’ time but the bank chose to give only 3 months – all because it has collateral – the only residential building of the entrepreneur valued at Rs1 crore, as against the outstanding loan of Rs65 lakh and interest overdue of Rs23 lakh.


Even as CNN-IBN TV channel was interviewing the entrepreneur for his Innovation Award, a notice under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was slapped on his house. The unit has market inquiries for the products – edible spoons, forks, and chopsticks, and at least five developing economies and UK evinced interest in transfer of technologies. Coffee Day is the first domestic buyer and a few more are on line. Marketing this product is cost intensive and time consuming. Given the reprieve, the unit would show case India in its ‘Make in India’ drive.


In another case, a leading public sector bank declared as NPA the account of a partnership firm manufacturing electric transformers for installation in rural areas.


This partnership firm whose managing partner is financially illiterate inducted a knowledgeable partner in financials at the instance of its relationship manager. The relationship manager and the accounting partner colluded to submit an inflated balance sheet for drawing far in excess of the working capital limits. The excess withdrawal was later regularised by enhancing the limits.


When the unit’s fortunes declined due to severe power outages and agitations for separate state in Telangana, it became an NPA. The orders from the power generation companies (GENCO) also did not come through for the same reason. In 2013, the Bank proceeded against the collateral security.


None of the unit’s guarantees devolved on the bank. The bank holds deposits to the tune of Rs5 lakh with different maturity dates. After the formation of Telangana State, it has secured Rs70 crore worth work orders since June 2015. Its goods are of good quality and are recognised by Bureau of Indian Standards (BIS).


It appears that there was a calculated effort to bail out a bank official by closing the unit and its collateral security came in handy. Government of Telangana took serious view of this instance as it would affect the 50 families dependent on the unit. In both cases, the state government offered joint monitoring, if rehabilitated. But the banks are slow to act.


The NPAs in MSMEs put to stress test, were 5.04% as of December 2015 with no significant contribution to the losses as percentage of either profit or capital. The industry NPA level was 6.68%.  Only 7.9% constitute MSME advances to the total advances. (FSR 12, December 2015)


Risk appetite for the MSMEs is very low among banks and their adherence to the guidelines of both the Reserve Bank of India (RBI) and Government of India (GoI) to identify sickness at the incipient stage and to introduce corrective action plans, is highly suspect. By just allowing postponement of instalments for three months, they label such loans as restructuring without going into the processes of restructuring. The standard advances were restructured to sub-standard advances and were range bound at 0.09% to 0.38% indicating that not much restructuring took place in the sector.


Banks know for sure that the MSMEs as vendors to the large industry and infrastructure sectors could not realise their bills within 90 days and thus unable even to pay interest turned NPAs. There is reluctance among the banks for either restructuring or revival of even viable advances.


Credit origination is also no less to blame. State Bank group is thrusting its insurance products as a compulsory product along with credit. The size depends upon the loan sanctioned. The banks debit the working capital loan account with the premium running to lakhs of rupees. SBI Life pays hefty commissions to the staff who cross-sells this product to the borrowers. Monitoring and supervision are hit hard by inadequate field staff leaving most accounts for arm-chair surveillance. Even the CMI data is passed off as compliance formality and not as monitoring tool.


There are some good signs for MSMEs though particularly in manufacturing. They can now look for some growth with the Ministry revising the definition of plant and machinery to include all such equipment owned by the same owner(s) across the districts and country to be reckoned for classification of MSME under the MSME Development Act 2006. In the long run, this redefinition would do a lot of good to the sector. In the short term, the sector may witness more non-performing assets (NPAs).


Telangana Government has put in a progressive industrial policy that also included a policy for revival believing that healthy growth of industry should not have in the neighbourhood many sick units.


It has plans to establish ‘Industrial Clinic’ for monitoring the incipient and sick units in MSME sector on a priority basis with facilities for diagnosis and techno economic viability (TEV) studies at the hands of the competent consultants under public-private partnership (PPP) mode. It proposes to give the revived units incentives on par with the new units to improve the cash flows once the bank concerned approved the revival plan.


All Public Sector Banks (PSBs), as per 2 June 2015 guidelines from the Ministry of MSMEs, are expected to arrive at a corrective action plan when the accounts indicate deterioration and monitor it for 60 days and also take up TEV study of the unit for ensuring viability. Each bank is expected to set up zone wise committees to examine and approve such proposals with the speed required. But these are yet to be set up.


On top of this, banks though moving on Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) coverage, their partial coverage of guarantee - term loan is under the collateral cover while the working capital is under guarantee cover. When there is default of the unit under term loan due to non-payment of interest for 90 days, it becomes an NPA qualifying for SAFRAESI proceedings. 


It is time that the RBI monitors the MSMEs on more robust data at the regional levels and ensures compliance of the guidelines. RBI data reveals only less than 5% of potentially viable units were revived during the last decade as compared to a huge corporate debt restructuring that went bust. The Finance Minister would do well to include in the budget tax incentives for strategic partners’ investments in revival of the potentially viable units. RBI may also consider redefining NPAs under the sector differently and also allow takeover of any viable unit if the parent bank is willing to shed it in a manner that such advance would not add to the baggage of NPAs of the receiving bank.


(Dr Yerram Raju Behara is a former senior executive of SBI and an economist and risk management specialist. He is also MSME Lead Consultant for the Govt of Telangana.)


 From E-Group, Banking-News



Bad bank can wait, let’s recast ARCs fast


Tamal Bandyopadhyay, The Mint

Published on February 22, 2016



Capital is the biggest problem for the ARCs, which had around 
Rs 50,000 crore of bad assets under management in fiscal 2015


The asset reconstruction companies or ARCs in India, which are in the business of buying bad loans from banks and making money by recovering them, had around Rs.50,000 crore worth of bad assets under management in fiscal year 2015. In the first three quarters of the current fiscal year, banks wanted to sell around Rs.90,000 crore of bad loans, but less than one-fourth of it has actually been sold to ARCs, even as gross bad loans of listed banks rose to Rs. 4.38 trillion in the December quarter, adding almost a trillion rupees in three months. Will the proposed National Asset Management Company be able to do what 15 ARCs could not in over a decade?


Bank CEOs have started making announcements on fresh packages of bad loans being put on sale, but the pace of sale is unlikely to gather momentum. If you ask the ARCs on why they are not aggressively buying assets, they will blame the Reserve Bank of India (RBI) norms that have raised the minimum investment from 5% to 15% in the so-called security receipts (SRs) or pass-through certificates that are issued against such assets.


The ARCs levy higher discounts when they buy loans offering cash, but when they offer SRs for buying loans, the discount drops. How do the ARCs make money? They get management fees of 1.5-2%. When the investment requirement rises three times, their returns drop dramatically. Also, the fees are now linked to the net asset value (NAV) of the assets and not the outstanding value of the SRs. So, any shortfall in the recovery of bad loans lowers their fees. Six months after buying bad loans, the ARCs are required to get the SRs rated, and based on the rating—which takes into account the progress in recovery—the NAV is calculated.


From the ARCs’ point of view, cash transactions are always better as they can levy relatively higher discounts, but they don’t have the money to do so. Under norms, they can be 100% owned by foreign investors who can lend money muscle and expertise, but none of them is entirely foreign-owned and, in fact, very few have foreign stakes. They blame the 49% cap on single holding for their failure to attract foreign investments. It is unlikely that RBI will allow a higher foreign stake for a single investor as it believes that a widely held shareholding pattern ensures corporate governance in a relatively lightly regulated sector.


SSG Capital Management, a distress and special-situation private equity fund, holds a 49% stake in Asset Care and Reconstruction Enterprise Ltd. KKR and Co. wants to pick up a stake in International Asset Reconstruction Co. Pvt. Ltd, but the investment is awaiting government approval. About half-a-dozen applications for new ARCs have been pending with RBI. Some of them have foreign investors on board.


Capital is the biggest problem for the ARCs. If indeed a fragmented ownership is coming in the way to attract foreign capital, the ARCs should be allowed to tap the capital market by selling shares to the public. It’s not clear whether the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, which governs ARCs, allows them to do so. It may not also be easy for them to raise money from public, as legal issues remain the biggest hurdle for the recovery of bad assets, leading to inordinate delays. Till the proposed bankruptcy law is put in place, ARCs will struggle to recover and redeem SRs. There are other issues as well. For instance, the stamp duty is not uniform in Indian states. This influences the pricing of such assets.


Pricing always remains a bone of contention for the sale of bad assets—while banks want a higher pricing, ARCs want to buy at a hefty discount. Nobody has clarity on the fair value of a bad asset put up for sale. One way of addressing this could be a recovery rating of such assets before they are sold, instead of rating them six months later. Recovery ratings reflect a fundamental analysis of the underlying relationship between financial claims on an entity and potential sources to meet those claims. The pricing can be based on such ratings and even if the banks are required to offer high discounts, they will not be afraid of being hounded by agencies like the Central Bureau of Investigation and Central Vigilance Commission.


The auction process must also be transparent. Currently, ARC officials are not allowed to visit the factories of a company offered as a security of the loans that are being sold. Unless they get a sense of the value of the securities that are backing such loans, how would they make a fair offer to buy them? We need a fair practice code both for the banks as well as ARCs to make the business of asset reconstruction a success.


When the asset reconstruction business started more than a decade ago in India, banks were selling bad loans and receiving SRs in return (nobody really bothered about their redemptions). This way, banks suppressed their non-performing assets as such assets got shifted from their loan books to the investment books (in the form of SRs). The cosy relationship that many banks had with the ARCs is now being enjoyed by the defaulters. There are instances where defaulters are buying back from the ARCs the underlying securities of the loans cheap. In fact, back-to-back arrangements are put in place for such deals before an ARC buys the bad loans from banks.


Indradhanush, the seven-point reform agenda announced by the government in August 2015 to revive public sector banks, promised to strengthen the ARCs, but nothing has been done. The finance ministry had set up a key advisory group in 2011 to look into the issues of ARCs. Does anyone know when this group met last time?



 From E-Group, Banking-News



Incognito bank visits to check service: RBI


Deepti Bhaskaran, The Mint

Published on February 18, 2016



RBI may even consider regulatory action against

banks if mis-selling of products continues


To monitor banks’ customer service and handling of consumer complaints, the Reserve Bank of India (RBI) will soon undertake incognito visits to bank branches, stated a press release issued by the banking regulator on 16 February.


At the annual conference of the banking ombudsmen at Thiruvananthapuram, Raghuram Rajan, governor, RBI, said the grievance redressal mechanism must be integrated in the business operations of banks. He said grievances were also an important input into regulatory and supervisory processes and customers must have the right to access banking services and grievance redressal machinery—be it a bank’s internal mechanism or the banking ombudsman—so that they are not “excluded” from the banking fold, according to the release.


“Every bank has an internal grievance mechanism that registers a consumer complaint at a branch level and automatically escalates it if not resolved within a specific time,” said Mayank Mehta, executive director, Bank of Baroda. “In fact, most banks have now appointed an internal ombudsman to adjudicate objectively,” he added.


Rajan had also said that a high level of automation would not only allow customers access the grievance redressal machinery anytime from anywhere but also reduce the cost of redressal. Harsh Pathak, a practicing advocate at the Supreme Court who handles cases related to the banking and financial industry, said, “The entire financial industry has a long way to go in terms of effective mechanism for customer service and handling of consumer complaints. That the RBI plans to review the level of customer service is a significant step. Now that most transactions happen electronically, record keeping and transparency is important. That can improve customer service and the redressal mechanism.”


Rajan also said that the RBI was exploring ways to resolve customer complaints across regulators through forums such as the Financial Stability and Development Council.


Apart from looking at customer complaints, RBI also plans to undertake a review of how banks have implemented the Charter of Customer Rights, which include five rights—right to fair treatment, right to transparency, fair and honest dealing, right to suitability, right to privacy and right to grievance redress and compensation.


“The Charter is available on bank websites and branches. We also incorporate these in training programmes,” said Mehta.


The right to transparency, and fair and honest dealing states that the financial services provider should make every effort to ensure that contracts or agreements are transparent, easily understood and communicated well. A product’s price, associated risks, terms and conditions that govern use over its tenure and the responsibilities of the customer and financial service provider have to be clearly disclosed. Further, the customer should not be subject to unfair business or marketing practices, coercive contractual terms or misleading representations. The Charter also says that products offered should be appropriate and based on an assessment of the customer’s financial circumstances and understanding.


But mystery inspections have revealed the contrary. According to the press release, Rajan said that findings of some recent incognito visits by RBI to check on sale of third-party products by banks and a study undertaken by some academicians and consumer activists hinted at mis-selling of products, especially insurance. RBI might consider regulatory action against banks if they continued mis-selling their products, he added.


“Continued mystery shopping will help if followed by punitive action. Internal mystery visits by banks themselves have not yielded desired results. Therefore, RBI stepping in is a positive,” said Manoj Nagpal, chief executive officer, Outlook Asia Capital, a wealth management firm.


In the same conference, RBI deputy governor S.S. Mundra said that with developments in technology, account number portability could be possible. If that happens, a bank customer will have more power to move away from a bank that she is dissatisfied with in terms of service, the press release added.


The underlying message seems to be that customer service is a business need for banks. The central bank’s reiteration of this is good news for you, the consumer.



 From E-Group, Banking-News



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