Bad loans exposing distress among Indian banks

Feb 11, 2016 0

By V. Jagannathan

CHENNAI– The distress in India’s banking system is becoming evident by the day with more of these financing institutions reporting poor results in the third quarter of this fiscal, amid mounting bad loans. What is more, the stress is more pronounced in state-run banks.

“Such reporting of losses by the Indian banks is unprecedented. The trend is clear — unfortunate that several public sector banks are posting negative results and wiping out the equity,” Saswata Guha, director of financial institutions at Fitch Ratings, told IANS.

Technically called non-performing assets, or NPAs, with only some subtle differences, the finance ministry’s own assessment is that these are growing — even though they are equally feared to be grossly under-estimated.

Guha expects the Indian banking sector to close this fiscal with a NPA of around a whopping Rs.4 trillion and total stressed assets of around Rs.9 trillion.

On Thursday, the trend of state-run banks declaring low profits or losses and the ever-ballooning provisions and NPA continued. The index for state-run banks of the National Stock Exchange fell 3.17 percent and that of the Bombay Stock Exchange was down3.81 percent.

In the past year, BSE’s banking index of Bombay Stock Exchange (BSE) has taken a 67 percent hit. In the case of Punjab National Bank, for example, the stock is down 58 percent, while for State Bank, it is down 52 percent.

Reserve Bank of India (RBI) Governor Raghuram Rajan sought to assuage the feelings. “The decline in bank share prices caused investors to panic. Bank share prices are being hit by the global markets turmoil,” Rajan said.

“We’re looking at banks having clean and fully provisioned balance sheets by March 2017. Banks are using tools devised to clean up their balance sheets.” Yet, Guha said government banks are aggressive on write-offs but not on recovery — not even a fifth of the write-offs.

Fitch Ratings’ Guha said the NPA levels do not seem to have plateued and may not go up sharply in the coming quarters. By 2017, it is expected that the balance sheets will become cleaner. The earnings outlook is also more daunting and the pain may continue during the next year.

“For government banks, the revenue is mainly from interest on loans whereas the private bank’s revenue stream is diversified,” Guha said, adding He said it is not that the private banks are immune to NPAs but their credit risk management is better than government owned banks.

Rajan said there was hope. “Change in attitude in the banking system takes time as banks try to unlock the value of their NPAs. But the end-game is in sight. We don’t envisage a further set of AQRs (asset quality review) and new loans that require to be dealt with.”

Rajan said public sector banks’ non-core credit grew at only 6.6 percent, while the same for the private sector was over 20 percent. The only reason for this is of managing stressed assets and some resulting risk aversion because of which public sector banks have curtailed lending.

“We have to clean up banks balance sheets to restore growth.”

Going by the finance ministry, the NPA Ratio of banks — net exposure versus bad loans — rose from 3.42 percent as on March 2013 to 4.62 percent as on the same month of last year. And in absolute terms, the ministry pegs it at Rs.1,83,854 crore versus Rs.3,09,409 crore.

Take the case of Punjab National Bank. Announcing the third quarter results, it said NPAs stood at Rs.22,983.40 crore on December 31, 2015, against Rs.13,787.76 crore in the like period of the previous fiscal — up a whopping 66 percent.

And State Bank of India (SBI), the country’s largest lender? The NPA at Rs.72,792 crore was 17 percent higher than Rs.61,991.45 crore at the end of December 2015, and 28 percent up from Rs.56,834 crore at the end of the quarter ended September 2014.

But the RBI’s Rajan has rubbished the suggestions that the NPA ratio could be at alarming levels.

“I think the 17 percent, 18 percent numbers maybe a little on the high side. But broadly speaking I think we should also be careful about treating any stressed asset as a total write-off,” he had told reporters earlier this month.

According to Guha, the next issue for state-run banks is the capital infusion. The government has said fresh capital infusion from the government will be based on good performance. “Our estimate is that the government infusion is sufficient,” Rajan said.

In the final analysis, Guha feels the situation may be ripe for consolidation in Inia’s e banking sector. “Let’s see if the government bites the bullet.”

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Improving loan origination quality must for India’s securitisation market to develop

Feb 5, 2016 0

CHENNAI–Securitisation of loan accounts is one way of improving liquidity of banks’ assets but the development of securitisation market depends on improving the quality of loan origination, said a senior official of the Reserve Bank of India (RBI) here on Friday.

“For the securitisation markets to develop, we need to improve the quality of loan origination, which solely depends upon ‘ownership of decisions’ relating to loan origination,” said deputy governor R.Gandhi.

He was speaking at the ‘Union Bank Conference on Financial Stability, Credit distress and Economic Growth: The way forward’ at the Great Lakes Institute of Management near here.

Simply put, securitisation is the sale of loan accounts to another player for a sum. The loan accounts thus transferred will not figure in the books of the seller.

According to Gandhi, directed lending in whatever form and outsourcing the loan appraisal function dilutes the concept of owning up this crucial decision of loan origination and contended that those who outsource the loan origination process have no commitment to the loan quality.

He also said central government – the owner of public sector banks – will be more than compensated by increased revenues and better valuations if the costs of social banking is provided through budgetary support after costing them on commercial principles.

Noting people perceive the public sector banks are relatively immune to destabilising impacts owing to government’s support, he said that the same sense of safety evades the government-owned banks when it comes to their valuations which in turn has an efficiency imperative – when judged by their returns on asset or capital employed.

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Reserve Bank of India to ease doing business for start-ups

Feb 2, 2016 0

MUMBAI– Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday announced various steps to facilitate the ‘ease of doing business’ for startups.

Rajan announced a string of initiatives, while announcing the sixth bi-monthly monetary policy review here.

“In keeping with the government’s Start-up India initiative, the Reserve Bank will take steps to ease doing business and contribute to an ecosystem that is conducive for growth of start-ups,” he said in the monetary policy statement.

Raghuram Rajan

Raghuram Rajan

Rajan pointed out that the slew of RBI initiatives will include enabling framework for receiving foreign venture capital, differing contractual structures embedded in investment instruments, and deferring receipt of considerations for transfer of ownership.

The initiatives also consists facilitating ‘escrow arrangements’ and simplification of documentation and reporting procedures for start-ups, he said.

Besides, the Indian central bank aims to make it easy for start-ups to raise foreign capital and operate in India.

Start-ups across sectors will find it easy to receive foreign venture capital investments and also easily transfer shares from foreign venture capital investors to other residents and non-residents.

The RBI is also planning to permit start-ups to raise rupee denominated loans from foreigners and allow them to create innovative convertible instruments to raise funds.

In addition, it aims to enable startups to issue shares without cash payment through ‘sweat equity’ or other legitimate payment owned by the company, as long as the payment does not fall into the purview of the Foreign Exchange Management Act (FEMA).

Rajan said RBI is preparing a detailed statement on start-ups to be issued separately.

The start-up India campaign was started by Prime Minister Narendra Modi on January 16.

He had then announced tax rebates for the first three years, exemptions on capital gains, a corpus fund of Rs.10,000 crore and a mobile app to register startups in a day among others.

The central government is expected to bring out more incentives to promote entrepreneurship and startups in the forthcoming budget.

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Securitisation of loans key to develop small banks

Jan 22, 2016 0

NEW DELHI– While non-banking finance companies (NBFCs) in India will continue to fund through securitisation, the practice of pooling of loans will be key for developing small finance banks, Moody’s Investors Service said on Thursday.

“Securitisation will continue to be instrumental for these small Indian finance banks, as it will take time for them to develop a retail deposit franchise,” the American agency said in a report here.

Securitisation involves pooling of financial assets or loans together to create a new security, which is then sold to investors.

“At the same time, NBFCs and MFIs (micro-finance institutions) will continue to fund through securitisation as the sector grows,” Moody’s said.

The Reserve Bank of India in September 2015 granted in-principle approval to 10 entities, including eight MFIs, to operate as small finance banks.

“With the aim of promoting financial inclusion to the under-served segment, the small finance banks will accept deposits and extend credit to marginal farmers and small business units. Their mandate overlaps with the target market of MFIs,” the report added.

In both India and China, NBFCs are key providers of credit to individuals and small businesses that would otherwise have limited access to bank loans or would incur high interest for such loans, Moody’s said.

“While there are various funding avenues open to the NBFCs in India and China, securitisation has proven to be reliable and competitively priced, and is therefore an important source of the funds the NBFCs use for lending,” said Moody’s assistant vice president Georgina Lee.

According to the US consultancy firm, the development of domestic securitisation markets will help both India and China achieve the objective of financial inclusion.

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Strengthening rupee swells India’s foreign reserves: Experts

Jan 2, 2016 0

MUMBAI– A strengthening rupee on account of healthy buying activity buoyed India’s foreign exchange reserves (Forex) kitty by $943.4 million, experts said on Saturday.

According to the Reserve Bank of India’s (RBI) weekly statistical supplement, the overall Forex reserves stood at $352.04 billion for the week ended December 25.

For the previous week ended December 18, the country’s foreign reserves had plunged by $1.40 billion at $351.10 billion.

Market observers pointed-out that strengthening rupee on account of unwinding of long-positions of US dollar prompted India’s central bank to purchase greenbacks.

The rupee has strengthened on the back of fresh demand in anticipation of healthy foreign capital influx into the central and the state governments’ bonds from January 1 onwards.

This led the Indian central bank to intervene in the open markets by purchasing greenbacks to keep the rupee value competitive for domestic exporters.

On a weekly basis, the rupee strengthened by 19 paise at 66.21 (December 23) to a US dollar from its previous close of 66.40 to a greenback (December 18).

“US dollar purchases by the central bank post the FOMC (Federal Open Market Committee) has led to the rise in the overall reserves,” Anindya Banerjee, associate vice president for currency derivatives with Kotak Securities, told IANS.

“The central bank bought greenbacks on account of strengthening rupee due to unwinding of (US Dollar’s) long-positions in anticipation of rupee demand.”

On September 29, the RBI had said that it intended to provide a more predictable regime for investment by foreign funds and decided to raise their exposure limits in phases in central government securities to 5 percent of the outstanding stock by March 2018.

In another key decision, the central bank had set a separate limit for investment by such funds in state development loans, which are to be increased in phases to reach 2 percent of the outstanding stock by March 2018.

The RBI’s decision is expected to usher in around $2.5 billion by this fiscal end.

Other analysts attributed to the rise in the reserves value on interest payments received by the RBI on foreign securities held by it.

“It is assumed that the RBI may have received year end interest payments on foreign securities it holds. This might be one of the reasons for the rise in overall reserves,” an analyst told IANS.

In addition, the foreign currency assets (FCAs) which constitutes the largest component of India’s Forex reserves gained by $922 million to $329.19 billion in the week under review.

Notwithstanding the gain in overall Forex kitty, the country’s gold reserves remained stagnant at $17.54 billion.

Gold reserves had plunged by $1.14 billion at $17.54 billion during the week ended December 4, as international prices crashed to a six-year low.

However, the special drawing rights (SDRs) were higher by $16.2 million at $4.01 billion.

Similarly, the country’s reserve position with the International Monetary Fund (IMF) rose. It edged-up by $5.2 million to $1.30 billion.

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Insurers should be Indian-owned, controlled by January 18

Dec 23, 2015 0

CHENNAI–The Insurance Regulatory and Development Authority of India (IRDAI) on Wednesday said all insurance companies have to report compliance on Indian ownership and control criteria by January 18, next year.

In a letter to chief executive officers of all insurance companies in the country on Wednesday, V.R. Iyer, member (finance and investment) IRDAI, said insurers have to report compliance to Indian ownership and control criteria by that date.

Insurers who are not able to conform to the Indian-owned and controlled criteria should submit an assurance from their board of directors on compliance within six months from date of issuance of guideline on the subject by IRDAI.

The IRDAI had issued the guidelines on Indian Owned and Controlled insurance company on October 19, 2015.

As the amended insurance law, an Indian insurance company should be owned and controlled by Indians.

According to the IRDAI, majority of insurers have not approached it and the Foreign Investment Promotion Board (FIPB) seeking a change in their shareholding pattern.

The insurance law was amended allowing foreign direct investment (FDI) up to 49 percent from the earlier limit of 26 percent.

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India fourth biggest exporter of illicit capital: Report

Dec 9, 2015 0

WASHINGTON–With an average annual outflow of $51.03 billion, India is the fourth biggest exporter of illicit capital over a decade with such financial flows surging to $1.1 trillion in 2013, according to a new report.

Dev Kar

Dev Kar

China, with $139.23 billion average annually ($1.39 trillion cumulative), was the biggest exporter of illicit financial flows from developing and emerging economies, according to a study released Wednesday by Global Financial Integrity (GFI), a Washington-based research and advisory organization.

Russia with $104.98 billion average ($1.05trillion cumulative) and Mexico with $52.84 billion average ($528.44 billion cumulative) came next.

India with $51.03 billion average ($510.29 billion cumulative) was fourth followed by Malaysia with $41.85 billion average annually ($418.54 billion cumulative) ranked fifth.

Authored by GFI Chief Economist Dev Kar and GFI Junior Economist Joseph Spanjers, the report pegs cumulative illicit outflows from developing economies at $7.8 trillion between 2004 and 2013, the last year for which data are available.

Titled “Illicit Financial Flows from Developing Countries: 2004-2013” the study reveals that illicit financial flows first surpassed $1 trillion in 2011, and have grown to $1.1 trillion in 2013.

This marks a dramatic increase from 2004, when illicit outflows totaled just $465.3 billion.

“This study clearly demonstrates that illicit financial flows are the most damaging economic problem faced by the world’s developing and emerging economies,” said GFI President Raymond Baker, a longtime authority on financial crime.

“This year at the UN, the mantra of ‘trillions not billions’ was continuously used to indicate the amount of funds needed to reach the Sustainable Development Goals. Significantly curtailing illicit flows is central to that effort.”

Illicit financial flows averaged a staggering four percent of the developing world’s GDP, the study noted.

In seven of the 10 years studied, global IFFs outpaced the total value of all foreign aid and foreign direct investment flowing into poor nations.

The IFF growth rate from 2004-2013 was 8.6 percent in Asia and 7 percent in Developing Europe as well as in the MENA and Asia-Pacific regions, the report found.

The report recommends that world leaders focus on curbing opacity in the global financial system, which facilitates these outflows.

Specifically, GFI suggested that governments establish public registries of verified beneficial ownership information on all legal entities, and all banks should know the true beneficial owner(s) of any account opened in their financial institution.

Government authorities should adopt and fully implement all of the Financial Action Task Force’s (FATF) anti-money laundering recommendations; laws already in place should be strongly enforced.

Policymakers should require multinational companies to publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis.

All countries should actively participate in the worldwide movement towards the automatic exchange of tax information as endorsed by the OECD and the G20, the report suggested.

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