Saturday, March 1, 2014

A tale of two banks: United Bank far better off than Indian Bank

A tale of two banks: United Bank far better off than Indian Bank
All United Bank of India needs is capital from the government and the right kind of leadership to get out of the mess. Photo: Indranil Bhoumik/Mint
Live Mint : Tamal Bandyopadhyay:26 Feb 14
Many in the banking industry feel the Kolkata-based United Bank of India
cannot survive on its own and must be merged with another bank. Some
 are even reliving the Indian Bank experience in United Bank’s current 
state of affairs. But barring the fact that both were part of the first set of 
14 banks that were nationalized on 19 July, 1969, they are as different 
as chalk and cheese.
Indeed, United Bank is not in good health. It made a Rs.1,238.08 crore
 net loss in the December quarter, after a Rs.489.47 crore net loss in
 the previous quarter. Its net worth has eroded substantially and its
 capital adequacy ratio has dropped to around 9%, the floor level.
In the December quarter, United Bank’s operating profit was
 Rs.545,08 crore, up from Rs.373.39 crore in the previous
 quarter. Despite that, it ended up making net losses in both 
the quarters as it had to set aside hefty amounts to take care of its bad loans.
In the September quarter, it made a provision for 
Rs.987.35 crore; in the December quarter, the provision
 rose to Rs.1,857.83 crore. The bank’s gross non-performing
 assets (NPAs) rose from 5.39% in the September quarter to
 10.82% in the December quarter. After setting aside money,
 net NPA increased from 5.39% of its total loans in the September 
quarter to 7.44% in the three months ended December.
The Reserve Bank of India (RBI) ordered a forensic audit of United
 Bank’s books late last year and restrained its management from
 giving loans beyondRs.10 crore. Till the bank gets fresh capital, 
it will not be able to expand its loan book.
If these facts encourage one to think that United Bank is in a dire 
state of affairs and it must either be merged or its board superseded 
and RBI must appoint an administrator to run the bank and nurse it
 back to health, let’s take a look at what happened to the Chennai-
based Indian Bank. It had gone through worse times and ye
t managed to walk on its own.
For a long time since the late-1980s, the Chennai-based bank
 faced huge asset-liability mismatches and had to depend on the
 overnight call money market to meet regulatory requirements 
such as cash reserve ratio and compulsory buying of government 
bonds. RBI restrained the bank from credit expansion in 1992 but it 
did not care to listen to the regulator. In 1996, it posted a net loss of 
Rs.1,336.40 crore, the highest by any bank in India till that time, and
 its net worth was wiped out by Rs.650.86 crore.
In fact, Indian Bank posted net losses for eight years at a stretch—
between 1994 and 2001—and the government kept pumping in money
 to keep it afloat. By 2001, its capital adequacy ratio was 13.6%. At one 
point of time, its gross NPAs were around 43% and net NPAs 21.6% 
of total loans.
Between 1998 and 2003—a year after Indian Bank made a net profit—
the government pumped in at least Rs.4,500 crore into it. The money 
was big considering the fact that Indian Bank at that time was roughly 
one-fifth of the size of United Bank now.
Rating agency Icra Ltd had chalked out a revival plan for Indian Bank in 
1997 and later, in 1999, an advisory group was formed under the
 chairmanship ofDeepak Parekh to improve the bank’s performance
Ranjana Kumar, its former chairperson, executed the restructuring
 plans deftly and turned around the bank.
United Bank is far better placed than Indian Bank. All it needs is
 capital from the government and the right kind of leadership to get 
out of the mess.
Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, 
who writes a popular weekly column Banker’s Trust.​

Banks rush to offload bad loans to asset reconstruction firms

Banks rush to offload bad loans to asset reconstruction firms
Gross NPAs of listed banks have risen consistently in the last two years as the economy has grown at its slowest pace in more than a decade. Photo: Priyanka Parashar/Mint
Live mint :Mumbai:jJoel Rebello:28 Feb 14
 Asset reconstruction companies (ARCs), or aggregators of
 non-performing assets (NPAs) of banks, have seen a large jump in supply 
of such assets this fiscal as lenders scramble to clean up their books.
Asset Reconstruction Co. (India) Ltd (Arcil), the largest aggregator of 
such loans in India, estimates that Rs.20,000 crore in bad loans has
 been put up for sale so far this fiscal, much higher than the
 Rs.12,000 crore seen in 2012-13.
Of this, Rs.6,000 crore to Rs.7,000 crore in bad loans has 
already been purchased by ARCs so far this fiscal, up from 
around Rs.2,000 crore last year, according toP. Rudran
managing director and chief executive, Arcil.
“Just like people choose to give away their old clothes when 
their closets are full, this year there has been a sharp increase in NPAs
 for sale to ARCs, because banks are eager to sell these assets noting
 the quick rate at which they are growing,” Rudran said.
Gross NPAs of listed banks have risen consistently in the last two 
years as the economy has grown at its slowest pace in more than a
 decade. FromRs.1.32 trillion at the end of the March 2012 quarter, 
such loans swelled to Rs.1.79 trillion by December 2012, and to
 Rs.2.43 trillion at the end of the December 2013 quarter.
To be sure, bank NPAs have been on the rise for the last many 
quarters, especially across public sector banks. However, attention 
to the issue was magnified after Kolkata-based United Bank of India
 reported gross NPA equalling 10.82% of advances for the December
 2013 quarter. The bank reported a record Rs.1,238.08 crore loss
 in the December quarter.
As bad loans surged and capital adequacy at the bank hit the
 minimum required level of 9%, United Bank was forced to stop
 giving fresh loans.
On Wednesday, news agencies reported that the lender also 
plans to sell more than Rs.700 crore in NPAs to asset
 reconstruction companies.
Just like United Bank, Chennai-based Indian Bank in a newspaper 
advertisement on Wednesday sought bids for “18 individual NPAs” 
without giving out the total quantum of loans being sold.
Top lenders like State Bank of India (SBI), Canara BankBank 
of Barodaand Union Bank of India are also looking to get rid of 
their sticky assets, confirmed a senior official at an asset reconstruction 
company, who did not want to be named.
V.P. Shetty, executive chairman at JM Financial Asset Reconstruction
 Co. Pvt. Ltd, said that this year the amount of NPAs for sale has been
 the highest since his company’s inception.
“We started out operations at the fag end of 2008-09 and in our
 five-year cycle this year the loans in the market are at the highest,” 
said Shetty.
ARCs expect banks to offload more NPAs in the immediate future,
 following new guidelines introduced by the Reserve Bank of India 
(RBI) last month, which incentivized banks to recognize and dispose
 of NPAs early. The guidelines were notified on Wednesday 
and will come into effect from 1 April.
“Banks can now sell even standard accounts in SMA 2 category to
 ARCs,” Rudran said. SMA 2 category loans are those that are 
overdue for 61 to 90 days and are on the verge of being classified as NPAs.
Generally, banks only consider selling loans that have already been 
classified as NPAs. Loans more than 90 days overdue are classified as NPAs.
“This is basically a preventive measure. One notable outcome of the
 recent change in guidelines is that ARCs are recognized for 
reconstruction of NPAs, and hence younger NPAs are coming 
in the market for sale to ARCs. Going forward, I feel, this will 
greatly help in NPA resolution,” Rudran said.
Besides, in the case of cash sales, the guidelines have for the
 first time allowed banks to directly book the profit or sale of a
 bad asset to an ARC in the profit or loss account and not a 
separate account.
However, a majority of NPA sales by banks to ARCs are not 
in exchange for cash, but in return for so-called security receipts
 (SRs), which are issued to banks pending recovery from an 
account. These SRs are then encashed after the loan is recovered.
In the recent guidelines, RBI has also permitted leveraged buyouts
 of stressed companies, by specialized entities such as private 
equity or venture funds, which buy out stressed assets only to
 re-sell them post restructuring.
“Appropriate incentive structures may be built so as to provide 
greater role to PE (private equity) firms and other institutions in 
restructuring of troubled-company accounts. These institutions
 can be expected not only to bring additional funds for restructuring, 
but also bring in expertise for management of the business unit in 
question,” RBI said in a statement on 30 January.

Currently, ARCs mostly buy NPAs of small- and medium-sized
 companies as buying larger loans require a significant amount 
of funds, technical skills and expertise. The recovery of large
 industrial accounts can also be a long-drawn and complex affair.
Shetty from JM Financial said most of the loans up for grabs in the
 market, are loans outstanding with medium-sized companies, 
which have failed to restructure their debt via the corporate debt
 restructuring (CDR) process.
“These loans have an average exposure of Rs.250 crore to 
Rs.500 crore. Both public sector as well as private sector banks
 are coming to sell as banks want to clear their books and want 
to give it to specialists companies which do just this job,” Shetty 
said.
The actual recovery of bad loans, however, continues to remain a
 challenge for ARCs, even as banks have shed their reluctance to 
part with their loans.
“Due to the economic slowdown, the recovery continues to be 
unsatisfactory. But banks have now realized that ARCs are their 
partners and it makes a lot of business sense to work with us. 
There is an enhanced understanding of the business and there 
is a lot of improvement in flow of information. We expect more
 loans to come in the market,” Rudran said.

NPAs :Early warning system




Govind Sankaranarayanan Financial express 1 Mar 2014

RBI’s proposed framework can be a game-changer for banks.

Recently, the United Bank of India (UBI) reported a large loss in the third 
quarter of fiscal 2014, an outcome of a five-fold increase in provisioning 
for delinquent loans. UBI’s financial woes were only the most acute 
representation of the deep risk of non-performing assets (NPAs) that
 pervades the banking system.

Reacting to the growing NPA challenge that it has observed, RBI, on
 January 30, published its guidelines towards “Early Recognition of 
Stressed Assets” to help bring under control the NPAs within the Indian 
banking system. This report came in the shadow of RBI’s own Financial
 Stability Report, which projected gross NPAs of the banking system to 
reach 4.6% by September 2014. That matters had reached such a pass, 
required, as per RBI, a deeper recognition that it was not sufficient to manage
 credit through lag indicators, such as gross NPA levels, but that there was a
 need to identify stress well before it results in delinquencies. This circular
 gives regulatory sanction (by means of incentives and penalties) to the need
 for continuous monitoring of accounts to ensure that borrowers attempt in
 good faith to achieve projections that they would have given bankers at the 
time they borrowed.
To understand why this paper is being released now, one would need to 
delve into the background of how the problem was created in the first place. 
As pointed out by yet another illuminating working paper of RBI on 
“Re-emerging Stress in Banks” published earlier in February 2014, periods
 of high credit growth are generally followed by periods of significant delinquencies. 
Growth above a certain rate might be possible for an individual bank is unlikely 
to be safe of the system as a whole. Based on the same paper, one could conclude
 that a system-wide growth in lending rates of more than 24% per annum for a 
sustained period increases the likelihood that loans move into the danger zone. 
Growth in lending rates exceeding 30% per year, a phenomenon that was seen 
at a certain period in the past decade, make it likely that delinquencies will be high.
The period of low interest rates immediately after the financial crisis coincided
 with an unreasonable rush to grow balance sheets. Debt, which was close to 
R1 trillion across a sample of large business houses, rose to R7 trillion over 
the past six years. As per reports by Credit Suisse, across large parts of the 
organised sector, debt is now at six times before earnings before interest tax 
and depreciation and interest are just above 1.4 times annual profits.
 When juxtaposed with the slowing growth in the economy, persistently
 high inflation and consequently high interest rates, it is tough to believe 
that all these loans will get repaid. It is for this reason that the current level 
of NPAs has started to exercise the regulator so much.
The very nature of lending means that there is a huge economic asymmetry 
already baked into the profitability equation. Since most banks make a margin 
of about 3% on their assets, they need to get well over 97% of their loan guesses 
correct to be profitable. This is a fairly high bar to set for what is frequently a
 geographically-dispersed judgement-based decision-making process. 
In order to get this perfectly right, it is necessary to be good and not just
 when you are underwriting a loan but also get the monitoring of the loan
 correct through its life.
The new “early recognition” guidelines finesse this problem by asking lender
s to identify certain accounts as special mention accounts and report these 
to a central repository. In the event a loan is 60 days overdue, joint lender
 groups may need to be formed, with incentives to find early solutions to the
 company’s problems. This is in contrast to the earlier situation wherein 
lenders addressed these issues only when loans were 6-9 months
 late in payments.
Through this, what the regulator has done is to place an onus on
 lenders to look at triggers, which suggests that companies are
 headed towards trouble and then disclose these to other lenders 
as well. To those outside the banking space, this will seem like a 
straightforward and common sense solution which ought always to
 have been followed. However, the nature of incentives within the 
system have tended to distort behaviour. There is a strong and 
seemingly impelling force across lending consortia to delay 
recognition of difficulties until denial become simply impossible. 
There also remains the natural tendency among lenders to rope in 
new lenders and thereby achieve some dilution of their share of the
 risks of a troubled asset.
Banks are penalised for an inability to predict early distress, by 
requiring to hold higher provisions. Additional provisioning norms
 will be imposed on companies whose directors sit on the boards 
of wilful defaulters or uncooperative companies (a euphemism for
 firms that refuse to share accounts, respond to queries and the like).
 Auditors of companies who turned a blind eye to the falsification of 
stock certificates or permitted dodgy book-keeping will need to be 
reported to the Institute of Chartered Accountants of India. Similar 
pressure may be brought on valuers of assets, lawyers, etc, who 
may have assisted a creditor in evading repayments.
RBI has provided several carrots to ensure that lenders do not
 face too great a burden because of new rules. These include the
 ability to spread the loss on sale of certain assets over a two-year
 period, allowing take-out financing to be treated as restructuring and
 permitting banks to reverse the excess provision on the sale of an
 NPA to an asset restructuring company under some circumstances.
Several of these recommendations are prudent, but will need an 
institutional culture within banks to make them work. It could be difficult
, even with the best intentions, for regulators to monitor whethe
r banks could truly have predicted early distress. To a large extent,
 boards of these companies need to keep asking tough questions 
to their managements, especially when they see any red flags.
The practice of re-examining why individual accounts that turned
 sour were deemed creditworthy in the first place can very easily
 turn to finger-pointing and is, therefore, generally discouraged in
 most companies. This difficult task will now need to be a part of
 the judgemental exercise banks will need to undertake. By asking 
themselves whether they could have done things better, as required 
under the new dispensation, lenders will frequently have to face the 
unpleasant truth that they had enough facts available to avoid delinquency,
 and in many cases chose to overlook those facts. This will need a degree
 of management maturity and moral courage.
While some will argue that the gross NPA levels of the Indian banking 
system were as high as 10% towards the end of the 1990s, and now 
they stands at only about 3.5%, the statistics do not reveal everything. 
Close to 5% of assets are restructured now and only by the application 
of a particularly elastic version of optimism would one believe that more
 than 50% of this would be collected in the long run. When one considers
 this fact, that the true NPA position of the banking system is above 6%,
 on a base of loans which is now three times as large as what was the 
case in the 1990s, one can begin to see why this would cause systemic 
concern.
In a capital-starved economy, the price of irresponsible lending falls more 
harshly on the small business, the young entrepreneur or the less
 well-connected. Unless the level of NPAs are reduced, the natural
 response is for lending to dry up for good projects, something which
 India can ill-afford. It is always impossible to quantify whether the 
several lakh crores lost out to NPAs deprived funding to a potential
 Indian Google or Microsoft or to even count the number of jobs that
 might have otherwise been created. To the extent that these changes 
will bring about a gradual but important cultural change in the way banks 
lend, it must count among those circulars that have great import for the long term.
The author is CFO & COO, Corporate Affairs, Tata Capital Financial Services
Govind Sankaranarayanan

Rs 100-crore realty loan may have cost UBI chief Archana Bhargava her job




Dheeraj Tiwari, ET Bureau | 26 Feb, 2014, 10.33AM 


NEW DELHI: Archana Bhargava may have had to quit unexpectedly
 last week as chairperson of United Bank of India because 
of a Rs 100-crore loan to a real estate developer despite opposition 
within the board, two officials told ET.

In late 2013, 10 general managers of the Kolkata-based bank had 

complained to both to RBI and the finance ministry that Bhargava
 had okayed the loan by overriding the board's dissent. The Reserve
 Bank of India has placed curbs on the bank giving loans of more
 than Rs10 crore to a single account due to its mountain of bad debt.
 "We are under a lot of stress. We cannot comment on this," said 
executive director Deepak Narang.

RBI and government officials confirmed that the complaint had been
 routed through independent director Sunil Goyal, who declined to 
comment. Bhargava resigned on February 22 citing health reasons.
 Agovernment official aware of developments said both the government
 and RBI were agreed on the course of action regarding Bhargava.


Financial services secretary Rajiv Takru and RBI governor Raghuram
 Rajan were on the same page on the issue... A staterun financial institution
 cannot be in a mess for long. And UBI's downfall was way too fast," said the
 official, reflecting on the bad loans of the bank which surged threefold 
to Rs8,546 crore at the end of December from Rs2,964 crore in March.
 Gross non-performing assets (NPAs) touched 10.82% of total loans at
 the end of December.

Bhargava has chosen to stay silent and not defend herself throughout the 
controversy amid conflicting reports about what exactly her role was. 
Some have depicted her as being over eager to clean up the bank's bad 
loans and riding roughshod over those who disagreed with her.

At one point the bank also blamed the spike in non-performing loans on 
the software it was using, although it seemed to step back from doing so
 in later statements.

According to some officials, the finance ministry and the RBI weren't
 convinced about Bhargava's efforts to cleanse the system. "Earlier,
 it was felt that she was setting the books right as most chairmen of
 state-run banks do when they take over. But then, complaints against 
her of both financial and personal mismanagement started flowing in," 
said a senior government official.

The forensic audit by RBI in November raised two issues, said a 
central bank official. "It was mentioned that some of the accounts
 were restructured without a viability study and some accounts, 
which were not eligible for special dispensation, were not downgraded,"
 he said. The government is yet to appoint a new chairman but both RBI 
and finance ministry officials accept that it will be a tough task for the
 next incumbent.

"We cannot supersede the bank's board, after all it's a staterun bank.
 The government will have to infuse capital and put pressure on recovery," 
said the RBI official cited above. "An administrative inquiry is under way 
as to why these NPAs were under-reported or disguised.

NPAs have to be addressed. If there is a lapse then responsibility will be
 fixed," financial services secretary Rajiv Takru said.