NPA worries: Banks call meet to chalk out strategy

George Mathew , Sandeep Singh | Mumbai/ New Delhi | FE :September 25, 2014 

Worried over the possibility of bank loans to coal block projects turning non-performing assets (NPAs) following the Supreme Court order, the Indian Banks Association (IBA), the apex body of banks in the country, has convened an urgent meeting of its management committee on Friday to chalk out steps to safeguard their exposure.

“The IBA managing committee will be meeting later this week to work out a strategy. We have to protect our money,” said an IBA official. While the lenders claimed the order will not give a “hard knock”, Credit Suisse had earlier estimated that the crackdown will put Rs 60,000-72,000 crore of loans at risk. 

The SC order has come at a time when asset quality of banks is already a cause of concern with overall gross NPA ratio rising from 3.26 per cent as on March 2013 to 3.85 per cent as on March 2014.

Playing down the impact, an official at State Bank of India said the exposure of the largest bank is around Rs 4,000 crore lent to power units which have fuel linkages with the affected coal blocks. IDBI Bank, another major lender to the sector, on Wednesday said its exposure to companies affected by the SC order is around Rs 2,000 crore. “There’s some impact. We are hopeful that the government will find a way to safeguard the banking industry’s interest. The government is keen to promote infrastructure sector in a big way,” said the chairman of a leading PSU bank. Other PSU banks and private lenders refused to disclose their exposure.

The banking industry is relieved that the uncertainty surrounding the issue has finally gone. “We believe that uncertainty is possibly the worst enemy of growth. We are glad that this is over with the SC verdict on coal blocks allocation. We now look forward for a quick plan of action for ensuring that coal supplies are not disrupted and thereafter a swift and transparent bidding process for reallocation,” said Arundhati Bhattacharya, chairman, SBI.

A source confirmed that while banks are not concerned regarding the interest receivables from large groups such as Aditya Birla and the Jindal group, they are already witnessing some defaults on interest payments from small companies that are dependent only on a single project.


“Big conglomerates are servicing their debt regularly and therefore banks are not much concerned about their exposure to them. But banks are facing issues of interest payment from smaller companies that are dependent on their single project for their profitability,” said a source who did not wish to be named.

Non-performing assets in banks a matter of concern: Subbarao

Chennai:First Post : 4 July 2013 

The Reserve Bank of India today said the growing non-performing assets in the banking sector is a matter of concern and steps are being taken to bring it down as soon as possible.

“Together NPAs and restructured assets are increasing and are quite sizable. It is a matter of growing concern … The Reserve Bank and government have taken all action necessary to ensure that NPAs come down as soon as possible,” RBI Governor D Subbarao told reporters in Chennai.

RBI Governor D Subbarao. AFP

Non-performing assets (NPAs) of banks have been going up for the last two years due to slowdown in the economy.

The gross NPAs of some public sector banks, including State Bank of India and Punjab National Bank have crossed 4 percent of the total assets at the end of March, 2013.

Gross NPAs of public sector banks have risen from Rs 71,080 crore as on March 2011, to Rs 1.55 lakh crore as on December 2012.

Subbarao further said the Indian banks are well capitalised.

“They would be able to withstand substantial shocks to the system,” he added.

After meeting chiefs of public sector banks, Finance Minister P Chidambaram on Wednesday said they have been asked to focus on their top 30 non-performing accounts and take action for recovery against the wilful defaulters.

“They are keeping a close watch on top 30 NPA accounts in each bank and action will be taken to recover especially when there is a case of wilful default,” he had said.

PTI

RBI may hike NPA provision ratio if needed: Chakrabarty

F C :PTI Dec 09 2012 , Mumbai

RBI Deputy Governor K C Chakrabarty has come down heavily on banks showing higher 
profits without providing adequately for bad loans, and said if need be, the central bank may hike provision coverage ratio (PCR) levels.


"Why banks need to show profits as high as 25 per cent? They can show 5 per cent growth in their profits. If they are not doing (providing more), I will increase it (PCR)," he told PTI in an interview.

The RBI had done away with its earlier requirement of forcing banks to maintain the PCR, or the ratio of provision to gross non-performing assets (NPAs), at 70 per cent.

The apex bank had increased the PCR to 70 per cent after the Lehman crisis in 2008 and this was applicable till September, 2011. While almost all private banks have higher PCR, majority of the state-run lenders could not meet this deadline.

A number of public sector banks, especially the smaller ones, have shown a drop in PCR in the second quarter earnings and posted a good jump in profits as a result.

The RBI has floated a discussion paper to explore having dynamic provisioning which requires banks to keep aside money during good times for a rainy day, rather than providing after an account has gone bad.

Speaking about NPAs of banks, Chakrabarty attributed a majority of them to poor administration and risk management practices of lenders and went to the extent of terming it as 'non-performing administration.'

"I call NPA as non-performing administration. We have to make the administration functioning," Chakrabarty, who oversees banking supervision at RBI, said.

The RBI Deputy Governor said the "change in the administration" has to come in a slew of areas which would be internal as well as external.

Lending rates would have been far lower if banks had got their NPAs down, Chakrabarty said.

Bad loans peaking, handholding of distressed firms is on the rise

 FC :Manju AB Nov 30 2012 , Mumbai

But persistently high NPA level creating constraints for banks to cut lending rates

There is nothing so alar-ming about the burgeoning non-performing assets (NPAs) and the restructuring book of banks, as the ongoing NPA situation is mirroring the last cycle of high NPAs in FY02, when they were as high as 10.4 per cent of total bank credit. This was a period that saw severe stress in large sectors such as iron and steel.

Banks are handholding companies by restructuring their debt and bringing them back to recovery gradually. Even today, gross NPAs and restructured assets put together are close to 9.2 per cent, but the stress on asset quality is peaking.

“The profitability of scheduled commercial banks would be under increased strain during 2012-13 due to higher level of NPAs,” K C Chakrabarty, deputy governor of the Reserve Bank of India (RBI) said at the Assocham banking summit on November 21.

Gross NPAs of the banking system have increased from 2.36 per cent in March 2011 to 3.25 per cent this June. Restructured standard accounts as a percentage of gross advances have doubled from 2.7 per cent in 2009 to 5.4 per cent as of June, with substantial increase in restructuring in certain sectors. Data indicate that restructuring is largely resorted to in the case of industrial sector accounts, particularly large industries, compared with smaller borrower accounts such as agriculture, micro and small enterprises. The persistently high level of NPAs and increase in restructured accounts continue to create significant constraints on banks’ abilities to reduce lending rates, thereby, in a sense, penalising the honest borrowers.”

Total restructured assets of banks at the end of the second quarter ended September 30 stood at Rs 2,96,400 crore, or 5.7 per cent of total assets. Total gross NPAs are Rs 1,82,000 crore or 3.5 per cent of total assets. Gross NPAs of public sector banks were 3.23 per cent of gross advances at Rs 85,950 crore, while for private banks, it was 2.34 per cent of gross advances at Rs 23,235 crore.

While SBI has restructured about 3.5 per cent of its total advances, other public sector banks have restructured about 7.8 per cent of their gross advances and private sector banks about 1.5 per cent of their advances.

Karthik Velamakanni, an analyst with the UK-based investment bank Espirito Santo, said, “In comparing the current asset quality cycle with the previous cycle (FY02-FY07), one can find similarities in terms of high GNPAs in percentage terms, low GDP growth and severe stress in a large sector like iron & steel in FY02 and infrastructure at present. Since FY02, the Indian banking sector has been strengthened in terms of improved legal framework for recovery (SARFAESI Act), asset reconstruction companies, introduction of credit bureaus and far more stringent NPA recognition norms. Because of these structural improvements, GNPA per cent may not increase to the FY02 level.”

Pratip Chaudhuri, chairman and managing director of State Bank of India, said: “It is quite realistic for the finance minister to expect banks to handhold companies and the statements that banks’ asset quality is alarming go against this. It will be extremely useful if other organs of the government also have the thinking and the policies in line with what the finance minister said, because so much of assets have been created and so many jobs have been created. Unless we handhold and come down heavily on every small sign of delinquency, the consequences for the economy would be quite adverse.”

So far a significant portion of the asset quality stress is already visible, given the high level of stress in priority sectors such as agriculture, MSME, education, SMEs and mid-sized companies.

“However, large companies are yet to see NPAs, especially in stressed sectors such as power and infrastructure, which we expect to see over the next two years. So, the stress on asset quality will peak out over the next 12 to 24 months,” said Karthik of Espirito Santo.

M Narendran, chairman and managing director of the Chennai-headquartered Indian Overseas Bank, said: “Earlier we thought India is insulated from the global financial crisis, but our experience over the past two years has shown that trouble is hitting us. Our exports have slowed down and our imports continue to grow. Companies created excess capacities to meet increased demand in keeping with the expected growth in the economy, but today the demand has come down. All this has resulted in bad assets in the banking system. But we expect NPAs to peak over the next six to seven months.”

Assets under stress include loans to the aviation, power, highways, fertiliser, steel and textile sectors. All these sectors have taken to credit restructuring once, but have still not been able to turn around.

Moody’s senior analyst Vineet Gupta said: “The growing number of restructured loans add to the risks already looming over Indian banks because of the weakening economy.”

That means the capital requirement for the banking sector would have to substantially increase.

“Companies need to innovate and embrace technology to improve their productivity and efficiency so that their costs can come down, they remain competitive and continue to service their obligation as borrowers. Banks on their part must look to arrest the deterioration in asset quality by adopting better risk management practices like better credit appraisal, closer monitoring of borrower accounts, greater information sharing among banks and by carrying out elaborate viability studies before restructuring. While NPAs and restructuring of assets cannot be wished away, they need to be effectively curtailed to ensure that the lendable resources of banks are maximised,” Chakrabarty added.

Accounting for NPAs when economy is down

BL : Mohan  R Lavi : Aug 30,2012

The jury is still out on who would be more disappointed if Kingfisher Airlines goes belly-up — the airline or State Bank of India (SBI). SBI leads the consortium of unpaid banks and financial institutions that have forked out funds to the airline.

Most of these lenders have already considered their exposure as a non-performing asset (NPA) in accordance with the guidelines of the Reserve Bank of India (RBI).

The SBI chief has called for a re-look at the NPA norms to prescribe standards that are in sync with reality.

In the past, whenever the economic environment has turned bleak, the Government has got going with a slew of measures — the stimulus package a couple of years back, relaxation in FDI norms in certain industries and deviation from accounting standards to permit capitalisation of exchange gains and losses being some examples.

During these times, the RBI has focused on managing interest rates and largely remained silent on tweaking NPA norms. All the glare and attention seems to have been focused on Kingfisher — a bit unfairly one could say — though there are other borrowers who are in a worse shape than the airline, and some who have even defaulted wilfully.

PRUDENTIAL NORMS

As per present the RBI guidelines, NPA norms come into effect when an account is not funded for a period of 90 days. 

Assets are classified depending on how long they stay in the NPA category.

In the present economic environment, 90 days is 

considered too early to trigger NPA status. 

Even though other conditions such as collateral security and restructuring proposals would affect the NPA status of an account, there is a view that the RBI can be a bit more liberal in this regard.

Accounting standards are also keeping pace with the times. A change is recommended from the ‘incurred loss model’ to the ‘expected loss model’, to recognise impairment conditions existing in financial assets.

The International Accounting Standards Board has issued an exposure draft on the amortised cost measurement and impairment of financial instruments. The exposure draft proposes an expected loss model for recognising impairments on financial assets recorded at amortised cost.

Currently, both US GAAP and IFRS use an incurred loss model for recording impairments on financial assets. Under an incurred loss model, impairments are recognised only after a loss or trigger event is identified. An expected loss model would recognise loss estimates throughout the life of a loan (or portfolios of loans) and other financial assets recorded at amortised cost.

The Basel Committee on Banking Supervision’s international accounting standards should be changed to improve how assets are valued when markets are illiquid or malfunctioning.

The International Accounting Standards Board should set standards to gauge “fair value” when the measures are unclear, and banks should record losses expected over the life of a loan portfolio earlier.

India is one of the countries that supports the expected loss model in the global move towards IFRS. Some experts have warned that the expected loss model would accelerate losses at the beginning of a downturn and, consequently, still have a pro-cyclical effect.

The Financial Crisis Advisory Group (FCAG) supports exploring alternatives to the incurred loss model, including the expected loss model and a fair value model.

The financial world sees a lot of merit in banks and financial institutions adopting Spain’s system of forcing banks to hoard capital in good times to draw upon in bad. The European Union (EU) is following suit with draft rules.

IFRS IN INDIA

After maintaining a stoic silence over an extended period of time, the Government has now stated that it would soon move over to IFRS. 

Whenever that occurs, the RBI should be prepared with Prudential Norms for Income Recognition and Asset Classification.

Most banks and financial institutions in India are listed and, hence, they would certainly be in the first set of entities that move over to IFRS.

The task for the RBI is certainly cut out, as it has to balance a dark economic environment with aggressive accounting standards. 

Having done so in the past (for Indian accounting standards), this should not be a too Herculean a task for the RBI

Reserve Bank asks banks to focus on recoveries of non-performing assets

NDTV, 01 Mar 2012 | 10:55 AM

The Reserve Bank of India has asked Indian banks to focus on recoveries, bankers said after a Wednesday meeting with the central bank.

However, the consensus was that non-performing assets are at manageable levels, bankers said after the meeting which also covered implications of Basel-III norms on NPA recognition.

No individual NPA accounts were discussed, bankers said, but aviation, textile and steel sectors were part of the dialogue. Earlier, there had been speculation that the matter of Kingfisher Airlines would be brought up at the meeting.

Bankers also suggested that restructuring should be extended to smaller accounts instead of just large-ticket size accounts, said Pratip Chaudhuri, chairman of India’s largest lender State Bank of India.

Chaudhuri said that an account should exit restructuring classification after one year, and that a restructured loan should not remain classified as such for its lifetime.

Other bankers have proposed a timeline of two years to exclude an account from restructured classification

He added that banks had asked for proper guidelines on classification of restructured loans, and that the definition should include timeline, clear guideline when account has exited restructured classification.

If a restructured loan adheres to revised repayment schedule, it should be out of restructured classification, he said.

The central bank, however, may not sector-specific NPA dispensation due to a need to comply with global standards.

There were no concerns about understatement of NPAs.

Banks, however, will continue to recognise NPV loss upfront

The meeting was attended by top representatives of public and private sector banks, among them SBI, ICIC Bank, Axis Bank, Punjab National Bank, Andhra Bank, Bank of Baroda, Union Bank, Bank of India, and Indian Overseas Bank.

Bad assets will pile up, but overall situation is under control: bankers

Anup Roy :Livemint:29 Feb 2012


Airlines, textiles, iron and steel are some of the sectors that are showing strains and firms are finding it difficult to repay bank loans


Mumbai: Top bankers told India’s central bank on Wednesday that in the current economic environment they could end up piling up more bad debts but overall the situation will remain under control. Banks said bad assets may grow by Rs. 60,000-65,000 crore—about 1%.


Airlines, textiles, iron and steel are some of the sectors that are showing strains and firms are finding it difficult to repay bank loans. When they are not able to pay back for three months, banks are required to treat the accounts as sub-standard and set aside money for the same.

Rising bad assets impact banks’ profitability as they do not earn interest on such assets, and on top of that, they need to set aside money.

Bankers discussed the issue at a meeting convened by the Reserve Bank of India (RBI) at its headquarters in Mumbai.

RBI, on its part, asked the bankers to step up their recovery process and tighten their asset quality monitoring mechanism. The central bank also took stock of Indian banks’ preparedness to embrace the Basel II norms, global rules that will assess bad assets in a different way.

Banking industry’s bad debts as a percentage of total lending are now at a six-year high.

Chiefs of State Bank of India, ICICI Bank Ltd, Punjab National Bank, Bank of Baroda, and Bank of India, among others, discussed relevant issues with RBI deputy governors K.C. Chakrabarty and Anand Sinha.

The meeting did not discuss in detail restructuring of loans as an RBI-appointed committee is looking into this, a banker who attended the meeting said.

“We did an assessment of NPAs (non-performing assets). Generally, there was a feeling that we should not be complacent but it (NPA) is not something which is too scary. We said NPA and restructure definition should have a time line. If an account performs after restructuring it is not affected for life... So that account should be taken out of the categorization of restructuring,” State Bank of India chairman Pratip Chaudhuri told reporters after the meeting.

“RBI was by and large confident that we should be able to reasonably bring down NPAs in the system even as higher incremental slippages can be expected,” said another banker present at the meeting, who declined being named.

Banks have seen an increase in bad loans as economic growth slows to 7% this fiscal from 8.4% last year. After declining continuously between fiscal years 1995-96 and 2007-08, the total stock of bad loans at banks has risen sharply, RBI’s Sinha said this month.

Tuesday’s discussion focused on four key points. Apart from getting bankers’ view on bad debts, RBI sought to know banks’ preparedness for advanced approach under Basel II norms. Banks are to apply to RBI by June or September stating their readiness to move on to the new system of monitoring loans and mitigate risks of bad debts.

RBI also asked banks to improve their MIS (management information system) capabilities and build up their data warehousing capabilities so that the returns filed by banks, or regular bank activity-related statistics, are completely system driven.

One critical element discussed at the meeting was that all accounts should have a single unique identification number instead of multiple identifications for different types of loans.

RBI’s latest data shows that bank credit growth has fallen to 15.7% against 24% a year ago as on 10 February.

Segregated data released on Wednesday showed that credit to industry increased by 20.2% in January 2012 compared with 26.5% in the previous year

anup.r@livemint.com

NPA, a multi-headed monster

Source :Business Line :T.S.krishnamurthy:9 Feb 2012


Non-performing asset (NPA) is a multi-headed monster having multiple implications on the performance of banks. An immediate offshoot of rising NPAs is the higher provision required. Once an account is classified as NPA it goes through several phrases requiring progressively higher provisions.


A sub-standard Asset requires a provision of 15 per cent on secured portion and 25 per cent on the unsecured exposure. After 12 months as Sub-Standard Asset, it gets classified as Doubtful Asset 1(DA1) and requires a provision of 25 per cent on secured portion and 100 per cent on the unsecured portion.
Once the account crosses one year as DA1, it becomes Doubtful Asset 2 (DA2-1to 3 years) and requires a provision of 40 per cent on the Secured portion and 100 per cent on the unsecured portion.


Once it crosses three years, it becomes Doubtful Asset3 (DA3) and requires 100 per cent provision irrespective of the availability of security. Unsecured loans such as clean loans, educational loans attract 100 per cent provision even at DA1 stage.


Accounts classified as fraud need not go through all these stages and will require 100 per cent provision as soon as it is classified as NPA. Such provisions have to be made out of the profits of the year thus, eroding the bottom line.


The remedy lies in an effective recovery mechanism and the tightening of sanction and appraisal procedures for which I propose to make some suggestions in addition to the ones I had made in my previous articles.
The prevention and recovery of NPAs also require some banker friendly initiatives by the Government and its agencies.


The judiciary also has a role in the mitigation of banks' hardships by having stringent standards for granting a Stay against the recovery measures initiated by the bank and rejecting frivolous objections raised by the borrowers in the initial stage itself.


A large chunk of NPAs comes from Government-sponsored schemes which are target-oriented and require to be granted without any detailed appraisal and without looking into the viability of the project.


The applications are sponsored by Government agencies like the District Industries Centre or other agencies created for specific schemes. In the case of loans secured by mortgage of immovable properties, the security is created by way of equitable mortgage that is, simple deposit of deposit of title deeds.


This does not require registration and the mortgage charge is transferred under Sec 58(f) of the Transfer of Property Act. Since this is not registered, it does not find a place in the Encumbrance certificates.


There have been several cases where the borrowers have sold the property or mortgaged it to a second lender pleading that the original title deeds have been lost. Even though such a sale/second mortgage a sale is not legally valid, banks have to go through the cumbersome procedure of impleading the buyer of the property in the recovery suit for proving its case.


Some States have introduced a system of registering the memorandum of title deeds. (A simple letter signed by the mortgagor confirming that he had deposited the original title deeds with the Bank with the intention of creating a mortgage).


This attracts Stamp Duty and encounters a lot of resistance from the borrower. Further, many banks have lost substantial amounts because of unscrupulous borrowers resorting to multiple borrowing from different banks on the same immovable property. 


To overcome these problems, a Central Registry has been established by an amendment to the SARFAESI ACT.


All charges (other than pledge) created on properties and assets of borrowers favouring banks and other notified financial institutions shall be registered with a Central Registrar appointed by the Government. This has come into effect from April 1 last year.


While this is a welcome step, which will largely prevent fraudulent transactions of the above nature, the sheer volume of such mortgage transactions makes maintenance of such records a daunting task. Further the task will be complete and effective only when all existing mortgages are recorded in the Central Registry.


At present, there is no provision for this in the Act. The Union Government should take immediate steps to constitute the National Company Law Tribunal and the appellate Tribunal for speedy resolution of the cases involving sick industrial units to avoid delays arising out of referring such cases to BIFR.


Often, banks in their anxiety to prevent slippage resort to restructuring of accounts without looking into the long term viability of the project. This is only a postponement of the inevitable, and such accounts more often than not turn into NPAs at a later date as has happened in the case of accounts restructured during 2008-09.
Finally, as has been pointed out in the Financial Stability Report of RBI, while Indian banks will migrate to Basle III from a position of strength, the new standards may require adjustments in lending behaviour.


As the Deputy Managing Director of SBI has pointed out recently, more rigorous standards of appraisal have to be applied while considering fresh exposures and the vulnerable sectors like power, aviation, textiles and real estate have to be assessed taking into account the competition and rising costs involved.
(The author is a retired banker. The views are personal.)