SBI numbers show promise but worst is not over for public sector banks

FP Dinesh Unnikrishnan15 Nov 2014

State Bank of India (SBI), the country’s largest lender, on Friday came out with decent numbers in the September quarter. The most critical factor in SBI’s earnings is steady decline in fresh slippages and health recovery.Gross non-performing assets (NPA) of the lender, during the quarter, have come down to 4.89 percent of its total loan book from 4.9 percent in the preceding quarter.

Thus, SBI’s bad loans have come down by a total of 84 basis points (bps) since the third quarter of last fiscal from 5.73 percent to 4.89 percent. One bps is one hundredth of a percentage point.

Net NPAs, after adjusting provisions, too have declined to 2.73 percent from 2.91 percent compared with the year-ago quarter even though have gone up marginally from the preceding quarter.

In the last one year, SBI has attempted to get a firm hold on the bad loan scenario by identifying the problematic areas and intensifying the fight against wilful defaulters, borrowers who do not pay back even if they have the capacity to do so.

The biggest pain on SBI’s book emerged from the mid-sized corporate segment and agriculture, which continued to be significant contributors to bad loans this quarter. But the bank has clearly managed to address the stressed asset situation as reflected in the quarter numbers.

The net profit at Rs 3,100 crore has beaten the estimates of analysts polled by CNBC at Rs 3,096 crore. The improvement in the net interest income to Rs 13,275 crore, up 8.4 percent, from Rs 12,251 crore in the corresponding period last year, has aided the 30 percent jump in the profit on a year-on-year basis.

SBI’s other income, which includes the treasury income, too have grown by 39 percent to Rs 4,571 crore from Rs 3,278 crore in the year-ago period.

Loan growth has been robust for the bank with its advances growing by 9.7% on year, which, in turn, helped the lender to manage strong growth in Interest income.

Total provisions, during the quarter stood at Rs 4,275 crore of which Rs 4,028 crore was set aside for bad loans.

That said, the numbers announced by other state-run banks such as Punjab National Bank and Indian Bank of India, reiterate the belief that the banking sector, dominated by government banks, is yet to come past the worst as far as bad loan situation is concerned.

Gross NPAs of total 40-listed Indian banks have grown by 17.5 per cent in the September quarter to Rs 2,68,933 crore from Rs 2,28,895 crore in the year-ago quarter and up by 7 percent compared with Rs 2,51,962 crore in the June quarter. But the pace of increase in bad loan generation has surely come down.

Of the total bad loans, almost 90 percent comes from state-run banks.

Bad loans are only one segment of the total stressed assets in the banking system. The other chunk is the restructured loans, which constitute almost double to the declared gross NPAs in the banking system.

Together, stressed assets constitute 13-14 percent of the total loans given by banks, while bad loan generation remained modest in private banks.

There are at least 10 banks in the Indian banking system, which have Gross NPAs above 5 percent of their total loans. Topping the list are state-run banks such as United Bank of India and Indian Overseas Bank.

As Firstbiz has noted earlier, the seeming economic revival is yet to show on the ground as reflected in the muted credit growth of banks largely due to the absence of new project proposals.

Unless the positive sentiments post the arrival of the Narendra Modi government at the Centre translates into investments and real economic activity on the ground, banking sector will not be freed from the ills of NPAs.

But the long-term solution lies in freeing state-run banks from the control of the government. These banks must be prepared to find sufficient capital to survive on their own instead of the current practice of annual capital infusion through budget allocation.

Going ahead, the government will find it extremely difficult to meet the rising capital requirement of state-run banks unless it is willing to reduce holding in these banks.

Also, shorter tenures of top executives and frequent intervention from politicians in the business decisions of government banks have only helped to add to their incompetence of sarkari banks before deep-pocketed tech-savvy rivals in private sector.

NPAs : Asset quality remains a niggling worry for Indian banks

Moneycontrol Bureau :Nov 05, 2014, 08.46 AM IST 

r.
Maintaining its cautious view, global rating agency Moody's recently said that it 



remains negative on Indian banks on the back of high leverage in the corporate 



sector.

Fears of worsening asset quality continue to haunt Indian banks. While poor asset quality is usually synonymous with public-sector lenders, private banks don’t seem to be out of the clutches of bad loans either. The list ranges from banks like State Bank of Bikaner and Jaipur  and State Bank of Travancore  to bluechip like ICICI Bank .

To begin with,  Indian Overseas Bank reported loss in the second quarter of the current fiscal year due to higher tax expenses and provisions for bad assets. The public sector lender made provisioning for bad loans to the tune of Rs 892.38 crore versus Rs 619.90 crore in the same quarter a year ago. Its asset quality worsened as gross non-performing assets (NPAs) jumped to 7.35 percent from 4.65 percent a year ago. Net NPAs also almost doubled to 5.17 percent from 2.83 percent a year ago.

The stock is likely to face heat as global rating agency Standard & Poor's has lowered the credit rating of IOB to BB+. The rating indicates speculative grade following IOB's asset quality deterioration. It expects the bank's asset quality to remain remain weak over the next 12 months.

While Union Bank of India ’s (UBI) net profit rose 78 percent in the quarter gone by, the picture on asset quality front didn’t seem too bright. Its gross non-performing assets (NPA) jumped 42 basis points quarter-on-quarter and 105 bps year-on-year to 4.69 percent. Net NPA climbed 25 bps Q-o-Q and 56 bps Y-o-Y to 2.71 percent in July-September quarter.

The subsidiaries of India’s largest public sector bank  State Bank of India (SBI) – State Bank of Bikaner and Jaipur (SBBJ) and State Bank of Travancore (SBT) also saw marginal rise in bad loans.

SBBJ’s gross NPA rose to 4.24 percent versus 3.6 percent and net NPAs was at 2.49 percent versus 2.1 percent, Q-o-Q. SBT was stung by higher NPA provisions. Its gross NPA increased to 5.11 percent from over 3.5 percent of the total advances, on a year-on-year basis. Net NPA also rose to 3.2 percent from 2.07 percent a year ago.

Their parent SBI is yet to announce it Q2FY15 earnings. In Q1FY15, the bank’s overall asset quality continued to be stable. Gross non-performing assets (NPA) slipped 5 basis points sequentially and 66 bps on yearly basis to 4.90 percent while net NPA fell 17 bps year-on-year (up 9 bps quarter-on-quarter) to 2.66 percent in Q1FY15.

Maintaining its cautious view, global rating agency Moody's recently said that it remains negative on Indian banks on the back of high leverage in the corporate sector.

" Our outlook for the country's banking system remains negative , as it has been since November 2011. The negative outlook reflects our view that high leverage in the corporate sector could prevent any meaningful recovery in asset quality, notwithstanding a moderate rebound in economic growth," the agency said in a note.

It further added that the negative outlook pertains mainly to the state-owned lenders which represent more than 70 percent of total banking system assets.

But largest private sector lender ICICI Bank is also not spared. The bank met expectations on profit and net interest income front (NIM) but asset quality weakened. Its gross NPA rose 4 basis points on a Y-o-Y basis and 7 bps sequentially to 3.12 percent and net NPA increased 11 bps on yearly basis and 9 bps quarter-on-quarter to 0.96 percent.

SBI Chief Tries to Shift the Blame on NPAs

Money control :DEBASHIS BASU | 17/10/2014 04:43 PM |   

Blames lax regulations for high NPAs when the real cause is widespread corruption in public sector banks

The State Bank of India (SBI) chairperson Arundhati Bhattacharya, in an interview with Financial Times, has called for shake up in the regulatory system, as if SBI and its chairman is an outside to the same system.

In the interview, the SBI chief admitted that rates of bad and restructured assets will keep rising for “at least a couple more quarters”, despite having already hit roughly 10% of loans. 

But remarkably for the first time for a chairman of a government-owned bank, she has argued that India needs tougher rules for defaulters, as well as “a proper bankruptcy law to help get orderly resolution of [bad] assets”. “What we need is a little more teeth,” she was quoted while calling for firmer regulations to target indebted tycoons. 

There are three things to note about this new, sudden demand for teeth. 

1. No chairman of state-run lender has ever raised his or her voice about poor regulations that is failing to curb the ever-rising non-performing assets (NPAs).

2. SBI and other banks have never targeted defaulting corporate borrowers with determination to recover monies. Indian borrowers have always felt safe borrowing from the public sector banks knowing fully well that chairmen of these banks have no accountability. 

3. In fact, successive bank chairperson have passed the buck to the next person and retired with full benefits, even as defaults continued to hit the government-owned banks at every economic downturn.

4. The demand for “more teeth” is coming from the State Bank of India but not private sector banks because these banks have negligible bad debts.

5. This merely proves that it is not the recovery laws but lax credit appraisal and totally compromised top management is responsible for abnormally high bad debts in government banks.

Indeed, the same corrupt nexus between public sector banks and it's defaulting borrowers was responsible for band loans reaching 13% of advances in 2001-2002. In response, the government had created Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 designed to help in the recoveries of bad loans. One of the key provisions of the Act is for banks to be able to auction the assets of defaulting borrowers. This law was supposed to wholly aid banks. 

Unfortunately, if the bank officials are corrupt and have lent money without adequate collateral, what auctions will they do? This is why spectacular defaults such as Deccan Chronicle and Kingfisher Airlines have led to no action against defaulters, despite the SARFAESI Act. In addition, SBI has been the biggest lender to Kingfisher. Have you heard of any action against any SBI official, including previous chairman, for what is obviously gross negligence in assessing Kingfisher’s creditworthiness and for not ensuring that the bank’s interests are covered?

In May, the All India Bank Employees' Association (AIBEA), while revealing wilful defaults worth Rs70,300 crore in 400 loan accounts in public sector banks (PSBs), has demanded a detailed probe in to the loan sanctioning and loans turning into bad assets. 

This is bad lending of epidemic proportions. If banks were not confident of the laws that would land them in this huge soup of bad loans, whom did they point this out to and why did they lend? No, these bad loans have only one root: corruption, something that Ms Bhattacharya does not want to talk about.

According to the bank employee's union, over the past seven years, there were fresh bad loans worth Rs4.95 lakh crore only in government banks, while during the same period, these lenders wrote off bad debts worth Rs1.4 lakh crore. Gross non-performing assets (NPAs) and bad loans in the PSBs have increased to Rs1.64 lakh crore as on 31 March 2013 from Rs39,000 crore as on 31 March 2008.

While the unions were demanding stern action against bank defaulters, not a single bank chairman supported it. Moneylife had asked the SBI chief three questions based on her FT interview. The questions were, did not SBI know that the laws were weak; did banks ever tell the RBI or the Finance Ministry about the problems and is SBI saying that the RBI has failed to act like responsible regulator?

Her office replied: "(the) Chairman in her interview had merely emphasized the need for tougher resolution mechanism to put a check on wilful defaulters. Additionally, she also said banks should work in tandem and more closely in consortiums, while lending only to projects that have government regulatory clearances in hand." It also said, "...to draw a link between the 3 questions that you have posed and the relevant interview is far-fetched."

The bank employee unions have been demanding fix responsibility on banks’ top brass for the loans that have turned bad, allow banks to share information on NPAs and wilful defaulters under the Right to Information (RTI) Act, and declare wilful loan default as a criminal offence. 

The fact is despite stringent credit appraisal process and committees to sanction loans, borrowers have siphoned off money from the banking system in connivance with bankers. Once this reaches large proportions that affect the functioning of the banks, the ministry of finance quietly steps in and washes the sins of the banks by recapitalizing them, even as chairman after chairman go scot free.

There is a reason for this perpetual lack of accountability of senior bank officials. Some chairmen are handpicked by ministry and finance minister for their ability to be pliant and sanction dirty loans. The Reserve Bank merely rubber-stamps this selection process. Who will go after the chairman when the MoF is involved and the RBI is hand-off? This is the root of bad loans in India, not lax regulations that Ms Bhattacharya tries to blame

Auditors’ query forces BOI to declare Gupta Coal loans as NPA

TOI 1 Oct 2014
Nagpur: The city-based Gupta Group is turning out to be another vexed loan case for the banks. While lenders are yet to finalize a corporate debt restructuring (CDR) proposal for two group companies, Gupta Coal India Limited (GCIL), which has the biggest loan of over 2,000 crore, has been declared a non-performing asset (NPA) by Bank of India (BOI) for its share of the debt.

BOI is the leader of a consortium of over half a dozen lending agencies with exposure in GCIL. However, the account was only classified as NPA after BOI auditors raised an objection. BOI's individual loan to GCIL stands at over 550 crore.

GCIL is a coal trading company also engaged in imports. Most of the other consortium banks continue to keep it as a standard asset, saying that the payment has been regular. Sources in BOI say it was in June that the account was finally classified as NPA. Though the bank tried its best to treat it as a standard asset, the auditors did not agree.

Now, with the auditors having raised objections, there is little chance of considering a CDR proposal for this company, which was in the offing to tide over this financial crisis faced by the Gupta Group.

The Gupta group is headed by Padmesh Gupta, a prominent businessman from the city. TOI had sent him a text message seeking his comments, but it remained unanswered.

A large part of the GCIL loan is a cash credit limit, apart from letters of credit (L/C) and bank guarantee. The latter make up non-fund-based loans, which are to the tune of Rs490 crore, say sources. It has been learnt that the auditors had questioned the method on the basis of which the limits were sanctioned. Insiders say the company's credit limit should not have gone beyond 220 crore but the total outstanding ended up crossing over 550 crore.

One of the main features of the loan package was that the non-fund-based loans were convertible into fund-based. With a letter of credit, the company can purchase goods from the vendor with the bank directly paying the vendor. However, the bank's dues have to be cleared within 90 days. If there is a provision to change non-fund-based loans like L/C to fund-based, on non-payment after 90 days, the cash credit limit can be extended proportionately. After this, funds are drawn from
the limit to pay back the dues on L/C.

So, it becomes a part of the larger loan, which does not become NPA so long as the interest is served.

This facility is generally provided when the borrower has a longer realization cycle. But it can also be a convenient method to avoid an account from becoming NPA. If the defaulted amount on L/C becomes part of the larger loan, only interest has to be paid to keep the account as standard, said a chartered accountant engaged in project finance.

A senior officer in BOI who is monitoring the case admitted that the account was classified as NPA following the audit objection. There was an issue related to the limits that were calculated. "The bank has gone by the laid down norms, though it was not correct as per the auditors," the officer said, not wishing to be named. However, another top official in this bank said there are certain instances of diversion of funds too.

NPA s :Blame It On Lazy Lending and on the discarding of the Prakash Tandon Committee norm of maximum permissible bank finance -

 B W Rajeev Dubey30 Sep, 2014 19:58 IST


If I were to pin all of this down to one reason, 

it’s the discarding of the Prakash Tandon Committee norm

 of maximum permissible bank finance 

There is one lot in the Indian banking industry that believes we have an impregnable banking system: that its robustness helped us escape unscathed when the developed world’s banking system collapsed in 2008; that despite the growing levels of non-performing assets (NPA) on the books of most Indian banks, they are not half as vulnerable as they are made out to be.

 

But there is another lot that is convinced about the impending crisis in Indian banking — thanks to the slowdown-induced industrial sickness across sectors such as power, aviation and steel. For 10 years, banks were competing with each other to lend. Corporates over-reached in raising debt. Lending norms were given the short shrift; and now, years of lazy lending have landed Indian banks in one of their biggest crises ever. Nearly Rs 4,30,000 crore worth of bad loans have already been referred to the corporate debt restructuring (CDR) cell as of June 30 this year.

 

For larger banks such as State Bank of India, gross NPAs as on 31 March 2014 stood at Rs 61,605 crore. Naysayers point out that it’s less than 5 per cent of the loan book. Point taken, but it’s still a little over $10 billion! That’s something worth worrying about even for the largest banks in the world.

 

Kolkata-based United Bank of India has a smaller book but its gross NPAs at the end of the last fiscal were at an alarming 10.47 per cent. At least 23 of India’s 27 state-run banks have NPAs higher than 3 per cent — the level at which banking regulator Reserve Bank of India would have cracked the whip earlier.

 

If I were to pin all of this down to one reason, it’s the discarding of the Prakash Tandon Committee norm of maximum permissible bank finance — not less than 25 per cent of working capital should be equity or quasi equity. The norm implied a maximum debt:equity ratio of 3:1. It was dumped in the mid-90s. But again, it would be unfair to blame the absence of this clause for the current crisis. Clearly, processes within banks that were geared towards a restrictive regime didn’t catch up with the reforms. Rampant corruption among disbursing authorities made it worse.

 

BW’s avid bank watcher, senior associate editor Raghu Mohan, has put together this story in his inimitable style.

On another front, having delivered two damp squibs on the foreign investment front (PM Narendra Modi’s Japan visit and Chinese President Xi Jinping’s India visit), Modi heads out for the US. But even before he embarks on the journey, he is already on the back foot. First, having fought the elections on an ‘anti-FDI in retail’ plank, he is unable to accede to a key US demand to open up FDI in retail and e-tail. Second, rival Congress has managed to stall the Insurance Amendment Bill which he hoped to carry as a trophy to the US. Third, the civil nuclear liability law continues to be to the dislike of major US and international firms.

 

There are slim hopes of any business breakthrough with US President Barack Obama, who is already being called a lame-duck President despite two years of his term remaining. Senior editor Joe Mathew examines, in an interview, why American pharma continues to be inimical to Indian drug firms’ interests.

 

(This story was published in BW | Businessworld Issue Dated 20-10-2014)

SC quashes allocation of 214 coal blocks allotted since 1993

Samanwaya Rautray & Sarita C Singh, ET Bureau | 25 Sep, 2014, 

NEW DELHI: The Supreme Courtcancelled almost all coal blocks given to private companies since 1993, delivering a severe blow to firms that invested heavily in power stations and factories linked to producing mines, but officials said the verdict clears the air for auction of blocks and formulation of policies to rejuvenate the troubled sector.

The judgment — similar to an apex court order cancelling 122 telecom licences in 2012 — dashed hopes of several business houses, including the Naveen Jindal and Aditya Birla groups, GMR and GVK, which will lose mines, but spared the mines attached to Reliance Power's Sasan project. The corporate sector fears that the apex court verdict will hurt coal supply, erode investor confidence, and hit sectors such as power, steel and mining. 

The officials of some companies said they would file a review petition while some legal experts asked why the private sector had been singled out for mistakes committed by the government.

The apex court showed no sympathy for the operators of 38 blocks that are already producing and five that are close to production and said these allocations were "fatally flawed" and the beneficiaries must suffer the consequences.

"It is expected that the government will not deal with the natural resources that belong to the country as if they belong to a few individuals who can fritter them away at their sweet will; these proceedings may also compensate the exchequer for the loss caused to it..." the court said.

The companies operating the 38 blocks will be allowed to produce coal for six months to ensure smooth transition before Coal India steps in. They will have to pay a penalty of Rs 295 per tonne for coal already extracted, on the basis of the calculation made by the Comptroller and Auditor General of India, which was accepted by the court.

Official data shows that 301 million tonnes have been mined from these blocks until last year, which translates into a penalty of aroundRs 8,800 crore, including a likely penalty of Rs 1,300 crore for JSPL alone. The court asked the companies to pay the penalty in three months. Shares of Jindal Steel and Power fell 10%, while lenders like Bank of India, Canara Bank, and Punjab National Bank lost 4.5-5.5% on worries that the decision would result in an increase in their non-performing assets (NPAs).

The bench, comprising Chief Justice RM Lodha and Justices Madan B Lokur and Kurian Joseph, justified its decision saying that the government was prepared to take things forward even if all allocations were cancelled. In that eventuality, the central government had said that CIL can take over and continue the extraction of coal from 46 coal blocks."...CIL would require some time to take over the coal blocks and manage its affairs for continuing the mining process. 
Effectively therefore, it was submitted that even if the allotment of these 43 coal blocks is cancelled, the central government can ensure that coal production will not stop," the court recorded. 

Government officials said they were planning to quickly auction the blocks and were preparing a plan to ensure smooth supplies, but industry was not convinced. Issac George, Group CFO, GVK Power & Infrastructure said: "This move will have an extremely negative impact on power, steel and cement companies as an issue that is almost 21-years old is being addressed now and a lot of investments have gone into these blocks which will now get impacted.

Also the penalties imposed by the Supreme Court are very exacting and will take a big toll on the finances of some of these companies, how will the companies cough up this kind of cash without seriously compromising their cash flows or indebting themselves further." 

Hindalco Chairman Kumar Mangalam Birla said he hoped the government had a plan ready. "...Many companies have invested lakhs of crores on these mines. I am sure the government has an action plan and we will learn more about it in the coming days and weeks." CII President Ajay Shriram said the judgement may have been intended to bring in transparency, but it will jeopardise investments made in the sector. 

"It will raise questions on sanctity of government policies impacting the investment climate. The government will need to expedite reallocating the cancelled producing blocks so that production is not affected in the short term," he said.Suhail Nathani, Founding Partner Economic Law Practices, who appeared for some of the companies whose mines have been de-allocated, said the court order would herald a new transparent regime for allocation of state-owned resources but the process of correcting "the wrong done by the Union of India" will take a heavy toll on the private sector. 

"Allotments over the past two decades were made in accordance with the laws and practice adopted by successive governments at the centre. It was nobody's case that the private sector made the rules or laws. Then, the question that begs consideration is why must private sector alone bear the cost of this wrongdoing - whether under law or equity?" he said.

Advaya Legal managing partner Ramesh Vaidyanathan said: "The verdict seriously questions the credibility of the government licensing processes and will have an adverse impact on foreign investment. Bankability of these types of licences and concessions is critical not only to developers of these projects but also other stakeholders such as investors, lenders and shareholders. What makes it worse is that a process that ran for more than 20 years has been held to be illegal, thereby implying that the clock can be set back several years down the line."

NGO Common Cause and lawyer Manohar Lal Sharma had challenged all coal block allocations since 1993 as illegal. The court had agreed with them on Aug 25, 2014, but had deferred a ruling on the consequences of its decision in view of its far-reaching economic impact.

NPAs by top defaulters like Kingfisher under deep scanner

Domain B 16 Aug 2014

The top 50 cases of non-performing assets (NPAs) in the banking sector are being closely monitored by both the finance ministry and the banks that have suffered the defaults from the corporate houses like Kingfisher Airlines -

According to a DNA report today, the finance ministry has indicated that in case of evidence of fraud, criminal action will be initiated against such debtors.

Earlier, the union finance ministry had ordered the Enforcement Directorate to monitor the affairs of the failed Kingfisher Airlines, after an audit in the State Bank of India, which has major exposure to Kingfisher, found it 'highly positive' on fund diversion (See: ED to probe failed Kingfisher Airlines over diversion of loans).

Based on the findings of SBI's forensic audit indicating on default in a Rs7,000 crore loan from a consortium of banks led by SBI, the finance ministry says that the company has diverted parts of the loan.


The audit report conducted by external agency E&Y has observed that chances of the airlines having siphoned off the loans for purposes other than the sanctioned use are 'highly positive'.
The finance ministry feels a Rs336 crore loan sanctioned by Union Bank of India (UBI) was withdrawn and deposited in another account with a private bank by Kingfisher, which is against the rules.

The audit report of the state-owned SBI, the country's largest lender, was submitted to the finance ministry two days back.

Kingfisher Airlines tops the list of bad debts in the banking sector, which in total has swelled to Rs2 lakh crore in the last five years.

This particular loan from UBI is not the part of the Rs7,000 crore loan given by the SBI-led consortium to the airline; but the audit report says part of this  loan has also been diverted.
A finance ministry official said, "In a similar fashion, the loans and advances taken from the banks in the SBI consortium has also been diverted, according to the findings of the report. The ministry is closely examining the report and we have already asked SBI to act fast on the NPA issue."

Some of the lending banks to liquor baron Vijay Mallya's failed airline venture such as SBI, IDBI Bank, and United Bank of India are set to declare Kingfisher Airlines as a wilful defaulter. Now the UBI can also take action on the diversion of funds.

"The matters are sub-judice and we cannot comment. We have no communication or knowledge about the alleged diversion of funds, which we stoutly deny," a UB spokesman told DNA.

With bad loans spiralling along with the accumulated interest, the government is now tightening the screws on defaulting companies. "The government has initiated meetings with the banks on the top 50 non-performing assets (NPAs). These will be reviewed at regular intervals as to date we have not got any desired results. ED level monitoring of such accounts by the banks has been ordered by the ministry," said an official.

Armed with the forensic audit report, the SBI is likely to approach the CBI to look into matters pertaining to wilful default and siphoning of funds. CBI has already registered cases against other big defaulters like Rajat Pharma, Deccan Chronicle Holdings Ltd, Century Communications, HTCL Ltd, and Zoom developers Pvt Ltd for 30 alleged wilful defaults.
In all 27 cases against nine companies have been registered. The investigative agency had approached SBI earlier seeking documents on the Kingfisher NPA. The bank had then denied saying it had no grounds to hand over the case then. It was after the CBI intervention that the forensic audit was ordered by the SBI.

In Kingfisher's case, to recover even a good percentage of the Rs7,000 crore is a long shot. The company has few assets since the aircraft it had were all leased and belongs to foreign companies which are trying to get them back. But the aircraft cannot be taken out of India due to cases against the company. Some buildings of the company have been seized and will be auctioned.

Bad Loans of PSU Banks Mounted Due to Economic Slow Down'

 PTI 01st August 2014 02:53 PM

• "NPAs have increased as the economy of the country has slowed down in the last two years," Jaitley said | File photo/PTI

NEW DELHI: Government today said non-performing assets (NPAs) of PSU banks have mounted due to economic slow down even as recovery increased to Rs 33,486 crore in 2014.

Finance Minister Arun Jaitley said bad loan amount in the last fiscal has mounted to Rs 2,45,809 crore from Rs 1,83,854 crore in 2012-13 and Rs 1,37,102 crore in 2011-12.

"NPAs have increased as the economy of the country has slowed down in the last two years," he said during Question Hour in Lok Sabha.

Jaitley said the total gross NPA ratio has gone up to 4.03 per cent in 2013-14 from 3.42 per cent in 2012-13 and 2.94 per cent in 2011-12.

India's economy has posted sub-five per cent growth for the last two consecutive financial years.

Jaitley said many industries have suffered losses in the last two years leading to their inability to repay the loans.

"Besides, there are many people whose intentions are not good. They do not want to repay the loans," he said.

The Finance Minister said the Reserve Bank of India has taken a number of steps to recover the bad loans of PSU banks that resulted in recovery of Rs 33,486 crore in 2014, Rs 19,832 crore in 2013 and Rs 17,272 crore in 2012.

Jaitley said RBI has taken a number of steps to recover the NPAs that include creation of a Central Repository of Information on Large Credits (CRILC) to collect, store and disseminate credit data to banks on credit exposures of Rs five crore and above, formation of Joint Lenders' Forum, Corrective Action Plan and sale of assets.

"RBI has issued instructions to the banks to review slippages in asset classification in the borrowal accounts with outstanding Rs five crore and above by the Board of Directors of the bank and review NPA accounts which have registered recoveries of Rs 1 crore and above. Further, Management Committee of Board should review top 100 borrowal accounts of below Rs five crore in each category of NPA," he said.

To a supplementary, the Finance Minister said bad loan amounts of PSU banks are much higher than that of private sector banks and there is no comparison between the two as their functioning is completely different.

Jaitley said private banks are circumspect whom to give loan and whom not to give while PSU banks have social commitment and cater to a large segment of population, particularly in rural areas.

"We cannot compare PSU banks with private banks. Their nature and functions are different," he said.

Jaitley said RBI guidelines on restructuring of advances by banks are divided into four categories - (i) guidelines on restructuring of advances extended to industrial units, (ii) guidelines on restructuring of advances extended to industrial units under corporate debt restructuring mechanism.

The other two are - (iii) guidelines on restructuring of advances extended to small and medium enterprises, and (iv) guidelines on restructuring of all other advances.

Jaitley said government has asked banks to be more focused in coordination with other members of consortium, assigning the responsibility at the executive director level, hiring best lawyers and monitoring their performance in defending bank's interest in Debt Recovery Tribunals and High Courts.

To a supplementary on the possibility of reducing lending rate of interest, the Finance Minister said the rate of interests are fixed by the RBI on the basis of various factors, including inflation.

Whenever inflation increases, the rate of interests of banks goes up and whenever the inflation comes down, the rate of interests also goes down, he said.

A better way to manage NPAs

BL  Sidharth Birla 1 Aug 14

Mechanisms to deal with stressed assets need a relook. A national asset management company would help

Prolonged slow growth has adversely affected India’s financial sector. The banking system is sitting on a pile of stressed assets which, if not checked, will snowball into a larger problem. As of December 31, 2013, gross NPAs had reached 4.4 per cent of total loans in the banking system, with public sector banks such as the State Bank of India (SBI) reporting much higher levels (over 6 per cent).

If restructured loans are added, stressed assets are estimated at around 15 per cent of bank loans. Of the total stressed assets, the industrial sector (especially infrastructure) accounts for the largest stock of NPAs.

Restoring the capex cycle is essential for economic recovery. This will not be possible without restoring the health of the banking system.

Given the present levels of impaired assets in banks’ balance sheets and future credit requirements, Indian banks require capitalisation of about ₹5-10 trillion over the next five years.

Present system ineffective

The requirement is especially worrisome for government-owned banks: they account for over 70 per cent of total banking assets. Reduction in impaired assets helps lower the capitalisation burden to an extent.

Thus, finding a solution for faster recovery and/or rehabilitation of stressed assets is critical.

Despite the presence of an established legal and regulatory framework for resolution of stressed assets, the existing system doesn’t seem to be working effectively. There are 14 registered asset reconstruction companies (ARCs) in India, of which four are active.

However, the process of removing stressed assets from banks to ARCs is inefficient and ARCs have not been successful in quick recovery/rehabilitation. Despite a significant rise in NPAs over the last five years, the sale of stressed assets (in value terms) to ARCs has remained more or less stagnant.

Banks are under no pressure to clean up NPAs and thus they prefer to roll over debt rather than recognise an NPA and mark it down to its realisable value.

Lately, the pressure to build books has forced ARCs to make unrealistic valuations; the average acquisition price over the past 12 months has soared to 60 per cent of book value as against 25 per cent earlier, with over 90 per cent of transaction value being paid through security receipts (SRs). As a result, the secondary market for these assets has failed to take off.

Look at the specific issue

Quick recovery by ARCs is also affected by inadequate capital and inability to aggregate consortium debt. Moreover, the unrealistic pricing of underlying NPAs has kept foreign investors at bay, despite the Government allowing foreign investors to hold up to 74 per cent of the share capital of an ARC. No wonder, over 90 per cent of SRs are currently held by the selling banks, as most of these ARCs are bank-sponsored.

An effective resolution of stressed assets thus requires looking beyond the existing system and addressing the specific nature of the problem through a specialised ARC framework. A review of international experience in this regard reveals some common underlying principles in the approach towards the resolution of NPAs by most countries, regardless of different models being adopted.

The research reveals several things. First, it is much better, less expensive and less disruptive to establish a specialised AMC prior to a financial crisis as was done in the case of Malaysia and Taiwan. Establishing an AMC once the crisis has occurred results in the shrinkage of economy, and the process of recovery is longer and more painful.

Second, in most cases, direct government funding or government guaranteed bonds were used to inject the capital required for clearing a bulk of the NPAs, which was done through their one-time transfer from banks to the AMC.

Third, the successful AMCs had one core objective: the rehabilitation and restructuring of viable assets. Additional funding mechanisms were put in place for meeting working capital requirements of the AMCs for rehabilitation of viable projects. Finally, another common feature of successful AMCs globally has been fair valuation in asset pricing, which contributed in building investor interest and developing a secondary market for such assets.

Managing the assets

Based on these experiences, Ficci has suggested the creation of a specialised entity called the National Asset Management Company (Namco) to effectively tackle large NPAs in India. The proposed Namco framework is unique because it requires Government/RBI sponsorship but no capital injection or guarantees.

The Government shall encourage public sector banks (PSBs) to take up to 49.9 per cent equity in this entity and transfer large-scale stressed assets to it. The selling banks will agree to provide up to 25 per cent of the sale price as additional last-mile funding, for rehabilitation or completion, if required. No new legislation is required; some modifications would have to be made to existing regulations.

Namco’s focus would be on the rehabilitation of large-scale NPAs, restructured loans and other potential stressed assets, mainly in the infrastructure sector. Given the long-term nature of underlying assets, such specialised entities will be allowed to issue SRs with a tenor of up to 12 years. To encourage greater investor participation, Ficci has suggested the transfer of stressed assets at fair market value, determined by an independent valuer.

Given the importance of restoring the health of the banking system for supporting economic revival, the Government and the RBI should facilitate the creation of Namco by taking necessary administrative steps in this regard.

A pro-active, preventive approach is desirable if we have to ensure speedy revival of the economy. Of course, this should be a time-bound and close-ended framework to improve the overall hygiene of the system.

The writer is the president of Ficci

Suit-filed NPA accounts rise 32% to over R70,000 crore

FE George Mathew | Mumbai | July 21, 2014 1:18 am

The top 10 loan defaulters owe Rs 18,000 crore to the banks, as per the figures collated by the RBI but released by bank unions.

Banks are increasingly taking legal recourse to recover loan defaults. The number of suit-filed bad loan accounts in the banking system has risen by 32 per cent to Rs 70,367 crore by September 2013 from Rs 53,251 crore in the previous year.

Normally a bank files a suit against a defaulter when it exhausts all other means of recovery. One-third of this amount is accounted by willful defaulters.

Moreover, the top 10  loan defaulters owe Rs 18,000 crore to the banks, as per the figures collated by the RBI but released by bank unions.

Kingfisher Airlines tops the list followed by Winsome Diamond and Jewellery, Electrotherm India, Zoom Developers, Sterling Biotech, S Kumars Nationwide, Surya Vinayak Industries and Corporate Ispat Alloys.

“The real problem of the banking sector is the alarming rise in non-performing loans. Since the RBI and the government are not coming forward to release the list of such defaulters, we are publishing the list,” said Vishwas Utagi, vice president, All India Bank Employees Association.

Releasing the default figures, Utagi said 400 companies have bad loan accounts of Rs 70,300 crore (not suit-filed accounts) in 24 PSU banks.

“Bad loans restructured and shown as good loans amounted to Rs 3,25,000 crore. Fresh bad loans in the last seven years were Rs 4,95,000 crore. Bad loans written off in the last 13 years were Rs 2,04,000 crore,” Utagi said.

The RBI and credit information bureaus like CIBIL publish the names of suit-filed accounts. Banks have filed cases against 4085 accounts for recovery of Rs 70,367 crore. The list of non suit-filed accounts is still kept as secret by the banks and the RBI. “Bank depositors have a right to know about defaulters,” he said.

The long-drawn process involved in litigations, remains a cause for worry. It takes several years to recover the dues from such defaulters. However, recovery is virtually impossible from many borrowers who have no assets to show and have siphoned off the money.
The amount stuck as NPAs is enough to meet the capital needs of banks in the new Basel regime.

“Bad debts only ailment of public sector banks”

Kolkatta The Hindu 19 July 14

Non performing assets of 26 Indian PSBs calculated in 2014 was Rs. 1,30,360 crore, up from Rs. 89,950 crore in 2013

Although the quality of service rendered by public sector banks (PSB) is far better than that of private or foreign banks in the country, the “only ailment” plaguing PSBs are bad debts or non performing assets (NPA), general secretary of the Bank Employees’ Federation of India Pradip Biswas told media persons here on Friday.

Releasing a booklet bearing names of the top loan defaulters taken from Indian nationalised banks based on the research and calculations of the Federation, Mr. Biswas said a lion’s share of the operating profit of every PSB is set aside every year to provide for NPA and is a “loot of public money.”

“The big corporate houses, having appropriate political patronage are the major culprits. Bank employees’ movement and other Left and democratic forces have long been demanding publication of the list of defaulting corporate borrowers responsible for growing NPA; successive governments have stonewalled the demand,” the Leftist bank employees union stated.

The union says , the net NPA of 26 Indian PSBs calculated in 2014 was Rs. 1,30,360 crore, up from Rs. 89,950 crore in 2013, almost a 45 per cent increase.

“Based on our research and calculations, Kingfisher Airlines, Dunlop and media group Anandabazar-Jugantor are one of the top loan defaulters,” Mr. Biswas said. Expressing his dissatisfaction over the recommendations of the P.J. Nayak Committee, Mr. Biswas said: “The Committee suggested lowering the government’s holding in banks below 50 per cent. We strongly oppose it and have submitted a memorandum to [Union Finance Minister] Arun Jaitley on June 27. He gave us a patient hearing and assured us that he would look into the matter.”

“Because of the presence of a strong public sector, the financial sector in our country, though affected, has not crushed down with the meltdown of the financial sector in the U.S.A. and other major economies of the capitalist world,” he said.

Impediments in recovery of non-performing assets

By MR Umarji, Partner, Alliance Corporate Lawyers ET 2 July 2014

The apex court has reiterated the need to protect the interest of borrowers, and emphasized that the exercise of extraordinary powers of recovery. 

Recently, there have been some judicial pronouncements by the apex court determining the scope of powers of enforcement of securities without the intervention of the courts, by the banks and FIs under the SARFAESI Act. The apex court has reiterated the need to protect the interest of borrowers, and emphasized that the exercise of extraordinary powers of recovery, by banks and FIs must be in compliance with the provisions of the SARFAESI Act.

In the case of Harshad G Sondagal vs IARC, the SC has held that borrower/mortgagor can lease the property over which security interest is created and in such cases, the lessee is entitled to remain in possession of the property for the period of the lease which is registered and such lessee cannot be dispossessed by the district magistrate or chief metropolitan magistrate under Section 14 of SARFAESI Act.

Inspite of earlier judgments of the SC that the procedure under Section 14 of the SARFAESI Act before the DM/CMM for getting possession of secured assets is administrative proceeding, the apex court held that rights of lessee of mortgaged properties will be decided by the DM/CMM. Banks are already facing a problem of inordinate delays in the office of DMs/CMMs in the matter of repossessing secured assets and the SC judgment will result in delays in recovery or defaulted loans, on account of DM/CMM being required to conduct quasi-judicial proceedings for deciding rights of tenants and lessees of mortgaged properties.

In terms of rule 8 & 9 of the Security Interest (Enforcement) Rules, 2002, before selling a mortgaged property a public notice of 30 days has to be given. In the case of Vasu P Shetty v. Hotel Vandana Palace, the SC considered whether a public auction with notice of less than 30 days is valid, in view of earlier failed auction for which adequate notice of 30 days was given as also failed OTS proposal given by the borrower.

The SC held that delaying tactics adopted by the borrower would not amount to a waiver of requirement of notice of 30 days as well as other requirements of settling terms of sale by private treaty between the parties, notice of sale to be published in a vernacular language newspaper and obtaining fresh valuation prior to conducting the sale. The effect of this judgment is that even in cases where repeated auctions are required to be held on account of delaying tactics adopted by the defaulters, the requirements of minimum notice of 30 days and other formalities have to be complied with by banks/FIs.

In the case of J Rajiv Subramaniyan v. M/s Pandiyas, the SC considered the validity of sale of secured assets by private treaty without the consent of the borrower and in violation of rules 8(5) (valuation of property), 8(6) (notice of 30 days) and held that such sale is unconstitutional. The apex court pointed out that the provision contained in Section 13(8) of the SARFAESI Act, 2002 is specifically for the protection of the borrowers in as much as, ownership of the secured assets is a constitutional right vested in the borrowers and protected under Article 300A of the Constitution of India.

Therefore, the secured creditor as a trustee of the secured assets can not deal with the same in any manner it likes and such an asset can be disposed of only in the manner prescribed in the SARFAESI Act, 2002. It is clear that compliance with directions issued by the apex court will result in delays in recovery actions and the finance ministry, therefore, needs to consider following amendments to the SARFAESI Act and the Rules, to facilitate speedy recovery of NPAs:

> Amend Section 17 of the Act empowering DRTs to decide rights of lessees or tenants or any other person claiming rights in the mortgaged properties and pass orders to protect their rights. The SARFAESI Act also needs to be amended to declare that notwithstanding anything contained in any other law, the borrower cannot sell, lease or deal with any property over which security interest is created without the consent of the secured creditor, except sale of its products or services.

> In cases of sale by private treaty a notice shall be given to the borrower to obtain a better offer within the time specified failing which the secured creditor can proceed to sell the property.

> In cases where the borrower has been given notice of 30 days for public auction of secured assets and such auction fails any subsequent auction can be held with shorter notice of 15 days instead of 30 days.

Views are personal