Indian Banks: Healthy, But Precarious

Source :Forbes India: Pravin Palande : Oct 4, 2011


Indian banks have brought bad loans down to 2.4 percent over 10 years, but now they need to be careful



The past three months have been tough for Indian banking.
 High interest rates and threats of a global recession have taken their toll on bank stocks. The NSE banking index fell 15 percent compared with the Nifty’s 11 percent slide in the past three months. Indian banks, ironically, have never been in a better state of health in the past 10 years.

A recent study by Boston Consulting Group (BCG) found that bad loans fell from a peak of 11.4 percent in 2001 to just 2.4 percent in 2010, showing the efficiency of management of capital.




 In fact, Indian banks have been performing better in controlling defaults with only 0.6 percent of loans handed out last year turning sticky, compared to 1 percent in the US and China. Indian banks also have a cost-to-income ratio of 47 percent, which is lower than Germany, France and the US. 

The main reason for the robustness was the banks’ focus on return on investment, cost-to-income ratios and the efficient use of technology. BCG expects that by 2025 the Indian banking sector will be the third largest in the world on assets, behind China and the US.

But now stress signals are showing up. The Reserve Bank of India expects non-performing assets (NPA) to inch up to 2.9 percent during 2011. IDFC Securities, a broking firm, recently said at least 17 percent of loans are stressed and some could go bad.


 Total bank credit to the industrial sector stands at about Rs. 17,60,600 crore.

“Credit to power and infrastructure sectors has grown 40 percent in the past four years and the proportion of the same has gone up to 14 percent in terms of total credit offtake, which has created additional risks to the banking segment,” says Ajay Parmar, head of institutional research at Emkay Global.

State-owned banks have a higher allocation to small industries, which could get hurt early if there is an industrial slowdown. 


Additionally, the central bank’s battle with persistent inflation is raising the cost of money, pressuring net interest margins that are expected to continue to narrow for at least another two years.

But no one is pressing the panic button yet because there is no dearth of liquidity in the system. Says Rajeev Thakkar, CEO, Parag Parikh Financial Advisory Services, “If margins are high then NPAs are not a cause for concern... There is a difficulty in the system but we are certainly not into recessionary territory.” 

‘We have a very aggressive approach to tackle NPAs'

Mr S. Raman, Chairman and Managing Director, 

Source :BL:ANJANA CHANDRAMOULY:29 sep.2011

Canara Bank, which moved to system-based NPA (non-performing asset) recognition fully on July 30, expects to clean up its asset book by this quarter. The bank would achieve this “without making a great dent in profitability”, Mr S. Raman, Chairman and Managing Director, Canara Bank, told Business Line in an interview.

Excerpts:

What is the impact of rising interest rates on asset quality?

Some portions of the portfolio may be under strain, but in my opinion interest rate hike has happened in a graduated way. As GDP growth continues to be around 8 per cent, the impact of 0.5 or 1 per cent more interest will not cause much strain.

Some housing loans, where people have borrowed quite aggressively, might get impacted. Else, I do not think there will be too much of an impact; it is manageable. SMEs (small and medium enterprises) may be under strain. But it all depends on GDP growth. If it happens, the SME segment might also sail through.

How much has the system-based recognition of NPAs added to your NPAs? What about recoveries?

In Canara Bank, we have a very aggressive approach to tackle NPAs in accordance with the guidelines. Where it was required to cover only loans of up to Rs 1 crore, we decided to lower the threshold to Rs 10 lakh on March 31, 2011. That did have a little spike in NPAs, but we have made tremendous amount of recoveries since then.

Similarly, in the first quarter of this fiscal, we lowered the threshold in stages to Rs 2 lakh. As on July 30, we have taken a decision that every single account in the bank would be system-recognised.

When we did it in April and May, we gave ourselves two months and a month, respectively, to recover from NPAs. We had huge recovery drives, lok adalatswere able to recover Rs 750 crore in the first quarter. Of this, over Rs 500 crore pertained to NPAs in the previous year.

A 28 per cent drop in net profits in one quarter is all we have encountered to make a clean-up of this magnitude. Because of the shifting to system-recognition, we had a reversal of income of Rs 210 crore. This quarter, too, we are making similar efforts. We would have cleaned up the entire lot this quarter without creating a great dent in our profitability.

Canara Bank's asset quality is good. Our exposure to MFIs (micro-finance institutions) is virtually zero in Andhra Pradesh, and other States also, it is a miniscule amount. Our exposure to commercial real estate, in relation to peer banks, is very small.

Last year we raised almost Rs 2,000 crore through QIP (Qualified Institutional Placement), and so capital-wise we are strong. After clean-up, our provision-coverage ratio is close to 70 per cent. We will be able to increase our provision size this quarter.

Average repo window borrowing continues to be high even as credit growth has moderated and deposit inflows continue to be high… Why?

The RBI has been saying that one per cent of total deposits is a comfort level. I don't understand why liquidity-wise there is any great issue.

Deposit inflows continue to be high because of higher rates of interest, and credit growth is moderate. Investments in liquid mutual funds by banks, including us, is higher than the spread that the RBI prescribes, and unwinding of which the RBI has given us time till January 2012.

Because of the comfortable liquidity, we have not unwound our extra mutual fund exposure positions; of course, unless and until the rate hardens and the demand for credit spikes suddenly, we will continue with those positions.

Overall, if you look at the liquidity or near-liquid assets, our position is actually pretty comfortable. That's one reason why NIMs (net interest margins) of banks were under pressure last quarter whereas they had to give higher rates of interest to deposits. There was almost a rate war in November-December last year.

Will CASA be affected by high fixed deposit rates? What has been your experience? What measures have you taken to shore up CASA?

We have introduced a lot of competition internally for improvement of CASA (Current Account, Savings Account), and have been able to open huge number of accounts. But it has become difficult to shore up CASA. It will take at least six months.

Your NIM has reduced in Q1, and you have projected NIM of 2.9 per cent for this fiscal? How do you plan to achieve this?

Our NIM in Q1 has been 2.5 per cent, despite interest reversal of about Rs 200 crore. Taking that into consideration, NIM would have been 2.7 per cent and not too far from what we have projected. We are confident of reaching 2.9 per cent this fiscal.

In Q2, we would be migrating to NPAs of up to Rs 2 lakh as part of system-recognition of NPAs, and would result in little bit of spike in NPAs and interest reversal.

But we would definitely improve on the present level, and in Q3 and Q4 we would have no problems at all. We would be able to come very close to 2.9 per cent tor the entire year

No Borrower, No Lender, Yet Willful Defaulter?

Source: Money-control ; Sat, Sep 17, 2011

Who is a Willful Defaulter?

 The answer to that question lies in one judgment covering two cases and setting a precedent for all derivatives transactions. Payaswini Upadhyay has the details.

In 2009, India’s leading pipemaker Finolex Industries refused to pay Deutsche Bank dues arising from a derivatives transaction. Deutsche Bank approached the Debt Recovery Tribunal alleging that Finolex was a Willful Defaulter. Last year, ICICI Bank termed Emcure Pharmaceuticals a Willful Defaulter as well, for not paying up on a derivatives deal.

Shishir Mehta
Partner, Khaitan

“Being a Willful Defaulter, there are grave implications for a borrower- the main one being that all lines of credit would be cut off. They would be blacklisted in the financial community. That means you would not have access to bank finance, getting access to capital markets would be a problem, the Directors of a Willful Defaulting company will have to step down from their directorships in other companies. So it’s basically a mechanism to blacklist a borrower and get them to, therefore, come on the negotiating table.”

That didn’t go down well with the companies who appealed to the High Court! The question facing the 2 judge bench was- Whether default under a derivatives transaction can be termed as ‘Willful Default’?

Now, the who, what, how of Willful Defaulting is governed by the RBI. Its Master Circular defines Willful Default to include ‘default by a unit in meeting payment or repayment obligations to the lender even when it has the capacity to do so’. The banks claimed their clients were Willful Defaulters as they had not honored the derivatives contracts even though they had the means to do so. But the companies argued that ‘Willful Default’ is based on the existence of a relationship of a lender and borrower and a derivatives transaction does not involve lending of money. Emcure’s Counsel Hitesh Jain says dues arising under a derivatives contract do not come under RBI’s Willful Default circular.

Hitesh Jain 
ALMT Legal
Counsel for Emcure Pharmaceuticals 

“This is a standalone circular, lender and borrower has been clearly defined. The meaning of lender and borrower is clear. So therefore, the dues arising under the derivative contracts cannot come under the circular.

Take for an illustration- suppose if a bank has taken a premises on a leave and license basis and it ahs paid a security deposit to the landlord and after the termination of the agreement, if the landlord is not paying the security deposit, can you say that since the landlord is liable to pay the money to the bank, therefore that transaction can also be termed as a lender and borrower.”

 But the banks argued that the RBI circular on Willful Defaults should not be looked at in a standalone manner. Deutsche Bank Counsel Fraser Alexander refers to other RBI circulars on NPA norms, exposure norms and prudential norms to make his case.

Fraser Alexander
Partner, Juris Corp
Counsel for Deutsche Bank

“When you refer to other circulars of RBI, it clearly shows for all purposes, derivative dues were to be considered as an exposure on the bank and of the borrower. Therefore, it would be a non-fund based facility. That is the reason why these circulars were referred to.”

The Bombay High Court agreed that the two companies were Willful Defaulters!

The Bombay High Court’s decision is in stark contrast to that of the Kolkata High Court. In 2009, a single judge bench of the Kolkata High Court, when hearing a similar case, ruled that RBI’s Willful Default circular did not cover derivatives transactions. So why did the Bombay High Court think otherwise?

Because it believed all the circulars must be seen in tandem. Also RBI filed an affidavit in court saying derivative dues are included under Willful Default.

So the banks were proven right and yet they lost the case!

 On a technicality! Finolex and Emcure both argued that the banks had not provided them with all the case papers before tagging them as Willful Defaulters.

Hitesh Jain
ALMT Legal
Counsel for Emcure Pharmaceuticals 

“No procedure has been followed and arbitrarily the banks classified the company- because they wanted to recover the money- as Willful Defaulters.”

The Court saw merit in that. It ruled that an incomplete Grievance Redressal Process was a violation of the principles of natural justice. 

Fraser Alexander
Partner, Juris Corp 
Counsel for Deutsche Bank

“Due to a technical reason, the court quashed this order on the basis of a technicality that the minutes of the meeting of the Willful Defaulter Committee was not provided to the corporate even though the reasoning was mentioned in the notice issued to them.”

Shishir Mehta
Partner, Khaitan

“I think this is a clear signal. As the derivative saga unfolds in the country, on one hand the banks need to make sure that the borrowers are the right entities – they have the right qualifications to enter into a trade. But once that checklist has been ticked off, I think it’s a very clear signal that borrowers can’t just walk away from a debt on derivative trade. Of course, in the present case, there were issues with regard to natural justice, but that is something which can be remedied. It’s just at the Grievance Redressal Committee stage. But what we can extract from this judgment is that banks would be very pleased with it and rightly so.”

It’s a near miss for banks in this round. The question is how will the Supreme Court view the same matter? All 3 cases - the two from the Bombay High Court and the one from the Kolkata High Court one will be heard together at the Apex Court starting October 18th.

Banks step up action against defaulting cos

Source : Manju AB Sep 18 2011 , Mumbai fc

Lenders use conversion rights, legal action to recover 

assets

Indian banks are stepping up legal action and usage of conversion rights against defaulting companies as economic slowdown and high interest rates lower debt repayment capabilities of companies.

One of the latest co­mpanies to face music are Zo­om Developers. Len­ders, led by Punjab National Bank, have referred the engineering and project implementation company to the debt recovery tri­bunal after a corporate de­bt res­tructuring (CDR) sch­eme failed to take off. Zoom has Rs 2,700 crore in loans and guarantees outstanding to 26 public sector and private sector banks.

Another defaulting company that faced action recently was GTL. On July 26, ICICI Bank invoked 2.85 crore shares, which accounted for 29.30 per cent stake in the telecom infrastructure provider, that were pledged by Global Holding Corporation, one of its promoter group firms.

Before that IDBI Bank had converted part of the debt of Ispat Industries to equity when the steelmaker defaulted, putting pressure on the company to repay the rest.

MVS Seshagiri Rao, joint managing director and group CFO of JSW Steel, said economic slowdown and high interest rates were putting stress on companies, forcing banks to step up action.

“When we took over Ispat in December 2010, IDBI Bank had already exercised the option of conversion right by which the bank converted part of the debt to equity. Later, we refinanced the entire debt,” Rao said.

In the case of Zoom, a senior official of PNB said they had approached the debt recovery tribunal to attach the company’s properties so that banks could recover the dues.“The CDR scheme is to make companies viable but in this case the business model is not viable. However, we have fully provided for our exposure so there will be no impact on the balance sheet,” the official said.

An official involved in the CDR scheme said, “Under the scheme, banks had to provide additional guarantees of Rs 750 crore, which were later struck down by the banks as the company was not keen to revive its business.” The company was also facing CBI investigation for financial irregularities.

No company official was available for comments despite calls made to its offices in Mumbai. The company website showed it was under construction.

The CDR scheme of the Reserve Bank of India helps companies in distress to extend the tenure of loans and get interest written off so that they can become operationally efficient. However, in the case of Zoom Developers, bankers concluded that writeoffs would not help the company.

Zoom Developers’ debt became a non-performing asset in 2009 when the company, which imports plants and machinery and installs indigenous plants, delayed payments to banks.

PNB holds Mega Recovery Camps for small agricultural loans

Source :BS: Virendra singh Rawat :New Delhi/Lucknow:sep:12:2011

Punjab National Bank, whose total advances to agriculture segment stood at over Rs 34,000 crore in the first quarter of current financial year, is holding ‘Mega Recovery Camps’ all over India aimed at small agricultural loans.


The bank is reaching out to small agricultural borrowers in distress and trying to help them repay the outstanding money by part waivers and rescheduling of installments.


Agricultural advances below Rs 10 lakh taken qualify for being taken up at these camps. Such camps have been organised in Kanpur, Lucknow and Varanasi in Uttar Pradesh.

“Over the last two months, we have organised such camps at around 20 centres pan-India and at least 15 more such camps would be organised at different places before the campaign is wrapped up,” PNB executive director Usha Ananthasubramanian told Business Standard.

She informed the bank had not set any target for the number of borrowers or amount to be settled in this campaign.


We just want to give an opportunity to small agriculturists and farmers to unburden themselves of the outstanding loans, while we also clean our books. We have received excellent response from the borrowers,” she added.


In UP, the total agriculture outstanding stood at Rs 7,623 crore at the end of June 2011.
In Lucknow Circle, the bank had received about 835 applications for the participation in the camp, while the total amount was over Rs 5 crore.


Commenting on credit off-take in the wake of hardening of interest rates of late, Ananthasubramanian admitted credit growth in the banking industry had slowed a bit, but on-going projects continued to roll.


“This year, we are targeting credit growth of 22 per cent vis-à-vis 24 per cent last year. However, our growth would still be higher than the growth forecast of 18 per cent for the banking industry by RBI,” she added.

Credit bureau keeps tabs on your debt repayments

Source : By R Srividhya :DigitalFC:Sep 11 2011

A poor record can mar your chances of obtaining a loan

One of the important signs of a mature financial market is the presence of active credit information services bureaus that provide vital information on credit behaviour of consumers to banks and financial institutions to help them take a decision on credit provision.

The sign that India has arrived as an important financial services market is evident from the huge plans that the three major global credit information companies in the world, Experian, TransUnion and Equifax, have for the Indian market.

What does a credit bureau do?

A credit information bureau works by collecting data from various banks and financial institutions on consumer and commercial borrowers. The data collected is shared with member institutions as and when they need information on the previous credit history of the borrower or for designing new products or to study consumer behaviour pattern.

Apart from banks and non-banking financial companies (NBFCs), credit bureaus also collect and share information with housing finance companies, credit card companies and state financial corporations. Information like PAN number, permanent address and phone number are usually used to identify a customer and link it across to his different credit transactions

Credit bureaus in India: The oldest and largest credit bureau in India is Cibil, which has credit information from various banks and financial institutions right from the year 2000. The leading credit information bureau, TransUnion has a 20 per cent stake in Cibil, which launched operations in 2004.

 Cibil, which has a data-sharing agreement with more than 600 banks and financial institutions, is the only one to provide a consumer credit score, apart from providing a detailed consumer credit report.

Experian, which entered India just last year, provides basic credit information services, mostly for corporate customers. “India is an important strategic market for us. We have plans of getting into consumer credit information area whenever the time is more appropriate,” says Mohan Jayaraman, who recently took over as managing director of Experian India.

The other leading global credit information bureau, Highmark Credit Information Services, is present in India through its credit bureau for the micro-finance industry.

Equifax Credit Information Services, which is a joint venture between Equifax and six leading financial institutions, also provides credit risk and analytics services.

How is credit information used?

 For retails customers, the credit scores and reports are useful in bargaining for better interest rates when seeking a new loan. By paying a small sum, retail customers can avail their credit report and credit scores from the credit information agency. 

Banks also use the credit information report to check information like the credit worthiness of the customer. “Our Cibil credit scores are usually in the range of 300-900, with the lowest indicating the high risk involved in lending to the customer.

 A person with a credit score of 800-850 is considered a good customer who is likely to repay the loans on time,” points out Arun Thukral, managing director, Cibil.

Credit bureaus in developed markets: In developed markets like the US and in parts of Europe, credit bureaus provide more value-added services such as identity theft insurance, security freeze, which prevents one’s credit report being reported to third parties, except those permitted by law and market analytics that helps study consumer credit pattern.

Banks expect NPLs to rise in power, real estate: Experts

Source: Fri, Sep 09, 2011 at 14:18 |  : CNBC TV 18

Indian banking sector is sailing through rough weather

 since the first quarter results announced by banks were dismal. 

The balance sheets of the banks are in a very bad shape right now.

RK Bakshi, executive director, of Bank of Baroda 

and N Narendra, chairman of Indian Overseas Bank, 

in an interview with CNBC-TV18’s Latha Venkatesh and Gautam Broker,

 spoke about the challenges the banking sector will have to face ahead.

Below is the edited transcript of the interview:

Q: When you reported your numbers, the banks witnessed fresh slippages of 0.25%, so that would be annualized 1%. There are fresh fears about coal linkages for power projects, concerns that state electricity boards (SEBs) will not buy extra power and that might leave the power companies in a bit of a spot. Do you think that you could have a couple of infrastructure loans turning bad and therefore more non-performing loans (NPLs) in that space?

Bakshi: As far as the slippage is concerned, it was quite in line with the guidance. We should not compare our standards with the international benchmark. Last year, our ratio was around 1.09% for the whole year and if it can stay within that, it should be fine. But that alone is not the number that matters. It is also important to see how the recoveries and upgradations in the NPL accounts and written off accounts happen. So, we need to see what kind of net accretion is happening.

Concerns are very valid about the coal linkages, environmental clearances, project progress, health of SEBs, but apparently many steps have been taken to resolve these issues already. We are not seeing any incidence that will turn bad this quarter, but these are longer term issues.

The power sector is considered as a backbone of industrial development in the country. Hence, issues in the power sector need to be resolved.  As far as SEBs are concerned, they are a very important segment of the distribution channel since they provide power to the end consumer.

Q: Your gross NPLs as of June 30th were Rs 3425 crore, will that increase by the end the year?

Bakshi: The NPLs have been increasing and may keep increasing if our recoveries and upgradations are not equal to the slippages. We still believe in our guidance, that the gross accretion to NPLs may not be more than 1-1.2%.

Q: What you are seeing in terms of NPLs in the power sector?

Narendra: We have given advances to very established players in the power sector and some of them have already started power production. As far as the infrastructure sector is concerned, there is no cause of any concern and around 8% of the infrastructure advances go to the power sector. However, we have not noticed any issues in the infrastructure and power sector.

Q: Tamil Nadu Electricity Board (TNEB) is one of the electricity boards, which is in greater trouble right now. What is your exposure to TNEB and have they not paid any of the loans lately?

Narendra: We have an exposure of Rs 1500 to TNEB; they have been paying very well. We also have their collection account and all the collections are coming to us. State government is taking some steps to improve the financial position and also have good power supply to the industry.

Q: You marked strong growth of around 25% in the previous quarter on a year-on-year basis. What are you factoring in for FY12 and in which sectors could we see the maximum growth or traction coming from? On which sectors do you maintain a cautious view?

Bakshi: We are looking at a much more moderate growth this year, in line with the RBI guidelines. Our budget for the year is not more than 20-22%, which we hope will materialise during this year including all the sectors. As far as the credit flow is concerned, there are a few factors to consider. Flow of the credit depends on sectoral performance and demand. It also depends on where we are reaching prudential caps, which we have internally fixed on various sectors.

For example, we have been regularly cautious on power or commercial real estate. We have substantial sanctions in hand, which are in the process of disbursement. The sector also needs some sort of stabilisation but micro level power projects can still be considered despite that. I don’t think we are cautious on any other sectors besides that.

Q: What is your own exposure to some of those microfinance institutes (MFIs) for which a corporate debt restructuring was in the process. Do you have any exposure to the big MFIs in Andhra Pradesh?

Bakshi: I will not talk about specific MFIs, but our total exposure to MFIs is about Rs 100 crore.

Q: Any MFI exposure? What is the status of the corporate debt restructuring (CDR), do you think it will go through?

Narendra: We have Rs 460-490 crore and got four accounts restructured since there has been a provision for restructuring. We have faced no difficulty on the payment front, it has been up-to-date. We are now continuously financing the MFIs. There are many good players in that space. We do take a note of the fact that there is a role play for MFIs and we should consider some of them for our advances as well.

Q: What might be the increase in the gross NPLs if there is slippage in your numbers this year?

Narendra: There are some NPAs, which were restructured earlier, still have liquidity problems. Similarly, there are certain accounts, which have issues because of linkages. We can restructure them if more problems occur.

Q: Can you give me a number on that?

Narendra: As far as our NPAs are concerned, we have a system related problem, which we are trying to resolve. In fact, we are also getting a good recovery from system related accounts. If the overall NPA aggregate matches with the Rs 2100 crore level of last year, then the recovery performance also remains very robust.

In fact, we would have recovered already more than Rs 400 crore and Rs 451 crore of NPAs as on June. So, we expect the level of incremental NPA to remain same on a quarterly basis. By the end of the year, we would be able to have fairly good amount of recovery. Our plan is to hold on at the current level of the gross NPA.

Q: If you can give us a percentage estimate of that increase?

Bakshi: I gave you a percentage of 1-1.2%.

Q: Any percentage for gross NPLs?

Bakshi: This will be the gross accretion minus upgradations and recoveries will be the net addition.

-