Time for some quick action by banks, RBI

Source :M. Sitarama Murty : BusinessLine :16 Aug 2010

The Reserve Bank of India made the first move in raising interest rates and the banks in turn have begun moving both the deposit and loan rates northwards. In a growing economy, the demand for credit will increase, but liquidity may not come under pressure in the near term. Savings too should grow in tandem but not at the same rate, thanks to the inflation that made a dent in the domestic budgets.

The rate movements appear to be fuelling undesirable competition amongst the bankers, a scenario, reminiscent of the unwarranted rate war three years ago. With the busy season still far away, banks have begun offering rates out of tune with their asset-liability management needs. This will only lead to erosion of margins and pressure on profits.

Raising resources

Any effort to pass on the burden to the borrowers would be resisted by looking at alternative ways for raising resources. Some have revived the FD route and before long the CP market would become active. Options of ECB/ FCCBs too are being seriously considered. Some banks reportedly are lobbying with the RBI for sub-Base Rate lending, but the RBI is unlikely to oblige. The banks would be compelled to subscribe to CPs at low rates.

The news on the NPAs front is not encouraging. Export and realty sector are yet to come out fully from the recessionary impact. The SME sector suffered major damage and would not be able to recover easily. The storm has receded, but it will be some more time before complete recovery is seen. The recent European crisis has only added to the anxiety. To reduce the NPAs, banks, perforce, would choose the ‘compromise' route with concomitant sacrifices.

Provisioning on NPAs

The RBI has advised the banks to achieve a level of 70 per cent provisioning on NPAs by September. For the banks at a lower level, it translates into making up for the deficit plus providing 70 per cent for all the new NPAs. Banks already at 70 per cent have to provide 70 per cent for the additions, to maintain the level. This amounts to providing for NPAs at prescribed rates in the normal course and making up for the shortfall by way of a floating provision. In the earlier years, the floating provision was handy as, in lean years and in case of need, banks could use it for making provisions for specific assets. This flexibility is no more available. Banks can only reckon it as tier-II capital. Apart from lack of adequate surpluses this acts as a disincentive. Two major banks have approached the RBI for more time to achieve the 70 per cent norm. Others will follow suit if the outcome is favourable.

Two developments that need urgent and serious consideration are the fresh option given for pension and the raising of the statutory limit for gratuity from Rs 3.5 lakh to Rs 10 lakh. The Indian Banks' Association has sent to the RBI a proposal for amortising this liability over a period of five years, as was done once in the past. The ICAI too has to take a view on this measure. The Income-Tax Department will have to give its nod for deferring the liability. The Basel-II discipline and the need to move over to IFRS do not leave much leeway for manoeuvring.

Though estimates vary widely, the burden could be in the range of Rs 20,000-30,000 crore depending on the number of employees switching over to pension now, their pay range and age profile. Better life expectancy, attractive pension packages and low interest rate regime prompted many to reverse their earlier decision. Banks have been resisting the demand for a second option, but the Government seems to have persuaded them. Add to this the need for setting aside Rs 8,000-10,000 crore for the steep rise in the statutory limit for payment of gratuity. Though it is known to be a consequence of the Sixth Pay Commission, the increase was sudden and steep.

There are no easy options and the banks should be ready to bite the bullet. The huge provisions could drive some banks into red or eat into their reserves, bringing down the capital adequacy, while the business needs and implementation of the Basel-II regime dictate an improvement. For the first quarter, banks have followed different options. Only an urgent resolution of the issue will leave some breathing time to banks to prepare.

Another worry for the banks is to ensure that capital to risk-weighted asset ratio doesn't fall because of the unrated assets in their books which carry higher risk weight and additional capital charge. Save for very large and reputed corporates, at least 75 per cent of the borrowers don't carry an external rating tag by approved agencies. It would be a task to get them agree to and abide by the discipline. Poor ratings in turn should mean stiffer interest rates, but banks may not risk loss of business and would rather sacrifice the risk-based pricing philosophy.

Agriculture advances

The pressure on earnings comes from yet another largely ignored source. Banks with agriculture advances less than 18 per cent of their net bank credit have to invest in Rural Infrastructure Development Fund (RIDF) of Nabard, at interest rates of 3.5 to 5 per cent, depending on the amount of shortfall. Assuming an average return of 7 or 8 per cent on agricultural loans, a whopping loss of three-four per cent on the investments running in to thousands of crores of rupees is a big blow to the banks. The position is relatively comfortable in a few public sector banks while it is difficult in private banks. The interest subvention of the government to the extent of 2 per cent is confined only to the public sector banks and is a clear disincentive amounting to discrimination for the private banks to achieve the bench mark. Farmers naturally prefer to deal with PS banks both for the incentive and a belief that only the ‘sarkari' banks can write-off their loans, at the instance of the government.

Microfinance institutions

The banks falling short on agricultural lending try to make it up partly by buying out at low rates the portfolios of microfinance institutions, that are known to charge to the ultimate borrowers anywhere between 15-24 per cent. This disguised securitisation would encourage more vigorous expansion of the microfinance institutions, some of which have already reached optimum level in terms of geographical spread, number of branches/accounts and ability to monitor and control operations.

Solutions and decisions have to come fast for these problems as hardly eight months are left in this year.

(The author is former Managing Director of State Bank of Mysore. Email: murthy@mandavilli.com)

Central bank of india plans to reduce NPAs

Source:The Hindu:Aug 11,2010:Corporate Reporter






CHENNAI: In an effort to reduce NPA (non-performing assets) accounts, Central Bank of India which is entering shortly its centenary year, has been taking various steps by resorting to out of court settlements.



Addressing presspersons here on Tuesday, S. Kannan, General Manager, Chennai Zone, said the bank had organised Lok Adalat, exclusively for DRT (Debt Recovery Tribunal) cases on August 6 under the auspices of Tamil Nadu State Legal Services Authority. Mutual negotiation was undertaken with various litigants from different DRTs functioning in Tamil Nadu and the bank had settled 24 cases involving an amount of Rs. 12.35 crore, Mr. Kannan said.



Early in January an adalat was conducted for DRT and non-DRT cases and 225 cases were settled for Rs. 13.50 crore. I



t was proposed to conduct another adalat next month exclusively for pre-litigation cases pertaining to Chennai city, Mr. Kannan said.



On the performance of Chennai Zone, Mr. Kannan said the zone comprising Tamil Nadu, Kerala and Puducherry achieved a business of Rs. 16,300 crore with Tamil Nadu alone contributing Rs. 12,462 crore.


The credit deposit ratio of the bank in Tamil Nadu was 158 per cent with deposits of Rs. 4,869 crore and advances of Rs. 7,593 crore.


For the current financial year, the plan was to increase the business of this zone to Rs. 20,000 crore.

Asset reconstruction cos seek hike in FDI limit

 

source: BL :Mumbai, May 26,2010

Asset reconstruction companies have moved the Government and the Reserve Bank of India to up the foreign direct investment limit in their equity capital as also the foreign institutional investment limit in each tranche of security receipts (SRs) issued by the companies from 49 per cent to 74 per cent.

Speaking to reporters on the sidelines of a FICCI seminar, Mr M.S. Verma, Chairman, International Asset Reconstruction Company Ltd, reasoned that when foreign investment up to 74 per cent was allowed in systemically important private sector banks, there was no reason why foreign investment in ARCs and the SRs issued by them should be capped at 49 per cent.

The need for upping the foreign investment limit in ARCs has arisen as raising funds from the domestic markets to buy non-performing assets from banks is proving to be a constraint as ARCs are perceived as high-risk enterprises.

According to Mr P.H. Ravikumar, Managing Director and Chief Executive Officer, Invent Assets Securitisation & Reconstruction Pvt Ltd, specialised international funds, which have an appetite for investing in non-performing assets, could easily fill the funding gap if the foreign investment limit is raised.

As the situation obtains now, the maximum foreign equity should not exceed 49 per cent of the paid-up equity capital of an ARC.

Further, foreign institutional investors registered with the Securities and Exchange Board of India can invest only up to 49 per cent of each tranche of scheme of security receipts subject to the condition that investment of a single FII in each tranche of scheme of SRs does not exceed 10 per cent of the issue.

To help ARCs get over capital constraints, it is understood that the RBI is considering raising the FII investment limit in SRs issued by ARCs to 74 per cent. Further, the single FII investment limit in each tranche of scheme of SRs is likely to be raised to 24 per cent from 10 cent now.

Mr M.R. Umarji, Chief Legal Adviser, Indian Banks' Association, said the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act could be suitably amended to raise the FDI limit in ARCs to 74 per cent while the RBI could suitably amend the guidelines on FII investment in SRs issued by ARCs.

ARCs are formed to acquire non-performing loans (NPLs) from banks and financial institutions with the objective of focused management and optimal recovery, thereby, relieving banks and financial institutions of the burden of NPL and allowing them to focus on core activities. Banks are left with cleaner balance sheets and do not have to deal with problem clients.

Federal Bank - Demand Notice

It’s time to clear the asset recast logjam

SOURCE :19 May 2010, 0017 hrs IST,Rajiv Ranjan,ET

Our asset reconstruction structure is unique; no other country operates a model of tightly regulated private sector companies engaged in the business of unlocking value from non-performing assets (NPAs) like we do. Why such a denouement for a unique dispensation like ours, then?

Because, a flawed implementation of a asset reconstruction company (ARC) model has resulted in the focus being shifted from unlocking value to ‘solving’ banks’ NPA problem. The key issue for ARCs is not the asset base but recovery and the time-frame within which it is made.
The performance on this front is agonising — at the end of six years of operation, the combined recovery of all ARCs works out to 31.9% of the acquisition price paid. Clearly, this points to a systemic logjam that needs to be tackled.

The logjam is on account of legal infirmities, legacy issues and certain bank practices but the more fundamental question that we need to ask is: Is ARC operation unlocking value for the economy the way it can and should? The simple answer to that question is ‘no’.

Garbage disposal cannot be the main role for ARCs, enforcement agents can do that as well, if not better.

The real value from NPAs will get unlocked only if ARCs do two things: one, tackle recalcitrant borrowers (that’s what Sarfaesi, or The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, was supposed to be all about) in order to make good recovery from NPAs that still have value; and two, rehabilitate revivable sick cases. ARCs have not resolved too many cases of the first variety and, as far as the second is concerned, they have not even scratched the surface.

There is confusion galore as two sets of RBI guidelines prescribe two different standards for determining the price at which banks should sell their NPAs — one for sale to ARCs (‘reasonably estimated realisable value’, or current market value – 2003 Guidelines for Sale to ARCs) and another for sale to banks (‘economic valuation of estimated cash flows’, or present value of expected cash realisations in future – 2005 Guidelines for Sale to Banks in Cash).

The 2003 guidelines ignored time value of money perhaps because, at that time, it was expedient to let banks ‘solve’ their provisioning problem by selling their NPAs to ARC at a price higher than warranted against issue of ‘security receipts’ (SRs).

In the absence of ‘fair practices’ guidelines, officials in the PSU banks-dominated banking system view sale of NPAs to ARC as a huge ‘risk’ — fraught with the dangers of a ‘vigilance’ probe. The logjam is complete: an ARC can submit cash bid matching the bank’s ‘reserve price’ only if it is willing to book a loss.

In order to break the logjam, following steps need to be taken:

First and foremost, we must put in place a mechanism so that banks are forced to get rid of their NPAs after a certain holding period — of, say, two years.

Second, Sarfaesi Act must be amended to confer extra powers on ARCs so as to instill responsible behaviour on the part of recalcitrant borrowers.

Third, RBI should issue guidelines covering ‘one-on-one deals between banks & ARCs for OTS and rehabilitation cases’, ‘auction and due diligence process’ (so that a one-sided application of market mechanism is avoided), ‘fair value’ (stipulating that ‘reserve price’ be computed based on: one, valuation of physical assets on ‘strip sale’, rather than ‘going concern’, basis; and two, present value of expected future realisations), inter-se transfer of debt (allowing such transfer for rehabilitation/ revival and debt aggregation purposes), ‘OTS payment by an ARC, on borrower’s behalf, as an investor’, etc.

Finally, the proposed Financial Sector Legislative Reforms Commission should be charged with the responsibility of mediating between ARCs, banks and the regulator in order to reform and reinvent asset reconstruction.

There is a unique opportunity for partnership between PE funds and ARCs, since the former have expertise in handling equity and the latter in handling debt. Investing funds together in a rehabilitation case would make sense because an ARC can also add value as a rehab expert and a debt aggregator with Sarfaesi powers, including the power to takeover management of the borrower’s business.

(The author is the president and CEO of Reliance ARC. Views are personal)

It's advantage clients in fight over derivatives losses

 
Source :BS :Ranju Sarkar / New Delhi May 20, 2010, 0:32 IST

Court interventions turn the tables on forex derivative losses, as banks push for out-of-court settlements.

The scales are slowly tilting in favour of exporters in their fight with banks on foreign exchange derivatives losses, which triggered a number of court cases in 2008.


If banks had an upper hand initially and forced many exporters to bear the losses, today many of them were willing to bear a bulk of the losses, said sources in the exporter community.

Axis Bank, for instance, recently settled a contract with Nahar Industrial Enterprises at 30 per cent, meaning the bank agreed to bear 70 per cent of the losses.
 
In 2009, YES Bank settled a contract with Sundaram Brake Linings in which it agreed to absorb 60 per cent of the losses.

Axis Bank did not respond to an email from Business Standard. Nahar officials confirmed the settlement, without disclosing details. YES Bank said the figures were incorrect but did not deny the settlement. Sundaram Brake Linings, in its results for the year ended March 2009, said it had settled the contracts with all banks. In two years, it paid Rs 9.48 crore to settle the total loss of Rs 109.48 crore it ran up on these contracts. If one goes by these figures, it seems the company had to bear only a tenth of the losses.

This is a big change from 2008, when a few judgements went in favour of banks and companies like Sundaram Multi-Pap or Nitin Spinners had to bear all the losses. So, what has changed?

Orissa HC stepped in

For one, there was an Orissa High Court order on December 24, 2009, wherein it directed a Central Bureau of Investigation (CBI) probe on a public interest suit blaming banks for these losses. More than this order, there was a sequel — the two reports sought by the court from the Reserve Bank of India (RBI) and CBI which confirmed many of the violations the exporters were claiming. ‘‘With this, the civil cases have become stronger. We don’t have to argue the extremely complex cases afresh before district courts to convince the judiciary about violations. Wwe can furnish the two reports, which confirm our allegations,’’ said S Dhananjayan of Tirupur’s Forex Derivatives Consumer Forum.


The HC had asked CBI to probe alleged mis-selling of these products, violation of foreign currency laws and any ‘‘offences of cheating, criminal conspiracy and fraud’’.

‘‘If the allegations are found to be true, CBI would be busting a large financial scam affecting the economy of the country,’’ the court had observed. But, on February 19, banks got an interim stay from the Supreme Court on the HC order.
Earlier, in a report to the high court,  
CBI gathered data from RBI that 11 banks
had unrealised dues from customers
to the tune of Rs 755.45 crore between April 2007 and December 2008, 
while the gross mark to market losses 
(by writing down the value of assets to their current value)
for customers of 22 banks were Rs 31,719 crore 
between 2006 and 2008.


Banks had sold exotic derivatives to exporters,
who suffered huge losses when their calls on currencies
went wrong. In 2007, such bets had backfired when the
swiss franc and the yen rose dramatically against the dollar.

After Orissa, more settlements are happening.
‘‘We would keep crying foul about banks and
few would take note. But, when everything
we have been saying is confirmed by RBI and CBI,
we stand vindicated,’’ said Dhananjayan,
a chartered accountant whose business is at stake,
as many Tirupur’s exporters facing closure are his clients.

Bankers’ imperative

On the other side, banks are also under pressure to clean up their balance sheets and provide for the losses on forex derivatives. ‘‘Besides, they realise there’s little chance of them winning the civil cases,’’ said Dhananjayan.

No wonder, banks are increasingly pushing for out-of court settlements (see table). They have already settled many high-profile cases.

Some exporters in Tirupur, who paid a substantial amount to settle the contracts, sense an opportunity. ‘‘They realise that it was not worth paying and are trying to recover their money by filing recovery suits,’’ said an exporter.

Besides the Orissa HC ordering a CBI probe, another milestone in exporters’ battle was the Supreme Court judgement on June 29, 2009, in the case titled Nahar Industrial Enterprises vs HSBC Bank.

The court said the challenges go into the very legality of the contract, and hence, these cases have to be tried in the civil courts, and not in debt recovery tribunals (DRTs).

What this means is that all forex derivative cases will have to be tried in civil courts and not DRTs. ‘‘These tribunals (DRTs) are mainly recovery agents of banks; there’s very little scope of getting a fair trial,’’ said an exporter.

In fact, cases (on forex derivatives) in various courts have never been argued, except in Rajshree Sugars. In every case, banks take up the jurisdiction point.

They have been arguing that every dispute should go to the Mumbai DRT, given the Isda Agreement and the terms of the contract. Isda, the International Swaps Dealer Association, represents participants in the derivatives industry.

However, the Nahar judgement ensured banks could no longer seek to transfer suits to the Mumbai DRT; this was quashed by the SC judgement. ‘‘The DRT mechanism is very simple. Banks would take a recovery certificate from the tribunal and recover the money/assets, just like they would recover other loans,’’ said an exporter. It also meant this fast-track mechanism was closed for banks and they had go through a real probe in civil courts.


Exporters grab advantage

And so, banks have been pushing for out-of-court settlements,
while exporters have been keen to pursue cases in civil courts.
This could simply be a pressure tactic to force banks
to settle the contracts on favourable terms to exporters.

For now, the strategy seems to be working.

But, exporters are equally to blame.
They all made money on these contracts the year before losses
threatened to edge them out of business.

They don’t deny this. 

What they contend is that the losses were highly disproportionate to the profits they made.
For instance, as cited in the Orissa HC judgement, a company which made
a profit of Rs 4 lakh on a contract the previous year made a loss of Rs 2.39 crore
on the same contract in 2008.

‘‘These were highly one-sided contracts.
Banks have speculated on behalf of exporters.
When losses came, they were booked on exporters,’’ said Dhananjayan.

.............................................................................................

FOREX DERIVATIVES: A CHRONOLOGY
 
I  .   MARCH-JUNE 2008

* Banks, exporters discover they are sitting on huge mark-to-market (MTM) losses on forex derivatives contracts due to adverse currency movements

* Many companies had bet on currency markets to make a quick buck. In 2007, such bets had backfired when the swiss franc and the yen rose dramatically against the dollar

* Many companies like Ranbaxy, Amtek start booking MTM losses. It became clear that forex losses would drag down corporate performance for subsequent quarters

* It became apparent that these were not just currency swaps but banks had sold more exotic and complex structures to companies, few of whom understood these trades

* In some cases, the MTM losses on forex derivatives were higher than a company's net profit in the previous year or their net worth, which threatened their existence

* Many smaller companies took banks to court, alleging they mis-sold these exotic products and sought refuge in litigation. Banks also sued many exporters

* Interestingly, many companies made profits on these derivatives the year before bets went wrong. Companies argued losses are several times higher than profits

II .  SEPTEMBER-DECEMBER 2008

* On Sep 15, the Bombay High Court asked Sundaram Multi-Pap to pay ICICI Bank Rs 2.94 crore as dues on derivatives contracts with the bank that it had failed to honour

* On Oct 15, the Madras High Court ruled in favour of Axis Bank, terming its contract with Rajshree Sugars legal. Review petition is pending before the division bench

* The disputes have not been argued, except in Rajshree Sugars' case. Banks harped on jurisdiction and sought to transfer the civil suits to Mumbai DRT
 
III  .  MAY-DECEMBER 2009

* On May 19, 2009, Cuttack-based lawyer Pravanjan Patra files a public interest suit in the Orissa High Court, seeking a CBI probe into forex derivatives losses

* In a significant judgement on June 29, 2009, in a case between Nahar Industrial and HSBC, the SC said derivatives cases have to be tried in civil courts, not in a DRT

* Orissa HC seeks a report from CBI, which finds that 11 banks had unrealised dues to the tune of Rs 755.45 crore between April 2007 and December 2008

* Of this, Rs 329.53 crore is under litigation; banks have written off Rs 203.79 crore. Gross MTM losses on these contracts between 2006 and 2008 were Rs 31,719 crore

* The SC judgement in the Nahar Case and reports by CBI, RBI in the Orissa HC, confirm malpractices and violations in forex derivatives; puts banks on the defensive

* Banks push for out-of-court settlements and are today willing to absorb a majority of the losses, unlike 2008, when they were forcing exporters to bear the bulk of the losses
..................................................................................................

WHAT COURTS RULED
Company	Bank	Court	Verdict
Sundaram Multi Pap Ltd	ICICI Bank	Bombay High Court	Co. lost case on a winding up petition, had to
Rajshree Sugars and Chemicals	Axis Bank	Madras High Court	Lost a case in front of a single judge. Its review petition pending in front of the division bench
Sundaram Brake Linings	Kotak Mahindra Bank	Madras High Court	Out of court settlement
Sabare International	ICICI Bank	Karur District Court	Cases still pending
Precot Meridian	Kotak Mahindra	Coimbatore District Court	Out of court settlement
Garg Acrylite	ICICI Bank	Haryana District Court	Cases still pending
Nahar Industrial Enterprises	HSBC Bank	Supreme Court	The SC disallowed the DRT to hear or pass any rulings on the forex derviative related cases
Sundaram Brake Linings	Yes Bank	Madras High Court	Out of court settlement
NCS Sugars Ltd	ICICI Bank	Hyderabad High Court	Out of court settlement
Nuzhiveedu Seeds	ICICI Bank	Bombay High Court	Out of court settlement
This is not an exhaustive list. Several cases were filed across district courts in the country.

SBI seeks more time for higher NPA provisioning

 

 Source ; PTI :May 16,2010

 

New Delhi,  Stung by a severe fall in its Q4 net profit due to higher provisioning for bad loans, the country's largest lender State Bank has sought more time from the Reserve Bank to meet the new requirement of setting aside funds to the tune of 70 per cent of the bad loans.

The SBI request assumes importance as its profit dropped by a whopping 32 per cent to Rs 1,867 crore in the fourth quarter of 2009-10 even when it raised provisioning only marginally from 56.19 per cent to 59.23 per cent of its total non-performing assets on quarter-on-quarter basis.

SBI's competitor ICICI Bank has already got six months relaxation to meet the new norms beyond the RBI stipulated September 2010.

"The RBI has allowed us time till March 31 next to reach a provisioning coverage ratio of 70 per cent.

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