Banks face cautious future on NPAs in certain sectors: ASSOCHAM

Source :Indiainfoline news services:Aug 14,2011

Gross non-performing assets (NPAs) of all scheduled commercial banks now comprise two per cent of advances compared to 15 per cent in late 1990s

Though banks have shown improvement in asset quality over the years, fast changing macro-economic scenario has thrown up renewed risks of accounts going bad in certain vulnerable sectors like telecom, airlines, small and medium enterprises, and agriculture. A detailed study by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) says there still remains a considerable scope for improvement in asset quality of Indian banking institutions and regulatory norms associated with them. Gross non-performing assets (NPAs) of all scheduled commercial banks now comprise two per cent of advances compared to 15 per cent in late 1990s. In value terms, gross NPAs increased at a compound annual growth rate of less than one per cent since 2000-01 compared to 23 per cent growth in gross advances. Similarly, gross NPAs of scheduled commercial banks – which were quite high to the extent of 8.1 per cent of net advances for the year ending March 1997 – declined to 6.2 per cent in March 2001 and further to just above a per cent towards March 2009 end. Public sector banks led the improvement in NPAs, said the study conducted jointly by ASSOCHAM and investment bank Resurgent India. Investors are affected adversely if the proportion of toxic assets increases in overall asset portfolio of a company, it noted. The study analysed this further and considered data for 11 listed banks for the year ending March 2010 which showed that proportion of NPAs to total loans stood at 2.21 per cent. If the ratio of NPA to total loans was a tad lesser at exactly two per cent, the market capitalisation would have increased by 6.4 per cent. However, if the ratio is increased to 2.5 per cent, then market capitalisation would have reduced by nine per cent. With the same data set, the NPA level of 2.75 per cent – 54 basis points higher than the actual level – would have resulted in market capitalisation decreasing by 17 per cent. Existence of high NPAs in one sector can lead to drying up of credit flow to others. This obviously leads to a contagion effect on the economy as a whole – especially if it is an important sector like housing, automobile, micro-finance and financial services, said the study. The recent economic meltdown initially in the United States and then in rest of the world was a direct result of many loans going bad. Lax credit practices and availability of free credit empowered banks to lend credit to even sub-prime borrowers without sufficient checks. On top of this, bundling these mortgage loans to housing sector in the form of mortgage backed securities and collateralised debt obligations led potential bad credit out of banks’ books and never reflected in the health of banking system. But the same existed in the system through harmful and complex derivatives created by banks and credit rating agencies. As soon as these loans started going bad, banks and institutions holding these securities had to book significant mark-to-market losses which ultimately led to downfall of mighty institutions like Freddie Mae, Fannie Mac, Bear Sterns and Lehman Brothers. The world has still not been able to recover to pre-crisis levels. The study thus recommended adequate insurance schemes for SMEs and agricultural sector (being the most vulnerable) to provide a meaningful cushion if the account turns bad. It is also imperative to favour public sector banks through taking over of bad loans from these accounts and compensating for restricted lending capacities. Weather derivatives can be used for protecting crop loan portfolio. Corporate debt restructuring agencies can be established to encourage voluntary meetings between creditors and debtors, and to oversee an independent assessment of a company’s viability and worth. Debtor assistance programmes can be devised to ease burden of falling employment, rising interest rates or devaluing currencies. Such programmes tend to be very popular politically and can be as necessary as bank assistance programmes. But they can raise moral hazard and undermine a payment culture if not managed properly. Banks could be empowered to get a particular segment of clients’ business audited or verified by an independent entity to detect any possible warning signals. Also, increased participation from asset reconstruction companies is required to take toxic loans out of banks’ books. These companies need to be strengthened with capital infusion and efficient top management. The government could carve out NPAs from banks being restructured, replace bad assets with government bonds on balance sheets and have NPAs managed by an asset management company to fix the problems.

Central Bank of India Vs Premier Paper Products

IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI

DATED THE 15^TH SEPTEMBER, 2004

PRESENT:  HON’BLE JUSTICE DR. PRATIBHA UPASANI

CHAIRPERSON

RA-12/2004

(IA-474/2003 in TA-1458/2002-DRT, Coimbatore)

BETWEEN:

Central Bank of India,

Variety Hall Road,

Coimbatore.

…  Appellant

            (Counsel:  Mr. S. Kothandaraman)

AND

1.  M/s. Premier Paper Products,

     By its Partner P. Nagarajan,

     (Now known as Premier Plass Pak Ltd.)

    

2.  P. Nagarajan

3.  P. Rajarathinam

4.  P. Ramamurthy

(Address of Respondents 1 to 4:  231, Pollachi Road, Coimbatore-641 021).

…  Respondents

            (Counsel:  Mr. M. Rajan for M/s. K. Chandrasekaran)

:  O R D E R  :

1.         Bank filed Suit OS No.454/1995 in the Sub-Court, Coimbatore, in the year 1995 which came to be transferred to DRT, Chennai, upon the establishment of DRTs under the RDDB&FI Act, 1993 and again re-transferred to DRT, Coimbatore, and re-numbered as TA No.1458/2002.

…2/

2.         This Appeal is filed by the appellant/Original applicant Central Bank of India being aggrieved by the judgement and Order dated 25.2.2004 passed by the Learned PO of DRT, Coimbatore, in IA-474/2003 in TA-1458/2002.  By the impugned Order the Ld. PO allowed the IA-474/2003 taken out by the defendants and disposed of finally the TA No.1458/2002 in view of the direction given by him in the IA. 

3.         Few facts which are required to be stated are as follows.

4.         Original Suit OS No.454/1995 was filed by the Bank against four defendants for recovery of amount to the tune of Rs.4,27,16,228.77p payable by the defendants to the applicant Bank for granting certain credit facilities to the defendants.  The defendants executed various security documents on several dates.  The defendants created mortgage by deposit of their title deeds on their properties with intent to create equitable mortgage as a security for due return of the loans availed by the defendant No.1 firm and its partners.  Since the defendants did not regularise their account the Suit as mentioned above, came to be filed by the Bank.  During the pendency of the proceedings, at one point of time, the defendants had given a proposal for settling the claim by offering Rs.464 lakhs but the settlement proposal did not come through.  One more attempt for settlement also failed.  Thereafter, the Reserve Bank of India came out with certain guidelines for settlement of NPA accounts.  In pursuance to the said guidelines the defendants submitted a revised proposal offering Rs.317.73 lakhs in full and final settlement of the Bank’s claim.  The proposal of the defendants was not accepted by the Bank and they were asked to improve their offer.  A revised offer was made of Rs.326.88 lakhs.  However, the revised proposal is still pending.  As per the Bank’s case, even that offer made by the respondents was subsequently withdrawn by them and another revised proposal was given by them on 30.4.2003 offering Rs.317.73 lakhs and to show their bonafides, deposited Rs.70 lakhs plus Rs.15 lakhs.  The said amount of Rs.70 lakhs was since withdrawn before the impugned Order dated 25.4.2004 came to be passed by the Ld. PO of DRT, Coimbatore.

…3/

5.         While the OA was still pending, the defendants made an application being IA No.474/2003 to the DRT praying for a declaration that they were entitled to the benefits of the RBI circular/guidelines and praying that the applicant Bank be compelled to accept the offer made by them of Rs.317.73 lakhs under the One Time Settlement (OTS) as per the Scheme of RBI. 

6.         The Bank’s contention was that the RBI guidelines were in the nature of guiding and not for governing.  The contention of the Bank was that the guidelines were not binding on the Bank.  It was contended that the guidelines are not issued under Section-21 (1) of the Banking Regulation Act, 1949 or under Section-47-A (1) (b) of the said Act.  It was contended on behalf of the Bank that in view of this, the Bank could not be compelled to accept the proposal made by the defendants.

7.         The Ld. PO of DRT, however, held that the guidelines were binding on the Bank and passed an Order directing the Bank to accept a sum of Rs.317.73 lakhs in full and final settlement of the Suit claim being the minimum of the NPA as mentioned in the guidelines dated 29.1.2003.  IA-474/2003 which was made by the defendants was accordingly allowed and since direction was given to the Bank to accept the said amount of Rs.317.73 lakhs in full and final settlement, without adjudication the Learned PO closed and disposed of the TA in view of the direction given by him in IA-474/2003. 

8.         I have heard Mr. S. Kothandaraman, Advocate for the appellant Bank and Mr.M. Rajan, Advocate for the respondents.  I have also gone through the proceedings and the Case law which was submitted across the bar, and in my view, the Ld. PO has committed an error in holding that the guidelines given by the RBI under the OTS Scheme are binding on the bank.

9.         I find myself in agreement with the submission made by the Advocate appearing for the Bank that the guidelines are there to guide and not to govern.  Reference can be usefully made to the decision of the Allahabad High Court reported in 2004(3) CCC 165 (AIL) (Sardar Prem Singh Vs. Bank of Baroda).  The Division Bench of the Allahabad High Court in this case has held that the guidelines for recovery of non-performing assets do not confer right on a party to get one time settlement and that guidelines are purely administrative instructions which are not enforceable by Court of law.

10.       I am in respectful agreement with the observations made by the High Court. Reference can be also usefully made to the judgement delivered by the previous Chairperson of this Appellate Tribunal in Appeal RA No.7/2003 in Appeal-1/2002 in OA-878/1995 (Sri Raghavendra Theatre Vs. Bank of India).  In this matter, the late Justice Smt. A. Subbulakshmy has observed that if default is committed by the appellant in terms of the compromise then the compromise has to be treated as broken and the terms of the compromise is no longer binding on the Bank.

11.       In the present case at hand also, the respondents defendants have not kept their words by abiding to the terms of the compromise proposal.  The payment was not made in time and as observed earlier, it cannot be said that the guidelines are binding upon the Bank even though they are prejudicial to its interests.  The Ld. PO ought not to have compelled the Bank to accept the proposal and dispose of the TA itself without adjudicating upon it.  The impugned Order will have, therefore, to be set aside and the appeal filed by the Bank will have to be allowed.  Accordingly, following Order is passed.

12.       Appeal RA-12/2004 filed by the Central Bank of India is allowed.  The matter is remanded back to the Learned PO of DRT, Coimbatore, for deciding the OA in accordance with law on its own merits.

(Dictated to PS & the transcript corrected, pronounced & signed by me today the 15^th September, 2004).

                                                                                                                        Sd/-

[ JUSTICE  DR. PRATIBHA UPASANI ]

CHAIRPERSON

Panel on education loan suggests creation of credit guarantee fund

Source :BL:KOLKATA, JULY 13:2011

Creation of a credit guarantee fund,

 extension of the tenor of repayment

 and moratorium period of educational

 loans are some of the key recommendations 

of the expert committee on education loan

 scheme constituted by the Indian Banks' Association (IBA)

The committee has submitted its recommendations to the Finance Minister, Mr Pranab Mukherjee, and the draft paper on the education loan scheme is likely to be released in a month's time, according to Mr T. M. Bhasin, Chairman and Managing Director, Indian Bank.

The expert committee was set up by IBA under Mr Bhasin to modify the education loan scheme launched in 2001-02.

“We have recommended the creation of a credit guarantee fund. A portion of the funds in the corpus could come from the government and a portion from banks. A certain portion of the premium on loans could also be set aside in the corpus,” Mr Bhasin told Business Line.

Banks have been urging the Centre to set up a credit guarantee fund on the lines of the fund created for the MSE (micro and small enterprises) by the Government and SIDBI (Small Industries Development Bank of India).

Concerned over the rise in defaults of educational loans, banks have been trying to rework some of the existing norms on such loans.

DEFAULT RATE

The cumulative outstanding under education loans for all banks stands at about Rs 45,000 crore as on date and the defaults are in the range of three-to-five per cent, Mr Bhasin pointed out. The defaults are higher on loans below Rs four lakh, which are collateral free.

The committee has suggested extension in the repayment period of education loans from five-seven years now to10-15 years to facilitate repayment and reduce the probability of default. “The moratorium period on such loans is typically six months. We have suggested it to be extended to one year,” he said.

, 

PNB to start bank adalats to clear NPA s

Source :livemint:PTI:Thu, Jul 12 2007. 11:43 AM IST


Bank’s gross NPAs stood at Rs4,300 crore; 
cases below Rs25,000 would be taken up at adalats



Chandigarh: The Punjab National Bank on 12 June said it will start ‘bank adalats’ across the country from next month in its bid to reduce its non-performing assets.


“Like Lok Adalats, we will be starting bank adalats wherever there will be NPA accounts,” PNB chairman and managing director, K C Chakrabarty, told the media here after holding a state level bankers’ committee meeting.


He said the bank’s gross NPAs stood at Rs4,300 crore and added that cases below Rs25,000 would be considered at the ‘adalats’.


Stressing there was a need to take technology to the rural areas as only 37,000 branches of all the banks in the country operate in such areas despite the existence of 600,000 villages, he said, “we are experimenting on some models at present”.


He said “poor man’s banking or mass banking is unviable unless we have technology.”
Chakrabarty said that the 112-year-old bank was third in terms of profit.


“Our total business rose 21.7% to Rs2,36,456 crore at the end of March 2007. Deposits amounted to Rs1,39,860 crore, up 16.9%. Low cost deposits formed 46.16% of total deposits while advances rose 29.4% to Rs96,597 crore,” he said.


Credit to agriculture increased by 27.3% to reach Rs18,571 crore while share of agri credit in net bank credit stood at 18.9% as against national goal of 18%.


The bank also plans to increase its ATM presence and the customer base from 35 million to 50 million.


“We are in talks with the Railways to install 100 ATMs at about 50-60 railway stations,” he said, adding that the bank also plans to launch its credit card by early next year.


On the bank’s foreign presence, he said PNB has been granted licence by Hong Kong Monetary Authority to set up a branch in that country.


“We also plan to open offices at Singapore (offshore banking unit) and a subsidiary at Canada,” he said.


On the performance of banks in Punjab 2006-07, he said 100% financial inclusion has been achieved in Gurdaspur and Mansa and six more districts had been identified to achieve this by end of September.


The overall advances to Minority Communities have risen from Rs11,896 crore as on March 2006 to Rs15,889 crore in March this year, up 33.6%.

Air India may not be able to service working capital loans

Sorce :livemint :P.R. Sanjai & Anup Roy:Thu, Jul 14 2011. 1:00 AM IST

Air India plans to raise $850 million (Rs.3,791 crore) to part-fund the purchase of 27 Boeing 787 planes as the state-run carrier battles to prevent working capital loans from turning into bad debt.


On Tuesday, Air India told finance ministry officials that the airline may not be able to service working capital loans from Indian banks if it doesn’t get an immediate equity infusion of Rs.6,600 crore from the government.


According to two Air India executives, if the carrier fails to make payments before 31 July, the loans will turn bad as no payments have been made in the last two months. A loan turns bad if a borrower doesn’t service it for three months. Neither of them wanted to be named as they are not authorized to speak to the media.


Without the equity infusion, the cost of borrowing will go up for the proposed $850 million debt-raising plan.


“The moment a company defaults in paying interest to banks, its future fund-raising programme gets affected, but Air India will get the benefit of being a government entity,” said Madan Sabnavis, chief economist at rating agency firm Credit Analysis and Research Ltd.
Air India has submitted a financial restructuring plan to the finance ministry. According to the plan, at least 60% of the total working capital will be converted into a long-term loan and the rest into cumulative preference shares for 15 years. It envisages a saving of Rs.1,000 crore a year in interest rates.
“The government has not cleared it as yet. If nothing fructifies, banks will have to classify the loan as a non-performing asset (NPA),” said a senior executive with a large public sector bank that has exposure to the carrier. He did not want to be identified.


Once a loan becomes an NPA, banks need to set aside money or provide for it. Besides, they also do not earn any interest on such loans.


“The government should take a decision whether we need to have an airline like Air India. If yes, it cannot be run as loss-making. Therefore, it needs to bring in private sector ethics to the organization,” Sabnavis said.


Air India should increase efficiency levels, lower expenditure and pare the workforce to cut its wage bill. 


Theairline has trimmed its workforce from 33,500 to 28,500 in the last three years.
Air India had debt of Rs.42,570 crore and accumulated losses of Rs.22,000 crore as of 31 March.
On Wednesday, Mint had reported that Air India was seeking a total equity support of Rs.42,920 crore till fiscal 2021. 


This includes guarantees for aircraft loans worth Rs.30,584 crore (both present and future) up to the 2021 fiscal year.


“It is possible to revive Air India, but it has to run like a commercial enterprise,” Sabnavis said.

Students' degrees could soon brand them defaulters

Source :BL:NewDelhi:july 13,2011

If you've defaulted on repaying an education loan, soon that fact could be stamped on the back of your degree or diploma certificate. The Indian Banks' Association (IBA) is said to be considering such a proposal to bring down non-performing assets (NPAs) in education loans.

THREE-PRONGED STRATEGY

“We have suggested a three-pronged strategy for the revised scheme. This includes tracking the student and creating a special credit guarantee fund for the education loan, besides stamping the certificate,” the chairman and managing director of a nationalised bank said.

The scheme will need the nod of both the Finance Ministry and the Reserve Bank of India before it can be introduced, added the chief executive of another bank.

Educational institutions are divided over this proposal. The Executive Director and Dean of Manav Rachna University, Col (Retd) V. K. Gaur, says, “It is not a good idea. Procedures for taking education loan are already very lengthy. Banks take more and more precautions, now one more provision will make life difficult for the students.”

He is apprehensive that stamping of certificates could be another way to exploit students.

On the other hand, Prof C. P. Singh, Professor-in-Charge of University School of Mass Communication, Guru Govind Singh IP University, supports the new proposal. He says, “If the certificate carries a stamp, what is wrong in it, if your conscience is clear, you would like to pay on time.”

FINALISATION OF SCHEME

The revised scheme is likely to be finalised within the next two months. Sources told Business Line that the initial structure of the revised scheme was discussed at a review meeting of public sector banks held last Friday.

Bankers are worried about the rising trend of NPA in education loans. Though they are not giving the exact percentage of standard assets turning into NPAs in the category, declining year-on-year growth in terms of accounts added and outstanding amount say a lot (see table).

Bankers say that the new system would require active co-operation from educational institutions for which specific instructions from the HRD Ministry will also be required. There is a strong possibility that a special credit guarantee fund will be created for education loans.

The size of the fund could be Rs 5,000 crore. It was also suggested that the loan repayment tenure should be increased to 15 years from the existing seven years. Though it was felt that such an option would increase the rate of interest, providing this option has not been ruled out.