A Better Way To Pay Off Debts

Source :Gary Belsky & Tom Gilovich :Time moneyland : December 8, 2011

‘Tis the season … to accumulate debt, and in that spirit we thought we’d write about a pair of related and timely subjects. The first is a new study, containing findings that could help you pay off loans faster. The second is a new book that may be the most useful and thoughtful gift you can give. Both could make you wealthier and happier.First the study, which comes from a handful of researchers led by Israeli marketing professor Moty Amar and including Duke University’s Dan Ariely, one of the most creative minds in behavioral economics. In a series of surveys and studies, the investigators identified and examined a cognitive bias they call “debt account aversion”: a strong preference of people with multiple loans to pay off smaller debts first, even when it makes more sense to pay down larger balances on loans with higher interest rates.

The flaw in this approach is obvious: Imagine owing a total of $10,000 to four different lenders, with balances of $300, $400, $1,300 and $8,000 and interest rates of 8%, 10%, 12% and 16%, respectively. Imagine further that you have $1,000 to put toward your borrowings. Logic dictates that you devote everything but the required minimum payments to decreasing the $8,000 balance (which costs more to carry) rather than closing out two of the smaller balances. You’ll pay off everything more quickly. On the other hand, going from four outstanding debts to just two sounds very appealing.

The researchers propose various causes, but at their core they combine to highlight a kind of meta-error we might fairly call the “simplification bias.” All things being equal but especially when they’re not—when we’re anxious, frightened or otherwise stressed or confused—people prefer to simplify their world and choices. In fact, it’s not so much of a preference as an elementary feature of how the mind works.

Which brings us to our second topic, what we might fairly call “Tom and Gary’s Holiday Gift Guide!”

Readers of our book and blog surely recognize the name Daniel Kahneman. Along with his partner, the late Amos Tversky, Kahneman is the parent of behavioral economics: Indeed, in 2002 he was awarded a Nobel Prize for Economics (his Nobel lecture is worth the 38-minute listen). Kahneman has been in the news lately because of a book he wrote; not his first, but the first intended for a general audience. It’s called Thinking, Fast And Slow, and we recommend it with the utmost enthusiasm.

In it, Kahneman offers something of a metaphorical view of decision making that he describes as an ongoing interaction between two independent actors within our minds: System 1 is non-conscious, fast-acting and intuitive; System 2 is generally conscious, slower-acting and analytical. Many of our most common judgmental biases and behavioral head-scratchers emerge from System 1 (which, in broad and loose terms, evolved to help our ancient ancestors deal with challenges to survival) and most of the thinking that allows us to consciously understand and sometimes override those instinctive responses emerge from System 2. But, in general, Kahneman writes, System 1 does most of the work: it is the quiet but influential driver of most judgments and choices. Conscious Thought might get top billing, but without Gut Feeling there’s no show.

And so, even though paying down large debts with high interest rates first makes more sense, eliminating small balances first feels right. After all, Gut Feeling whispers to us, going from four debts to two has to be a good thing. And it can be—if, say, a feeling of accomplishment (“Hey, I eliminated two debts!”) motivates borrowers to focus on paying off remaining debt in lieu of spending (and charging) more. At the very least, though, Amar and Ariely’s paper (“Winning The Battle But Losing The Way: The Psychology of Debt Management“) indicates that your feelings about paying down loans might be counter to your financial well-being—and are therefore worthy of some System 2 thought.

Likewise, Thinking, Fast And Slow is a worthy purchase this holiday season. For yourself, certainly, but especially for someone else in your life. Kahneman is skeptical about our ability to notice and correct our own System 1 biases, but he’s more optimistic about our chances for identifying and tweaking those of others. So this bestseller is really a two-for-one special: a good read for someone you care about—and a chance for them to help you improve your decision making!

Repayment crisis in education loans worries TN banks

Source :Aparna Ramalingam, TNN : Dec 8, 2011, 04.34AM IST


CHENNAI: The number of educational loans that are not being paid back is increasing in the state. 


Non-performing assets (NPAs) in educational loans stood at Rs 528.16 crore, accounting for 5.02% of the educational loan business on June 30. For co-operative banks, this figure stood at Rs 1.6 crore representing 1.25% of the total educational loan portfolio of such banks, as per a report of the State -Level Bankers' Committee (SLBC). 


"In case of educational loans, repayment normally commences after completion of course or after bagging a job. With professional courses like engineering and medicine being four to five years long, repayment is an issue," said M Narendra, chairman, SLBC, Tamil Nadu, and CMD, Indian Overseas Bank. "Only 30% of students in the state get recruited from campus. The rest have to look for jobs. So repayment becomes a problem," he said. 


While there is no security required for educational loans up to Rs 4 lakh, the co-borrower (usually the parent) stands as guarantor for loans between Rs 4 and Rs 7.5 lakh. Educational loans in India normally range between Rs 4 and Rs 45 lakh with the repayment period being seven to 10 years. 


Loans disbursals in the state registered a growth of 37% to touch Rs 12,103 crore in September compared to Rs 8,841 crore last year. "While the percentage of NPA in priority sector advances has come down in all categories between March and June, it has gone up in educational loans considerably," says the report. 


One reason is the recent influx of students from north India to engineering colleges in Tamil Nadu. "Many of them don't have a permanent address and it becomes difficult to track them once they complete the course," said SN Mishra, convenor, SLBC. 
Rising interest rates have resulted in higher educational EMIs and this has contributed to the rise in delinquencies, said bankers. 


Bleak employment opportunities abroad have also contributed to rising NPAs. "Earlier, women graduating from nursing colleges used to bag jobs abroad within six months to a year. Opportunities abroad have dwindled since 2008 and this is being reflected in the repayment pattern," said a senior official from Central Bank of India.

IOB plans to restructure SME and corporate loans

Source : BS :Vijay C Roy / New Delhi/ Chandigarh December 7, 2011, 0:02 IST

In order to facilitate its corporate customers who have been hit by dollar appreciation and slowdown, public sector bank — Indian Overseas Bank is planning to restructure the SME and corporate loans. The bank has received applications from its customers regarding restructuring of loan.

Speaking to Business Standard, executive director, A K Bansal said, “The dollar appreciation has impacted importers. Also, corporates who have raised money under FCCB (Foreign Currency Convertible Bond) route are under pressure and they are finding it difficult to repay. We are getting applications from our customers regarding restructuring of loans. In order to address the issue we have facilitated them by offering longer repayment schedules and we are thinking to further facilitate them."

The bank’s NPA has touched Rs 3,898 crore as on September 2011, whereas it was around Rs 3,200 crore as on March 31, 2011. On being asked about the reason, behind increase in NPA, he mentioned, “There are so many reasons behind increase in NPA. Firstly, the real estate sector is facing slowdown, delay in projects and bad recovery from agriculture sector. Also, we have switched over to system based NPA."

However, amid fears of pressure on margins of banks in the prevailing high interest rate scenario, Bansal said, “Banks are expecting NIM of 3 per cent by the end of this financial year against 2.8 per cent as on September 2011. There has been some increase in the cost of funds but it has been more than compensated by the yield on assets. We aim to maintain our net interest margins (NIM) by increasing our low-cost deposits, or the current and savings account (Casa) deposits. We would garner more Casa deposits by opening new branches and accounts."

Further, having already opened 116 branches in the current financial year, the bank is plans to open another 300 branches specially in tier-II and tier-III cities. Also, the proposed expansion will help the banks to achieve a Casa of 31 per cent from 28 per cent at present.. In Punjab and Haryana, the bank is opening 11 more branches in the current financial year. Out of the total, three branches would be specialised SME branches and two would be specialised branches for corporate.

Bansal mentioned that the thrust area of the bank will be to continue to give loans to micro small and medium scale enterprises and the agricultural sector, according to the targets.

Further, having already crossed 2,90,000 crore business as on September 30, 2011, the bank is expecting a business growth of 20 per cent in the current financial year.

Big borrowers of India Inc default on Rs 47,000 crore loans

Source  :Pradeep Thakur, TNN | Dec 6, 2011, 04.31AM IST

NEW DELHI: Large borrowers, who took loans of Rs 10 crore or more, have defaulted on payments to the tune of Rs 47,000 crore, with banks not even pursuing cases to recover over half the amount.

Data available with the finance ministry shows that least 700 defaulters who had borrowed Rs 10 crore or more from public sector banks and cumulatively owe over Rs 26,000 crore have gone scot free despite not clearing their dues. In another 3,400 cases where loans are of the order of Rs 1 crore or more, the lenders have moved courts and tribunals to recover Rs 21,400 crore.

But there are still concerns over the way banks are using options such as one-time settlement scheme to recover the dues. Investigations have shown that in several instances, it was not a simple case of default but even cheating was involved. Bank executives failed to attach personal assets of directors of companies that had defrauded the banks, sources said. 

In fact, in several cases, defaulters have gone ahead to get a second loan despite not clearing their past dues. These facts were brought to the notice of the Central Vigilance Commission by CBI sometime ago after many of its cases fell in the courts when bankers reached one-time settlements with its big defaulters. 

In one such case in Patna, a PSU bank auctioned a mortgaged property at 20% of the valuation made by its experts. Investigation had revealed a conspiracy involving bank officials, valuators and the borrower as the property mortgaged was an agricultural land used as security against a commercial loan. 

The finance ministry has now asked these banks to spruce up their balance sheets given the fact that nearly Rs 14 lakh crore of credit has been outstanding against big borrowers - those who have borrowed Rs 10 crore and above. There are over 22,500 borrowers who owe over Rs 10 crore to nationalized banks. 

The RBI has refused to divulge the names of the defaulters against whom no suits have been filed, citing secrecy clauses. 

To help the banks recover bad debts, the government has also brought in a bill seeking changes in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and in the Recovery of Debts due to Banks and Financial Institutions (RDBF) Act, 1993. 

The new bill seeks to provide mandatory registration of mortgages and is expected to help reduce the cost of funds for banks and also reduce NPAs.

is Reliance Power looking to reschedule debt?

Source :Promit Mukherjee & Rajiv Ranjan Singh | Place: Mumbai | 
: DNA :dec 6,2011 8 24 IST

With the commissioning date of its 4,000 mw Sasan ultra mega power project (UMPP) delayed by over 12 months, is Reliance Power looking to reschedule debt?

The company is in talks with IDBI Capital for the debt rescheduling, according to sources.

Reliance Power, however, denies any such plan saying it hasn’t drawn down on lines of credit to do so.

Sasan is the first UMPP bagged by Reliance Power and only the second to be awarded (after Mundra) in the country.

“Several independent power producers in the country are adopting the rescheduling route as their projects have been delayed due to problems not in their control,” said a top banker. Sasan UMPP is one such project, he said.

Rescheduling refers to a process under which a company approaches its bank to defer the payment of the principal amount on its loan by a few years as expected cash flows get delayed due to unforeseen delays, though it continues to pay interest during this period. The delay could be on account of difficulty in land acquisition, environmental and forest clearance or unexpected rise in raw material prices, which forces these companies to look for alternative sources.

“The power sector is going through a very tough time and we have had queries for debt rescheduling, which should not be confused with corporate debt restructuring,” he said, but added that in the next 12-15 months, several private power companies are expected to come up for restructuring as well.

This is different from corporate debt restructuring, which is a more complicated process of reorganising the outstanding liability of a company that is viable but is going through financial hardships and runs the risk of defaulting on impending repayments.

Under this process, the borrower and lender may mutually agree upon a course of action — typically, outside the purview of the Board for Industrial and Financial Reconstruction, Debt Recovery Tribunal and other legal proceedings — under which short-term debt may be converted into longer term debt and vice versa, or some a part of the debt may be converted into equity.

As per Reserve Bank of India guidelines, companies can go for restructuring only if their annual earnings before interest, tax, depreciation and amortisation, or Ebitda, is more than their annual debt.

The Sasan project is being built at a cost of `19,500 crore. Of this, nearly `11,000 crore ($2.2 billion) is debt syndicated by a few foreign banks, while the company is pumping in `5,000 crore as equity. The rest is domestic debt.

The project achieved financial closure in April 2009 with a consortium of banks and financial institutions led by the State Bank of India.

An email sent to Reliance Power remained unanswered at the time of going to press, while IDBI Bank refused to talk on the issue.

According to an analyst with a domestic brokerage, many newly operational power plants are operating at a plant load factor (PLF) of 60-65%, which coupled with a high fuel cost, doesn’t allow these plants to break even. Their tariff planning has gone haywire because of the volatile international coal prices and companies which were betting on imported coal, mainly from Indonesia, have suffered the worst.

“While bidding for power plants, companies place their quotes on two cost fronts —- fixed and variable. To grab projects, companies always quote low variable and high fixed cost to reduce the volatility of tariff, and any adverse change in the variable cost leaves companies with no room to manage costs,” said the analyst.

In power projects, fixed cost is a function of setting up of the infrastructure and variable cost is largely a function of the fuel the plant will consume, which in case of thermal power plants, is coal.

Recently, Tata’s upcoming UMPP at Mundra and Reliance’s second UMPP at Krishnapatnam saw the plant economies going haywire as the variable cost, which in this case was availability of coal from Indonesia, shot up due to the change in tariff regime implemented by the Indonesian government.

Starting September 22, Indonesia has benchmarked its coal prices to international prices, thereby escalating the cost of coal procurement to above $100 per tonne. This has made running the plants a loss-making proposition.

Cos approach banks for recast of over Rs 28,000 cr debt in Q2

Source :Zeebiz :PTI :Tuesday, December 06, 2011, 15:37


New Delhi: The economic slowdown has started taking a toll on the banking sector, with a large number of companies approaching banks for restructuring of debt totalling about Rs 28,890 crore in July-September, 2011.
     
Leading the pack, Punjab National Bank (PNB) has received requests for corporate debt restructuring (CDR) of loans worth an estimated Rs 1,490 crore.
     
PNB was followed by IDBI Bank, with estimated CDR referrals of Rs 1,390 crore, 
and Union Bank of India with requests for restructuring of debt worth Rs 1,280 crore
during the second quarter of the current fiscal.
     
During the same period, the estimated CDR referrals to Canara Bank amounted to Rs 1,230 crore, while Central Bank of India received debt restructuring proposals worth Rs 1,210 crore and ICICI Bank referrals worth Rs 1,170 crore, according to data compiled by IDBI Capital.
     
It is to be noted that the total cases referred under CDR increased to 19 in the second quarter from 16 in the first quarter of the current fiscal.
     
However, in terms of the amount, there was nearly a five-fold rise in the value of CDR referrals to Rs 28,890 crore in July-September from Rs 5,670 crore in the April-June period of 2011.
     
In the first six months of the current fiscal, the total value of CDR referrals has soared to an eight-year high of Rs 34,500 crore.
     
The number of CDR referrals increased to 35 during the April-September period from 22 in the same period last fiscal.
     
The corresponding amount of loans referred for restructuring has also increased to Rs 34,560 crore in the first half of the current fiscal from Rs 5,180 crore in the same period of 2010-11, it said.
     
The CDR framework provides a timely and transparent mechanism for restructuring the debt of viable corporate entities facing problems outside the purview of the BIFR, DRT and courts for the benefit of all concerned.
     
The scheme covers only multiple banking accounts, syndication and consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs 10 crore and above.
     
CDR requires approval by a super-majority of 75 percent of creditors (by value), which makes it binding for the remaining 25 percent to fall in line with the majority decision.
     
Once a case is referred for CDR, a standstill period of 90/180 days is invoked. 


Within the standstill period, both the borrower and lender agree to keep things as they are (standstill) and commit themselves not to take recourse to any legal action during the period.
     
A standstill is necessary for enabling the CDR system to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise. 

Sharp Jump in Corporate Debt Restructuring (CDR )

Source : The Telegraph :Monday , December 5 , 2011

Mumbai, Dec. 4: Industry is witnessing a sharp jump in instances of companies moving the corporate debt restructuring (CDR) cell — a loan recast forum of banks. Analysts consider this as a sign of moderating growth and an outcome of rising interest rates. In the first half of this fiscal, there has been an increase both in the number of cases as well as in the value of the loans being referred for recast. Bankers feel the trend is unlikely to change in the next six months as companies continue to face difficulties because of the macro-economic environment and the uncertainty in developed nations. According to Sandeep Jain, banking analyst at IDBI Capital, the number of cases that have been referred for debt restructuring rose to 35 in the first half of 2011-12 compared with 22 in the corresponding period last year. In value terms, the amount of loan being referred has also shot up to Rs 34,560 crore in the first half — the highest in the last eight years — compared with Rs 5,180 crore last year. However, this figure includes the GTL group’s total debt of Rs 22,620 crore. “Excluding the debt of the GTL group, the total figure still stands at Rs 11,940 crore, which is twice last year. The increasing trend of CDR cases is worrisome and total restructuring can increase multi-fold in the current environment,’’ Jain said in a report. CDR is a mechanism for restructuring debts of viable corporates who have been affected by internal or external factors; the cases are outside the purview of the Board for Industrial and Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and other legal proceedings. There are certain conditions on the cases that can be recast under CDR. For instance, the mechanism covers only multiple banking accounts/syndication/consorti-um accounts with banks and financial institutions having an outstanding exposure of at least Rs 10 crore. Moreover, if 75 per cent of the creditors by value agree to a restructuring package of an existing debt, this will be binding on the remaining creditors. Once a case is referred to CDR, there is a “standstill” agreement binding for 90/180 days. During this period, both the borrower and the lender commit themselves not to taking recourse to any other legal action so that the debt restructuring exercise can be undertaken without any intervention. Analysts say there has also been a jump in non-CDR recast cases. It is estimated that during the first half of this year, banks restructured around four per cent of their advances. PSU banks had to deal with higher restructuring proposal than their private peers. For instance, the State Bank of India restructured loans of over Rs 500 crore during the quarter, taking the cumulative restructured book to Rs 35,400 crore.

Dues and woes

Source : Vandana : The Week :Saturday, December 3, 2011 14:22 hrs IST 


Debt recovery officers of public sector banks are a worried lot these days.


 Reason: the escalating number of loan defaulters. The banking sector, which is already under pressure from frequent rate hikes, now has another problem to tackle—the non-performing assets. Public sector banks particularly are facing a hard time containing them, as a part of their NPAs is on account of non-payment by government-owned entities.

An NPA is an asset which does not produce income. A loan for which interest is 90 days overdue is classified as NPA. Gross NPAs of listed banks crossed Rs:1 trillion in the quarter ended in September, 33 per cent higher than a year ago. According to the Reserve Bank of India, the total NPA of state-run banks was Rs:747 billion, 2 per cent of their total lending corpus, till last December. 

Banks' asset quality has become a major concern for the RBI and it has asked lenders to monitor and tighten their credit management systems. “Rising interest rates and substantial amount of restructuring done during the crisis period, if not done with due care, are likely to put further pressure on asset quality of banks,” said a recent RBI report.

The results for the quarter ended in September of most public sector banks were below expectations owing to the mounting NPAs. Higher NPAs require banks to do higher provisioning (which means setting aside capital for loans that have gone bad), locking up a significant amount of capital and eroding profitability. Under the current provisioning norms, banks have to maintain funds ranging from 10 per cent for substandard assets to 100 per cent for assets under ‘loss category'.

“Banks also need to maintain the provision coverage ratio of 70 per cent of gross NPAs. Provisions eat into your capital generation. It is going to be a tightrope walk for banks to manage the NPAs,” said Vaibhav Aggarwal, research analyst, Angel Broking. India's largest lender State Bank of India's provisioning of bad loans stood at Rs:4,664 crore at the end of September, an increase of 21 per cent over the corresponding period a year ago.

The economic downturn in the west is one of the major reasons for the increase in non-performing loans. Profit margins of many businesses have shrunk, leading them to default on loans. “There are clear signs of slowdown in the Indian economy as well. Exports grew by only 10.8 per cent, the lowest in the last two years. Indirect tax collections have dropped by 2.5 per cent and the index of industrial production (IIP) has dipped by 1.9 per cent. The business climate has become gloomy and even though there is no intention to default, companies are unable to pay up on time,” said Robin Roy, associate director (financial services), PricewaterhouseCoopers.

The frequent increase in interest rates is another problem. Many companies that announced the second quarter results recently have identified the increasing interest cost as one of the major reasons for their profitability going down. The RBI hiked key rates 13 times in the last 20 months. 

International rating agency Moody's has raised red flag on public sector banks' spiralling NPAs, and changed its outlook on the banking sector from “stable” to “negative”. “With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY2012 and FY2013,” said Vineet Gupta, vice-president and senior analyst at Moody's.

Interestingly, the computer-based recognition of NPAs, to which all banks had to shift by September 30, has added to the banks' woes. Computer-based NPA recognition removes the subjectivity that the banker may exercise in classifying a loan as non-performing. “The system recognition has given a number of new NPAs. But, our recovery teams are very active. We have started debt resolution branches and centres to support them. Retail borrowers are still turning up to pay as they are in a better shape but the problem is with corporates and small and medium enterprises,” said an SBI official.

Also, a large number of loans that were restructured in 2007-08 have come to haunt public sector banks. Some of these loans have now become NPAs. There are various ways of restructuring a loan, such as allowing customers to postpone their interest payments until business prospects improve, increasing the tenure of the loan or, in case of corporates, converting debt into equity. If a company goes for a second round of restructuring, it is calculated as NPA on the bank's books. Restructured loans that turned bad accounted for 17 per cent of loans of 10 major banks.

A part of the stress on public sector banks' balance sheet is due to the exposure to sick government-owned entities, such as Air India and state electricity boards (SEBs). The national carrier has a debt of Rs:46,950 crore in a consortium of 20 banks. Its annual interest payment on this debt is around Rs:1,800 crore. Air India, which has accumulated losses of Rs:20,000 crore, has been in a poor shape for quite a while, raising question marks on receivables to the banks.

The whole aviation sector, in fact, could dent the asset quality of banks, say experts. “All the aviation companies are bleeding and we have seen the Kingfisher fiasco recently. The government will have to take some serious steps to save the airlines and banks that have lent to them,” said Roy.

Some other sectors are also under stress. “Textile, infrastructure and power are the sectors where one could see some stress. But, we have not stopped fresh loans. We have to support the industry and are disbursing loans on a case-to-case basis,” said S.K. Verma, general manager, Union Bank of India. 

In October, rating agency Crisil cautioned that lenders would be risking about Rs:56,000 crore unless the government brought about urgent reforms in the power sector. SEBs are staring at huge losses as a result of selling power at subsidised rates and mounting transmission and distribution losses. Though the loans to SEBs have not yet become NPAs, analysts are concerned about them. 

“We don't expect government entities to be stressed assets on our books. Some of them could go for restructuring,” said M. Sridhara, deputy general manager, Canara Bank. Punjab National Bank has already restructured its loan of Tamil Nadu State Electricity Board.
According to the RBI, the agricultural sector contributed 44 per cent of the total incremental NPAs of domestic banks in 2010-11. Another major contributor is the SME sector. SMEs have been severely affected by the downturn and most of them are under financial distress.

CPI(M) leader Gurudas Dasgupta, who had come out with a report cautioning the government on spiralling NPAs in 2005, has a different take on the issue. “There is a lack of political will on the part of the government to move on this issue,” he said. “There should be more aggressive recovery of corporate loans by banks as these loans constitute a major portion of the NPAs of banks. There should be enough security to cover the loan. Banks should be more prudent while lending to corporates.”

In contrast, private banks have been able to reduce their net NPAs. They reduced their accumulated net NPAs from Rs:6,972 crore in 2008-09 to Rs:3,871 crore in 2010-11. Said Aggarwal, “Private sector banks have been in a consolidation mode and are lending more wisely. Private banks can change their business mix more quickly, plus their productivity and efficiency are better.”