Bank frauds rising: Double to Rs 6,212 cr in 2012-13

Mumbai,Ramkumar :BL ;Nov. 22: 2013 

Public sector banks main victims of poor appraisal systems

Bank loan frauds almost doubled in 2012-13 adding up to Rs 6,212 crore against Rs 3,183 crore in the previous year. Public sector banks accounted for a chunk of these frauds. In terms of numbers, 349 cases of fraud of over Rs 1 crore were reported in 2012-13 up 28 per cent over the previous year’s 273 cases.

A fraud is an act or omission intended to cause wrongful gain to one person (in this case, the borrower) and wrongful loss to the other (the bank), either by way of concealment of facts or otherwise. 

In a recent presentation, RBI Deputy Governor K. C. Chakrabarty said poor credit appraisal and low level of promoter equity have led to a jump in the number of loan related frauds, especially diversion of funds. Loan related frauds accounted for 64 per cent of the money misappropriated followed by technology related and know-your-customer (mainly in deposit accounts) frauds.

There has been a 15-fold rise in large value fraud cases involving amounts of Rs 50 crore and above, from three cases in 2009-10 (involving an amount of Rs 404 crore) to 45 cases in 2012-13 (Rs 5,335 crore).

Chakrabarty observed that loan appraisal standards are lax for bigger loans both at the time of sanction and restructuring even as the assessing standards are stringent for smaller borrowers.

Loan appraisal must focus on the quantum of equity brought in by the promoters, the source of the equity, and the contingency planning in respect of infrastructure projects. According to Chakrabarty, “Increase in cases of large value fraud in accounts financed under consortium or multiple banking arrangements, involving even more than 10 banks at times, is a newly emerging, but unwelcome trend in the banking sector. Another glaring issue in this context is the considerable delay in declaration of frauds by various banks in cases of consortium/ multiple financing.”.

He pointed out that the RBI has come across cases where there is a lag of 12-15 months in declaration of the same case as fraud by different banks. This not only enables the borrower to defraud the banking system more, but also gives him time to erase the money trail and queer the pitch for the investigating agencies.

SpiceJet ‘networth a negative Rs 630 cr’, airline in urgent need of funds

FP : Sindhu Bhattacharya Nov 21, 2013

New Delhi: Mounting losses and an unstable cost environment could make further funding of SpiceJet’s operations difficult. The airline seems to have improved its domestic performance in October over peers, leaving Air India behind to claim the second slot in market share and yields will surely have improved too over the second quarter because of price hikes announced in September by all domestic airlines. But one or two months of better performance alone may not be enough for SpiceJet to survive — it needs funding and needs them urgently.

Rashesh Shah and Darpan Thakkar of ICICI Securities have said in a note to clients earlier this week that the airline’s networth is negative Rs 603 crore as on September 30th and its loan liability is over Rs 1,700 crore.

“Given the negative net worth of Rs 603 crore and loan liability of over Rs 1700 crore, funding the operations, going forward, would remain a very challenging task for the company…..Any strategic tie-ups with foreign carriers remain a key positive trigger while currency weakness and rise in competition from other carriers also pose a threat to our recommendations.”

Rashesh Shah and Darpan Thakkar of ICICI Securities have said in a note to clients earlier this week that the airline’s networth is negative Rs 603 crore as on September 30th and its loan liability is over Rs 1,700 crore.

SpiceJet posted its highest ever quarterly loss in September at Rs 559 crore due to escalating costs, currency weakness and passenger slowdown. It has in the past been engaged in talks with several potential investors, including foreign airlines, but no funding has materialised from these efforts so far.

Promoters have been infusing funds into SpiceJet regularly but the Marans have already infused equity and hiked promoter stake in the airline by 5% this fiscal so the equity route for bringing in more funds till March 2014 is now closed.

Vikram Suryavanshi of Antique Stockbroking said in a note last week that he now expects the airline to post a loss of Rs 530 crore this fiscal against earlier estimate of Rs 99.1 crore profit since its profitability is highly sensitive to fuel costs.

Can SpiceJet take another year of losses? Aircraft fuel expenses were 11% higher for SpiceJet year on year in the September quarter and fuel cost as a percentage of sales increased to 57% in the quarter from 53% in the same quarter last year despite higher revenue from its international business.

To put things in perspective, not just SpiceJet but every other Indian airline except IndiGo saw erosion of profitability last quarter as fuel costs remained unpredictably high and airlines’ pricing power remained limited in the face of mounting competitive pressures. In fact, auditors to three publicly listed Indian airlines have raised red-flags on their ‘going concern’ status after the September quarter ended.

Vijay Mallya‘s Kingfisher Airlines, Naresh Goyal’s Jet Airways and Kalanithi Maran’s SpiceJet – auditors of each have raised concerns in their latest quarterly review reports. A ‘going concern’ is a situation where a company has sufficient resources to continue to operate indefinitely and to avoid any potential bankruptcy risks.
Kingfisher is non-operational, Jet has just yesterday completed sale of 24% equity stake to Etihad Airways which means a large amount of cash inflow is expected into the airline which in turn will help cut long term debt and help improve profitability. The only airline of the three where concerns over future funding and indeed viability remain is SpiecJet.

The only way forward for SpiceJet is to expand international operations so that aircraft utilisation is improved and continue efforts to get fresh funds

RBI raises concerns about bank loans, debt recovery

The report also expressed concern about a steep rise in the growth of restructured debt under the corporate debt restructuring or CDR mechanism in 2012-13. Photo: Bloomberg

  Mint Anup Roy 21 Nov 2013

Asset quality showed signs of deepening deterioration as doubtful loan assets rose in the sector, the central bank said

Mumbai: Indian banks are struggling to reduce bad loans and improve their loan recovery process, the Reserve Bank of India (RBI) said on Thursday, warning that increasing stress on asset quality posed a major challenge to the banking system.

RBI’s annual publication, Trend and Progress of Banking in India, released on Thursday, said the gross non-performing asset (NPA) ratio of the banking industry, at the aggregate level, stood at 3.6% at the end of March from 3.1% a year ago.

The deterioration in asset quality was most perceptible for State Bank of India (SBI), the country’s largest lender, and its five associate banks. The group’s NPA ratio reached 5% at the end of March. SBI and its five associates constituted 23.45% of Indian banking industry’s total assets in fiscal 2012-13.

“In the short term, the stress on banks’ asset quality remains a major challenge,” the report said.

Slower economic growth, which at 5% in the year to last March was the least in a decade, high interest rates and stalled projects have hurt the cash flows of companies and impaired their ability to repay debt. Prospects of a recovery in economic growth have been dimming, with estimates for the current year being progressively scaled down.

Asset quality showed signs of deterioration as doubtful loan assets rose in the sector, RBI said. A loan not serviced by the borrower for a year is termed doubtful.

The increased shift of loan assets towards the doubtful category was most prominent at the SBI group and nationalized banks, the report said, adding that the slippage ratio, defined as additions to NPAs during the year as a percentage of standard advances at the beginning of the year, also showed an increase during 2012-13.

At the aggregate level, the ratio of restructured standard advances to gross advances stood at 5.8% at end-March 2013. It was the highest for nationalized banks—at 8.3%, followed by the SBI group—at 4.7%, according to the report.

“While the primary driver of the deteriorating asset quality was the domestic economic slowdown, the contribution of other factors like delays in obtaining statutory and other approvals as well as lax credit appraisal/monitoring by banks was also significant,” the report said, adding credit concentration in certain sectors and higher leverage among corporations also increased stress on asset quality.

The report also expressed concern about a steep rise in the growth of restructured debt under the corporate debt restructuring (CDR) mechanism in 2012-13. The mechanism covers only multiple banking accounts where the collective exposure is Rs.10 crore and above.

In 2012-13, the total number of cases approved for restructuring under this mechanism increased by about 37%. The debt thus restructured rose 52%. Iron and steel and the infrastructure sectors witnessed the maximum stress in asset quality.

Banks need to strengthen their recovery processes, and it should be focused on “efficiency and fairness—preserving the value of underlying assets and jobs where possible, even while redeploying unviable assets to new uses and compensating employees fairly”, the RBI report said.

To do this, there is “urgent need for accelerating the working of debt recovery tribunals and asset reconstruction companies”.

If economic growth picks up, the bad debt position “may improve”, the report said.

Economists say that may not be the case in at least this financial year.

“The cyclical factors, like agriculture-related activities, may improve, but we have deep-rooted structural problems. Even as those are addressed, the positive impact will come only after a lag of seven-eight months. The reforms processes initiated were mostly by the end of the last fiscal and there’s still lots to be done. Overall, the last fiscal year was one of the most uneventful business years,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The root cause of all ills, though, remains inflation, Nitsure said. Until that is brought down substantially, India will continue to lose its competitive edge and a recovery in exports will be hard to achieve.

The year 2012-13 was marked by a slowdown in the growth of credit to all productive sectors—agriculture, industry and services. The slowdown was the sharpest for agriculture and allied activities, according to the RBI publication.

Retail loans, led by loans to the housing and auto sectors, was the only segment that continued to grow in the year.

However, Indian banks did well in garnering deposits. Private sector banks outpaced other banks in garnering savings bank deposits after the deregulation of the savings bank rate. Private banks offered higher interest rates—as much as 7%—for savings accounts, compared with 4% by public sector banks.

The share of savings deposits for new private sector banks stood at around 25% of their total deposit base and was the highest among all bank groups in 2013, the report said.

According to the report, Indian banks are relying more on short-term resources to fund long-term projects, leading to an asset-liability mismatch. While in the shortest maturity basket of up to one year, banks’ deposits outpaced loans, for longer term maturity baskets, loans outpaced deposits.

Going forward, public sector banks will require an additional capital of Rs.4.15 trillion, of which equity capital will be Rs.1.4-1.5 trillion, and debt capital will beRs.2.65-2.75 trillion.

The government, which has already infused Rs.47,700 crore in the banks and announced it would inject an additional Rs.14,000 crore, has enough headroom to liquidate its stakes in state-owned banks to raise more capital.

The government’s shareholding in its banks ranges from 55% to 82%.

Banks are paying the price as India Inc sits on a debt time bomb

When corporates do not have enough money to repay the interest on their 
outstanding debt, banks can’t be in the best of shape.Reuters

by  FP Vivek Kaul Nov 22, 2013

Borrowing money to run or expand a business is standard operating procedure. The only thing is that the money that has been borrowed needs to be repaid. But sometimes the business does not make enough to repay the borrowed money or debt as it is referred to as.

And some other times, the business does not make enough money even to repay the interest on the debt, that it has taken on. Indian businesses are going through that phase right now. A significant number of them are not making enough money to even repay the interest on the debt that they taken on.

In a report dated November 19, 2013, Ashish Gupta, Prashant Kumar and Kush Shah of Credit Suisse make this point. As they write “Of our sample of listed companies(around 3,700 listed companies), the share of loans with corporates having interest coverage (IC1) <1 went up to 34% (versus 31% in 1Q14). Of these, 80% (78% in 1Q) of loans were with companies which had IC<1 for at least four quarters in the past two years and 26% of them have not covered interest in eight consecutive quarters.”

Now what does this mean in simple English? Around 34% of the listed companies that Credit Suisse follows have an interest coverage ratio of less than one. Interest coverage ratio is essentially the earnings before interest and taxes of a company divided by its interest expense. If the interest coverage ratio is less than one what it means is that the company is not making enough money to pay the interest on its outstanding debt.

Hence, more than one third of the listed companies in the Credit Suisse sample are not making enough money to pay the interest on their debt. Of this lot nearly 80% have had an interest coverage ratio of less than one in at least four quarters in the past two years. And 26% have not made enough money to cover their interest for eight consecutive quarters.

The only conclusion that one can draw from this is that India Inc is sitting on a debt time bomb. “Large corporates continue to be under significant stress as out of the top-50 companies by debt with interest coverage<1 in the second quarter, 23 companies haven’t covered interest in seven or more quarters in past two years and 38 companies were loss making at a profit after tax level,” write the analysts.

A lot of this borrowing was carried out during the easy money years of 2003-2008, when banks were falling over one another to lend money. But now the chickens are coming home to roost. When corporates do not have enough money to repay the interest on their outstanding debt, banks can’t be in the best of shape.

The non performing assets of banks have been on their way up. As economist Madan Sabnavis wrote in a recent column in The Financial Express “Ever since the economy started slipping, companies have found it difficult to service their loans leading to NPAs’ volume increasing from 2.4% in FY11 to 3.0% in FY12 and around 3.6% in FY13. In absolute numbers, they stood at around Rs 1.9 lakh crore in March 2013.”

But what is even more worrying is the rate at which the total amount of restructured loans have been growing. Under restructuring, companies are allowed a certain moratorium on repayment of the outstanding debt. The interest rates to be paid on the outstanding debt are eased at the same time.

In a note dated November 7, 2013, Gupta and Kumar of Credit Suisse had pointed out that “ Indian Bank.restructured loans were at Rs3.3 trillion (Rs 3,30,000 crore) of which 55% has come through the corporate debt restructuring route.” The total amount of restructured loans are now at 6% of the total loans that banks have given(around 47% of networth of the banks).

And this continues to grow at a huge speed. In October 2013, the corporate debt restructuring cell received new references of Rs 170 billion (Rs 17,000 crore).

Economist Madan Sabnavis throws some more numbers. “The CDR website shows that the volume of restructured debt has increased continuously, touching Rs 2.72 lakh crore as of September 2013 from Rs 0.9 lakh crore in FY09, and was at Rs 2.29 lakh crore by March 2013. In terms of a ratio as a percentage of total advances, CDR was higher at 4.4%, and even traditionally this ratio has been higher than the declared gross NPA ratio…Adding the NPAs to CDRs, the total would stand at 8% for FY13, which is quite scary,” he wrote in TheFinancial Express.

The reasoning given for corporate debt restructuring is that often a project that the business has borrowed for, does not take off due to external circumstances. This can vary from the environmental clearance not coming in to the land required for the project not being acquired in time.

But with the amount of loans being restructured rising at such a rapid rate leads one to wonder whether the banks genuinely feel that these loans will be repaid or as they just postponing the problem? Take the case of October 2013. New references of Rs 17,000 crore were made to the CDR cell. In comparison for the period of July 1 to September 30, 2013, references to the CDR cell had stood at Rs 24,900 crore.

The Reserve Bank of India(RBI) is clearly worried about this. “You can put lipstick on a pig but it doesn’t become a princess. So dressing up a loan and showing it as restructured and not provisioning for it when it stops paying, is an issue. Anything which postpones a problem than recognising it is to be avoided,” Raghuram Rajan, the RBI governor said a few days back.

But just being worried will not help.

Lok Adalats to help banks, NBFCs recover loans

BL : Mumbai :Thursday 21 November 2013

In probably a first-of-its-kind exercise that could aid the loan recovery efforts of banks and non-banking finance companies, the National Legal Services Authority will organise Lok Adalats in all districts on November 23.

The Authority seeks to reduce the number of pending cases relating to recovery of loans as well as dishonour of cheque cases in various courts.

Free legal services

The Authority was constituted under the Legal Services Authorities Act, 1987. This legislation provides free legal services to the weaker sections of the society and allows organisation of Lok Adalats for amicable settlement of disputes.

According to Reserve Bank of India data, in 2011-12, scheduled commercial banks referred 4,76,073 loan recovery cases aggregating Rs 1,700 crore to Lok Adalats. They recovered Rs 200 crore via this channel. The ratio of the amount recovered to the amount referred to works out to 11.8 per cent.

Besides Lok Adalats, banks have two other channels to recover their loans — the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) and Debt Recovery Tribunals (DRTs).

Loan value

According to M.R. Umarji, Chief Legal Adviser, Indian Banks’ Association, small value loans up to Rs 20 lakh can be amicably settled between the borrower and the lender using the forum of Lok Adalats.

Umarji said claims pending before the Motor Accident Claims Tribunal too would be taken up for settlement on November 23.

Lok Adalats can take cognizance of cases where either two parties to a dispute agree to utilise the services of the forum or one of the them makes an application to the court (and the court is prima facie satisfied that there are chances of a settlement) for referring the case to the Adalat

.

The Lok Adalat is vested with the same powers as are vested in a civil court under the Code of Civil Procedure while trying a suit in respect of: the summoning and enforcing the attendance of any witness and examining him on oath; the discovery and production of any document; and the requisitioning of any public record or document or copy of such record or document from any court or office.

New High Court museum is 70% done

The Hindu :Madhavan:Thursday 21 November 2013

Nine months after work began on the new museum on the Madras High Court premises, about 70 per cent of the construction work is complete.

Officials of public works department (PWD) will now set in motion interior works including wall panelling, false ceiling, glazed-tiled flooring and airconditioning.

Besides this, work on setting up display cases and arranging illumination of the entire museum complex will also be taken up. Experts from the School of Architecture and Planning, Anna University, have been roped in to provide designs.

“So far, we have completed the basic civil work. We are expecting to complete the entire project, including an auditorium in the same complex, by early next year,” said a PWD official.

The High Court has, in storage, some rare manuscripts, including copies of Mahatma Gandhi’s speech during his maiden visit to the High Court for the annual law dinner meet in 1915, several judgments given by British judges before the formation of the High Court, judges’ uniforms including robes used for more than a century, and objects including wooden pens used for writing judgments during the 1900s. These will go on display at the new museum.

The two-storeyed structure is being built at a cost of Rs. 10 crore. It is being constructed to mark the 150th year of the Madras High Court — one of the three oldest high courts in the country — that was formed in 1862. The other two are the Calcutta and Bombay high courts.

“In fact, Madras High Court is the second high court after Allahabad high court to have a permanent museum on its premises,” said the 80-year-old curator of Madras High Court museum, T. Krishnamoorthi.

Mr. Krishnamoorthi said a small piece of parchment with an imprint of the oath taken by a group of British judges of the Supreme Court of Madras, the first modern judicial system in the country, in 1801, are among the oldest collections.

The existing museum, which is located on the north-eastern side of the High Court, was opened in April 2005 by the then Chief Justice of the High Court, Markandey Katju.

However, the existing museum is cramped with only a handful of collections including busts of the first Indian Judge, Sir T. Muthuswamy Iyer (1878-1895), and the first Indian permanent Chief Justice, P.V. Rajamannar (1948-1961). “We have written to other high courts and also to the London museum to source rare judges’ robes and sheriff robes to exhibit in the new museum,” said Mr. Krishnamoorthi.