RBI permits banks to use buffer to cover bad loans

In allowing banks to use a part of these reserves, RBI is implicitly acknowledging
 that mounting bad loans are a systemic concern for the banking sector in
 Asia’s third largest economy. Photo: Pradeep Gaur/Mint

LIVE MINT : Dinesh unnikrishnan FEB 07 2014. 10 48 PM IS

The Reserve Bank of India (RBI) on Friday allowed banks to use up to one-third of the amount banks have set aside as countercyclical buffers to make provisions on bad loans.

Countercyclical provisioning buffers and floating provisions broadly refer to the capital reserves that banks need to build in good times; these are used only in times of economic or system-wide downturns.

In allowing banks to use a part of these reserves, RBI is implicitly acknowledging that mounting bad loans are a systemic concern for the banking sector in Asia’s third largest economy.

This is the first time the Indian central bank is allowing banks to use emergency provisions ever since the reserves were created starting 2010.

By definition, banks can use such provisions only for contingencies under extraordinary circumstances for making specific provisions against impaired accounts after obtaining their board’s approval and with the permission of the central bank.

Also, the boards are required to lay down an approved policy regarding the circumstances that would be considered extraordinary.

“It has been decided, as a countercyclical measure, that banks may utilize up to 33% of countercyclical provisioning buffer, floating provisions held by them as on 31 March 2013, for making specific provisions for non-performing assets, as per the policy approved by their board of directors,” RBI said in a notification on Friday.

Although the creation of such a reserve was under discussion since 2006, banks started building up the reserves only in 2010.

Mounting bad loans have been a major worry for the Indian banking system, especially since the 2008 global financial crisis that followed the collapse ofLehman Brothers Holdings Inc. in late 2008. By conservative estimates, the Indian banking system has about Rs.2 trillion in bad loans, and another Rs.4 trillion loans are being restructured, together constituting about 10% of the total loans of Indian banks.

The increase in such loans hurts the profitability of banks since they need to set aside more money to cover for the souring assets.

Gross non-performing assets (NPAs) of 35 listed banks rose 39.4% in the December quarter to Rs.1.71 trillion from Rs.1.23 trillion in the year-ago period, according to data sourced from Capitaline.

Banks with the highest level of bad loans are United Bank of India (10.2%),State Bank Of India subsidiaries State Bank of Mysore (6.56%) and State Bank of Hyderabad (5.77%); Allahabad Bank (5.47%); Indian Overseas Bank (5.27%); and Uco Bank (5.2%)

State Bank of India, the country’s largest lender, will announce its earnings on 14 February.

Recently, RBI laid out a road map to deal with the surge in bad loans in theRs.82 trillion banking system, through early recognition of stressed assets.

Analysts, however, are sceptical about this road map saying it doesn’t address the issue of the existing stock of bad loans.

The framework outlines a corrective action plan that would give incentives for early identification of stressed assets by banks, timely restructuring for accounts considered to be viable, and prompt steps for the recovery or sale of assets in the case of loans at the risk of turning bad.

It also proposed accelerated provisioning in cases where banks fail to come up with a recovery plan.

On Friday, RBI said utilization of the countercyclical provisioning buffer and floating provisions will be over and above the utilization of the countercyclical provisioning buffer and floating provisions for the purpose of making accelerated additional provisions under the recent framework.

India Ratings and Research Pvt. Ltd, an arm of global credit rating agencyFitch, last week warned that stressed assets, which include bad loans and restructured loans, in the Indian banking system are likely to increase to 14% of total loans by March 2015.

RBI working paper warns of further strains in asset quality of banks

The RBI working paper titled, “Re-emerging stress in the asset quality of Indian
 banks: Macro-financial linkages,” said if the current adverse macro-economic 
condition persisted, the system level gross NPA (non-performing assets) 
ratio could rise to 4.4 per cent by end-March 2014. File photo

 KT J  :T H :February 7, 2014

Growth prospects in the near-term seemed to have subdued

A Reserve Bank of India (RBI) working paper has warned banks of further strains on their asset quality.

The working paper titled, “Re-emerging stress in the asset quality of Indian banks: Macro-financial linkages,” said if the current adverse macro-economic condition persisted, the system level gross NPA (non-performing assets) ratio could rise to 4.4 per cent by end-March 2014. This ratio could go up to 7.6 per cent under the severe risk scenario, it added.

Public sector banks, it said, might continue to register highest NPA ratio.

The growth prospects in the near-term seemed to have subdued, it said. “In October 2013, the IMF (International Monetary Fund) scaled down its projection of world GDP (gross domestic product) growth for 2013 to 2.9 per cent. In its First Quarter Review of Monetary Policy 2013-14, the RBI has also revised its growth projection for 2013-14 downwards to 5.5 per cent,” it added. While the credit growth in the recent period had ebbed, the RBI projected the non-food credit growth to be around 15 per cent in 2013-14. “Thus, notwithstanding the fact that credit growth is not going to be significantly robust, muted economic prospects and global headwinds could lead to further deterioration in asset quality,” the RBI working paper said.

“The position is not alarming at the current juncture, and some comfort is provided by the sound capital adequacy of banks, which ensure that the banking system remains resilient even in the unlikely contingency of having to absorb the entire existing stock of NPAs,” the RBI paper said.

Stress tests

The stress tests for banks showed that even under a scenario in which 30 per cent of restructured advances became NPAs, bank stress remained contained, and banks sufficiently capitalised.

Nevertheless, the RBI working paper suggested that “it is worth to recognise the problem in its early stages, and initiate corrective measures in the right earnest”. Though restructuring of advances was helpful in containing the effect of rising bad loans in banks’ balance sheet, in the long-run, however, it could have implications for asset quality of the banks just in case a significant proportion of these restructured advances turned out to be bad loans.

“Hence, there is a need to carefully monitor the impact of restructuring on asset quality of banks in the medium- to long-run,’’ the working paper said.

The spurt in NPAs, it said, was due to assorted factors ranging from inadequate appraisal and monitoring of credit proposals to aggressive lending, among others. “Delay in administrative clearances was an equally important reason for pressure on asset quality which needed correction, it pointed out. “There is a need to strengthen oversight of financial and corporate risks, and policies to incentivise genuine corporate restructuring and improvements to insolvency framework,” the working paper said.

Trends revealed that though public sector banks contributed to the bulk of NPAs. The share of new private sector banks, and foreign banks in the total NPAs had gone up in the post-crisis period. “Nonetheless, public sector banks and foreign banks have mainly contributed to the recent rise in NPAs. Public sector banks and old private sector banks have witnessed greater deterioration in their asset quality in the case of priority sector, while it is vice-versa in the case of foreign banks and new private sector banks,” the paper pointed out.

Other industries

If one were to go by the RBI working paper, coal and textiles had contributed substantially to the recent deterioration in asset quality. The other industries that contributed to the rise in NPAs included iron and steel, other textiles, jute textiles, cotton textiles, computer software, leather and leather products, sugar, tobacco, rubber, metals, construction and vegetable oils and vanaspati industry.

Lenders may revaluation mortgaged assets of to Zoom Developers

Atmadip Ray, ET Bureau Feb 5, 2014, 12.14PM IST

KOLKATA: Lenders to Mumbai-based Zoom Developers may go for a revaluation of the mortgaged assets that were put on the block since they failed to sell them to recover part of the Rs 3,000-crore outstanding loans.

A consortium of 25 lenders, led by Punjab National Bank(PNB), had put seven assets of the project development and information technology company on sale thrice without any success. United Bank of India had issued a sale notice on behalf of the lenders, but there were no buyers. The last notice was issued on November 18, 2013, and the last date of receiving the tender was December 19.

"It seems no one's willing to pay the reserve price," said a senior banker involved in the process. "We may need to engage a value afresh to do a valuation again and lower the reserve price of the assets on the block," he said requesting anonymity.

Total reserve price for the seven properties was fixed at Rs 72.88 crore, which is just about 2.4% of the outstanding dues. It perhaps suggests that banks had lent to Zoom without physical security to cover therisk.

A section of the lenders has suggested that a revision of the valuation of the properties will probably get buyers, but a final decision will be taken only at the next lenders' meet.

 Lenders are also free to sell the mortgaged properties in private deals but they need to obtain consent from the borrower if they fail to sell them at a price higher than the quoted reserve price as stipulated under the Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest (SARFAESI ) Act-2002.

The government allows private treaties after one sale notice. Among the seven properties put up for sale, two are at Mumbai's Andheri area with a cumulative reserve price of Rs 33.2 crore and the other five are in Indore where the firm is registered. Bankers said they have managed to sell just one of its property for Rs 1.7 crore outside this list.

UBI had taken symbolic possession of the mortgaged properties since Zoom's promoters Vijay Choudhary and BL Kejriwal and its guarantors failed to repay the loan.

 Total dues of the secured lenders are Rs 3,002 crore, plus interest and other expenses to be accrued since September 2011, until banks recover all their dues.