NPAs are a concern, but no reason to panic: IDBI chief

• Image Credit: Courtesy: IDBI
• M.S. Raghavan

 10 Mar 14

Dubai: India’s banking sector is facing a challenging environment as slowing economic growth has exacerbated the increase in non-performing assets (NPA), but there is no reason to panic as most banks have the capability to augment capital buffers, M.S. Raghavan, chairman and managing director of IDBI Bank toldGulf News.

IDBI Bank, formerly Industrial Development Bank of India (IDBI) was a development financial institution that was converted into a public sector commercial bank in 1994. Raghavan attributes the rising NPAs to cyclical and structural factors.

“Non performing loans (NPLs) are closely linked to the growth cycle. From 1992 India was growing consistently at 6 per cent on an average and went up all the way to peak at 9 per cent. Commensurate with that the NPLs were shrank to as low as 2 per cent. In the past three and half years we have seen that not only the growth has topped out, but has started declining and with the decline in growth the NPLAs too have started rising,” said Raghavan.

A slowdown in economic growth combined with excess capacity in the economy adversely impacted the NPL situation. IDBI Bank’s third quarter net profit dropped 75 per cent to Rs1billion compared to same quarter last year, dented by a steep fall in non-interest income and slow growth in net interest income. Asset quality of the bank worsened during the quarter. Gross non-performing assets (NPA) increased 177 basis points to 5.44 per cent and net NPA climbed 100 bps (11 bps quarter-on-quarter) to 2.93 per cent compared to a year ago.

Apart from the slowing economy, Raghavan attributes historical a structural reasons for the current NPL situation of the bank.

“We were a development financial institution that was converted into commercial bank. Historically balance sheet was largely exposed to corporate and infrastructure sectors. Even today 76 per cent of our portfolio is committed to corporate sector and about 24 per cent to retail sector,” he said.

Capital infusion

As a result of rising NPLs and lower profitability, provision expenses of most banks rose in the first three quarters of the year. Additionally the introduction of Basel III raises the amount of capital that Indian banks will need to meet minimum targets.

With its tier-I capital adequacy ratio below eight per cent, IDBI Bank plans to achieve it above eight per cent by the end of March. In an effort to augment capital, IDBI has been in talks to sell some of its strategic stakes it owns in other companies.

“By the March 31 this year, our tier 1 common equity will be 7.1 per cent. We will like to have our common equity at 8 per cent or above. There is no compulsion on us to do it immediately. As per the Reserve Bank of India requirement we need to achieve it only by 2018. But as an acceptable practice in India we feel that our common equity has to be approximately 8 per cent,”

The bank recently made an attempt to sell its 17 per cent stake in credit rating agency Credit Analysis and Research Ltd (CARE), but the deal fell through, as the price was below its expectations of Rs900 (Dh53.97) a share. The bank is now attempting to sell a part or full stake in Stock Holding Corporation of India Ltd (SHCIL) in which it owns 18.9 per cent equity in SHCIL. In addition to sale of these strategic stakes, the bank is also understood to be seeking to raise $300 million (Dh1,102 million) through a Basel III compliant bond issue.

Unable to find jobs, students default on education loans

Aparna Ramalingam,TNN | Mar 10, 2014, 02.55 AM IST
CHENNAI: They passed out of colleges with high hopes of finding a job with fat salaries. But the lukewarm job market has dented their dreams. 

Several students have defaulted on educational loans. Defaults have risen to 7%-8% of the total outstanding from nearly 5% a year ago. 

As per industry estimates, gross NPAs (non performing assets) or bad loans of some nationalized banks and smaller private banks are as high as 7% to 8%. "The gross NPAs in educational loans have been high for two to three quarters now," TM Bhasin, CMD, Indian Bank said. Indian Bank's portfolio shows that 5% of its educational loans are bad loans. At Indian Overseas Bank (IOB), it stands at around 8%. "The economic slowdown has made it difficult for students to find jobs and that too sometimes at low salaries. This has had an impact on repayments," M Narendra, CMD of IOB said. 

Bankers point out that entry level salaries are now stuck around 2 lakh to 2.5 lakh per annum without any increase. This has also hit loan repayment to some extent. 

"At current interest rates (12%-13%) in educational loans, the equated monthly installment (EMI) of an average loan of 4 lakh is around 8,900 per month. Rent and transportation adds to living expenses and these force many to default on EMI," said a senior banker. 

There are other reasons for rising delinquencies too. "The major reasons are unforeseen circumstances beyond the control of borrowers, like frequent job hopping for better salary and a shift in the place of residence," AK Bansal, chairman of Corporation Bank said. Bad educational loans of this bank more than doubled to 130.56 crore during the third quarter of this financial year as against 58.53 crore during the corresponding quarter of the previous year. 

However, bankers hope things to ease by the end of the quarter. "NPAs will come down by the end of the fiscal with the government promising to pay interest component on loans taken prior to 2009 by a section of borrowers," Indian Bank's Bhasin said. The finance minister has said in the vote on account that the centre would allocate 2,600 crore which will benefit about nine lakh students who had borrowed before 2009. 

Loans for overseas education appear to be safer for banks. "Educational loans in our bank have been of a higher quality when compared to the rest of the industry as most of the students who have availed loans from us have taken it for studies abroad. Students who take such loans almost get some form of assistance, stipend or jobs in the campus while studying abroad. The non-payment issue is higher in the domestic market," C V Rajendran, CMD of Andhra Bank said.

Why more than a dozen lawyers couldn’t keep Subrata Roy out of jail

Fbiz Editor 5 Mar 14

How many high-powered lawyers does it take to keep one bigwig out of jail? Two? Three? Five?

Well, if the gentleman we are talking about is one Subrata Roy, boss of the Sahara Group, even 16 lawyers have not been able to keep him out. Some of the 16 doubled up as lawyers for three group directors who are also in the dock with Roy for failure to comply with the Supreme Court’s orders of August 2012 for the refund of Rs 24,000 crore raised illegally by two Sahara companies.

Roy is in hot water – and in Tihar jail till 11 March, along with two directors – because he claims he has paid the money back to investors, many of them fictitious, when the court asked him to route the payments through Sebi.

Sixteen lawyers apparently could not make him understand this simple point. The bench made a sharp observation on this.

“All through, you have engaged the best and the most bright counsel for arguing your case but you have not made payment to investors," the bench with Justices KS Radhakrishnan and JS Khehar said.

The roster of Sahara lawyers starts with senior advocate and maverick BJP MP Ram Jethmalani and included Ravi Shankar Prasad, Rajeev Dhavan and CA Sundaram, among others.

At yesterday’s hearing, Subrata Roy’s lawyers came up with many explanations for his failure to comply with its orders, including that it would be wrong to ask Roy to cough up money for investors who had already been paid.

Justice Radhakrishnan rubbished Sahara’s claim that the money had been paid directly to investors as “absolutely wrong”.

Even as Roy’s lawyers tried their best to get him out of the hole, Roy himself managed to dig himself in deeper

The best exchange came when an exasperated court explained why it had to deal harshly with Roy. The bench said: “You pushed us to the corner. Had you been serious, this position would not have arisen."

At some point, Roy told the court: “I am giving an assurance I will pay the money to you."

Justice Khehar gave him a curt rejoinder: “We don't need from anything from you.”

Roy, now lodged in Tihar, will be wondering what he did wrong with 16 lawyers on his side.