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At Rs 4 lakh crore, bad loans exceed market value of PSU banks

NEW DELHI: For every Rs 100 parked in shares of public sector banks, investors carry the burden of Rs 150 as bad loans, which have cumulatively ballooned to Rs 4 lakh crore or 1.5 times the market value of these lenders.

In comparison, bad loans of private sector banks are just about 6.6 per cent of their total valuation.

In case of PSU banks, if loans that face the risk of being declared NPAs (Non Performing Assets) going ahead are also taken into account, their overall stressed advances are estimated to be almost double at over Rs 8 lakh crore.

The problem appears less acute at private sector banks as their gross NPAs are only about one-eighth at about Rs 46,000 crore, which is also well below their total market value.

The Reserve Bank has set March 2017 as deadline for banks to clean up their balance sheets, forcing them to promptly disclose NPAs, take remedial measures and also make adequate provisions in their financial statements. The banks have began complying with effect from their latest set of financial results, which are for the quarter ended December 31, 2015.

The gross NPAs of banking sector are estimated at over 5 per cent of total loans, while overall stressed assets (including declared and potential bad loans) are at about 11 percent.

An analysis of their latest quarter results shows that the cumulative gross NPAs of 24 listed public sector banks, including market leader SBI and its associates, stood at Rs 3,93,035 crore as on December 31, 2015.

This is nearly 1.5-times of their total market value, which currently stands at Rs 2,62,955 crore.

This also marks a rise of over 50 per cent from their gross NPAs totalling Rs 2,61,918 crore a year ago.

As per RBI, an asset becomes non-performing when it ceases to generate income for the bank. The banks need to declare a loan as NPA which remains overdue for more than 90 days.

Except for State Bank of India (SBI), and a few smaller ones, all listed public sector banks have gross NPAs in excess of their market capitalisation. In most cases, the quantum of bad loans is more than double the market value, while some lenders have gross NPAs as high as four or five-times of their respective market valuations.

In comparison, most private sector banks have gross NPAs well below their market values, although the quantum of bad loans have risen for them as well in a big way.

The gross NPA of 16 listed private sector lenders stood at Rs 46,271 crore as on December 30, 2015. This compares with their total market value of over Rs 7 lakh crore.

Taken together, the cumulative gross NPAs of all listed banks – public and private – has risen to Rs 4.4 lakh crore, while their total market value stands at Rs 9.6 lakh crore.

The banks have taken a big beating on their valuations in recent weeks on investor concerns over bad loans.

The country’s most-valued private sector lender HDFC Bank alone commands a market value of about Rs 2.5 lakh crore, which is not far below the total market value of all listed state-run banks. Besides, SBI alone accounts for almost half of the total valuation of all public sector banks.

In terms of gross NPAs also, SBI comes on top (Rs 72,791 crore) and is followed by Bank of Baroda (Rs 38,934 crore). Others with high NPAs include Bank of India, PNB, Indian Overseas Bank, IDBI BankBSE -0.54 %, Canara BankBSE 0.57 %, Union Bank, Central Bank, Uco Bank and Corporation Bank.

Among private sector lenders, ICICI BankBSE -1.23 % comes on top with Rs 21,149 crore of gross NPAs, while others with high levels of such bad loans were Axis BankBSE 0.73 %, HDFC Bank, Federal Bank, Karnataka Bank and IDFC Bank.

Raising concerns about the ballooning bad loans, eminent banker and HDFC Ltd Chairman Deepak Parekh said last week that the health of banking sector is one of the key issues impacting the Indian economy.

As at September 30, gross NPAs of banks stood at 5.1 per cent while stressed advances stood at around 11 per cent. The stressed advances of PSUs stood even higher at about 14 per cent, as per RBI.

The quarter ended December 31, 2015 has been even more brutal for banks, with at least ten lenders posting gross NPAs in excess of 8 per cent and 22 others of more than 5 per cent.

“The RBI has clearly articulated that band aid solutions no longer work and that deep surgery is needed. I agree. The RBI went on further to state that the recognition of NPAs was the anesthetic needed for the surgery.

“While I absolutely do not wish to second guess the regulators and I do not at all doubt their competence in assessment of the situation, I only wish to caution that too much of anesthesia can also result in a patient becoming comatose!” Parekh cautioned.

“The banking sector cannot afford another quarter like the one just gone by, but banks have already warned that the next quarter may also look dismal. In just 40 days, listed banks have lost more than Rs 1.80 lakh crore in their market cap,” he added.

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Changes in recovery law to expedite disposal of 70k NPA cases

NEW DELHI: Far-reaching changes in the loan recovery law will help expedite disposal of over 70,000 pending cases involving more than Rs 5 lakh crore and ease the NPA situation, official sources said.

The amendment law, which received presidential assent on August 16, sets time limit for disposal of debt recovery cases and seeks to improve ease of doing business by ensuring speedier resolution of defaulted loans.

The highlights of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 are expansion of definition of security interest, inclusion of debenture trustees and strengthening of asset reconstruction companies (ARCs).

Besides, secured creditors like banks and financial institutions (FIs), ARCs and debenture trustees will get priority over any other dues, including taxation ones of central and state governments or any local bodies, the sources said.

Now, a district magistrate has to decide on applications by banks and FIs within a specific time limit of 30 days.

However, this period may be extended by another 30 days further in exceptional situations for reasons recorded.

The legislation provides stamp duty exemption on loans assigned by banks and financial institutions to asset reconstruction firms.

Around 70,000 cases involving more than Rs 5 lakh crore are pending in Debt Recovery Tribunals (DRT) and the proposed amendments will facilitate expeditious disposal of recovery applications.

The Act also proposes creation of a national database. Currently, security interests created in favour of banks and FIs are registered with the central registry CERSAI.

Now, all secured creditors and taxation authorities issuing attachment orders are enabled to register with CERSAI and this will help in creating a national database of encumbrances on property rights.

The Act, approved by Parliament earlier this month, amends four laws — the Sarfaesi Act, the DRT Act, the Indian Stamp Act and the Depositories Act.

“So far, the laws were in favour of the defaulters. We tried to correct the balance. There should be firmness, coupled with fairness in recovery of loans,” Finance Minister Arun Jaitley had said.

The move assumes significance as it comes against the backdrop of the episode involving liquor baron Vijay Mallya, who owes Rs 9,000 crore to banks, but has left the country to take refuge in England.

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NPA norms to keep exerting pressure on banks’ profit: RBI Deputy Governor S S Mundra

MUMBAI: Reserve Bank guidelines on providing adequate provisioning to cover bad loans would continue to put pressure on banks’ profitability for some time, even though some banks are witnessing reduction in proportion of NPAs, RBI Deputy Governor S S Mundra said today.

Mundra was responding to media queries in a press conference post RBI’s sixth bi-monthly monetary policy review here.

“Overall, the (banking) system has shown an improvement in operating profit. But on the back of our provisioning, I think some of the pressure on net profit would continue,” Mundra said.

Briefing about the asset quality in banking system, Mundra said: “We are yet to receive the results from all the banks for the third quarter…while there is some elevation in gross NPA ratio in the banking system across category, whether it is public sector banks or private sector banks, but for the first time in few quarter, this time it is seen that in few banks the ratio has come down vis-a-vis the preceding quarter.”

Likewise, on the net NPAs front, Mundra said in consistent with gross NPAs, there would be an elevation, but in a large number of banks, the ratio has come down.

“…(it) is clearly showing that the level of provisioning is quite adequate. Also, there has been conversion of restructured assets falling into NPA category and as a result, across the industry there is a reduction in the percentage of restructured assets,” said the deputy governor.

During April-September period of the current fiscal, public sector banks’ gross NPAs have hit Rs 5,89,502 crore, about 11.82 per cent of the gross advances they furnished, according to a recent government data.

In previous fiscal, public sector banks had gross advances of Rs 51,04,915 crore, of which Rs 5,02,068 crore (9.83%) was categorised as gross non-performing assets (GNPA), Minister of State for Finance Santosh Gangwar informed the Lok Sabha last week.

On the other hand, gross NPAs of private sector banks were Rs 48,380 crore, meaning just 2.70 per cent of gross advances of Rs 17,91,681 crore during the fiscal 2015-16.

On capital adequacy ratio, Mundra stated most of the banks were well placed to meet the regulatory norms they were required to have at the current point of time.

“But going forward, quite a few number of banks would be required to raise the additional capital,” he added further.

Article- http://economictimes.indiatimes.com/industry/banking/finance/banking/npa-norms-to-keep-exerting-pressure-on-banks-profit-rbi-deputy-governor-s-s-mundra/articleshow/57042083.cms

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NPA growth is slowing, but still a worry; RBI open to idea of creating a bad bank

Mumbai: The Reserve Bank of India is open to creating an agency to hold non-performing assets of banks, an idea most recently highlighted by chief economic adviser Arvind Subramanian, to relieve the banking sector of its biggest burden.

Central bank officials said they are open to all solutions on solving the NPA problem of banks, including shifting their NPAs into a so-called bad bank. However, such an entity should be designed well so that these loans are attractive to buyers.

Though the pace of additions in NPAs has slowed, the high amount of bad loans on bank balance sheets is a concern. Resolving this problem and recapitalisation of the lenders are crucial for timely transmission of policy rates and ultimately revive lending to some industries, the central bank said in its monetary policy statement.

Deputy governor SS Mundra said the gross NPA ratio for some banks has come down for the first time in many quarters, but that isn’t enough to mitigate all worries.“The level of stressed assets in the industry is slightly above 20%; it would not be fair to say that there is no concern. There is concern,“ he said. The RBI has given a number of tools to banks for resolving the problem and “our sense is that a combined use of these tools is something that we will continue to monitor,“ he added.

On having a bad bank, as suggested by Subramanian in the Economic Survey , RBI’s new deputy governor Viral Acharya said for such an entity to work, it has to be designed right. “The big piece of the problem is getting banks to sell the assets at a right price to asset reconstruction companies and private investors who want to come in.How to get that right price to come in by using a portfolio or a bad bank kind of an approach, I think that is going to be key,“ he said.

The RBI will think about how such an entity can be designed to attract maximum investors. In fact, the idea of a bad bank has been around for some time but has not taken off due to a variety of issues.

“Bad bank is a good idea but the consensus on it has been delayed,“ said Saurabh Tripathi, director at Boston Consulting Group. “If banks can consolidate all their bad assets, then it will help in quicker resolution because right now there are differences between banks in resolution of assets. These differences won’t be there if these assets are transferred to a bad bank and managed professionally .”
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Focus on NPA recovery; disclosure of defaulters’ names less important: SC

NEW DELHI: The Supreme Court on Friday asked the government to focus on the recovery of nonperforming assets at banks and tighten rules to ensure that the problem does not recur, shifting the focus of the debate from naming the big defaulters.

“Disclosure of names leads us nowhere. We want to find out the root cause for the malaise in the system,” a bench led by Chief Justice TS Thakur said. “We want to know why NPAs are accumulating. And, what are the reforms being undertaken to ensure that NPAs do not recur.”

The court had earlier insisted that there was no reason to withhold information on the big defaulters from the public. It had even insisted that disclosing such information would have a salutary effect on the system, a suggestion that the government had rejected.

Solicitor General Ranjit Kumar had in fact submitted, in a sealed cover, a list of those who owed banks more than Rs 500 crore, but had urged the court not to make it public so as not to undermine public confidence in the banking system.

On Friday, however, the three-judge bench, which also included Justices AM Khanwilkar and DY Chandrachud, changed the paradigm of the debate by asking the government to focus on recoveries. “What are the deficiencies in the recovery system,” the CJI demanded to know.

He, however, refused to jump into the issue without first awaiting a report by a committee set up by the government to examine it. Kumar, the second top-most law officer of the government, insisted that the court await the report before acting on the claims made in a public interest petition that the NPAs had reached massive proportions.

The finance ministry is also independently examining the issue. The government is in the process of examining all the deficiencies in the process as well as tightening the statutory regime to ensure recoveries.

The Debt Recovery Tribunal and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 would be strengthened, Kumar said. The government had also brought in the bankruptcy code as a step towards dealing with the problem, he said.

The SG said a committee, predominantly comprising leading bankers, was examining these issues.

The case will now come up for hearing on December 12, after the committee submits its report.

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Changes in recovery law to expedite disposal of 70k NPA cases

NEW DELHI: Far-reaching changes in the loan recovery law will help expedite disposal of over 70,000 pending cases involving more than Rs 5 lakh crore and ease the NPA situation, official sources said.

The amendment law, which received presidential assent on August 16, sets time limit for disposal of debt recovery cases and seeks to improve ease of doing business by ensuring speedier resolution of defaulted loans.

The highlights of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 are expansion of definition of security interest, inclusion of debenture trustees and strengthening of asset reconstruction companies (ARCs).

Besides, secured creditors like banks and financial institutions (FIs), ARCs and debenture trustees will get priority over any other dues, including taxation ones of central and state governments or any local bodies, the sources said.

Now, a district magistrate has to decide on applications by banks and FIs within a specific time limit of 30 days.

However, this period may be extended by another 30 days further in exceptional situations for reasons recorded.

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Despite NPA crisis there is still hope for PSU banks

Investors of PSU banks are wondering how much of their value has been eroded by the non-performing assets (NPAs) crisis. Several stock broking firms and analysts are asking clients to exit their PSU bank holdings, putting further pressure on stock prices. However, before making a hasty retreat, it is important to understand how long this situation is likely to last and the corrective measures being taken by the government, regulatory authorities and the banks.

The new initiatives: The passage of the Bankruptcy Bill by the Parliament would pave the way for faster winding up of unviable units and recovery of loans. Also, the Strategic Debt Restructuring (SDR) scheme, introduced by the RBI in 2015, has made it easier for banks to acquire a majority stake in ailing companies by converting their sticky loans into equity. Consolidation of PSU banks is also being encouraged by the RBI and would improve the performance of some of these banks. The government has also helped with capital infusion— Rs 480 crore in United Bank of India in May.

RBI’s tough stance: According to RBI, a loan on which the interest or repayment remains overdue for more than 90 days should be declared as NPA. RBI’s strict definition and warning that banks must clean up their balance sheets by March 2017 has hastened the process of NPA recognition and provisioning by the banks. Hence the tottering profit ratios seen in the past few quarters.

Sectors in distress: Several sectors of the Indian economy—realty, infrastructure, power—have suffered from project delays for a number of reasons such as difficulty of land acquisition and environmental issues. In sectors such as steel, cement and oil, the crash in commodities resulted in the borrowing firms’ deficient performance in repaying bank loans. Reversing of the commodity cycles, government’s efforts to improve business environment, and schemes such as Make in India are all likely to improve the performance of these sectors, making it easier for the borrowers to repay loans. Once this happens, the NPA provisions made during the past quarters would be reversed, giving a push to the bank earnings. The market value of their shares and dividend pay-outs would accordingly improve.

Intellectual capital: The appointment of the Bank Board Bureau is a welcome step and will help in improving the quality of the top management in PSU banks. Highly qualified and experienced management is absolutely necessary for a bank’s functioning including risk management, project appraisal and loan recovery. It appears that public sector banking is set for a complete overhaul. Also, PSU banks may have bad loans, but they also have a very good deposit base and enjoy 72.9% of

the market share in deposits.

Hopefully, the initiatives being undertaken will begin to show results soon. PSU banks could become an attractive investment proposition from a long-term perspective’.

(By Narender L. Ahuja, Professor of Finance, IMT Ghaziabad)

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Alok Industries, with Rs 20000 crore NPA, seeks BIFR protection

MUMBAI: Alok IndustriesBSE 0.60 % will seek protection from lenders as its plays to approach BIFR on grounds that 50% of its net worth has been wiped out as on March 2016.

The developments comes at a times lenders are struggling to recover their Rs 20,000 crore loan which is now classified as non-performing loan by all banks. In a notice to the stock exchange the company said that the board on Friday decided to seek protection under BIFR and it has called for an AGM on November 19 to seek shareholders approval.

Bankers failed to revive the company after the company failed to implement corporate debt restructuring scheme. Subsequently attempts to revive the company also did not yield any positive results. For instance, lenders tried to find new promoters for the company under the Strategic Debt Restructuring scheme which allows banks to convert their debt into equity and get a new buyer for their stake

A company is declared a sick unit if half of their networth is wiped off and they can seek projection under BIFR or Board of Industrial and Financial Reconstruction with the aim to revive the company.

Meanwhile, HSBC has filed a winding up petition along with unsecured lenders to recover its outstanding dues worth $55 million.

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Refer all high-value NPA resolution cases to OC: Finmin to PSBs

NEW DELHI: The Finance Ministry has asked public sector banks to approach the newly constituted overseeing committee (OC) for resolution of all high-value bad loans and not just accounts considered under S4A.
This was conveyed to the lenders at last month’s meeting between Finance Minister Arun Jaitley and the heads of PSU banks.

According to ministry sources, some banks were under the impression that only cases under the Scheme for Sustainable Structuring of Stressed Assets (S4A) are to be reviewed by the OC.

There were some information gaps which have been addressed in the meeting with the Finance Minister, sources said.

A two-member OC, which includes former State Bank of India chairman Janki Ballabh and former chief vigilance commissioner Pradeep Kumar, has been set up by the Indian Banks’ Association in consultation with both RBI and vigilance and investigating agencies.

The OC has been created to ensure that the entire exercise of NPA resolution is carried out in a transparent and prudent manner.

Gross NPA of public sector banks has surged from 5.43 per cent (Rs 2.67 lakh crore) in 2014-15 to 9.32 per cent (Rs 4.76 lakh crore) in 2015-16.

Meanwhile, the RBI has said it will come out with modified guidelines by this month-end to allow a portion of sustainable bad loans to be treated as standard asset in a bid to effectively deal with high NPA problem.

The Reserve Bank has put in place the ‘Scheme for Sustainable Structuring of Stressed Assets’ (S4A) in order to provide an avenue for reworking the financial structure of entities facing genuine difficulties and requiring coordinated financial restructuring.

The scheme provides flexibility in restructuring, which may involve material write-down of debt and/or making large provisions, RBI had said in the fourth bi-monthly monetary policy review for 2016-17.

Banks that have taken up cases for resolution under the S4A had represented that the asset classification norms under the S4A may be reviewed to make the scheme more effective.

Accordingly, it is proposed to allow that portion of debt determined to be sustainable to be treated as a standard asset in all cases, subject to certain conditions, it had said.

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NPA woes likely to be a drag on ICICI stock

ET Intelligence Group: After a strong rally of about 43% since February, the shares of ICICI Bank BSE 0.24 % recently gave up some of these gains ahead of its June quarter results.

Though net profit for the June 2016 quarter managed to beat Street expectations, the stock may continue to remain under pressure as the weak operating performance and elevated slippages may affect net interest margin for the current fiscal.

In the June quarter, net profit fell by 25% year-on-year

to Rs2,232 crore. This was lower than the 30-40% drop predicted by analysts as strong treasury gains and lower tax outgo reduced the impact of a lacklustre 0.8% growth in net interest income — the difference between interest earned on disbursed loans and interest paid on funds raised.

Bad loans are expected to loom large on the bank’s near-term performance. This became evident after the bank disclosed a list of stressed loans worth Rs44,065 crore below investment grade, last quarter. Loans worth Rs8,249 crore turned bad during the quarter and more than half of this came from the disclosed below investment grade bucket.

The below investment grade bucket will put pressure on the future asset quality. The gross bad loans stood at Rs27,193 crore or 5.87% of gross advances at the end of June quarter. It has recognized a substantial portion of loans to mining, metals and steel sectors from this bucket as bad loans and the combined exposure has came down by 25% sequentially during the June quarter.

The management indicated that 30% of fresh slippages in the June quarter may be upgraded to standard account by the year-end. However, pressure on net interest margin (NIM) may continue as the bank will not be able to accrue interest income on additional non performing assets (NPA).

The NIMs in the June quarter declined to 3.16% from 3.54% in the year-ago quarter and 3.37% in the previous quarter. At a time when corporate credit is not picking up, ICICI bank like its peers, has increased focus on retail banking where loan growth has been more than 20% in the last few quarters. While this may support NIMs, its expansion will be limited by the slowing fee income growth as corporate lending concentrates towards companies with higher credit rating.