Saturday, July 05, 2014

Rating OF Corporation Bank Downgraded

CARE downgrades Corporation Bank's perpetual bonds-Business Standard

It reaffirmed a "AAA" rating for lower tier-II bond
During FY14, the bank reported a net profit of Rs 562 crore, down from Rs 1,435 crore in 2012-13. Its total income rose to Rs 19,606 crore in FY14 from Rs 16,942 crore in FY13

CARE Ratings has downgraded Corporation Bank’s perpetual bonds and upper tier-II bonds from “AAA” to “AA+” on weak profitability. It also flagged concerns over moderate resource profile due to drop in the share of show-cost deposits.

It reaffirmed “AAA” rating for lower tier-II bonds.

The revision in ratings reflects the weak profitability during FY14 impacted by deterioration in its asset quality and moderate resource profile characterised by declining proportion of low-cost deposits, CRISIL said.

The ratings, however, continue to derive comfort from capital support and majority ownership of bank by the Centre  (63.3 per cent holding), adequate capitalisation levels and stable asset growth.

The bank’s ability to improve its resource profile and asset quality, enhance its profitability and maintain stable capitalisation levels would be the key rating sensitivity, the rating agency added.

The upper tier-II bonds and perpetual bonds are rated one notch lower than lower tier-II bonds. It is due to their increased sensitiveness to capital adequacy ratio (CAR), capital raising ability and profitability during the long tenure of instruments.

During FY14, the bank reported a net profit of Rs 562 crore down from Rs 1,435 crore in 2012-13. Its total income rose to Rs 19,606 crore in FY14 from Rs 16,942 crore in Fy13.

The bank had 2,021 branches and 2,264 ATMs as of March this year. The bank also has its representative offices at Hong Kong and Dubai. The bank has a wholly-owned subsidiary — Corp Bank Securities Ltd.

Thursday, January 30, 2014

Pakistani Banks May Now Open Their Branches In India

Our Government could not stop cross border terrorism. India could not stop infiltration from our borders attached with Bangladesh, Pakistan and others. India could not stop introduction of fake notes in India from Pakistan and through neighboring countries. 

Indian government started Bus service from Indian cities to cities in Pakistan but could not safeguard Indian interest and could not stop entry of terrorists from Pakistan to India in disguise. Indian government started train service from India to city in Pakistan but could not develop love and affection between citizens of two countries. 

Indian government allowed several cultural programme between artists of India and that of Pakistan but could not dilute intensity of animosity in the hearts of Pakistani people against Indian people.

There are custom offices around border with Pakistan but Indian officials could not stop supply of arms and ammunition s from neighboring countries to Indian territory. It is open secret that India based naxal groups or anti national terror groups have huge stock of arms and ammunition which they use from time to time to kill innocent rural folks, to disturb Indian cities and to attack Indian armed forces.

Training camps are reportedly functioning all over the country to promote anti national activities and to promote naxalism and terrorism in India to destabilize India. People of India are being trained by Pakistan based terrorist organizations to create communal disharmony, to provoke riots and to weaken the country by hook or by crook.

Indian rulers are in dialogue with rulers of Pakistan for decades together but could not stop terror attack on Indian territory by Pakistan based terrorist and could not stop growth of Indian brand of terrorism called as Indian Mujahidin or SIMI or similarly other Indian brand terrorist organizations under the patron and guardianship of Pakistan based terror camps. 

India has hundreds of bitter experiences with Pakistan rulers when Pakistan has cheated India in the name of friendship. India gave status of 'Most Favoured State' to Pakistan but failed to change the heart of Pakistani rulers , Pakistani armed forces and ISI who are bent upon disturbing India. 

Indian government imposed faith in Nawaz Shariff, but Kargil War happened, head of Indian army Jawan cut off and taken away and there are frequent violation of line of control by Pakistan based armed forces. Rather cross border firing from the side of Pakistan has been found to be in increasing trend in recent past.

All above bitter truth is not my saying but the facts which appear in newspapers of India, which our leaders use to say in their speeches, which TV media use to say in their programmes and news broadcasts..

In spite of all these threats India has been facing from neighboring country like Pakistan, Our government is in process of starting three Indian banks to work in Pakistan and allowing in lieu of that three Pakistan based banks to start functioning in India. 

Is this not a direct threat to Indian economics, direct invitation to terrorists to disturb India economically and in brief, a direct step to add fuel to fire?
I am unable to understand how Indian regulators like RBI will be in a position to ensure hundred percent       compliance  of KYC norms prescribed by RBI (Know Your Customers) from Pakistan based banks when they failed to do so for even Indian Banks even after decade long efforts and vigorous follow up in this regard.

I am unable to understand how RBI will safeguard India from money laundering which is more likely to take place from proposed Pakistan based banks working in Indian territory as RBI and Government of India completely  failed to stop the same even from some of private banks in India which were exposed by Kobra Post sting operation in recent past. 

I am unable to understand how RBI or for that matter Government of India will stop lending in India by Pakistan based banks for promotion of terror acts, for purchase of arms and ammunitions to disturb Indian towns and cities in the name of fake business identities formed by India based anti nationals who are said to be working in nexus with Pakistan based terror camps.

There are several cases of advances made by Indian banks based on fake deeds, or for fake business on fake identities, when India is not fit to control and properly monitor even Indian banks, how will they stop Pakistan based banks in doing and promoting  ill-motivated activities   to weaken India   .

The casual approach and corrupt minded officials sitting in custom and excise departments or at borders has failed or you can say willfully allowed Pakistan based terrorist to send drugs, arms and other dangerous weapons to Indian counterparts in disguise of potatoes and food grains to serve their self interest.

GOI should understand how majority of officials in government offices are bought by bribe and how do they indulge in activities which harm the country. 

And now allowing Pakistan based banks to function in India will do nothing but add fuel to fire. There is no doubt to me keeping in view the working style of Indian bosses and Indian politicians that India is inviting more problems from Pakistan than solving anyone by taking a decision to allow three banks from Pakistan to function in India and vice versa..

Lastly II may say an old proverb in  Hindi    “ Aa Bel Mujhe Mar”

There may be apprehension in the minds of a large section of Indian mass that Pakistani banks will collect deposits from Indian people and may use the same to kill Indian people, may use Indian base to destabilize Indian economy and may use the Indian money to propagate and promote their terrorism against India from India's land. Pakistan based banks may use banking channels to distribute fake currencies and thus strike at the root of Indian economy.they may sanction personal loans to buy arms and ammunition and to buy explosives and drugs etc.they may sanction loans to manufacture arms and illegal weapons in India and so on.

What will be the checkpoints is a million dollar question which Indian rulers are supposed to give to Indians?

India, Pakistan to allow 3 banks in each other's country: Minister--Economictimes 17.01.2014

ISLAMABAD: India and Pakistan are working to allow three banks to set up branches on each other's soil to normalise trade relations and boost commerce, Minister of State for Commerce Khurram Dastagir Khan has said.
The two sides had agreed in August 2012 to issue a full banking licence to two banks from each country. However, normalisation of trade was hit after Pakistan failed to deliver on a commitment to grant Most Favoured Nation-status to India in January last year

"We were told that the Reserve Bank of India had since, I would say, lessened its restrictions, it is no longer two banks. Any bank that fulfils the requirement can apply. For the time being, we are working on three banks each," Khan told PTI here.
The issue of setting up bank branches on each other's soil was raised with Indian Commerce Minister Anand Sharma by Pakistan's Punjab Chief Minister Shahbaz Sharif when he visited New Delhi recently.
Khan, who left for India today to participate in a SAARC business meet, said, "The State Bank of Pakistan has just written to the RBI that three banks would like to open their branches in India. I don't know when but it will happen. Some movement has taken place."
In 2012, the two Indian banks allowed to operate in Pakistan were the State Bank of India and Bank of India. On the Pakistani side, the quasi-state owned National Bank of Pakistan and privately owned United Bank Ltd were selected for running full banking operations in India once they obtained licences.
However, there has not been much forward movement on the issue.
Khan, a top leader of the ruling PML-N party, argued that the biggest hurdle to normal trade ties was the "very restrictive visa regime".
"People cannot travel to the other country. Visa is not something that appears on trading figures but is very substantial. If businessmen from one country cannot travel to another country and see firsthand and analyse the economic opportunities that are there, then trade is severely hampered," he said.
"Visa restriction is what we call a non-tariff barrier," he added.
Khan pointed out another issue not reflected by trade figures was the lack of bilateral banking relations.
"That is also not a trading issue but is a necessary facility required for trading. So banking relationship has to be there. Another issue that we will talk about, maybe not in this trip, is to allow communication network. Allow roaming," he said.
"And here I am quite definite that obtaining a SIM in Pakistan is miles easier than it is in India. So if people can't communicate and use the banking channel, and if they can't travel, it is a hurdle to trade," he said.

Monday, December 30, 2013

RBI Report On Probable Risk On Banks

The Reserve Bank of India today released the Financial Stability Report (FSR) – December 2013. The eighth in the series, the FSR – December 2013 is being released against the backdrop of a mild positive market reaction to the announcement of tapering in the US Federal Reserves’ bond purchase programme from January 2014. The commencement of the taper should signal a calibrated return to normal liquidity and credit conditions in the global markets and also better pricing of risk. This will mean a repricing of certain assets with consequent volatility. Efforts during the past few months have been directed to make the Indian economy more resilient to the ultimate withdrawal of liquidity from the system and less reliant on unstable external capital for growth.

The FSR, published every six months, aims to create awareness about the vulnerabilities in the financial system, to inform about the resilience to stress of the financial institutions and to generally serve as a health check on the financial system.
The Report reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability.
  • The US Federal Reserve has now laid to rest the uncertainty on timing of the exit and tapering in its bond purchase programme, which is set to begin from January 2014. However, financial market volatility will be conditioned by the pace of tapering going forward.
(Paras 1.1 – 1.2, Chapter I)
  • Realignment of global growth as well as high inflation differential between advanced economies (AEs) and Emerging Markets and Developing Economies (EMDEs) is a potential source of exchange rate volatility and may result in volatile cross-border flows with every repricing of risk.
(Paras 1.4 – 1.5, Chapter I)
  • The delay in tapering allowed India to bring about adjustment in the current account deficit (CAD) and build buffers by replenishing its foreign exchange reserves. However, macro-economic adjustment is far from complete, with persistence of high inflation amidst growth slowdown. Fall in domestic savings and high fiscal deficit are other major concerns for India.
(Paras 1.8 – 1.23, Chapter I)
  • Corporate performance continues to be weighed down by boom period expansions and excess capacities, amid shifting asset composition towards financial investments.
(Paras1.24 - 1.27, Chapter I)
  • House prices and outstanding loans for housing by housing finance companies have grown relatively faster during the last few years.
(Para 1.32, Chapter I)
  • Inadequate social security coverage in India against a backdrop of changing demographics will pose challenges for expanding the pension system given the fiscal constraints. The National Pension System (NPS) was created to serve Government employees and private sector workers.
(Paras 1.35 – 1.37, Chapter I)
(Para 2.1, Chapter II)
  • Network tools have been used to assess impact of contagion due to risk of credit concentration. Failure of a major corporate or a major corporate group could trigger a contagion in the banking system due to exposures of a large number of banks to such corporates.
  • The risks to the banking sector have further increased since the publication of the previous FSR in June this year. All major risk dimensions captured in the Banking Stability Indicator show increase in vulnerabilities in the banking sector.
(Paras 2.4 – 2.17, Chapter II)
  • Asset quality continues to be a major concern for Scheduled Commercial Banks (SCBs). The Gross Non-performing Assets ratio of SCBs as well as their restructured standard advances ratio have increased. Therefore, the total stressed advances ratio rose significantly to 10.2 per cent of total advances as at end September 2013 from 9.2 per cent of March 2013.
(Paras 2.28 – 2.29, Chapter II)
  • Five sectors, namely, Infrastructure, Iron & Steel, Textiles, Aviation and Mining together contribute 24 percent of total advances of SCBs, and account for around 53 per cent of their total stressed advances.
(Paras 2.34 – 2.37, Chapter II)
  • Macro stress tests on credit risk suggest that if the adverse macroeconomic conditions persist, the credit quality of commercial banks could deteriorate further. However, under improved conditions, the present trend in credit quality may reverse during the second half of 2014-15.
(Paras 2.51 – 2.61, Chapter II)
  • India stands committed to the implementation of the global regulatory reforms agenda and has made considerable progress on this front. Although firms and markets are beginning to adjust to the regulatory approach towards ending too-big-to-fail (TBTF), recent research indicates continued expectation of sovereign support to such institutions.
Paras 3.1 – 3.5, Chapter III)
  • Due to the interconnectedness with banks, liquidity pressure is felt by the money market mutual funds (MMMFs) whenever redemption requirements of banks are large and simultaneous. Regulatory measures taken to reduce the degree of interconnectedness seem to have been successful in reducing the liquidity risk in the system.
(Paras 3.13 – 3.17, Chapter III)
  • India’s domestic markets for interest rate derivatives have not taken off due to the absence of some of the basic building blocks. Efforts are on to address these issues.
(Paras 3.22 – 3.26, Chapter III)
  • Action to create central repositories for the banking sector, corporate bond market and insurance sector has been initiated. This move is expected to break the information asymmetry in those markets.
(Paras 3.31 – 3.37, Chapter III)
  • It has been observed that the equity prices of the companies in which the promoters had pledged significant portions of their shares, are relatively more volatile than the broader market during times of correction.
(Paras 3.51 – 3.55, Chapter III)
Alpana Killawala
Principal Chief General Manager
Press Release: 2013-2014/1294

Tuesday, December 10, 2013

Bankd Union Blows Whistle On Bad Loans

AIBEA blows the whistle on bad loansof Indian banks-Money Life

Bank union, AIBEA, demands that banks recover bad loans from wilful defaulters

Trade unions are usually quick to announce protests to demand higher wages or better working conditions. This time, however, the All India Bank Employees Union (AIBEA), one of the biggest employees unions in India, has decided to turn into a powerful whistleblower. On 5th December, AIBEA gave a call to ‘stop the loot of public funds’ and start recovery of bad loans. This is a welcome development. I have always held that the destruction of giant entities, such as Air India, Unit Trust of India, and giant public sector entities in telecom and engineering, is as much due to employee apathy as it is due to the loot by politicians and bureaucrats. AIBEA has signalled that it will name and shame defaulters, if necessary, to force banks to start acting tough and recover bad loans. The Reserve Bank of India (RBI), as the banking regulator, is fully aware of what is going on; but now, the unions are asking it to move from rhetoric to action. The AIBEA cites the overused quote about India having sick industries but no sick industrialists. It also quotes RBI governor, Dr Raghuram Rajan, who recently told banks, “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 (rather) than recognising it, is to be avoided.” AIBEA points out that the top four bad loan accounts add up to a massive Rs22,666 crore, which include Kingfisher Airlines and Winsome Diamond and Jewellery Co. Will RBI stop the “systematic loot of public money” by recognising these as pigs with lipstick?

The data collated and released by the AIBEA is a frightening indictment of the banking regulator and the finance ministry. While the government has been boasting about India having escaped the global financial crisis, how does it explain the four-fold increase in bad loans—from Rs39,000 crore in 2008 to Rs164,000 crore today? The creation of new bad loans is a mind-boggling Rs495,000 crore, according to AIBEA.  And, corporate debtrestructuring through provisioning, concessions, waivers, write-offs, concessions, one-time settlements (which are done multiple times), compromise proposals, etc, add up to a massive Rs325,000 crore.  

Write-offs of bad loans by PSU banks in the past seven years amount to a massive Rs140,000 crore. If we include the bad loans of private banks and foreign banks and other financial institutions, the total bad loans are more than Rs2,50,000 crore, says the AIBEA statement. Worryingly, it says, things have reached a point where management is making banks vulnerable by reducing the provisioning of bad loans. RBI has pointed out, and is aware, that the provision coverage ratio of India’s banking system has dropped from 55% to 45% as against a global average ratio of 70% to 80%.

AIBEA’s demand will resonate with depositors who are being asked to pay higher charges for every service, to ensure higher profits for banks every quarter. AIBEA, for once, is on the same side as two big stakeholders of banks—bank customers and shareholders. Clearly, the call to publish the names of defaulters, to make wilful default a criminal offence, investigate collusion between banks and borrowers and the demand not to ‘incentivise corporate delinquency’, will find huge support among ordinary people.

Monday, September 09, 2013

Banks See No Quick Fix For NPA Pain

If government is really interested to know the ongoing fraud in bank in sanction of high value or low value loans for last two decades, CBI should first investigate the wealth of retired CMD and current CMD, ED and all General Managers of all public sector banks and try to compare the same with their total income earned during their entire service. Then only CBI and GOI can assess the volume of corruption rampant in this sector in the name of credit growth or achievement of set targets or to please the politicians especially ministers who hold the key of promotion of bank officers.

Unfortunately Ministers are Godfather of all such corrupt officers who have spoilt the future of banks. When the head of any institute is inefficient, inactive and corrupt, one cannot dream of good governance and similarly when government is formed of corrupt ,inactive and ineffective ministers , one cannot imagine of clean administration.

Until we get success in getting rid of rampant flattery and bribery culture and until we stop whimsical transfers and arbitrary promotions in all government offices and public sector undertakings we cannot imagine of improvement of health of any bank or any PSU or any government office. The culture of flattery is the root of all maladies prevalent and rooted in the entire system.

Bank staff who are wondering in dreamland expecting wage hike of 20 or 30 percent should keep in mind that until they save banks from corrupt executives and corrupt officials they cannot expect earning high profit and when profit is low , banks cannot think of giving respectable wage hike.Politicians have spoilt banks by their dirty vote bank politics and when banks incur losses they will blame bank staff only.

Assets in banks will continue to move from standard to Non performing assets and none can stop it without changing the mindset of rulers. Now stress assets are reflected as 5 to 6 percent and it will move to 20 to 30 percent of total advances if the system is not changed immediately. FM or RBI can prescribe hard dose of medicine but they cannot yield fruitful result without the support of all involved in the process. Dirty politics of vote bank has damaged not only the economy of the country but badly affected the social harmony, regional harmony and communal harmony.

This is why why there is Free Fall of Indian rupee In Free Market despite all efforts made by learned FM, PM and RBI governor.Because the fall is not due to fault occurred in last few days or few  months, it is the consequence of bad policies followed by team of economists ruling this country from Delhi. Similarly accumulated bad assets in public sector banks are not due to global recession or due to natural calamities, they are the bad consequences now precipitating due to bad policies and bad execution of good policies by bad officials sitting at top posts in these banks in nexus with corporate and politicians. 

Banks expect no quick fix for NPA pain despite RBI warning--ET 10.09.2013

KOLKATA: Despite the Reserve Bank of India's (RBI) hard talks against loan defaulters, banks are expecting more pain in terms of asset quality as the systemic gaps allow bad borrowers to divert funds and go scot-free under the garb of economic slowdown. 

Bankers said this trend has almost become viral and put an added stress on the bad loan scenario which has anyway been weighed down by slower economic expansion. It's also a common refrain from bankers that borrowers misuse the debt restructuring facility and use the banking system to recapitalise their failed ventures. 

Rajan has declared a war against defaulters by saying that promoters do not have a divine right to continue if an enterprise flops, but the existing legal and administrative gaps have created enough doubts in the mind of a banker that nobody is expecting a quick-fix solution to the spiralling NPA situation. 

"Although RBI governor's statement on NPA has sent a strong signal to defaulting borrowers, banks are facing difficulties at the field level in implementing SARFAESI Act and taking physical possession of mortgaged properties due to administrative gaps. This needs to be addressed first, otherwise bad borrowers will continue to use the loopholes and make mockery of the system," United Bank of India executive director Deepak Narangsaid. 

Rajan has mandated deputy governor KC Chakrabarty to take a close look at rising NPAs and the restructuring process. The central bank has proposed to collect credit data and examine large common exposures across banks to create a central repository on large credits. "Nothing can change overnight," said South Indian Bank managing director & chief executive officer VA Jospeh. "There are gaps in the system and hopefully the committee finds out the lacuna in the system and address it." 

Some suggest that the RBI may use its RTGS network to find the trail of the diverted money. "Even if we know that bank loans are being diverted, we don't have the ammunition to find the trail and create charge on the asset, limiting our ability to recover loans. The RBI's RTGS network can be used in such cases effectively," a senior bank executive said in the condition of anonymity. 

The sluggish economic growth has already led to a sharp rise in NPAs, with the gross ratio touching 3.9 per cent in June. The RBI has estimated that gross NPA may rise to 4.4 per cent if the macro-economic situation does not improve. Besides, banks are sitting on a pile of restructured loans. 

The Corporate Debt Restructuring Cell has approved 415 accounts amounting to Rs 2.5 lakh crore in the past eight years. By a very conservative estimate, even if 10 per cent of it turns bad, a whopping Rs 25,000 crore worth of loans will add to the NPA list. 

With the first quarter GDP growth slowing to 4.4 per cent, a four-year low amid a contraction in mining and manufacturing sectors, banks have every reason to lose sleep. The future looks grim, with global investment bank Nomura cutting India's real GDP growth estimates to 4.2 per cent for 2013-14 from 5 per cent earlier.

Saturday, September 07, 2013

Bad Debts AND NPA

Bad debt and NPA: making sense of banking mess--By  Alam Srinivas

FM asked banks to go after loan-defaulting promoters. But the public fund siphoning will continue unless deeper, systemic solutions are put in place
In 2008, Indian policy makers boasted that the global financial crisis would not affect the future growth in this country. In November the same year, the then finance minister P Chidambaram told an international business audience that “we will be back to a high growth rate (of nine percent)” by the end of 2009. He, along with a few economists, insisted that the country’s financial system, especially the banking one, was fairly insulated from the global catastrophe.

Almost 52 months later, the FM sang a different tune. In March 2013, he told parliament that “it is not a correct assessment that we were not affected by the 2008 banking crisis.” He added that the crisis “did not end in 2009. It deepened in 2011-12”. This was the reason that Chidambaram publicly asked the banks to go after ‘willful defaulters’, or those (corporate) borrowers who have made a habit of not repaying their loans and allowing their companies to go bankrupt.
The ugly fact is that the Indian banks are in shambles. In the past year or so, their levels of bad loans, or those that may never be repaid, have shot up alarmingly. Total NPAs (non-performing assets or bad debt) of 40 listed Indian banks have zoomed by over 40% -- from Rs 1.25 trillion in December 2011 to Rs 1.79 trillion in the same month in 2012. In a few cases, like Punjab National Bank and Indian Bank, the overall NPAs have doubled; in the case of Central Bank of India, they were up over 50%.

More importantly, experts question the ability of the banks, the regulator (RBI) and the finance ministry to recover this debt. The reason: apart from the large borrowers, like powerful business persons, the fault for this financial mess also lies with the policy makers and RBI. All three are equally responsible. However, in a bid to distance from the problem, each section blames the other. Thus, Chidambaram’s diktat on ‘willful defaulters’ may be an exercise to divert attention from his blunders.

Banks: From NPAs to CDRs

For several years, the banks found an easy way to hide their bad loans. They neither wrote off the loans, nor admitted they would not be repaid, nor did they force business persons to pay up. Instead, they opted for what is termed corporate debt restructuring (CDR). In such cases, the loans were merely restructured – the promoters were given a moratorium and asked to repay after a couple of years, interest rates were reduced, and part of the loans were converted into equity. This ensured that the loans did not become part of the banks’ NPAs.

According to government officials, Rs 3 trillion worth of debt in only the infrastructure sector has been restructured in the past few years. Bankers complain that the number of proposals they received for CDR packages has risen in the past few months. In a recent interview, the CMD of Allahabad Bank, Shubhalakshmi Panse, claimed that the number of CDR packages would increase over the next 6-9 months, and many promoters have asked for a second round of debt restructuring.
In retrospect, CDRs delayed the inevitable in most cases. Several companies that got two rounds of CDRs – loans have to be classified as NPAs after the second round of CDR – ended up being sick or had to be sold to a new owner. The classic case is that of Ispat Industries, which was owned by the Mittals and, in end-2010, sold to Jindal Steel. Its debt history in the past 10 years proves the complicity of the lenders to bail out the promoters. Instead of trying to get back their money lent to Ispat, the banks helped the promoters to continue with their unviable ways.

The first CDR of Ispat Industries was finalised in 2003 and, six years later, as the company continued to be in trouble, the debt restructuring package was reworked to give the company more time. Nothing worked. The company remained in the red and asked for the third CDR in 2010. That’s when the banks said enough was enough, and forced the Mittals to sell out to Jindal Steel. Shockingly, now the Jindals may get a new CDR package, expected to be finalised within a few months.

However, the Mittals took the banks for a long ride. Both in 2003 and 2009, they promised the lenders that they will mend their ways. They claimed that they would achieve quick financial closure for their several stuck projects such as the captive power plant, one million ton capacity coke oven, and the 2 million ton pellet plant. The Mittals said that they would sell the flats at their Pedder Road (Mumbai) property to infuse cash into the company. They reneged on most of these promises.

It was not only the fault of the banks, which refused to force the promoters to implement these decisions, and the Mittals, who found excuses. The company was not in a position to do well because it had inherent problems. Even if the Mittals had delivered on their commitments, the adverse scenario in the steel sector would have pulled down Ispat Industries. Therefore, it was incredible that once Jindal Steel purchased it, the banks were willing to give it another chance.

Today, the Jindals have decided to refinance the Rs 75 billion debt through another set of banks. So, new lenders will pay off the older ones, and restructure future payments along with a moratorium. It is shameful that a company, which has underperformed, gets three CDRs in a decade. This reflects poorly on the Indian banks. “Maybe the banks’ representatives on boards of several companies should be pro-active to prevent defaults or bad loans,” feels economist Bibek Debroy.

RBI: Policy sops to defaulters

Obviously, the regulator should have stopped the banks’ practices. Instead, it encouraged it; in fact, the RBI gave more freedom and flexibility to the banks to offer CDRs to corporate entities. First, it set no limits on the number of debt-restructuring packages given to a single company. Second, there were no restrictions on a single promoter, who got several CDRs for different firms in his/her group. There was, thus, no concept of a group approach in debt recast, although a formula is in place for loans. For example, a bank’s loan exposure to a sector or a group is defined.

Thirdly, as per its May 2005 guidelines, the RBI washed its hands off CDRs. The regulator stated that its role in debt restructuring would be “confined to providing broad guidelines” and its officials would not participate in the actual discussions and negotiations between the banks and promoters. The entrepreneurs were thus free to politically and otherwise influence the banks’ CMDs through their connections and get reprieves on repayments of their loans.

Fourthly, the May 2003 guidelines extended CDRs to even the ‘willful defaulters’, the same ones that the FM now wants the banks to take action against. The CDR Core Group, which was carved out of the CDR Standing Forum, which had representatives of the banks, could approve such debt recast to deliberate defaulters if the former felt that the latter would rectify their mistakes. Clearly, this left a huge window of opportunity for the promoters to get their way.

More importantly, in many cases the RBI has encouraged CDRs in a specific sector. For instance, in mid-2010, the central bank approved a package for the aviation sector since it believed that most airlines were, or on their way, in financial trouble. Since then, only one carrier, Kingfisher Airlines, has taken advantage of the RBI decision. In October 2010, Kingfisher’s debt was restructured with a moratorium, lower interest and part conversion of loans into equity. Since then, the financial fortunes of the Vijay Mallya-owned airline have only become worse, and it has shut down its operations.

“As part of CDR committees, the banks have a conflict of interest. They are under pressure to show lower NPAs, and thus restructure the loans, and lend more each year. So, one can build a case for an independent authority, and not the RBI, to decide whether to sell the company’s assets, force a change in management, or push the existing owner to  initiate critical decisions,” says Debroy.

Policy makers: Crony banking

The central and state ministries contributed to the NPAs. Many projects, especially in infrastructure, get delayed or stuck due to lack of official clearances, like land acquisition and those related to environment and forests. This trend will get accentuated in the near future. Analysts says that several projects are due to hit project completion deadlines in 2013-14, when they have to technically begin to repay their loans. If these projects are delayed, their promoters may not be able to do so. One hopes that the new cabinet committee on investments (CCI) can deliver results.

In addition, Chidambaram has decided to take on debt defaulters for budgetary reasons. “His concerns for revenues and expenditure and, hence, fiscal deficit, have forced him to take this decision. But what we require is mindset and systemic changes,” explains Barun Mitra, founder, Liberty Institute. The FM realises that the government may have to extend huge sums to the banks – some contend the bailout amount to be $1.7 trillion – over the next few years in a worst-case NPA scenario.

Moreover, it is difficult to define ‘willful defaulters’. “In India, we consistently see that companies become sick, but not the promoters, whose personal wealth grows. This is unlike the US, where many entrepreneurs become bankrupt. Legally, it may be difficult to have a group concept for debt repayments. One should also not forget that many defaulters have political backing; the part of the reason is crony capitalism and the way it is practiced in India,” says Mitra.
Policy makers make it more difficult for the public sector banks because they have a huge say in the selection of their CMDs. Since these are political appointments, the CMDs operate with different mindsets. For example, towards the end of their tenure, they tend to lend more liberally or restructure debt more easily in a bid to show a better balance sheet. The new occupant does the opposite; he/she hopes to start with a clean slate. Normally, a change in chairperson leads to an increase in NPAs.

So, it is not just the chairperson of the bank who is responsible for NPAs; it is also the promoters with political connections, and the politicians, who have a huge say in the functioning of most banks, including the private ones. The RBI too with its hands-off approach, which cannot work without adequate regulation and monitoring, has to share the blame. Willful defaulters are a small part of the problem; lack of will and faulty regulations constitute the remaining portion. 

Yet ad hocism still rules the roost in the selection process, and most public sector bank chiefs have a short tenure of two years or a little more. This means many of them spend the first few quarters cleaning up the balance sheet to prove that their predecessor was not a prudent banker - but as their retirement approaches, they fall into the same trap and stop declaring bad assets to show better profits.

Thursday, September 05, 2013

Moody Downgrade Bank's Rating

Moody’s downgrades subdebt, junior subdebt ratings of 11 Indian banks--Business Line 05.09.13

Global ratings agency Moody’s Investors Service has downgraded the subordinated debt (subdebt) and junior subordinated debt ratings of 11 Indian banks.
“Moody’s removed one to two notches of the two to three notches systemic support uplift previously incorporated in the public sector banks’ subdebt and junior subdebt ratings, concluding a review started on June 3, 2013,” Moody’s said in a statement.
The 11 banks are State Bank of India, Bank of 
Baroda, Bank of India, Canara Bank, IDBI Bank, 
Indian Overseas Bank, Syndicate Bank, Union 
Bank of India and top three private banks ICICI 
Bank, HDFC Bank and Axis Bank.
Creditor 'bail-in'
The statement said that Moody’s downgrade reflects the increasing international trend of imposing losses on the holders of subdebt securities (creditor “bail-in’’) as a pre-condition for distressed banks to receive government support.
As a consequence, Moody’s assumes that Indian government support is less likely to be forthcoming for the holders of such securities.
“The global financial crisis has demonstrated that support can be provided selectively, with the costs being shared with subordinated creditors of a bank, without triggering any contagion, as it was previously feared,’’ Gene Fang, Vice-President at Moody’s, said.
Moody's analysis observes that India has a modern and progressive approach to bank regulation. There is no explicit legal power allowing Indian regulators to selectively impose losses on the subdebt holders outside of a liquidation process.
However, as a member of the G20 and Financial Stability Board (FSB), India could move towards adopting a bank resolution framework which imposes losses on subordinated debt holders.
On balance, Moody’s assumes that Indian government support will be less likely in the future. “Nevertheless, we believe for public sector banks a high probability of support is still justified, resulting in a one notch subdebt rating uplift,’’ it said.