Monday, June 8, 2015

Modi Government On Bad Debts And NPA

Bad debts or stressed assets or None Performing Assets , all are more or less same and they are all responsible for continuous downfall in profit and shrinkage in profitability , erosion in capital and they all add injury to sickness of banks. There are many internal reasons which cause creation and accumulation of bad assets. There are external reasons like political exploitation and  shortcomings of remedial measures through  legal recourse and administrative hurdles in smooth and timely recovery of dues from defaulters. There may be adverse affects on repayment culture due to high interest rate or loan waiver culture announced by politicians for vote purposes. There may be many more other reasons in the eyes of regulators or from the point of view of Chiefs of banks.

Whatsoever may be the reason behind growing sickness in PSBs, it is dead sure that health of public sector banks has been consistently deteriorating despite claim of Government and RBI that health of bank is improving or likely to improve from next quarter.

Manmohan Singh, former Prime Minister used to say every now and then that price rise will be contained in forthcoming quarters or government banks will be strengthened by infusing additional capital to improve the health of public sector banks. But he undoubtedly failed to do any thing good for betterment of PSBs and to ensure that further deterioration does not take place. He along with all his Finance Ministers got success in passing his tenure  as Prime Minister of India. PSBs continued to face one after other impediments in containing sickness due to stressed assets.

Deterioration may stop only if banks are able to stop at least addition of fresh slippages and are able to improve the quality of lending and  are able to alter and modify the dirty intention of politicians behind change in policies  and quality of human resource .

On the one hand present government is talking of cleanliness in bank , talking of full autonomy and absolute operational freedom to banks and promising non interference in internal affairs of public banks, on the other they are fuelling  the fire by imposing one after other non-banking workloads to already declared sick banks and thus contributing fresh damage to asset quality. Banks may earn few crores in insurance activities or may earn blessings of Modi by devoting full energy in execution of social welfare programmes of the government, but they are likely to loss many more times of income by causing standard assets to turn substandard assts.

I however feel pleasure that at least Reserve Bank of India and present government  has at least publicly understood the gravity of  risk due to ever rising bad debts in bank's books and risk inherent in hiding bad debts. They have understood well the bad impact of culture of window dressing in business, evergreening of loans to contain slippages to NPA, restructuring of bad loans to hide bad loans , the culture of loan waiver schemes and finally the bad ways and means used to achieve imposed target by clever bankers. 

Government of India and RBI has taken some steps during last one year to improve health of ailing banks. Capital infusion has been linked to performance of banks. Provisioning on restructured loans has been increased, Process of recruitment of top officials like ED and CMD is getting new direction to stop corruption. All these measure may have short term benefits , but they have potential to add new wounds on sick banks. For example if weak banks are not given help of capital infusion , they will have to keep their interest rate high and they will lose business in the hands of stronger banks. Weak bank will thus grow weakness and face the risk of closure due to Basle norms. Similarly delay in posting of ED and CMD of banks may cause addition of fresh problems. Posting of officers from private banks as Head of PSBs may have greater repercussion down the line in a bank.

I welcome new steps taken by RBI to contain bad debts and to empower banks to acquire 51 % equity of chronic defaulters. It will have a deterrent effect on defaulting companies. It will have a  positive impact on companies which are doing well and which are loyal borrowers of banks. But mere becoming owner of 51% equity of a defaulting company , banks will not be able to recover the bad money to a great extent. It is to be kept in mind that Ratio of capital in books of a company is microscopically small. A company with equity of Rs.10 crore only can get the loan of hundreds and thousands of crore of rupees from banks. Similarly premium on equity in stock market will also extinguish as soon as the news of taking over of 50% stake by lending bank goes into market. Further , as soon as bank become owner of  50% equity of a company , it is duty bound to take care of company's health, formulate plan for growth  , stop leakage of income and improve operational capacity which banks will not be able to dream of in near future.

I am however happy that present government is not dead as previous government was dead . Current government under the leadership of Mr. Narendra Modi has done a lot of positive work and actively engaged in doing more and more to improve the intrinsic value of PSBs. Hundreds of projects which were languishing in corridors of government departments in search of statutory clearances or licenses have now got green signal and they can now at least go for erection of plant , start operation or think of expansion of their project. Companies which took loan for setting up a plant were paying interest but not able to their expansion work .Companies will no longer face the risk of escalation in project cost if all departments under GOI start functioning well. I hope Mr. Modi will give a real boost to banks in near future.

Real transformation and real reformation in banks will take place only by striking at the root of Human Resource  in banks, administrative and legal set up. GOI will have to stop promotion, transfers and recruitment based on flattery and bribery. They will have to give value to seniors and respect experienced officers. Motivation in rank and file in banks will only help bank management in containing risk and in curing disease for good and for ever. Banks were better managed during seventies and eighties compared to what they are doing in the name of merit , in the name of reformation and in the name of freedom.

RBI mulling proposal to give lenders 51% equity control in company that fails to repay -
Economic times 8th June 2016
MUMBAI: Banks and the banking regulator are running out of patience as sticky loans soar. Last week, senior officials of Reserve Bank of India and five large lenders met to discuss what could till now be the most dramatic step to deal with truant borrowers. On the anvil is a harsh new rule — christened "strategic debt conversion" — that will automatically give lenders 51% equity control in a company that fails to repay even after its debts are rejigged to give the management a second chance.

Read more at:

Banking on a better tomorrow: Public sector banks scout for a survival kit- Financial Express 8th Jun 2015-

With private sector banks leading in fees, retail loans, savings and current accounts, public sector banks have a tough fight on their hands.

IT may not have sunk in just yet, but state-owned lenders, with all their reach and goodwill, are falling behind their private sector peers. This stark reality is reflected in the numbers for FY15: the combined profits of 13 private sector banks—at Rs 37,361 crore—outstripped the total profits of 25 public sector banks (PSBs) of R36,349 crore, a first time in Indian banking history.

The government, the majority owner of PSBs, is aware of the problem—it acknowledges the variance in performance between public and private lenders. In January, a Gyan Sangam was held in Pune, essentially a brainstorming session where senior bankers confabulated with experts and government officials to come up with a blueprint for a better tomorrow. There was talk of better governance, less interference from the government and longer tenures for bank chiefs. It’s unlikely these will help too much because the damage to the balance sheets is fairly severe.

Banking experts suggest mergers as a way out—they say fewer but stronger and better capitalised banks might work better. However, as Reserve Bank of India (RBI) governor Raghuram Rajan has pointed out, there’s little point in merging two weak banks or even a strong one with a weak one. The government, for its part, isn’t handing out the kind of capital that banks have been looking for; last year it capitalised just nine banks with less than R7,000 crore on the grounds that the remaining banks hadn’t performed in line with the specified benchmarks such as the last three years’ weighted average return on assets (RoA) and return on equity (RoE). Many interpreted this as a nudge towards consolidation: if the weaker banks couldn’t find capital for themselves, they would have to succumb to a merger. The kitty too this year is a very small R7,940 crore and most banks are likely to miss out.

Analysts estimate that PSBs will need some $30 billion of capital in the next five years while private banks will be able to manage with $6 billion. Under the circumstances, experts believe, it might be better if the government gives up its stake; that way there will be less meddling and the markets might be willing to buy in to the PSU bank story. After all, if the private sector banks are able to meet priority sector norms with a much smaller reach, it’s simply because they’re better managed and operate independently.

Many blame the government for the current state of banks’ balance sheets; according to a retired banker who was part of the Gyan Sangam, a fair share of the bad loans that PSBs, have on their books is the result of pressure from government to fund infrastructure projects.

Deutsche Bank believes the market share of private banks could expand to around 30% by 2020 from 20% currently. “Private banks are in a sweet spot. The macro economy is improving, savings are being created and they have invested in the branch network,” analysts at the foreign bank noted, pointing out that the competition is struggling with asset quality issues and lack of capital.

“We expect serious market expansion for the private banks,” the report observed, explaining that although the loan market share for private banks rapidly expanded in the early 2000s it has remained flat over the last 10 years. “While it appears that the overall market share is now stable, it is important to note that private banks have taken a very big lead in the profitable segments—fees, savings and current accounts, retail loans,” the report noted.

Experts say the human resource policies at a PSB are very stringent and rigid. According to Saurabh Tripathi, partner and director at BCG, the average cost per employee of a private sector bank is much lower than that for the public sector bank because the former has the option to negotiate the salaries and pay according to the candidate’s experience and capability.

The problem of human resources at PSBs are linked to the presence of trade unions who have had their way all these years—recently they negotiated a 15% hike for the employees at a cost of R4,732 crore per year. Almost 8-10 lakh bank employees are covered by the wage agreements. Unlike the private banks, PSBs are unable to appraise performances of employees and reward them accordingly. “Even when the bank wanted to transfer an employee, there was pressure to change it,” Deepak Narang, former executive director at United Bank of India, observes. Narang believes that in order to revive the PSBs, all senior executives should understand the credit appraisal mechanism and be bold enough to stand up against errant borrowers and say no when needed.

The unions have staunchly opposed the merger of PSBs. Which is why State Bank of India (SBI) has been able to merge only two of its seven subsidiaries. State Bank of Saurashtra was merged in 2008 and State Bank of Indore in 2010.
Data shows that 5.17% of the total loans disbursed by PSBs have gone bad while the total bad loan ratio of the system, in FY15, stood at 4.45%. “With bank chairmen being ‘incentivised’ to lend and to meet loan targets set by the government, the quality of lending was compromised,” observes a former PSB banker. The focus, clearly, was on growing the balance sheets, not on the quality of the assets.
The interference may have stopped and bankers perhaps are no longer getting calls from the finance ministry. However, the change has come a little too late in the day. The sovereign nature of PSBs will keep them afloat but unless the government is committed to funding them, many will find it hard to raise capital. With private sector banks creeping up on them, PSBs have a tough fight on their hands.

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