Banking
Will RBI’s new framework help banks struggling with bad loans?
The Reserve Bank of India's (RBI) updated "prompt corrective action" (PCA) framework could suggest a greater willingness to take regulatory action to address problems at struggling banks. However, according to a ratings agency, its implementation is likely to be effective only if it is matched by credible plans to address the significant asset quality issues and capital shortages of banks.
 
In a report, Fitch Ratings says, "The RBI primarily limited itself to restricting bank lending under the previous PCA framework. The scope for possible regulatory actions has been broadened under the amended framework, but it remains uncertain to what extent the RBI will use the tools it has just made available." 
 
"Moreover, the RBI will not be able to address problems in the banking sector on its own. Significant efforts to resolve bad loans, for example, would leave banks in need of recapitalisation, given that haircuts and increased provisions would be required. State banks are generally in a poor position to raise new capital, which makes them largely reliant on the government for recapitalisation," the ratings agency added.
 
The RBI has tightened the thresholds - for capital ratios, non-performing loans (NPLs), profitability and leverage - at which banks enter the PCA framework. Fitch says this appears to be an acknowledgement of the significant asset quality stress in the system and that more banks are in need of regulatory intervention. 
 
PCA was previously viewed as an extraordinary step, which the RBI urged banks to make great efforts to avoid. That now looks likely to change. More than half of state-owned banks would breach at least one of the new thresholds, mainly owing to high NPLs, based on their latest financial reports. The new PCA framework will be invoked on the basis of the banks' FY16-17 financials, which they are still reporting.
 
The RBI has also given itself greater discretion in terms of the measures it can use to intervene in banks once they fall under the PCA framework, which suggests it has recognised a need to take corrective action at an earlier stage when banks run into difficulties. 
 
The previous PCA, in contrast, explicitly reserved the most interventionist actions for banks that had breached more extreme thresholds. It is possible that intervention could involve forcing banks to conserve capital, if other actions do not address problems. The risk of non-performance on bank capital instruments may therefore have risen.
 
According to Fitch Ratings, the actual impact of the new PCA rules will depend on how the RBI uses them. "Two circulars released on Tuesday, which pressure banks to make provisions above the regulatory minimum and require further disclosures on NPLs, point to the RBI's seriousness. These circulars might weigh on bank earnings in the next round of reports. Should the additional disclosures reveal weaknesses that are greater than expected there could be further pressure on the banks' Viability Ratings," it added. 
 
The ratings agency feels that RBI may use the PCA framework to identify weak banks as candidates for mergers. It says, "State Bank of India (SBI) took over five smaller lenders earlier this month, and further consolidation could be part of the overall strategy to clean up the banking system. However, mergers would also require the support of the government."
 

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COMMENTS

B. Yerram Raju

4 days ago

I fully agree with Dr T.V. Gopalakrishnan and Mr K.V.Rao on the Moneylife;s informative blog. Solution should be sought where the problem existed. By threats that are too well known, will the RBI be able to impose lenders' discipline? It should ask the RBI representatives on Boards to take the bull by the horn. RBI should inquire from its own executives sitting on the Boards the reasons for accumulation of NPLs in the non-priority sector and infrastructure sector. Did the Banks do the due diligence of all the directors/partners of the companies they lent for, periodically and called for change of errant directors of such companies? When are the banks noticing the bulging up of NPAs and what action at what point of time has been taken? Has the Bank Board been kept informed of such actions periodically through a note? If the industrial environment due to either domestic or international market failures is vitiated leading to company's failure, whether the concerned banks have taken to systemic corrections suggested by the RBI through various circulars? It is time that the RBI becomes more mundane and cause rectification and not get contented with issuing master directions that are akin to drops of rain on a walking elephant.

Gopalakrishnan T V

7 days ago

The need to give a kick start to the economy by making the PSBs healthy and highly professional in their very business of raising deposits and lending money is paramount and very urgent and any delay in reviving the banks can badly affect their very survival in business leave alone supporting the economy which is otherwise stagnating for want of timely and cheap credit. The banks have to shift all their very badly identified and un provided for NPAs as on 31st March 2017 to an escrow account to be maintained by the Government and they need to be very intensively followed up with all legal and other measures to recover the dues at the earliest..

Since the PSBs are becoming weak by day due to mismanagement of advances portfolio resulting in the accumulation of non performing advances and stoppage of of expansion of fresh credit for productive purposes, there is an equally and urgent need to make them highly professional and commercial in their management of credit and risk to ensure that the fresh formation of NPAs does not occur any more and if at all they recur, they need to be liquidated and taken care of by banks and bad borrowers themselves through some self correcting mechanism in place. A small levy of penalty based on banks and borrowers’ conduct of loan accounts will do the trick. It is rather unfortunate to observe that though the cost of funds for banks has come down considerably thanks to sudden spurt in deposits at low interest rates after demonetization of high denomination notes, banks are finding it extremely difficult to cut the lending rates and find avenues of credit expansion thereby creating a serious uneconomical mismatch of assets and liabilities. The solution for slow pick up of credit lies in changing the business model and to realign the assets side removing the NPAs from the balance sheets and build up of new short term credit and less of infrastructure loans. Long term bonds which can take care of infrastructure finance can also rescue both the banks and the Government to find resources. If these bonds are made tax free, public subscription is also guaranteed without any limit.

What is needed now is that the Government should keep away from banks, make the Banks Boards Bureau more accountable in its expected role of individual bank’s performance, make the RBI to intensify its regulation and supervision over formation of bad debts and improve the quality of loan assets. After all what the economy needs is improvement in its overall performance in terms of better macro economic fundamentals like investment, production, consumption savings, employment and equitable distribution of wealth and for that a strong banking system is sine qua non.

Simple Indian

1 week ago

It is high time PSU Banks are given operational autonomy from the Finance Ministry, so that Bank Managements can decide on policies and service levels at their level. Much of the woes of PSU Banks is due to interference by Finance Ministry and others in the top echelons of Govt. It is common knowledge that businessmen like Vijay Mallya manage to get huge loans without adequate collateral, due to phone calls Banks get from FM/Ministries. Such practices must stop and Banks should be free to gauge credit-worthiness of businessmen just as they do for common loan applicants. Bank lending has become a joke in India, as a common citizen will be hounded by goons 'engaged' by Banks to recover even a mere Rs 50k/1L loan, but the likes of Vijay Mallya can swallow thousands of crores from the Banks and still go abroad and continue frolicking at Banks' expense. As with most ills in India, at the basic level, it's political interference in functioning of institutions which must stop. Unless this happens no PCA or RBI guideline to Banks on lending will be of any use. Moreover, what about service levels to common Banking customers, who have been asked by some Banks like SBI to maintain a much higher MAB than they did before ? The SBI Chairperson publicly stated that the Bank needs funds to maintain Jan Dhan Yojana A/cs initiated by the Govt of India. In that case, why shouldn't the Govt forego its meatly dividends from PSU Banks and let them use that money to maintain JDY A/cs ? Why should common Bank customers, who have nothing to do with JDY nor are going to get better services post increase in MAB 'pay' for JDY A/c maintenance ? Unless such unethical practices are stopped, many people will avoid the Banking system and depend on cash economy, which is far more equitable and fair.

Ramesh Poapt

1 week ago

half hearted knock!?

Deepak Narain

1 week ago

Responsibility should be fixed on those who authorized sanction of bad loans. The assets of defaulters should be seized. SBI is already a big loser and needs to be freed from political interference and be placed under the charge of the likes of KV Kamath, Deepak Parekh, N R Narayanamurthy, etc.

K V RAO

1 week ago

Merger with so called strong banks will not solvent he problem."Strong banks" in the context of state-owned banks is an euphesim. None of the SoBs is strong.Ask any of the really strong bank in private sector (read HDFCBank)about its willingness to take over.The answer is quite obvious with a big NO.

REPLY

K V RAO

In Reply to K V RAO 1 week ago

I fully agree with K V Rao's views. Finance players should be handled with gloves.S MOHAN

SRINIVAS SHENOY

1 week ago

The banking staff should be given recovery targets to be achieved, preferably in their Annual Appraisal Reports. Their performance should be considered on their recovery assistance, which at present is the need of the hour.

SuchindranathAiyerS

1 week ago


Bankable Bad Loans!

The More things appear to change, the more they are the same.

India is all about appearance, never about substance. Like RD Parades and Fleet Reviews rather than putting an end to threats to security like the Constitutionally fomented and pervasive incompetence and corruption that has ensured that India cannot even manufacture a reliable and effective rifle or pistol let alone combat aircraft. India is about funeral parades rather than protecting soldiers lives.

Why would RBI be different? How will amalgamations address the source of the problems? Will it address staff competence and integrity that has been severely corroded by unionism, reservations and seventy years of falling National standards? Will it address, or in any way reverse, the Nationalization of Banks in 1969 which turned Banks into Bharath Sarkar ki Sampathi to be plundered by the Politician-Bureaucrat-Police-Judge-Preferred Religions, Chosen Castes, Select Tribes and the rest of the Constitutional Kleptocracy and their cronies for their exclusive privilege, pomp, pleasure, pelf, and perversions?

What are the sources of the problems? Will the RBI dare confess to their own collusion by way of ineffective and inadequate inspections, guidelines and follow through as well as meek surrender to Government's populist, anti- National, uneconomical and non bankable policies since 1949? Will the successive Finance Ministers. including the current President of India, come clean on the methodology, and processes by which Bank Chairmen and Boards of Directors were selected and appointed since 1969?

plus ça change, plus c'est la même chose

REPLY

K V RAO

In Reply to SuchindranathAiyerS 1 week ago

I strongly agree with S Aiyer's views.Indira Gandhi deserves all the condemnation for transferring banks to the state sector in July 1969 and April 1980.Nothing can be done now except privatisation.As S Aiyer has stated trade unionism will not allow that to happen.No responsibility for all the layers of management &less work with more pay for workmen staff. All are enjoying except the customers.

Nifty, Sensex may rally further - Thursday closing report
We have mentioned in Wednesday’s closing report that Nifty, Sensex may rally. The major indices of the Indian stock market ended with gains, with Nifty breaking the five day streak. The trends of the major indices in the course of Thursday’s trading are given in the table below:
 
 
Indian Equity markets settled with modest gains after gyrating in a small range in the positive terrain throughout the day as largely positive global cues supported gains. The S&P BSE Sensex, rose 85.82 points or 0.29% to settle at 29,422.39. The Nifty 50 index rose 32.90 points or 0.36% to settle at 9,136.40. The Sensex gained for the second day in a row while Nifty snapped a five-day losing streak today. The Sensex hit its highest closing level in one-week.
 
Realty, IT, bank, capital goods and FMCG stocks hogged limelight in today's trade. HDFC was the leading contributor to Sensex' gains, up nearly 2% followed by Infosys, TCS, Asian Paints, Maruti and Lupin. Adani Ports retained its uptrend, rising 1.8%.
 
ICICI Bank and Axis Bank shares prices fell 2-3% after bad asset quality performance reported by Yes Bank. HDFC Bank gained 1% ahead of its earnings on Friday. The country's second largest private sector lender is expected to report profit growth below 20% for the second consecutive quarter in Q4FY17.
 
IndusInd Bank gained 0.3% as majority of brokerage houses retained their bullish stance on IndusInd Bank, citing strong performance excluding one-off provisions in the quarter ended March 2017. Shalimar Paints ended the day with over 5% gains after investor Porinju Veliyath of Equity Intelligence bought some shares.
 
Yes Bank dropped 3.76% as the bank's bad loans rose in Q4. Yes Bank's net profit rose 30.2% to Rs 914.10 crore on 29.44% rise in total income to Rs 5606.38 crore in Q4 March 2017 over Q4 March 2016. The bank announced Q4 results after market hours yesterday, 19 April 2017. The bank's gross non-performing assets (NPAs) rose to Rs 2018.56 crore as on 31 March 2017 as against Rs 1005.85 crore as on 30 December 2016 and Rs 748.98 crore as on 31 March 2016.
 
National Aluminium Company (Nalco) rose 0.74% to Rs 68.25 as the government's two-day offer for sale for offloading a total of 10% stake in the company began yesterday, 19 April 2017. The Government of India held 74.58% stake in Nalco as per the shareholding pattern as on 31 March 2017. The floor price for the offer for sale (OFS) was fixed at Rs 67 per share. Retail investors will be allocated offer shares at a discount of 5% to the cut off price.
 
Domestic bourses made a positive start to the session on higher Asian stocks. After trading with small gains in early trade, key indices steadily added on to the gains and hit fresh high in early afternoon trade. Indices hovered within a narrow range in positive terrain later during the session amid firm European cues.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
Overseas, most European stocks rose as strong results from Unilever lifted bluechip consumers staples stocks and helped offset weakness in the energy sector. Construction of buildings and infrastructure across the eurozone rose at the fastest pace in almost five years during February, reflecting a period of unusually mild weather and indicating that businesses and households may be more willing to invest after years of caution. Back home, the market breadth was positive today; On BSE there were 1845 advances, 1029 decline and 161 unchanged. On NSE, there were 1126 advances, 536 declines and 75 unchanged. The closing values of the major Asian indices are given in the table below:
 
 

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Justice Patel grants 'reasonable' costs of Rs184 because it was 18th April!
Yet another order, by Justice Gautam Patel, arguably one of the most watched judges of the Bombay High Court is creating ripples among the legal community and others. The matter was simple. An arbitration was sought to be withdrawn. The petitioner’s advocate, Cyrus Ardeshir sought permission to withdraw and file fresh proceedings. The respondent’s advocate ‘vigorously’ opposed it. The judge decided the matter by allowing the arbitration petition to be withdrawn as dismissed with liberty to file a fresh petition for the same reliefs and on the same cause of action. 
 
The respondent’s lawyer pressed for costs. The Judge agreed. But, as his order says, “Costs must, however, be reasonable”. So here’s what he does. The order says, "Since today is 18th April and having due regard to the merits of the opposition, it is reasonable to award costs in the sum of Rs184. These are payable by account payee cheque only by the Advocates for the Petitioners to the Advocates for the Respondents. The costs are to be paid within six months from today and are subject to deduction of tax at source, if applicable”. 
 
Justice Patel’s order, in his inimitable droll style, which describes the entire sequence of events, makes for interesting reading. His order and the payment of Rs184 is however, a stinging indictment of needless dramatics in the courtroom on a simple matter that ought to have been acceded to and done without wasting the Court’s time with objections. Justice Patel’s track-record indicates that he reserves his most sarcastic observations and innovative orders for cases that seem to be an unnecessary waste of precious judicial time. In this case, the order is categorical that the cost will be paid by one ‘advocate’ to the other — not the client. In other cases, Justice Patel has strongly backed advocates who have done their duty as responsible officers of the court. 
 
In this case, Cyrus Ardeshir, representing the petitioners, KS Chamankar Enterprises tried to withdraw an arbitration petition. "The reason he gives, though unsupported by an Affidavit, is that after the filing of this Petition, the Petitioner found a large volume of material that had earlier escaped its attention. Mr Ardeshir candidly states that there was an action instituted by the Enforcement Directorate and his client’ records were in considerable disarray. The Petition would, in his submission, either require, a substantial amendment, with possible inconvenience to all sides, not least of all the Court, or leave to withdraw with liberty to file a fresh petition with all the material. He says that it is for these reasons alone that the Petitioners have been advised to seek a withdrawal with liberty to file a fresh proceeding," the HC stated.
 
Justice Patel says to his 'very great surprise', he found the application (by petitioners) was vigorously opposed by Ankit Lohia, the Counsel for Prime Builders. Mr Lohia stated that no such liberty should be granted and no notice was given to them that KS Chamankar would apply for such liberty and no ground has been made out under Order 23 Rule 1(3)(a) or (b) for granting the Petitioner any such leave.
 
The Court, however found the submission for sub-clause (a) as misconceived and petition was being withdrawn for a correct reason without causing any prejudice to Prime Builders. Justice Patel said, "There is no question of a formal defect. What the argument overlooks almost entirely is the wording of sub-clause (b). The sufficiency of ground in said Clause (b) is a matter between the Petitioner and the Court. What Mr Ardeshir says is correct. It is also necessary to prevent multiple proceedings: there would then have to be an application for amendment, which might or might not be contested, followed by further affidavits and so on, thus only resulting in greater delay. There is no possible prejudice to the Respondents since there is no ad-interim order nor does Mr Ardeshir seek any such order today. Had there been any such order, this would have been a factor in Mr Lohia’s favour. It is also not argued that the liberty sought should be refused on account of anything stated in the Affidavits in Reply."
 
"In any case, the Respondents’ interests can be sufficiently protected by leaving all contentions open. Mr Ardeshir does not suggest that any arguments from the Respondents should be foreclosed, and quite rightly so. The opposition is without substance," Justice Patel says.
 
While dismissing the arbitration petition as withdrawn, the HC allowed KS Chamankar liberty to file a fresh petition for the same reliefs and on the same cause of action. The Court said, "All rights and contentions are specifically kept open on both sides."

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COMMENTS

Bapoo Malcolm

1 week ago

This case is one that shows that courts are primarily temples of truth; before justice. All evidence must be allowed to be on the table. Even if found later; provided due diligence had not discovered it earlier. This does not include purposeful concealment.

Then there is the penchant amongst lawyers to keep on asking for "Costs". To cut matters short, amounts can be doled out. Of course, the receiver can always appeal the order. Then, ask the client to spend more; not necessarily to recover the spend.

All told, it can always be considered a moral victory; all be it a Pyrrhic one.

Bapoo Malcolm

1 week ago

Want to read more on frivolous suits? Please keep your eyes peeled on Moneylife's next issues. There is an article tentatively titled, " WANT TO SPEED UP THE COURTS? HERE’S ONE WAY".

The Dhoni story in today's paper is another example. Everybody and his aunty is a "religious" person. One whose 'sensibilities' are disturbed; without his having any sense.

There is more to come; by way of "religious" cases. We will spend more time and money on cows and their food, while millions of children are dying due to lack of nutrition.

And then, there's always Aarey to grab in the name of protection. All done legally, of course. Through meaningless suits with hidden agendas.

Only some courts are willing to call a spade a shovel. Let's pray for more.

Bapoo Malcolm

1 week ago

That's a lot more than what I had got, Rs. 30/- only, for a stupid matter filed against me. And the advocate took it, saying it was his!

Simple Indian

1 week ago

Our legal system is notorious for prolonged delays, with civil cases spanning across generations of accused/complainants. Hence, to reduce the burden on Courts, the laws should be amended to impose heavy fine &/ prison term to complainants / accused (and perhaps their lawyers too) for filing frivolous cases and wasting the time of the Court. Just as a stringent punishment of imprisonment deters people from indulging in contempt of court, wasting its time should also be punishable.

Ramesh Bajaj

1 week ago

I have come to the conclusion that going to Court is for the extremely well heeled.

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