Chaudhuri says banks? NPA worries largely overplayed calls for phasing out CRR
collected from BUSINESS STANDARDhttp://business-standard.com/india/news/sbi-chief-wants-npa-rules-tweaked/484223/&&#cs
State Bank of India (SBI) chairman has called for a change in non-performing assets’ (NPAs) norms, and reiterated the need for ending the practice of banks keeping reserves with the Reserve Bank of India (RBI).
“There is a need to change the norms relating to NPAs. We should not see a ghost in everything,” said Pratip Chaudhuri.
“For instance, a company has taken a two-year loan to install a machinery. If it fails to repay in two years, just because the repayment has been stretched beyond its original schedule, we should not consider it as an NPA. Nowhere in the world such a yardstick is applied. We need to see if the machinery equipment is sound and capable of generating good output.” The bank chief made these comments to reporters on the sidelines of a banking seminar organised by the Federation of Indian Chambers of Commerce and Industry.
The country’s largest commercial bank saw a surge in bad loans in the first three months of this financial year. The bank added close to Rs 7,500 crore of bad loans on a gross basis during the quarter, prompting investors to sell its shares. Its gross NPA ratio was at 4.99 per cent, while net NPA ratio was at 2.22 per cent at the end of June 2012.
Chaudhuri also said concerns over SBI’s credit quality was “largely overplayed” and the bank will see an improvement in the health of its assets from the July-September quarter. “Our quarterly profit was more than most public sector enterprises’ but our stock got a huge battering because of our NPA. We have done an analysis of the situation. NPAs are largely in the mid-corporate and SME sectors. But with a little consideration, a little understanding and stretching the repayment period, most of these accounts can be upgraded,” Chaudhuri said.
The chairman of the banking behemoth said there would soon be an improvement in the NPA numbers. “We accept the reality, but still, I think, NPA concerns are largely overplayed. In the next two to three quarters, our NPA management will be much better. Current trends do not indicate any increase in our NPAs. In fact, there could be a contraction in our NPAs in this quarter,” he added.
The bank has asked some of its borrowers to sell non-core assets to improve cash flow. If a company is short of capital, SBI is ensuring that the firm takes steps to strengthen its capital base. “If the company is asset-rich but cash-poor, we are positioning more loans to them,” said Chaudhuri.
SBI has also appointed 20 senior executives from various public sector enterprises to review the technical aspects of industrial projects before sanctioning fresh loans against them.
No need for CRR
Chaudhuri said RBI must phase out cash reserve ratio (CRR) as it is increasing banks’ cost of funds and preventing lenders from reducing interest rates to revive the slow economic growth. He said the statutory liquidity ratio (SLR) was adequate to ensure solvency and liquidity reserve of banks.
“There are compelling reasons to have a re-look at the CRR. As the RBI does not pay interest on CRR, this acts as a tax on the banking system, placing banks at a competitive disadvantage vis-a-vis NBFCs and mutual funds. As a result, resources are being transferred from the tightly regulated banking sector to the more lightly regulated financial institutions,” Chaudhuri said.
CRR, which is at 4.75 per cent, is the portion of net demand and time liabilities that banks have to keep with RBI.
The lenders do not earn any interest on this reserve.
“The rationale for a CRR, strong though it was at one time, has, however, lost much of its validity.... Additional pre-emption towards CRR is largely superfluous. The original logic of the CRR has been diluted over time and no longer applies,” he said. If CRR is not abolished, he said, RBI must pay an interest on these funds.
Also, CRR must be made mandatory for insurance companies and debt mutual funds to ensure a level playing field. “RBI needs to consider paying interest on the impounded funds at a rate corresponding at least to the savings bank rate if not the repo rate or the reverse repo rate. Our contention is that CRR be phased out as this would allow banks to lower lending rates, helping industry.”
Around Rs 3 lakh crore bank funds are parked as CRR, more than the aggregate loans of large lenders such as ICICI Bank and Punjab National Bank, Chaudhuri added.
MY COMMENTS
SBI Wants Easier NPA Norms, NO CRR OR Interest on CRR, No SLR to Increase Profit ,More Lending AND Comfortable Survival --More Free Fund More Loot and More Freedom
SBI is silent how such large volume of NPA Accumulated?
Who are responsible for concealment of NPA, for making lesser provisions and for inflating profit in the past decade or two?
Have they taken any action against erring top officials whose dirty policy for making their Balance Sheet attractive was in the same manner in which companies like Satyam Computers did?
Have they taken any action against bank officials who were involved in sanction of loans to bad business men and due to whose malicious intention the loan became bad and SBI suffered loss?
Have they punished any DGM or AGM or GM or CMD or ED for any of bad loan accounts because high values of loans are sanctioned only by top officials thought process at branch?
Ministry of Finance and Government of India acted against Satyam Computers to save Investors, but silent on Bankers who defrauded investors by their immoral and illegal acts?
After all , these state run banks were showing better results and serving poor customers in better and friendly way before 1991 and say after and after nationalization of banks when SLR, CRR , Bank Rate were more tougher.
IF CRR is reduced to zero and if severe liquidity crisis arises in near future due to heavy rush from depositors demanding their cash back as sometime back had happened with ICICI bank, What banks will do to safeguard them?
What will happen if even after reduction or release of entire CRR and SLR, volume of NPA goes unabated adversely affecting liquidity and rolling of fund?
Who will save depositors and how will they be safe?
If borrowers do not repay their dues in time , how banks will lend in future ?
Will they demand fresh capital infusion from government of India as hitherto they have been doing to fulfill Basle norms?
And when government is also suffering from fiscal crisis, how GOI will provide capital?
After all CRR and SLR are two Safety Valves built in the system by prudent bankers to protect banks from all types of adversities. Safety Valve in pressure cooker provide safety to cook when he or she forgets taking due care before cooking through pressure cooker.
It is but natural that due to natural calamities or due to adverse business environment or due to global reasons banks have to face huge cash demand from depositors and liquidity crunch from time to time .
If CRR and SLR is abolished or reduced from present level, these banks will go fail and depositors will face the consequences arising out of faulty credit decisions of bank officials.
Everywhere in the world there is system of having safety valve like CRR and SLR to protect the interest of depositors and investors. I am unable to understand why bankers have gone insane and demanding removal of safety valve which is meant for providing safety to them also in addition to investors and depositors.
Indian has also experienced worst situation arising out of frequent cases of bankruptcy of private banks before 1969 when private banks, chit funds, Non Banking companies used to collect deposits from public offering attractive interest rate and then all of a sudden declare closure of banks. Even in recent past , we have experienced several cases of closure of many cooperative banks, scheduled banks , chit funds and NBCC because of their ill motivated actions and because of non-existence of or failed safety vale .
Why SBI chairman is bent upon diluting age old norms of CRR and SLR. Rather it is also one of many reasons that state run banks crossed the prudent limit of lending i.e. upto 60 percent of deposits they have. It is they who by making bad lending blocked their good money with bad business houses and adversely affected their liquidity.
If CRR is reduced to ZERO and SLR is also reduced, what will happen and what SBI Chairman will do if the situation of Bad assets further deteriorates, ?
How long they will continue to beg Capital infusion form Government and seek fresh equity from investors or survive with seek dilution government stake in their equity?
Further it is more astonishing that the Ministry of Fiance has recommended payment of 7% interest on CRR fund but the same MOF did not ask banks to pay 10% on all government fund parked in their bank.
To add fuel to fire Government has allowed SBI to operate in Pakistan and ignored the risk airisng out of huge stock of bad assets in the books of SBI .
It is pertinent to mention here that SBI Chairman Mr. Pratik Choudhury has been begging since long release of interest free CRR fund or for payment of interest on fund parked with RBI in compliance of CRR fixed by RBI to increase profitability of the bank. It is simply because he has understood the bitter truth of his bank, he better knows the voluminous bad assets hidden in the system and still considered as standard assets either by tampering with system or by restructuring or by ever greening of loan processes.
I would further like to add here that lacs of crores of rupees out of government fund central or state meant for various developmental projects have been parked mostly in branches of SBI.
If state and central government and all public sector undertakings demands at least 10 percent interest on deposits i.e. equal to rate their base rate fixed for lending ,made by the government in these banks, there is no doubt to me that their entire profit will vanish and most of the banks will book huge loss.
There is no doubt that the crisis which will erupt after demands of interest by state and central government on the fund kept in SBI as interest free deposit will be more dangerous and disastrous than the crisis which had engulfed many banks in USA and UK in the year 2008.
SBI Chairman says that if CRR is abolished , banks will get fund of Rs.300000/ crores and then they can reduce interest rate and increase lending. SBI should imagine a situation when all departments of state government and central government, all punchayats and mukhiyas and all public sector undertakings either remove their fund from SBI and other banks and decide to park the same in treasury?
What will happen if GOI advised them to pay interest at 10% on all funds kept with these banks?
SBI demanding interest on CRR should therefore be ready to pay interest on government fund.
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Asset quality of banks emerges as serious concern, more so for PSBs
The Reserve Bank of India (RBI) has flagged off its growing concern over the deterioriation in asset quality of banks, with public sector banks (PSBs) showing particularly obvious signs of stress on this account. The results of the listed banks in the first quarter of FY13 also corroborate this view, and analysts say the stress levels are likely to continue and there is no relief in sight.
In its annual report for 2011-12 released Thursday evening, RBI has pointedly said that the decline in asset quality has “emerged as a concern within and outside the Reserve Bank during 2011-12.” India, the central bank says, was not an exception to the general trend of an economic downturn impacting the quality of assets.
“Asset quality deterioration during 2011-12 was particularly significant in the case of public sector banks. The gross Nonperforming Assets (NPAs) of the public sector banks increased to 3.2 per cent of gross advances at the end of 2011-12 from 2.3 per cent at the end of 2010-11. In net terms, their ratio went up to 1.5 percent from 1.0 per cent over the same period.”
RBI has pointedly said that the decline in asset quality has “emerged as a concern within and outside the Reserve Bank during 2011-12.” Reuters
The central bank says while the NPA levels are still low by historical trends or cross-country comparison, the restructured standard advances in the PSBs increased to 5.7 percent of gross advances by at the end of 2011-12 from 4.2 percent a year ago.
Pointing to the slippage ratio increasing and recovery slowing down, RBI says this reflected
the stress arising in sectors like aviation and power, which are beset with deep problems. The overall deterioration in macro conditions put added pressures on asset quality. While some of these changes reflect the NPA cycle that generally tracks economic cycle, the sector-specific issues that include management and industrial relation issues need to be resolved, RBI says.
There has also been a significant rise in restructuring of loans during the year. Several firms opted for corporate debt restructuring. Restructuring increased substantially during Q4 of 2011-12, taking the restructured loans at the end of 2011-12 to about 5 percent of the loan book of the scheduled commercial banks (SCBs), up from 3.9 percent a year ago. Aviation, state electricity boards (SEBs), textiles, telecom, shipping, power and steel were amongst the sectors that reported stress contributing to the restructuring, according to RBI.
However, in what can be seen as somewhat of a relief, the central bank does stress that the increasing NPAs and loan recasts are not systemic issues. While some strength of the banks’ balance sheets may have eroded, these, the central bank notes, have been in line with the movement in business cycles that have occurred earlier.
“The balance sheets are far from becoming fragile. The CRAR of the SCBs at the end of 2011-12 was 14.1 per cent, way above the prescribed 9 per cent norms and only marginally less than the 14.2 a year ago. Core CRAR, however, increased to 10.3 per cent at the end of 2011-12 from 10.0 per cent in 2010-11.”
RBI top brass has been meeting the managements of the banks to understand the problems of stressed assets and urge them to address the problem for some time now. A series of stress tests carried out to study the impact of various adverse macro-financial shocks on the health of banks showed that the banking system remained resilient even under stress scenarios.
An assessment of the stability of the banking system conducted through a series of banking stability measures did indicate that distress dependencies amongst banks had increased in recent years but remained well below the levels observed during the global financial crisis in 2008-09.
Keeping in view the increasing incidence of restructuring and for reviewing the guidelines in the light of experience gained, RBI had constituted a working group which recommended doing away with regulatory forbearance regarding asset classification, provisioning and capital adequacy on restructuring of loans and advances gradually over the two-year period.
It has recommended increasing the provisioning requirement on stock of restructured loans from existing 2 percent to 5 percent in a phased manner over the two-year period along with the 5 per cent provisioning requirements on all newly restructured loans.
It has also suggested increase in promoters’ contribution to at least 15 percent of the diminution in fair value of the restructured account or 2 percent of the restructured debt,whichever is higher.
Says RBI: “A principle of higher amount of promoters’ sacrifice in case of restructuring of large exposures under CDR mechanism may bring about an incentive-compatible mechanism for lending discipline.”
In a warning to banks, the RBI says while the deterioration in asset quality during 2011-12 has been partly due to cyclical downturn, inadequate credit writing standards as well as weak credit administration has also played a role. The banks need to upgrade their systems to prevent slippages and improve the post-sanction recovery process, the central bank says.
In a report analysing the first quarter results of banks, broking house Motilal Oswal says the results throw up a negative surprise on margins where all PSBs surprised negatively, despite benefit of CRR reduction and capital raising, due to higher stress on asset quality.
Among the key highlights for the results of PSBs, the broking house lists that margins fell quarter-on-quarter, led by sharp increase in cost of deposits and higher slippages. The report says there is no relief on asset quality with slippages remaining at an elevated level and no significant improvement on recoveries and up-gradation. This apart, moderation in business growth and a decline in current account savings account (CASA) ratio continues. While the quarter saw lower restructuring, the pipeline remains high.
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