Nationalised banks facing tough time’
Andhra Bank (AB) Chairman and Managing Director B.A. Prabhakar opined that the nationalised banks are facing the biggest challenge due to drop in economic growth in the country.
The crisis in manufacturing industry and agriculture sector had severely affected the financial growth of public sector banks, said Mr. Prabhakar and called upon the employees to strive whole-heartedly for bringing the past glory of the Public Sector Units (PSUs) banks.
The bank chief spoke about HR initiatives, Non-Performing Assets (NPA), fall in banking business, Financial Inclusion Scheme, core banking, increasing frauds, promotions and other issues in the All India Andhra Bank Award Employees’ Union (AIABAEU) Sixth National Conference held here on Sunday.
Employees of various banks from all over the country participated. All India Bank Employees Association (AIBEA) general secretary Ch. Venkatachalam inaugurated the two-day conference. AIABAEU president and AB Workmen Director Manoranjan Das presided over the programme.
Fall in growth
Addressing the delegates, Mr. Prabhakar said that the growth in banks has dropped to 15 per cent in 2012, due to the NPAs are increasing steeply. The over dues which were only one per cent in 2011, increased to 3.42 per cent last year in the Bank, he said and stressed the need for focusing on Current and Savings Account deposits, Small and Medium Enterprises.
Mr. Venkatachalam said 95 per cent of the rural areas are not under the reach of banks in India and only 13 per cent of the people are using banking facilities. Instead of encouraging globalisation, Government should take steps for strengthening PSUs and extend banking services to all areas.
Stating that nationalised banks are playing a key role in the economic development of the country, he observed that Indian PSUs have become a role model for their counterparts in other countries, which closed their shutters during recession.
Earlier, the bank officials and union leaders garlanded the portrait of Bogharaju Pattabhi Sitaramayya, the founder of Andhra Bank, which was celebrating the 90{+t}{+h}year celebrations.
AB Executive Directors S.K. Kalra and Mishra, General Manager R. Padmanabhan, Central Bank of India Workmen Director B.S. Rambabu, MLC Jelly Wilson, union leaders T. Ravindranath, B.V.V. Kondala Rao and others participated.
http://www.thehindu.com/todays-paper/tp-national/tp-andhrapradesh/nationalised-banks-facing-tough-time/article4327809.ece
The banking system has recently shown signs of moderate rise in instability due to increase in non-performing assets (NPAs), the Reserve Bank has said in a working paper.
“The movements in the banking stability indicator...That there are symptoms of a moderate rise in instability of the banking sector in recent periods perhaps due to the rise in the NPA,” it said in a working paper on Banking Stability - A Precursor to Financial Stability.
The NPAs, or bad loans, of the Indian banking sector rose sharply to 1.28 per cent in 2011-12 from 0.97 per cent in the previous year, because of high interest rate and slowdown in the global economy.
For public sector banks, it rose to 1.53 per cent in 2011-12 from 1.09 per cent a year ago. Though private lenders reduced their NPAs to 0.46 per cent from 0.56 per cent.
The paper said there is a need to exert precautionary measures to improve the overall performance of the banking sector and initiate regulatory measures appropriately.
It said policymakers will need to work towards strengthening the banking sector to enable the banks to bear the shocks resulting from an adverse turn in the real sector environment.
Also, it said there is a need to build enough safeguard in the banking sector to avoid the negative feed-back loop between the banking sector and the real sector which could lead to the germination and aggravation of a financial crisis.
Referring to the recent global economic crisis that began in 2008-09, the paper said, “the real act of the financial crisis was enacted in the courtyard of the banking sector where the trigger of financial crisis initially took place.”
However, concerted efforts are being made by various organisations such as the IMF, BIS and World Bank as well as individual central banks to evolve various leading indicators of the financial stability, including banking sector, in order to make an informed judgement about the evolving risks to the financial system and initiate corrective policy measures.
The paper also observed that banking instability has immediate adverse effect on the financial markets stability as well as real sector output.
“...Stability in the banking sector is a necessary condition for maintaining financial stability,” it added.
It further said deterioration in the banking stability indicator has adverse impact on the real sector and similarly deceleration in the real sector performance will adversely affect banking
Indian banks’ loan recasts surge to Rs.2.12 trillion
Lenders restructure Rs.24,584 crore in October-December, up from Rs.19,544 crore in the previous quarter
Updated: Mon, Jan 21 2013. 08 23 PM IST
Mumbai: Slowing growth in Asia’s third largest economy, high cost of money, and project delays are denting the ability of Indian companies to repay their loans, leading to an unprecedented surge in restructured assets.
Total loans restructured by Indian banks under the so-called corporate debt restructuring (CDR) route crossed Rs.2 trillion in December. In the October-December quarter, banks restructuredRs.24,584 crore of loans, up from Rs.19,544 crore they recast in the previous quarter, to reach Rs.2.12 trillion.
Under CDR, commercial banks typically stretch the repayment period to stressed companies, offer a moratorium and reduce lending rates, among other things. In the event of a restructured loan turning bad, the provisioning liability shoots up to 15% from 0.4% for loans that are standard.
Many analysts suspect that 25-30% of the restructured loans may turn bad unless there is a significant revival in the economy.
“There is definitely more pain to come as more cases are likely to come up for restructuring, especially from money given to infrastructure sector,” said V. Sri Karthik, an analyst at Espirito Santo Securities India Pvt. Ltd.
In the current fiscal year, banks have recast Rs.62,085 crore under CDR, around 50% more than the restructured loans in the whole of last year. Banks have overall restructured Rs.2.11 trillion of loans from 362 cases through the CDR route.
The actual figure of restructured loans might be nearly double this estimate as it does not include bilateral restructuring cases that banks undertake individually with companies.
Such a rise is significant as most analysts believe that banks will have to recast more loans in the approaching months, given the slow pace of recovery in India’s economic growth and lower prospects of aggressive rate cuts by the Reserve Bank of India (RBI) as inflation continues to remain beyond its comfort zone.
Restructuring woes
Indian banks began restructuring on a massive scale in 2008 for loans given to property developers and small and medium enterprises in the aftermath of the global financial crisis that followed the collapse of US investment bank Lehman Brothers Holdings Inc.
At that time, the recasts were done after RBI gave special dispensation to banks to recast loans to certain segments without classifying them as substandard assets.
“While 15-20% of those loans have turned bad during the 2008 cycle, the percentage could be 25-30% this time as the recovery in growth is slow and chances of a rapid cut in interest rates are less unlike in 2008-09,” Karthik said.
Hit by global and domestic factors, India’s economic growth slowed to 5.3% in the September quarter from 5.5% in the preceding three months. RBI is yet to heed a widespread demand for a rate cut to prop up growth, citing persistently high inflation.
Bad loan levels in the banking system have spiked in the past few years because of a slowing economy. Gross non-performing assets (NPAs) of 40 listed Indian banks rose to Rs.1.66 trillion in September, up 46.8% from a year-ago period.
Among the large banks that have the maximum amount of NPAs are the nation’s largest lender State Bank of India (5.15%), Central Bank of India (5.54%), UCO Bank (4.88%) and Punjab National Bank(4.66%).
“Increasing loan recasts are certainly a concern and this will definitely have an impact on the profitability of banks,” said Ananda Bhoumik, a senior director at India Ratings and Research Pvt. Ltd, formerly known as Fitch India.
Stress in many sectors is likely to ease towards June when a pick-up in economic growth is widely expected, though problems pertaining to the infrastructure sector, where clearance bottlenecks often lead to project delays, are likely to persist, Bhoumik said.
Bankers said they are left with few options but to recast the loans of their troubled borrowers.
“It is indeed a risk, but not an extremely large risk and unmanageable. This is a reflection of a slowing economy,” said Arun Kaul, chairman and managing director of Kolkata-based state-run UCO Bank.
Kaul, however, is optimistic about a recovery. “Most of the financial indicators indicate that the worst is over and things will start improving from now on,” Kaul said.
Rating agencies are keeping a close tab on the rise in the restructured loans and resultant stress in the system. Crisil Ltd, the Indian unit of global rating agency Standard and Poor’s, expects the total loans restructured by Indian banks to touch Rs.3.25 trillion by March 2013. Crisil had earlier predicted Rs.2 trillion by March.
In a report released on Monday, global rating agency Moody’s Investors Service said the credit outlook for banks in the Asia-Pacific region in 2013 remains stable on the expectation that they will remain insulated from the negative credit pressures that are affecting western banks, but banks in India and Vietnam continue to carry negative outlook owing to their asset quality pressures.
According to Moody’s, impaired loans are yet to peak in India among public sector banks. “While the government is likely to remain supportive, relatively high inflation and modest fiscal capacity mean that policy options are constrained,” the report said.
A major chunk of the restructuring between October and December emerged from the iron and steel, infrastructure, textiles and construction sectors. Ironically, most of the restructuring burden is on state-run banks, which have a substantial exposure to troubled sectors such as iron and steel, textiles and power.
These lenders are often forced by the government, the majority shareholder in these banks, to restructure loans. For instance, in May last year, the government had announced a Rs.35,000 crore debt-restructuring package for troubled textile companies through public sector banks.
Move to merge banks opposed
AIBOA to make public a list of non-performing assets
The Centre’s proposal to merge nationalised banks would widen the gap between the banking industry and the customers, and it would pave the way for privatisation of banks, said S. Nagarajan, general secretary of All India Bank Officials Association (AIBOA), on Sunday.
Addressing presspersons, Mr. Nagarajan referred to a move by the Union Ministry of Finance on ‘grouping of nationalised banks’ for toning up the administration of public sector banks. He said that the country’s banking industry, by virtue of its large network and services, was popular in the international arena.
The strong roots of the banking system across the country prevented the entry of private banks. But, the Centre’s move to merge the banks would destabilise the banking sector and pave the way for privatisation, he said.
Strikes
To a question on the future course of action against the move, he replied that decision in this regard would be taken at the end of the national conference of All India Bank Employees Association (AIBEA) to be held in Cochin next month. Further, the AIBOA would await the budget proposals for the next financial year. He also said that the financial inclusion programme would be defeated if the banks were merged. The number of branches would be reduced and the customers would be deprived of their right to select a bank of their choice.
The public sector banks had undertaken strike for 45 times protesting the privatisation move, the last one being on December 20.
Mr. Nagarajan said that the AIBOA was preparing a list of non-performing assets which would be made public in course of time.
M.A. Srinivasan, general secretary of Canara Bank Officers’ Union, underlined the need for filling up the vacant posts in public sector banks. About two lakh posts were lying vacant in various cadres.
Later, they addressed district office bearers of the AIBOA. K. Kandasamy, district general secretary, spoke.
http://www.thehindu.com/todays-paper/tp-miscellaneous/move-to-merge-banks-opposed/article4327571.ece
Growing gaps in banking
Asset-liability mismatches, a skewed non-food credit to GDP ratio and declining asset quality pose a serious threat
Three indicators—independent but not unrelated—now point to the precarious state of the banking industry. Each on its own is a worry for banks but viewed together, they are a big concern for the economy. For the moment, these signals are being muffled by the surprisingly good quarterly results of banks. But left unaddressed, the interplay between them can lead to a severe macroeconomic disturbance.
First, there has been a sharp increase in the asset-liability gap. In 2012, the aggregated asset-liability mismatch for the banking sector increased eight times over the previous year. In the operationally crucial one-to-three years maturity time bucket, the gap, which was 0.5% in 2011, has increased to 4.7%. This is an aggregate number and there will be banks with a much higher incidence of this mismatch.
Significantly, this spike has emerged because of a sharp drop in deposits. Thus, even as the share of assets with one-to-three years maturity remains the same, the drop in deposits of this maturity has caused the asset-liability mismatch to rise rather dramatically.
In the longer maturity buckets such as that between three and five years and more, the gap is high though not rising. In fact, there is a marginal drop in these cases. This is so largely because of long-term bond issues.
The second factor at work is that non-food credit to gross domestic product (GDP) ratio is at a decadal low—almost the same as it was in the mid-70s. This shows that the flow of credit to the commercial sector is significantly lower compared with the long-term trend of the past four decades.
Underlying this growing gap are the structural factors in the relationship between growth and credit. It has been empirically established that from 1950-51 to 1979-80, there was a one-way cause and effect from credit to growth: credit drove growth during the period of government-directed lending. In the following decade—1980-81 to 1990-91—the causality broke down with no clear relationship between credit and growth. Between 1991-92 and 2010-11, there is a clear causality from output to credit. In this phase, it is the output cycles that drive credit cycles, the obverse of what it was earlier.
As such, when policy attention is focused by the government or the Reserve Bank of India on driving up bank credit to the commercial sector, they seem to be operating in the mindset of an earlier era.
This reversal of causality has a policy implication: it reduces the effectiveness of monetary policy as an instrument to drive up credit. Even if growth of credit is ensured through a policy diktat, it will not necessarily increase the rate of growth of output. Also, even an interest rate reduction is unlikely to stimulate credit growth in a phase of slow growth of the economy.
The third factor is the consistent deterioration in asset quality. There has been a sharp increase in non-performing assets (NPAs). Over the last year or so, NPA growth—at around 45% on a year-on-year basis—has consistently outpaced growth in advances. While standard assets grew by 20%, restructured assets increased by twice that rate. This raises the level of impaired assets in the banking system to double-digit levels for the first time ever.
These three pressure points should be seen in the context of impending stricter prudential norms, large scale ownership of banks by the sovereign and the need for capital infusion by a fiscally stretched government. On the whole, it is the picture of an impending crisis; a crisis that can be sparked off by any extraneous global or domestic event.
Given the asset-liability mismatch in the face of uncertain capital refurbishment plans, individual banks may be forced to shrink their asset book. Along with that, asset restructuring, which has been going on, may be taken to higher levels. At this stage, an increased incidence of loan loss provisions will further cut their capital adequacy and individual banks’ capital requirements will become even more binding.
Concurrently, given the uncertainty, the cost of issuing equity to sustain lending will become prohibitively high. As a consequence, faced with the choice between issuing new capital and curtailing lending, banks will opt for the latter.
It is at this stage that asset-liability can cease to be a bank-specific issue and will become a sovereign risk given the government’s ownership of banks and other financial institutions.
In such a fragile situation, the real problem is that a liquidity problem, even if it is in one large financial entity, can quickly become a solvency issue. A localized concern can erode the confidence in the banking sector.
From there on, even an accidental drying up in systemic liquidity can have a knock-on effect on the real economy and rapidly give way to a wider solvency crisis.
Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comments are welcome at haseeb@livemint.com
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