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Friday, May 15, 2015

RBI Dictate Bank Boards

RBI has advised bank boards to do detailed scrutiny of their quarterly and annual financial results during board discussions. It appears to be nothing more than ridiculous and a clever step by RBI to put the onus of correctness and genuineness of financial result on bank boards .

 It is the duty of RBI to ensure correctness of financial results announced by various banks including private banks to avoid repetition of stories like that of Satyam Computers. It is the duty of RBI to carry out random checking of bank financials and internal working from time to time to create good culture and to stop fraud and manipulation in banks. RBI officials used to audit in seventies and eighties but gradually they  stopped this culture because they are also not adequately manned to cope with the work load needed to properly audit thousands of branches .It is therefore not surprising they too shake hands with clever bank officials and indirectly favour culture of manipulation. Even politicians do not like exposure of bad health of banks .They all are birds of same feather.

RBI is therefore bent upon avoiding owning the responsibility of fraudulent games played by CEOs of banks in hiding bad assets. RBI officials understand very well that huge volume of stressed assets in Public sector banks is concealed by bank officials in nexus with team of Chartered Accountants who certify the correctness of financial results, correctness of profit , provision and bad assets.

RBI also knows very well that volume of bad assets will continue to rise every quarter and no power on earth can stop it , can reduce the speed of assets turning bad until there is change of hearts and change in attitude of credit officials of banks, change in mindset of dirty politicians who are least bothered of quality of assets but more concerned about vote bank and lending and until there is change of heart of officials and magistrates sitting in various administrative offices, courts, police department, DRTc etc.

Here it would like to add here that it is the team of Charted Accountants who are supposed to be more intelligent and talented and who are the competent and legal bodies to certify the correctness of financials of all companies and banks, certify bad assets as standard assets in nexus with bank officials and in lieu of some costly gifts and red carpet welcome extended to them by bank officials..

It is CAs who guide banks how to conceal bad advances , how to lend money to bad borrowers, how to manipulate financials to inflate profit and reduce provisions against bad loans. It is team of CAs who guide business men how to evade tax and how to use black money in real estate or in business itself. It is team of CAs who sign on balance sheet of branches of banks blindly or in greed of some valuable gifts. It is team of CAs who sell their signature at every point of business , at every point of compliance and certification. Gift culture at all levels make the case of certification easy .

Bank officials have been in habit of concealing bad asses to please their bosses, A Branch   Manager of a branch try to please his Regional Head,, a RH may try to please his Zonal Head and all try to keep the Chief of Bank in good mood and for this purpose they all have to conceal bad assets .If any officer or any team of CAs dare declaring bad assets as bad asset truly, their career is sure to be doomed. O the contrary officers and CAs who are clever in concealing bad debts are promoted and their career is brightened.

 Every quarter bank Chiefs promise that the health of bank will improve from next quarter . They book good profit in one quarter and show drastic fall in profit in next quarter.  This clever hide and seek game of figures has been continuing for last ten years and specially after from the period when bank became technology friendly .

The bitter truth is that neither RBI , nor bank officials, nor team of CAs and nor politicians want to say spade a spade . They all are so called positive-minded and it is their compulsion to show banks as healthy so that evil works are not exposed. It is their compulsion to conceal bad assets and to book more and more false profits and projects banks as prosperous so that investors and customers of banks do not lose trust on PS banks.

If a NPA of a bank rises, investors will avoid investing in share of such banks, business men will not like to park their fund in such banks and will not like to borrower money from such banks, RBI officials will have to face the awkward position before ministers, and finally politicians will have to face the anger of common men whose hard earned money will be at stake in case of bank going weak and finally sink.

It is therefore wrong to believe that bank board will be able to find out or detect the fraud game played by CAs and clever bank officials . After all , if they say bad assets as bad , it will  tantamount  to digging own grave. When protectors become looters, none can save us from disaster. When team of CAs can be bought , when bank officials are bought, when legal officials are bought ,when politicians are bought and when every good certificate of good health can be bought by every officer , RBI should not expect correctness of financials of any bank in particular and any company in general  .

Similarly art of Tax evasion taught by CAs to business community help in creation of black money in the system in nexus with tax officials, Hence it will be wrong to blame business community or any individual for tax evasion or for buying a landed property at higher rate but registering at lower rate using black money. It is a well established culture in India and to stop the same  is nothing but  hard nut to crack . Even politicians cannot survive without black money , how others will stop playing with powers of black money. Culture of flattery will end as soon as culture of dishonesty is stopped. None will like it from core of their heart . All want others to be his or her yesman .

If RBI officials , to begin with ,make a through scrutiny of all accounts of all borrowers who have been enjoying credit facility of more than 100 or 50 crore , the bitter truth of bad debts will come to surface, provided however that bank officials are kept miles away from the place where scrutiny  is taking place and provided talented team of CAs are not allowed to talk to any borrower and any bank officials during the period of audit and inspection and entire task is conducted before CCTV and financially expert team of media men.

If RBI does not have enough manpower even to make scrutiny of Rs.100  crore borrower, they may start the task with scrutiny of books of best five banks . If it is proved that banks considered as best performers are best only due to best manipulation and fraudulent placing of figures only , it will become crystal clear to all concerned that the crisis in public bank is more deep rooted , bad culture is imbibed in DNA of all concerned and to stop the culture of manipulation in PS banks is nothing but wondering in dreamland.

It is worthwhile to mention here that proposals of loans and advances of Rs.50 crore or Rs.100 crore and above are sanctioned by none other than bank boards . It is bank boards which are supposed to monitor the health of high value loans . How it is then possible for such  bank boards to doubt financials certified by CAs ? It is just like asking a thief to investigate the act of stealing and punish the culprit. There is invariably an unity among dishonest and corrupt officials . They all try to save each other in their mutual self interest. It may be kept in mind that each bank board is manned by RBI directors also.

If a Branch Head says that loan sanctioned by his predecessor is bad due to bad lending or bribe led lending, he will have to face the same precarious situation when his successor joins his branch after his transfer. As such each officer thinks it better and safe to hide bad loans by hook or by crook to save his colleague from punitive action and to avoid rejection in promotion processes. This culture is well established at all  levels of management.

RBI says bank boards to do detailed scrutiny of financial results-Business Standard-15.05.2015

RBI said bank boards should look at financial reports and their integrity, including NPA management
The Reserve Bank of India (RBI) has said bank boards should do a detailed scrutiny of their quarterly and annual financial results in their board discussions. According to seven critical themes prescribed by the P J Nayak committee, instituted by RBI that reviewed bank boards’ governance, the latter should look at their financial reports, including non-performing assets (NPAs) management and reported NPA and provisioning integrity.

In the first bi-monthly monetary policy statement of 2015-16, RBI had proposed to do away with the Calendar of Reviews and replace it with the seven critical themes. These include business strategy, financial reports and their integrity, risk, compliance, customer protection, financial inclusion and human resources.

RBI said it has been observed that the Calendar of Reviews uses considerable board time and, as a result, the board might not be in a position to give focused attention to matters of strategic and financial importance. The committee had also recommended that discussions in the boards need to be upgraded and greater focus should be given to strategic issues.

According to RBI, business strategy would include development of new products; competitiveness of individual businesses; business reviews in relation to targets. Risks would include policies concerning credit, operational, market, liquidity risks; assessing the independence of the risk function.

Compliance would include regulatory requirements; adherence to the RBI and Securities and Exchange Board of India norms; observations from the annual financial inspection by RBI, among others.

Customer protection would look at mis-selling, particularly third-party products; laying down the appropriateness of products to different customer segments; understanding the broad trends among others. Financial inclusion would look into review of priority sector lending; payments for the disadvantaged; deposit mobilisation from weaker sections; support to microfinance institutions; and other issues.

The theme human resources would look at appointments and approvals of directors, perks and perquisites for employees, incentive schemes for employees, promotion policies for employees, training and skill development of employees.

Bad loans may not have peaked yet: Raghuram Rajan-By Anup Roy --Livemint

Central bank working with lenders to recognize and resolve non-performing assets, says RBI governor
The quantum of bad loans in the Indian banking system may not have peaked yet, Reserve Bank of India (RBI) governor Raghuram Rajan warned, echoing the concern of analysts and bankers.
Rajan’s comment comes a day or two after rating companies Crisil Rating Ltd and Moody’s Investors Service warned of more pain for the Indian banking system. Crisil on Tuesday said the gross bad debt of the banking system will likely rise to 4.5% of total assets from 4.3% at the end of March 2015. 
Moody’s India sovereign analyst Atsi Sheth warned that India’s sovereign rating could be affected if banks do not repair their asset quality.
Rajan, speaking at a news conference after the central bank’s board meeting in Goa, said the central bank was working with lenders to recognize and resolve these non-performing assets (NPAs), news agency Reuters reported.
One such measure the central bank has already taken is introducing a term-loan facility for infrastructure projects where loans can be reset every five years. Informally termed 5/25 for stretching a project loan to 25 years with a reset every five years, this scheme is expected to ease pressure on infrastructure companies.
Since such schemes ease the load on promoters to pay back, it is also a good way to keep banks’ balance sheet healthy. But technically, it is also a good way for banks to hide the bad debt numbers, Crisil fears.
The 5/25 scheme alone could mask bad loans of at least Rs.80,000 crore in fiscal 2015-16, according to Crisil. If banks manage to hide more, the bad debt situation on paper will look healthier than that in 2014-15, Crisil said.
Out of 39 publicly traded banks in India, 29 have reported fourth-quarter earnings so far and the bad debt numbers show no sign of improving, although the pace of accumulating bad debts may have slowed a bit.
In the quarter ended 31 March, gross NPAs of these banks grew 28.8% to Rs.1.81 trillion from Rs.1.4 trillion in the year-ago quarter. They grew 3.3% over the third quarter ended December. Interestingly, slippages, or good loans turning bad in the quarter, came down for some banks.
Banks continue to restructure a large number of loans, though, an analyst said. “This shows the stress is far from over,” said Abhishek Kothari, an analyst with Quant Capital, adding that he expects bad assets to peak in the next two-three quarters.
At least 15% of restructured assets soon fall back to the NPA category.
Infrastructure logjam
According to RBI’s annual report released in June 2014, six sectors account for the majority of bad debt in Indian banks: infrastructure, metals, textiles, chemicals, engineering and mining. The six account for only 30% of the total credit, but 36% of the total bad debts in bank books.
Bankers attribute this to the slower-than-expected recovery in the economy and cheap import of commodities and steel from countries such as China and Russia.
“Domestic companies can’t produce at a cheaper rate than the cheap imports. How can you expect our companies to generate positive cash flow when there is no demand and, at the same time, countries like China dumping finished goods like steel?” asked Bank of Baroda ’s managing director and CEO Ranjan Dhawan, while presenting his bank’s results on Tuesday. “We have only one exceptional client in our bank who wants to set up a power plant, but otherwise I haven’t seen a single greenfield project coming up. Who will want to expand capex in this environment?.”
Moody’s managing director for corporate finance, Philipp L. Lotter, said in an interview on Wednesday that infrastructure projects would take time to generate cash flow even if the government’s efforts to improve coal and gas availability show results.
Issues related to land acquisition, fuel availability and environmental approvals held up projects, but the National Democratic Alliance government that took over in May last year has tried to address some of the issues. However, several analysts and executives maintain that there has been no change on the ground.
RBI’s hand
That may require RBI to play a hand, say analysts.
“Token rate cuts will not help. We need to see at least 100-150 basis points cut from the RBI because interest cost has become a major drain for companies in the infrastructure and manufacturing sectors,” said Vaibhav Agrawal, vice-president (research) at Angel Broking Pvt. Ltd. “Take a manufacturing company with a debt-to equity ratio of 3:1, servicing its loans at a minimum of 12-13%. Now factor in project delays and multiply the cost for a few years more. The damage done by high interest cost will be evident. Now that inflation has fallen and commodity prices have fallen sharply, RBI should take the risk of cutting rates drastically,” Agrawal said.
Agrawal does not see asset quality improving in the next six to nine months at least, but expects companies in metals, power, and minerals to show some greenshoots of recovery in a year’s time as positive reforms in these sectors take effect in the coming months.



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