Some Important News On Bad Loans From Newspapers

Bad bank is a process, not a bank
Government needs to get legal cases fast-tracked, even strong-arm debt-stressed promoters to let go of firms
42 listed banks have added Rs 1 lakh crore in gross NPAs in Quarter ended 31st December 2015 .

27 of which are in the public sector –
90% of the increase in NPAs from Rs 3.5 lakh crore in the September 2015 quarter to Rs 4.5 lakh crore in the December quarter came from PSU banks

Gross NPAs rose by Rs 65,000 crore in the March 2014 quarter, Rs 60,000 crore in the June quarter, and Rs 40,000 crore in the September quarter, they jumped by Rs 99,000 crore in the December quarter.

It is further open secret now that the pain in the March quarter could be worse.
Based on a sample of 42 banks, gross NPAs for all-banks rose from 5.1% of advances in the September quarter to 6.5% in the December quarter – for PSU banks, they rose from 6.5% to 8.1%.

There is also the issue of whether banks have come out with the real numbers even now.
At the level of all banks, based on RBI's estimates, culled from the RBI’s Financial Stability Report (FSR) in December, the dodgy loans work out to around Rs 8 lakh crore – that’s 11.3% of total advances of around Rs 70 lakh crore.
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Ggovernment needs to pump in a lot of capital into PSU banks, it is probably a good idea to seriously consider the idea of a bad bank instead of just throwing good money after bad. A bad bank, needless to say, is not really a bank, it is a process to clean up bad loans. What it involves is the bad bank buying out the loan from bank and forcing the existing promoters out as well – once the bank has taken a haircut on the loan and the value of equity is reduced to zero, the asset can be sold to another promoter and will be viable since it will cost half or less what it did originally .

Bank NPAs are just the tip of the iceberg


With losses being reported in the current quarter and the next, the rating of many PSU banks will go below the radar and if a downgrade happens, they will find it difficult to raise resources plus the cost of borrowings will go up for them. And after having burnt their fingers in the past, the risk-taking ability of many of the banks will diminish further and the slowdown will continue.

Though the government has so far committed around Rs 25,000 crores to the banks and an assurance to fund further, given its deficit financing compulsions and the need to provide for the Pay Commission/OROP recommendations in the next fiscal, and the poor disinvestment cash flows, the government would find it difficult to pump in the required capital.
Once these banks start showing losses, they will not be able to pay dividends to the government nor pay taxes, which will further aggravate the situation for the government as its return on investment as an investor would be very negligible for the next few years.

The State Bank of India, the largest lender, announced a 61 per cent drop in profits for the third quarter of 2015-16 and warned of worse to come in the next quarter. A higher provisioning for bad assets and contingencies dragged down Punjab National Bank’s net profit by 93 pc to Rs 51 crores, while Canara Bank’s profit eroded by 87 pc, to Rs 85 crores.
Managing directors of two leading private sector banks (ICICI Bank and Axis) have also confirmed that the pain will continue in the next quarter, through the Reserve Bank of India had given time to all the banks to clean up their books by March 2017.

In order to improve the financial health of PSU banks, the government is considering more steps to empower them to recover bad loans. "The bankruptcy law is under active consideration. The government is also considering some further steps to empower banks to be in a position to recover these monies. I think it’s a problem which will soon come under control," Jaitley has said.

The quarterly results announced so far give realistic NPA levels in the leading PSU banks and the losses (ie, due to provisions for bad loans) amounting to over Rs 10,866 crores for eight of the banks and their gross NPAs aggregating to Rs 1,64,846 crores.

Name of Bank	Loss Q3/FY16 (All figures in Rs crores)	Profit Q3/FY15	Gross NPA	Gross NPA as %age of loans
Bank of Baroda	-3,342	334	38,934	9.68
IDBI Bank	-2,183	327	19,615	8.94
Bank of India	-1,505	173	36,519	9.18
Indian Overseas Bank	-1,425	-516	22,672	12.64
Central Bank of India	-837	138	17,564	8.95
Dena Bank	-663	77	7,916	9.85
Oriental Bank of Commerce	-425	20	11,824	7.75
Allahabad Bank	-486	177	9,802	6.40
Total	-10,866	730	1,64,846

The above table clearly reveals that the banks, under compulsion from RBI, as part of their Asset Quality Review have finally come to terms about recognising the NPAs in their books and have started provisioning for the bad loans.

But why did they not do it on their own?
　
What happened to corporate governance standards, more so in private sector banks where the management is supposed to be professionalised?

Why are banks putting the blame on RBI’s AQR as the reason for realistic provisioning and agreeing to treat some of the large bad loans as NPAs, when they are treated as NPAs in many other banks?

With the AQR, some of the accommodative structures practised by a few banks to treat the accounts as standard have now been exposed by the regulator.

It is a paradox that while the Indian economy is growing at over 7 pc, the health of the banking system is becoming weaker and weaker.

Seventy percent of the assets are managed by PSU banks and if they have to further lend/to be in the business, huge capital needs to be provided in the next one year. Some estimates say that around Rs 2,50,000 crores ($ 40 billion) is realistically required by all the banks to fund the losses and to meet Basel III requirements in the next two years.
Though the government has so far committed around Rs 25,000 crores and an assurance to fund the banks further, given its deficit financing compulsions and the need to provide for the Pay Commission/OROP recommendations in the next fiscal, and the poor disinvestment cash flows, the government would find it difficult to pump in the required capital.

Once these banks start showing losses, they will not be able to pay dividends to the government nor pay taxes, which will further aggravate the situation for the government as its return on investment as an investor would be very negligible for the next few years.
The government had also not spelt out clearly whether it will still want to maintain its majority stake-holding in PSU banks or it is willing to come to down to 51 pc in the short term and eventually hold lesser share. This has lots of political ramifications and at the present time, the government will not venture into privatising PSU banks. This was the recommendation of the Dr PJ Nayak committee but the government was not in support of this move.



Public sector banks' bad loans equal defence, education, roads and health spending

If the unpaid loans made by India's public-sector banks were recovered, they would be enough to pay for India's 2015 spending on defence, education, highways, and health

These bad loans, or gross non-performing assets (NPAs) as they are called in banking parlance, of public-sector banks crossed Rs 4.04 lakh crore ($59 billion), a rise of 450% since March 2011.



Provision coverage ratio declines sharply for most public sector banks
Provision coverage ratio, a measure of the funds set aside by banks to cover bad loans, has declined steeply in the past 3 years for almost all public sector banks



The Mint

The provision coverage ratio (PCR), a measure of the funds set aside by banks to cover bad loans, has declined steeply in the past three years for almost all public sector banks. The chart has the details for the top 10 public sector banks by market capitalisation. A higher provision coverage ratio means the bank is protecting itself better against its bad loans.
A decline in the ratio means that provisions have not been made to the extent of the rise in bad loans. Except for a few banks such as State Bank of India, Central Bank of India and Indian Bank where PCR has remained more or less stable or increased marginally since March 2013, the ratio has declined sharply at most public sector banks.

The ratio is expected to remain low in the March quarter as well. The amount of bad loan additions will remain elevated because most public sector banks are yet to declare at least half the non-performing assets (NPAs) that need to be reclassified as under the Reserve Bank of India’s (RBI’s) asset quality review. As a result, provisions will have to be built up again, affecting bank profits for quite some time


The ratio is expected to remain low in the March quarter as well. The amount of bad loan additions will remain elevated because most public sector banks are yet to declare at least half the non-performing assets (NPAs) that need to be reclassified as under the Reserve Bank of India’s (RBI’s) asset quality review. As a result, provisions will have to be built up again, affecting bank profits for quite some time



Rising NPAs: CAG set to scrutinise PSBs’ books
As public sector banks’ (PSBs) non-performiing and restructured assets have constrained their profitability and market capitalisation, the Comptroller and Auditor General (CAG) of India is set to scrutinise these banks’ books for the first time to analyse how the capital provided by the Centre in the past five years was utilised by them, sources told FE.

As public sector banks’ (PSBs) non-performiing and restructured assets have constrained their profitability and market capitalisation, the Comptroller and Auditor General (CAG) of India is set to scrutinise these banks’ books for the first time to analyse how the capital provided by the Centre in the past five years was utilised by them, sources told FE.
"The proposal is to examine what has happened to the money given for recapitalisation of public sector banks. The required performamce audit will start sometime this year," an official said.

Between FY11 and FY16, the capital infusions in the 22 PSBs cost R86,624 crore to the exchequer. The country’s largest lender, State Bank of India, accounted for nearly a quarter of this money. By March 31, the government may infuse another R5,000 crore in these banks. As part of the recapitalisation plan announced in last August, the government will infuse R25,000 crore each in 2015-16 and 2016-17 while R10,000 crore each would be provided in the subsequent two years to meet basel III capital adequacy norms and to grow business. Another R1.8 lakh crore is to be raised by these banks from market during 2006-18.

As on September 2015, the PSBs accounted for 86% of the R3.47 lakh crore NPAs with all scheduled commercial banks. This number has increased significantly in October-December of 2015 after the Reserve Bank of India mandated banks for an asset quality review (AQR) that has shaved off many PSBs’ bottom-lines due to reclassification of many accounts as NPAs to reflect the true value of the loans. The market value of listed banks has eroded by R1.8 lakh crore in just 40 days up to February 11 as investors turned bearish on banking stocks. Eleven public sector banks, including Bank of Baroda, IDBI Bank and Bank of India, have posted R12,867 crore loss in the December quarter, due to surge in provisioning for bad loans. The SBI has posted 62% dip while PNB reported a 93% fall in net profit in the quarter.

Even though the parameters of the CAG audit of PSBs is a work under progress, experts reckon that audit of PSBs — which hold about 75% of banking sector assets — could throw up examples of wrong practices which resulted in higher capitalisation requirement for banks. There have been reports of asset reconstruction companies, partly owned by banks, buying bad loans at higher than market prices, thereby suppressing the extent of NPAs in many banks.

While the CAG has conducted audit of non-bank PSUs over several decades, the supplementary audit of PSBs would be in addition to the existing practice of chartered accountants conducting statutory audit of the banks.
　
10 PSU banks under CBI lens----Asian Age
The CBI, which is investigating Rs 6,000 crore suspicious remittances case at a Bank of Baroda (BoB) branch in Delhi, is all set to probe similar irregularities in at least 10 more public sector banks.

According to sources role of senior officials of several other public sector banks are now under the scanner of the agency. "The agency is preparing to start a separate probe to find-out similar irregularities in other public sector banks," sources said.

Investigations by the agency have revealed that 59 current account holders and unknown bank officials of the BoB branch in Ashok Vihar allegedly conspired to send overseas remittances, mostly to Hong Kong, of Foreign Exchange worth approximately Rs 6,000 crore in illegal and irregular manner, through 6,255 transfers during May 2014-July 2015, in violation of established banking norms under the garb of payments towards suspected non-existent imports, they added.

The CBI recently registered a case under Sections 120-B (criminal conspiracy), 420 (cheating) of the IPC and the Prevention of Corruption Act, 1988, against 59 current account holders and unknown bank officials and private persons on a complaint from BoB.
Investigations revealed that the accused had abused their official position and in conspiracy with each other and with the said account holders had allegedly cheated and misappropriated the bank funds to the tune of Rs 13.75 crores, thereby allegedly causing loss to Bank of Baroda, sources in the agency said.

"Accounts were allegedly opened either in fictitious names or in the names of persons who were employed in different companies. Forged and fake identity papers like PAN cards and voter ID cards were allegedly used for opening the accounts in fictitious names," sources said.

Meanwhile, the Enforcement Directorate (ED), which is also probing the case, is all set to send judicial requests to the authorities concerned in Hong Kong and the UAE to get details about certain individuals based there as part of its investigations into the case.