State-run banks’ bad loans mount in June quarter-- 'Dinesh Unnikrishnan'
Incremental addition of gross NPAs touches 3.5% of loan assets; gross NPAs increase by 51% to Rs1.2 trillion
Mumbai: Fresh additions to the pile of bad loans at India’s state-run banks reached the highest level in a decade in the three months ended June, as slower economic growth, high interest rates and project delays impared the ability of borrowers to repay loans.
The incremental addition of gross non-performing assets (NPAs) in the June quarter was 3.5% of loan assets, compared with 2.8% in the same quarter last year. Such levels were last seen in the fiscal year 2003-04, when fresh additions stood at 2.7%, said Vaibhav Agarwal, vice-president of research at Mumbai-based brokerage Angel Broking Ltd.
According to a Mint analysis of the earnings of 35 listed banks, which have so far reported their first quarter earnings, the gross NPAs of 22 public sector banks grew by 51% to Rs.1.2 trillion in the June quarter from the year-ago quarter. Compared with the March quarter, state-run banks’ gross NPAs rose by 15%.
The country’s largest lender, State Bank of India(SBI), is yet to announce June quarter results.
India’s economy grew 5% in the year ended 31 March, the slowest pace in a decade, as high borrowing costs forced companies to put fresh investments on hold and consumers to cut spending. Delays in securing mandatory government approvals and problems in land acquisition have stalled many big ticket projects, stopping the cash flows of companies and denting their ability to repay debt.
New additions to gross NPAs at private sector lenders was muted relative to state-run lenders, Gross NPAs of 13 private banks rose 12% in the three months to June compared with the year-ago quarter and 7% over the March quarter. “There is no catalyst for improvement. We expect the second quarter to be even worse,” Agarwal of Angel Broking said.The five banks that rank top
among the state-run lenders in terms of gross
NPAs are Central Bank of India(6.03%), State
Bank of Mysore (5.61%) UCO Bank (5.58%) Punjab
National Bank (4.84%) and Allahabad
Bank (4.78%).
Rising bad loan levels have taken a toll on the shares of banks with bankex, or the index of major bank stocks, falling by 23% so far this year in comparison with a 3.72% decline in the Sensex, the BSE’s benchmark index.
“Bad loan recovery will be entirely dependent on the economic recovery,” said B.A. Prabhakar, chairman and managing director of Andhra Bank.
Growth concerns
Many lenders have restructured corporate debt, lengthening loan maturity periods and cutting rates, to prevent the loans from turning bad. Banks have to set aside more money to cover non-performing loans than for restructured loans. “Bad loans are rising because the overall economy is not doing well. We are financiers to the real economy,” said Hemant Contractor, managing director of SBI. “The government has taken steps to revive the economic momentum. We are hopeful that things will improve.”
For a majority of the state-run banks, a modest jump in their net profit during the quarter has come from gains in treasury income in the June quarter, analysts said. “Without that component, the hit would have been much sharper,” Agarwal of Angel broking said.
But that cushion will not be available for the banks in the current quarter as bond yields have gone up by 85 basis points (bps) after the Reserve Bank of India (RBI) began tightening liquidity in the banking system to shore up a weak rupee. One bps is one hundredth of a percentage point.
RBI capped individual bank borrowing limits at 0.5% of deposits. To tighten liquidity even further, RBI also made it mandatory for banks to maintain 99% of the cash reserve ratio (CRR), or the portion of deposits that they are required keep with the central bank, on a daily basis, against the earlier 70%.
Rising bond yields eat into the profits of banks because they have to set aside more money in the form of mark-to-market provisions on such investments. Besides the bad loans, restructured advances pose a bigger threat to the banking system as a major chunk of these loans are likely to turn bad in the absence of a significant recovery in the economy, experts warned.
Indian banks have cumulatively restructured more than Rs.2.5 trillion of loans under the so-called corporate debt restructuring (CDR) mechanism, with a significant portion of this being done by the public-sector banks in recent quarters.
The actual figure of restructured loans will be much higher because banks enter into bilateral restructuring agreements with individual clients. Although an aggregate figure isn’t available, the money involved in such bilateral recasts is estimated to be equal to the CDR figure, taking the total restructured loans to over Rs.4 trillion. Analysts expect 25-30% of these loans to turn bad.
In the June quarter, banks restructured the debt of 12 companies, totalling Rs.20,000 crore, including some of the larger cases such as the Rs.13,500 crore debt recast of engineering and construction firm Gammon India Ltd and Rs.3,000 crore debt recast of logistics company Arshiya International Ltd.
Notably, the momentum of restructuring increased even as companies are now required to make provisions for such loans. Under new RBI rules, banks need to set aside 5% of the fresh restructured loans as provisions. If the loans turn bad, the provisioning goes up to at least 15%. Higher provisioning affects the profitability of banks.
In 2012-13, banks restructured Rs.75,000 crore of loans under the CDR mechanism, nearly double the level in 2011-12.
Analysts estimate that between a fourth and fifth of such restructured loans turn bad. “The earlier assumptions that banks will be able to recover money from the restructured loans and an improvement in the bad loan situation has somewhat gone wrong due to a persistent slowdown in the economy,” Agarwal of Angel said.
Finance ministry asks public sector banks to conduct independent assessment of project--ET
MUMBAI: The finance ministry has instructed public sector banks to do their own due diligence on loan proposals instead of relying excessively on the appraisals done by lead banks, a move which aims to arrest the rising incidents of defaults.
These banks have also been told to monitor the end use of funds to prevent any diversion or misuse of loans. At present, small and midsized banks depend on the due diligence done by lead banks.
"The finance ministry has said that banks should do their independent assessment of the project rather than blindly follow the proposal given by lead banks," said a bank chief who did not wish to be named. For decades, large corporates have appointed big banks like the State Bank of India, ICICI Bank or IDBI Bank as lead banks.
However, the conflict arises because these lead banks appraise the viability of the project and also arrange loans for the borrower for a fee. At times, the lead bank also underwrites the loan, and later, sells a part of it to other banks. "The finance ministry is saying that each bank that sanctions loan should sign on the dotted line only when they are satisfied with the appraisal.
When the loan turns bad, they should not point fingers at the lead bank," said a general manager of a large bank in charge of credit monitoring. Stressed loans in the books of PSU banks have touched doubled digits. Rating company Icra estimates that the gross non-performing assets of public sector banks were 3.8% and restructured advances were 7.1% of the total loan book for the fiscal year ending 2013.
Small to mid-sized banks, which do not have appraisal skills, say that they participate in the consortium mainly with the comfort that lead banks would also retain a slice of the loan on their books.
These banks have also been told to monitor the end use of funds to prevent any diversion or misuse of loans. At present, small and midsized banks depend on the due diligence done by lead banks.
"The finance ministry has said that banks should do their independent assessment of the project rather than blindly follow the proposal given by lead banks," said a bank chief who did not wish to be named. For decades, large corporates have appointed big banks like the State Bank of India, ICICI Bank or IDBI Bank as lead banks.
However, the conflict arises because these lead banks appraise the viability of the project and also arrange loans for the borrower for a fee. At times, the lead bank also underwrites the loan, and later, sells a part of it to other banks. "The finance ministry is saying that each bank that sanctions loan should sign on the dotted line only when they are satisfied with the appraisal.
When the loan turns bad, they should not point fingers at the lead bank," said a general manager of a large bank in charge of credit monitoring. Stressed loans in the books of PSU banks have touched doubled digits. Rating company Icra estimates that the gross non-performing assets of public sector banks were 3.8% and restructured advances were 7.1% of the total loan book for the fiscal year ending 2013.
Small to mid-sized banks, which do not have appraisal skills, say that they participate in the consortium mainly with the comfort that lead banks would also retain a slice of the loan on their books.
Thursday, June 27, 2013
Asset Quality Is Worse Than What Is Shown In BS
Banks in general have again started concealing bad assets and the same hiding approach which was applied when the work of identification of bad assets used to take place manually.
Management of banks in general have started threatening and using coercive methods to force branch officials, branch heads, regional and zonal heads and top ranked officials to stop slippage of assets into NPA category and hence they all have started using various unlawful tools to keep the account always standard despite sickness in the account as per RBI prudential norms. They have started using age old ever greening process to keep all accounts standard.
Banks in general have again started concealing bad assets and the same hiding approach which was applied when the work of identification of bad assets used to take place manually.
Management of banks in general have started threatening and using coercive methods to force branch officials, branch heads, regional and zonal heads and top ranked officials to stop slippage of assets into NPA category and hence they all have started using various unlawful tools to keep the account always standard despite sickness in the account as per RBI prudential norms. They have started using age old ever greening process to keep all accounts standard.
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