In a last-ditch effort to convince the lenders to DHFL, Oaktree Capital has sent a fresh letter to the CoC stating that evaluation of its offer based on incorrect information could be subject to judicial, administrative and investigative review.
Sources said Oaktree has expressed concerns that its bid is being misrepresented despite offering maximum value to the stakeholders.
Oaktree has highlighted that in terms of total recovery being offered to financial creditors as well as net present value, its financial proposal is clearly superior to all other PRAs.
The total recovery for lenders according to Oaktree’s resolution plan is envisaged at ₹38,400 crore and the NPV could be about ₹36,418 crore.
Sources said Oaktree has stated that the total cash amount that the CoC would receive immediately on the implementation of its resolution plan would be about ₹17,400 crore.
For DHFL’s stake in its life insurance subsidiary, ₹Rs 1,000 crore will be paid to the financial creditors unconditionally and through upfront cash before the Resolution Plan is implemented. It will also be providing additional interest income of ₹Rs 1,700 crore as upfront cash on a committed basis.
In terms of equity infusion, Oaktree is understood to have clarified that it is committed to providing fresh capital infusion of ₹1,000 crore as a cushion to DHFL lenders, by way of a firm commitment letter.
It is also understood to have emphasised that it will create a clean structure and all fresh capital Infusions injected by it into DHFL will benefit the business and its stakeholders.
Oaktree is also understood to have raised concerns about the proposed merger of Piramal’s existing housing finance business with DHFL.
The government is in hurry to give the corporate houses an edge over the existing players.
In January 2021, banks in India will remain closed for 14 days, including four Sundays along with second and fourth Saturdays, and one national holiday. According to the Reserve Bank of India (RBI), these holidays may differ from state to state and be different in various banks. Customers are advised to plan their bank-related work accordingly, in order to avoid any last-minute trouble. While banks will remain closed on these days, mobile and internet banking will remain functional. As for the year 2021, banks across India will remain shut for more than 40 days. It may be noted that the dates given below were informed by RBI under the Negotiable Instruments Act.
Only Aizawl will observe a bank holiday on January 2 and 16, 2021. The holiday on 14th January 2021 will be observed in banks across Ahmedabad, Chennai, Gangtok and Hyderabad. Banks in Chennai and Guwahati will remain shut on January 15, 2021, for Thiruvalluvar Day or Magh Bihu and Tusu Puja. Only Agartala will observe a bank holiday on January 23, 2021, on account of the birthday of Netaji Subhas Chandra Bose. While on January 25, 2021, only Imphal will observe a bank holiday due to Imoinu Iratpa. Further, for the first quarter of the year 2021 (January-March), banks will be closed for 19 holidays, other than Sundays and 2nd and 4th Saturdays.
S&P does not assign equity credit to additional tier 1 instruments issued by Indian public sector banks due to uncertainty over their ability to absorb losses on a going-concern basis.
S&P Global Ratings on Thursday affirmed its ‘BBB-‘ long-term and ‘A-3’ short-term issuer credit ratings on Indian Bank while pointing out that the outlook on the long-term rating was negative. The agency said it has removed the ratings from CreditWatch, where they were placed with negative implications on June 26, 2020.
S&P said it affirmed the ratings because it expects Indian Bank to be able to absorb a moderate deterioration in its asset quality over the next 12 months and benefit from faster-than-expected economic recovery in India. “Indian Bank’s performance following its merger with Allahabad Bank has been better than we expected,” it said.
According to S&P’s estimate, Indian Bank’s credit costs will stay high at 2.2%-2.9% over fiscals 2021 and 2022. The bank’s reported NPL ratio declined to 9.9% of total loans as of September 30, 2020, from 11.4% as of March 31, 2020.
In the absence of the Supreme Court ruling barring banks from classifying any borrower as nonperforming, Indian Bank’s NPL ratio would have been higher by about 55 basis points, but still lower than in previous quarters.
The improvement in the asset quality was helped by a six-month moratorium on loan repayment and financial savings of borrowers.
S&P said the management expects 2%-3% of the loans to get restructured under the central bank’s one-time restructuring window. On the corporate side, these are mostly loans from the hotels and tourism sectors, which were hard hit by the pandemic.
“We see a high risk of Indian Bank’s RAC ratio falling below 5% on a sustained basis if the bank’s credit costs or credit growth are higher than our forecast, especially if the bank is unable to raise commensurate common equity capital. Indian Bank’s RAC ratio was 5.2% as of September 30, 2020,” it said.
S&P does not assign equity credit to additional tier 1 instruments issued by Indian public sector banks due to uncertainty over their ability to absorb losses on a going-concern basis.
The negative outlook reflects the agency’s view of a likely weakening in Indian Bank’s capitalisation and asset quality owing to Covid, while it sees a one-in-three chance of a downgrade over the next 12-18 months.
“We will lower the rating by a notch if Indian Bank’s RAC ratio falls below 5% on a sustained basis or the bank’s NPL ratio or credit costs increase sharply and we expect them to remain at that level or increase. The RAC ratio could fall below 5% if Indian Bank’s credit growth or provisioning is higher than our forecast, particularly in the absence of capital infusion. We would revise the outlook to stable if the bank’s RAC ratio can sustain above 5% and its asset quality remains comparable to similarly rated peers,” S&P said.
The October-December quarter witnessed 75% of the credit ratings being reaffirmed.
By Malini Bhupta
Barely nine months after the moratorium was imposed on Yes Bank, the private sector lender is on the road to recovery. Prashant Kumar, MD and CEO, in an interview with Malini Bhupta, says operating profits and recoveries would be sufficient to provide for credit costs and it would not need to consume capital.Excerpts:
Nine months after the moratorium was imposed, can you say the Yes Bank turnaround story is complete?
The moratorium was imposed on March 5 and I joined the next day. At that point, the expectation was that the bank would be merged with SBI. Customers lacked confidence and it reflected in deposit outflows. In September 2019, deposits stood at Rs 2.1 lakh crore and those came down to Rs 1.05 lakh crore in March 2020. The bank’s CD ratio was at 166% at the time, as it was not able to raise substantial capital during FY20. And within a week of this, the nationwide lockdown due to the COVID-19 situation was imposed. At SBI, we always believed that we are capable of dealing with any situation. With SBI having a 49% stake in the bank, we embarked on the bank’s journey of transformation, and failure was not an option. The bank had raised Rs 1,930 crore through QIP in August 2019.
To rebuild the confidence of the stakeholders, it was not only important to recognise the problems, but also be transparent about them. If you don’t recognise the problem, there can be no solution.
What was critical for the turnaround of the bank?
After 12 days, the bank came out of the moratorium and I was clear that communicating with customers and employees would be the key. Every day, I was talking to customers and our employees. The bank announced the December 2019 results on March 14 and we provided 73% on our GNPAs.
Three things were very critical for the turnaround. First, the quality of our human resources. Second, the customer engagement and service, and third the digital and technology capabilities of the bank. The entire payment system of the country was paralysed during the moratorium and some players did move on to other banks. However, when the moratorium was lifted, most of the customers came back to us with the feedback that other banks could not handle the traffic.
What about the bank’s ability to cover credit costs?
The most critical aspect for any bank is its machinery to generate the operating profit. Despite the COVID-19 situation, the bank could generate operating profits, which was used to provide for credit costs, showing a profit both in Q1 and Q2 of FY21. We already had 75% provisions for NPAs, but COVID-19 has a separate impact on the loan book. Operating profits and recoveries would be sufficient to provide for credit costs and we would not need to consume capital.
How are you planning to chase recoveries and that too in times like these?
We created a separate vertical within the bank for stressed assets. This team’s responsibility is recovery and resolution of stressed assets. We have a wonderful team of 75 people and we are engaging with customers every week. The board reviews it every month. While this is against nobody, but since it is public money, I need to recover it. We have recovered Rs 1,000 crore in the first two quarters, and for this year, our target is to recover Rs 5,000 crore. Each account needs a different strategy and genuine customers need to be supported. We believe we can recover 50% of Rs 40,000 crore of bad loans.
What about the bank’s financials after taking the hit upfront after you took over?
If you see, our operating profit is back to last year’s levels and we are firmly on track to grow the business and generate profit. Today, while we cannot recognise NPAs due to COVID-19, we are making provisions. We have made provisions of ~Rs 2000 crore but more will be required, which will be met from operating profit (earned) in Q3 and Q4. Hopefully this, plus recoveries will be enough to meet our needs.
What about your capital ratios?
At present, our CET ratio is 13.4% and overall capital is at 20%. In a worst case scenario, 1-1.5% of capital may be needed to take care of the stress. Even then our capital will be at 12%. For any bank, it is important to generate operating profit which can take care of any surprise on the loan book.
What is Yes Bank’s strategy going to be once it puts its problems behind?
The bank will focus on retail. When we say more focus on retail, it does not mean that we will not focus on corporate. Earlier, corporate was 56% and retail/MSME was 44%. Our strategy is to increase the mix of retail/MSME to 60% over the medium term.
This is also because the corporate sector is not growing for a couple of reasons. No investments are coming from the private sector. On the working capital side too, the requirement from good corporates wasn’t there as they could raise money from the money markets. Good companies can raise money from money markets at 3.5%. So, if corporate demand is not there, you park your money in government securities or lend to retail. If you park money in government securities, then you are not a banker.
On the retail side, there is a huge demand. All banks have their own credit risk frameworks and because of your own constraints you can cater to a limited section of the society. Today, when NBFCs are missing from the market, it is a huge opportunity for banks.
The meetings were also attended by deputy governors of RBI.
The governor of the Reserve Bank of India (RBI) held meetings with the chiefs of public sector banks and some private banks on Tuesday and Wednesday, respectively, through video conference. At the meetings, governor Shaktikanta Das asked banks to strengthen their capital and provisioning positions, as also their ability to lend and contribute to financial stability.
The meetings were also attended by deputy governors of RBI. In his opening remarks, Das touched upon the current economic situation and emphasised the importance of the banking sector in supporting the ongoing revival in economic activities.
“With specific reference to the financial sector, he highlighted the measures taken by the RBI since the onset of the pandemic to stabilise the economy and to ensure financial stability. With regard to the banking sector, he reiterated the need for banks to remain vigilant and take proactive measures to strengthen their resilience and lending capacity by raising capital and making provisions proactively,” said a statement on the RBI website.
The other issues discussed in the meeting included an assessment of the current economic situation and outlook, monetary policy transmission and the liquidity situation, credit flows to different sectors of the economy, including stressed sectors and MSMEs, and progress in the implementation of the resolution framework for Covid-related stressed assets.
Progress made in making the identified districts in states and union territories (UTs) 100% digitally enabled, strengthening and enhancing the capacity and efficiency of the IT infrastructure and IT systems in banks and focussed attention on improving grievance redress mechanisms in banks were also discussed.
All of these have of late been areas of concern for the regulator. For instance, during the last monetary policy announcement, governor Das had said that with a view to enhance the efficacy of the grievance redress mechanism in banks, it will put in place a comprehensive framework comprising enhanced disclosures on customer complaints and monetary disincentives in the form of recovery of cost of redress of complaints.
In a recent speech, he said that financial inclusion in the country is poised to grow exponentially with digital savvy millennials joining the workforce, social media blurring the urban-rural divide and technology shaping policy interventions.
“Going forward, harnessing the near universal reach of bank accounts across the length and breadth of the country, there needs to be greater focus on penetration of sustainable credit, investment, insurance and pension products by addressing demand side constraints with enhanced customer protection,” he said.
As the risk profile of NBFCs is changing at a fast pace, there was a need for a regulatory framework for dividend declaration.
RBI’s latest draft on the declaration of dividends by non-banking financial companies (NBFCs) may help them in strengthening their balance sheet by improving leverage ratios and creating a buffer and surplus for fresh lending. RBI’s move will also help NBFCs in creating better provisioning against the delinquent assets, said a report by India Ratings. As the risk profile of NBFCs is changing at a fast pace, there was a need for a regulatory framework for dividend declaration, the report added. The draft circular said that non-deposit and systemically-important NBFCs with capital-to-risk weighted assets ratio (CRAR) below 15 per cent and net NPAs above 6 per cent will not be able to pay any dividend.
NBFCs emerged as a crucial segment during the pandemic as demand for credit has substantially increased in NBFCs. In order to infuse greater transparency and uniformity in practice, it has been decided to prescribe guidelines on the distribution of dividends by NBFCs, RBI said.
However, the RBI draft circular does not commensurate with the guidelines issued by the Department of Investment and Public Asset Management (DIPAM) on dividend payments. According to DIPAM, PSUs are required to pay a minimum annual dividend of 30 per cent of profit after tax or 5 per cent of net worth, whichever is higher. The rating agency further said that this anomaly will have to be resolved and either the RBI will modify its draft circular or come up with a special provision for the government-owned NBFCs, or DIPAM will have to revisit their guidelines for dividend payments.
Meanwhile, it is believed that draft provisions on dividend payments will nudge NBFCs to accelerate the resolution of their stressed assets, otherwise their dividend payments will remain constrained. The NBFCs have received various support as India struggled through the coronavirus pandemic. From TLTRO 2.0 to additional liquidity, the NBFCs have been at the centre of government policies in recent months.
ICICI Bank said it will acquire 9.09 per cent stake in MESPL for cash consideration of Rs 4.5 crore.
ICICI Bank on Tuesday launched an online platform to enable foreign companies to establish or expand business in India. The platform termed as ‘Infinite India’ will provide banking solutions, as well as value-added facilities to customers. The bank said that its platform eliminates the need of coordinating with multiple touch points.
Vishakha Mulye, executive director, ICICI Bank, said, “The initiative is part of our strategy to further strengthen our technology-enabled offerings aimed to partner with foreign companies coming to India.”
“We believe that our dedicated strategy for this segment will further simplify the journey of foreign companies looking to start or expand their business in India,” she added. The platform offers value-added services such as incorporation of a business entity, corporate filings, licences and registrations, HR services, compliances and taxation among others. The value-added services will be available in association with a leading cloud-based business accounting and corporate services firm, while the bank will continue to induct more partners to expand its bouquet of services on the platform.
While the overall lending rates have declined when we look at the headline rates, the transmission is probably slower when we look at various products or risk segments.
The distressed asset market, which had gone into a deep freeze after the outbreak of Covid-19, has started to recover in Q3. Large banks have lined up a string of legacy non-performing assets (NPAs) for sale to asset reconstruction companies (ARCs). The deterioration of household incomes has also led banks to consider the ARC route for retail assets and the activity in this segment is now 30-40% higher than pre-pandemic levels.
On Monday, State Bank of India (SBI) and ICICI Bank put out notices for the sale of their exposures to Action Ispat & Power (Rs 540 crore) and Gammon India, respectively. A consortium of lenders to Jindal India Thermal Power (JITPL), led by Punjab National Bank (PNB), has also sought bids for the project. Earlier, Bank of Baroda (BoB), Axis Bank and IDBI Bank have also run processes for NPA sales, according to sources.
Some of the sales happening now would have been closed in the initial months of FY21, had the pandemic not halted due-diligence processes. For instance, a foreign bank with a significant interest in the stressed asset space had earlier bid for three power projects — Coastal Energen, GVK Goindwal Sahib and JITPL. After the pandemic outbreak, it withdrew the bids.
In fact, latency is one of the key factors driving the series of deals right now. Aswini Sahoo, executive vice-president and chief investment officer at Asset Reconstruction Company (India) (Arcil), said, “There are deals that should have happened in the early part of this year which have now got bundled together in the last few months. We will see some more large names in the power sector, which could get closed in the next quarter.” The deal closures in the next quarter can be put into two buckets, Sahoo added. One bucket is that of the corporate cases and the other is that of small and medium enterprises (SME) and retail. Deals up to Rs 5,000 crore could be seen in the next quarter, with Rs 2,000 crore in the retail and SME segment and the rest in the corporate segment.
Another feature of some of the asset sales happening now is the presence of a promoter willing to settle the account. The JITPL auction is being held under a Swiss challenge process after the consortium received a binding proposal of settlement from the company. Action Ispat is understood to have attracted bids from an ARC and there too, a Swiss challenge is being run.
A top executive with another ARC said that bigger deals are likely to pick up from here on and there are mainly three categories of deals being made. “The deals by stressed asset funds through ARCs had also frozen up because investors were not able to take a view amid the pandemic. The second type is where you have a small amount which is being settled by the promoter through the ARC route,” he said, adding, “The third type of deal, which we expect will now pick up, is in the retail space.” These portfolios being offered by banks range between `300-2,000 crore and there is a mix of secured and unsecured loans.
The end of the moratorium and the restructuring window could also open up space for NPA sales in 2021, said Sanjay Tibrewala, chief executive officer, Phoenix ARC. He observed that earlier, retail sales were more sporadic and in the last few months, there has been a 30-40% increase in action on retail sales by banks. “We could see a lot more deals happening next year because the moratorium has come to an end and there are not too many cases of restructuring. So there will be only two options — either these accounts will be sold to ARCs or banks will start recovery actions themselves, whether through IBC or Sarfaesi.” While recovery action can be carried out in parallel, asset sales could be a viable option for banks, he added.
Asset pricing, too, could improve in 2021, according to some executives. Jyoti Prakash Gadia, managing director, Resurgent India, said, “In the next year, the market is expected to stabilise, which will help in arriving at a proper pricing for the assets.” This, he added, will lead to more transactions happening, particularly in relation to those projects which are generating revenues and are indicating reasonable viability, including those in the infrastructure sector.
A consortium with Canara Bank as a leader and 13 other banks was formed in 2013 and the total limit sanctioned was Rs 4,765.70 crore. (Reuters Image)
Transstroy India, the Hyderabad-based infrastructure company has come under the Central Bureau of Investigation (CBI) scanner over allegations of fraud and involving lending by a consortium of banks. The sums are huge.
According to a statement by Canara Bank, the leader in a consortium with 13 other banks “though the total limit sanctioned was Rs 4,765.70 crore, the share of Canara Bank is only Rs 678.28 crore.” But other than state its extent of involvement, it also says that “the account was declared as fraud and reported to the Reserve Bank of India (RBI) on February 10, 2020.”
However, Sridhar Cherukuri, the chairman and managing director, and the CEO of Transstroy India, denies any wrongdoing by the company. “There is no fraud in the company and we could not pay the money because in the Polavarum irrigation project, the Andhra Pradesh government overnight invoked and encashed our bank guarantees worth over Rs 900 crore and that is why the account has become an NPA (non-performing asset). There is no fraud and these are all allegations,” he says.
There is also the component of political connection. Cherukuri is related to Rayapati Sambasiva Rao, formerly with the Congress and later with the Telugu Desam Party. Though Cherukuri maintains “let the investigating authorities do their job and the truth will come out”.
Those who have tracked the banking sector and lending to the infrastructure sector, say this case of Transstroy India (the company apparently derives its name from a Russian technical partner) has again put into focus the existing provisions and the extent to which banks have appropriate checks in place and questions that now emerge. While, it is wrong to conclude that all are fraudsters or that every lending to infrastructure company is fraught with dangers, but it is a no brainer that lenders ought to be exercising caution. But then, do they? After all, this is not the only company that has come under the CBI or any regulatory scanner in recent years despite enough and more laws and provisions in place for lenders to safeguard their interests.
Consider this: Following the news of the CBI inquiry into Transstroy India, Canara Bank “in reference to the news item circulating regarding alleged fraud to the tune of Rs 7,926 crore by M/s Transstroy India Ltd,” clarified that “in a consortium with Canara Bank as a leader with 13 other banks formed in 2013 and the total limit sanctioned was Rs 4,765.70 crore, the share of Canara Bank is only Rs 678.28 crore.”
The note also says that “the company was enjoying limits from various banks under Multiple Banking Arrangement from 2001. Subsequently, a consortium with Canara Bank as a leader with 13 other banks was formed in 2013.” The account, it says, was declared as fraud and reported to the Reserve Bank of India (RBI) on February 10, 2020. Canara Bank, it adds: “has made I00 per cent provision for this account as per the prescribed prudential norms.” The company, it says, was “already declared as a wilful defaulter on December 26, 2018 by our Bank.”
Also, “out of Rs 7,926.01 crore fraud amount appearing in the press note, the amount of lending made by all the 14 consortium members is Rs 4,765.70 crore. The remaining amount was lent under Multiple Banking Arrangement.”
Wider Worries
Even as the appropriate authorities investigate the matter, the questions that now emerge are around due diligence. To what extent was this done in a methodical manner at the stage of approving the loan? How was the arrangement on the security tie-up and the nature of the collaterals sought? If the promoters extend personal guarantees, how is the net worth assessment done of the promoters? Also, in this context what is the extent to which the tax returns of the promoters were reviewed and whether it is only on the basis of the disclosures made by the promoters? All of them are crucial safeguards, in case a company goes belly up.
Also, was the Trust and Retention Account (TRA) Mechanism set in motion? This is a provision to safeguard the interests of a lender for an infrastructure project and a mechanism to control the cash flow and ensure funds are not siphoned off from the operations. Was the system of having an independent engineer appointed by the bankers to monitor the construction and usage of funds and whether monthly reports were submitted stating these?
On the point about 100 per cent provisioning that Canara Bank talks of, it is arguably a good accounting practice and in tune with the established norms. But then, its note also says: “The case was referred to National Company Law Tribunal (NCLT) and was admitted by NCLT, Hyderabad on October 10, 2018, and that the company is under the process of liquidation.”
This again begs the question: before the case was referred to NCLT, what were the steps taken by the consortium of bankers to recover the money from the promoters? Apparently, it is answers to these that will ensure banks not only stay healthy but are also not caught off-guard.
RBI has sought transfer of all the petitions to the Bombay HC to avoid multiplicity of proceedings and conflicting judgments.
The Supreme Court on Friday sought response from various shareholders and others on why all the petitions related to merger of Lakshmi Vilas Bank (LVB) with DBS Bank India, pending before different high courts, should not be transferred to the Bombay High Court.
RBI has sought transfer of all the petitions to the Bombay HC to avoid multiplicity of proceedings and conflicting judgments.
Justice MM Shantanagoudar issued notice to various shareholders including AUM Capital Markets and Indiabulls Housing Finance, among others. It posted the matter for further hearing in January.
Currently five petitions challenging the LVB merger scheme with DBS Bank, issued by the central government on November 25, are being heard by four different HCs of Madras, Bombay, Karnataka and Delhi. The amalgamation scheme has already come into force from November 27.
The banking regulator told the SC that it would be in the interest of justice to have all the matters consolidated and heard together to avoid multiplicity of proceedings. “Great prejudice is being caused to RBI and to all the stakeholders involved because of parallel proceedings being conducted by the four HCs when the issues involved in all the proceedings are identical or similar,” counsel Liz Mathews stated in the transfer petition.
RBI also said that it is essential that there are no contradictory or inconsistent judgments passed by different HCs on the same issue.
“Such inconsistent directions are likely to hamper the effective implementation of the scheme and would be against the interest of the depositors.
This will be in consonance with the public policy of India,” the petition stated, adding that it had become difficult for RBI and its counsel to conduct proceedings in different HCs due to Covid pandemic.
Various petitions before HCs have alleged that by permitting the merger, RBI was overlooking its own rules by allowing “a back-door entry” to a foreign banking entity into the Indian market.
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