Tag: bad bank

K Balasubramanian, Citibank India, BFSI News, ET BFSI

Banking & Finance

[ad_1]

Read More/Less


The government’s Atmanirbhar Bharat initiative can help increase the share of manufacturing to 25% of GDP by 2025, coming at a time when most global companies are evaluating their capital expenditure plans amidst US-China tensions, said K Balasubramanian, head of corporate banking group at Citibank India. This would provide a strong impetus to exports from India, foreign investment in the country, and job opportunities, he told ET in an interview. Balasubramanian also said that while the proposed bad bank is “a great initiative”, it will prove “an accounting gimmick” unless foreign investors are brought in. Edited excerpts:

What is your take on the government’s Atmanirbhar plan?
India’s Atmanirbhar programme is a great move to drive the manufacturing contribution to GDP to 25% by 2025. It is coming at an opportune time with most global companies evaluating their future capex plans with the developing situation between the US and China. This would provide a strong impetus to exports from India, besides FDI and job opportunities, already seen in the EMS (electronic manufacturing services) sector.

What role is Citi playing for it?
We have been actively engaged with our clients across the world, including the US, Korea, Taiwan, and Japan to attract investments into India. Over the past six months, we have done roadshows across Europe, the US and Asia, covering more than 250 global clients and had senior representatives from government departments talking to these global companies.

Why are Indian companies rushing to raise funds offshore?
With the surplus liquidity around the world and muted credit offtake, investors are chasing quality issuances, bringing down the credit spreads. Most deals continue to be priced at a very tight spread over secondaries. Several Indian corporates and financial institutions are locking long-term financing at attractive levels. We see this trend to continue in 2021 and it could be a record year for Indian foreign currency issuances.

What could lower funding costs further?
Indian companies over the past few quarters are gearing up to the ESG (environmental, social and governance) space. Several corporate houses are drawing up their ESG strategies, which, over a period of time, would become an important factor for accessing capital markets.

Does it make sense to borrow offshore, ignoring the local market?
Companies with international operations and global businesses use different pools of capital and diversify their borrowing base. The structural surplus liquidity situation is a phenomenon across the world on account of easy monetary policy by most countries and large Covid-related support extended by governments across the world.

Can a company borrowing in rupees benefit from overseas funding?
We are also witnessing an interesting phenomenon in the market, where corporates can borrow long-term rupee debt from banks/mutual funds and swap it to US dollar at sub-Libor level, bringing down the effective cost much lower than a traditional dollar borrowing level.

Do you see signs of green shoots when it comes to company growth?
There is a massive liquidity overhang in the system with banks placing about Rs 6-7 trillion with the RBI. The organic capex growth is muted except for select companies taking advantage of the Atmanirbhar scheme.

Will credit growth pick up?
We believe the credit demand in the economy will return in FY2022. The Union budget is a big catalyst with the government outlaying large infrastructure spends. We expect FY2022 to be a robust year with strong corporate rebound and growth coming back. Certain sectors such as real estate, infrastructure and automobile are seeing good activity since opening up.

Do you expect the proposed bad bank to make things better for the banking system?
Bad bank is a great initiative and much needed for the country, with most public sector banks carrying a high level of non-performing loans. This would free up capital for banks saddled with bad assets. It will be helpful for them to concentrate on regular good business. However, the true benefit of the bad bank would be achieved only by getting foreign/private sector money. Else, this would become an accounting gimmick.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , ,

Bad Bank: Seasoned public sector bankers to be roped in on deputation

Banking & Finance

[ad_1]

Read More/Less


Veteran bankers from public sector banks (PSBs) will be roped on deputation to get the so-called ‘Bad Bank’ off the ground. This bank is being floated to clean up the books of PSBs.

With the Indian Banks’ Association (IBA) and the Department of Financial Services (DFS) putting the formation of the Bad Bank on fast-track, bankers feel deputation is the best option as inviting applications for filling various positions, shortlisting eligible candidates and interviewing them could be a drawn out process.

In the run-up to the formation of the Bad Bank, the association has already asked banks to furnish data on stressed accounts with principal outstanding above ₹500 crore, both under consortium and multiple banking arrangement.

The IBA is likely to sound out PSB chiefs for deputing officials in the top executive grade – General Manager and Deputy General Manager – with experience in dealing with recovery cases.

The Bad Bank, which is envisaged as an ‘Asset Reconstruction Company (ARC) – Asset Management Company (AMC)’ structure, may also take outside professional help.

Precedents to deputation

There are precedents to deputation when the bank sector undertakes joint initiatives.

For example, the erstwhile Corporate Debt Restructuring (CDR) Cell had staff deputed from lenders such as IDBI Bank, State Bank of India, and ICICI Bank, among others.

More recently, the ‘Doorstep Banking Services’ initiative of PSBs has senior officials drawn from various banks on deputation to oversee its rollout across the country.

Bad bank is actually a good idea

The association is working with the Department of Financial Services and a few lenders to set up the Bad Bank, pursuant to the announcement in this regard by Finance Minister Nirmala Sitharaman in the Union Budget.

The move to set up a Bad Bank comes in the backdrop of the macro stress tests conducted by the Reserve Bank of India indicating that the gross non-performing asset (GNPA) ratio of all scheduled commercial banks may go up from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario.

This ratio may escalate to 14.8 per cent under a severe stress scenario, cautioned the RBI in its latest Financial Stability Report.

In her Budget speech, Sitharaman observed that the high level of provisioning by public sector banks on their stressed assets calls for measures to clean up their books.

In this regard, she said an ARC and AMC would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds (AIFs) and other potential investors for eventual value realisation.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , ,

‘Bad Bank’: IBA asks lenders for details of stressed A/Cs of over ₹500 crore

Banking & Finance

[ad_1]

Read More/Less


In preparing for the formation of a so-called ‘Bad Bank’, the Indian Banks’ Association has asked lenders to furnish data on stressed accounts with principal outstanding above ₹500 crore, both under consortium and multiple banking arrangement.

This will help in assessing the capital required to float the ‘Bad Bank’, which has been envisaged as an ‘Asset Reconstruction Company (ARC)/Asset Management Company (AMC)’ structure, to clean up lenders’ books

The IBA is working with the Department of Financial Services and a few lenders to set up the ‘Bad Bank’, pursuant to the announcement by Finance Minister Nirmala Sitharaman in the Budget.

Specifically, banks have been asked to submit details of their stressed accounts exposure (fund and non-fund based as also debt investment) above ₹500 crore as on December-end 2020 under consortium/multiple banking arrangement (MBA). The data include both IBC and non-IBC cases.

Excluded entities

Fraud accounts, those in sight of resolution under the IBC and those under liquidation, accounts of financial service providers (such as NBFCs, mutual funds and broking firms), and quasi equity/equity and unsecured exposures have been excluded from the reporting format.

What this means is that the ‘Bad Bank’ will not buy lenders’ exposures to these set of accounts.

Banking expert Hari Hara Mishra said, “While an integrated platform (Bad Bank) for all high-value non-performing assets (NPAs) will facilitate debt aggregation and help faster resolution, bridging price expectation mismatch between banks and the proposed ARC may pose some challenge, given the complexity of security interest and varying charge particulars, which characterise the Indian lending landscape.”

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , ,

Can the banking and insurance sector count on better times?

Banking & Finance

[ad_1]

Read More/Less


Aside from prioritising investments, adopting an expansionary fiscal stance and pegging in a sharp increase in capital expenditure in FY22, the Budget has rightly taken several bold moves to strengthen the financial sector to ensure sustainable growth in the economy.

As was widely expected, the Centre has finally laid down a roadmap for privatisation of public sector banks (two to start with). While this can improve credit growth, bring in better operational efficiencies, and address the growing recap issue, implementation will be critical.

The government – the majority shareholder – has been injecting capital into PSBs year after year. But further recapitalisation has become challenging. Various estimates indicate that PSBs will require about ₹40,000-50,000 crore in FY22. Aside from the quantum of capital infusion, the other key issue lies in the government’s sizeable holdings, which impedes huge recapitalisation (over 90 per cent in few PSBs). Also, public sector bank boards are still not adequately professionalised, and the government still deciding on board appointments, has led to politicisation.

Privatisation of some PSBs can help address these issues. But it will be important to implement such a bold move in a planned manner. After all, it will be critical for the entity to have strong boards before it is privatised, lest the government selling down its stake may not find many takers. PSBs have been trading at 0.4-0.5 times book value for the past few years. But even such low valuations, haven’t kindled investor interest.

To push forth its wider set of objectives of state policy, the government can seek to retain full control of some large PSBs, and de-list them.

Finally, a bad bank

In a bid to ease banks’ capital and spur lending, the Budget has finally proposed the setting up of a bad bank. But will this help restore the health of the banking sector?

There are several issues that need attention while implementing such a proposal. For starters, assessing the amount of funding or capital that a bad bank requires will be critical as will be the mode of constant funding. In India, there are already 29 asset reconstruction companies. But ARCs have not been able to make a meaningful impact owing to multiple headwinds. One critical issue has been capital. ARC is a capital intensive business. While there are 29 ARCs, the top three ARCs constitute over 70 per cent of the industry. Owing to judicial delays in the recovery process, drawing investors has been difficult.

Also, steady recapitalisation of originating banks (selling bad loans to the bad bank) will also be imperative, as asset transfer is likely to occur at a price below the book value. How will the government raise resources to meet the overall funding requirement?

The next critical issue to be addressed will be pricing. Arriving at a consensus on pricing has been a key issue with banks and ARCs, more so because of the lack of a distressed asset market in India. In case of a bad bank a transparent and robust pricing mechanism will be all the more critical. Also, the bad bank will need institutional independence, ring-fencing it from political intervention.

Addressing all these issues will be critical for the bad bank to serve its intended purpose.

Insurance is an important route through which the Centre can raise stable long-term money. Hence, increasing the FDI limit in insurance to 74 per cent from 49 per cent can help bring in more capital into the sector. However, will raising the FDI limit alone draw foreign investors into the sector? Not necessarily, if past trends are any indication.

Also, the rationalisation of taxation of ULIPs, could impact some players which have a heavy ULIP portfolio and a higher ticket size.

The government had increased the FDI limit in insurance in 2015 to 49 per cent from 26 per cent. But five years after the limit was raised, only 8 life insurance players out of 23 private players, and 4 out of the 21 private general insurers have foreign promoter holdings of 49 per cent. Many insurance players still have foreign holdings of 26 per cent or even lower, according to data available for September 2020. Indian promoters still hold 100 per cent stake in companies such as Exide Life, Kotak Mahindra Life and Reliance General.

But given the broader picture across both life and general insurance players, it appears that raising the FDI limit alone may not assure easy access to capital. Also, while the mandate that the majority of directors on the board should be resident Indians is welcome, whether there will be any cap on voting rights of foreign shareholders needs to be seen.

In what could hurt the top line growth of few life insurance players, the Budget has sought to remove the tax exemption currently available on maturity proceeds of ULIPs (above annual premium of ₹2.5 lakh). This can hurt the growth of few life insurance players that have a heavy ULIP portfolio. Of the listed players, ICICI Pru Life and SBI Life have a relatively higher ULIP proportion in their product mix (48-62 per cent of annualised premium equivalent). HDFC Life will see minimal impact of the move. Also, its average ticket size is about ₹60,000 on ULIPs. For ICICI Pru Life the average ticket size on ULIPs is slightly higher at ₹1.8 lakh (as of FY20), and it could see some impact on its growth. However, the impact on profitability will be lower as ULIPs are lower margin business than protection products for life insurers.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , ,

Is there a case for a bad bank?

Banking & Finance

[ad_1]

Read More/Less


The economic uncertainties from the Covid -19 pandemic has once again re-opened the debate on the need for setting up a bad bank to take care of the fresh wave of bad loans and also free up resources for lending.

While the Finance Ministry is understood to be examining such a proposal, Reserve Bank of India Governor Shaktikanta Das also recently said the central bank is open to look at such a plan.

Significantly, the Economic Survey 2020-21 has been silent on the issue of a bad bank but has pointed out the need for an asset quality review after the current forbearance ends and a re-capitalisation of banks to spur lending.

All eyes are now on whether Finance Minister Nirmala Sitharaman will announce such a plan in the Union Budget 2021-22 or will look at other ways to resolve the challenges in the banking sector.

The RBI in its latest Financial Stability Report has estimated that the gross NPAs of banks may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario and the ratio may escalate to 14.7 per cent under a very severely stressed scenario.

This is already becoming evident in the third quarter results of banks that reflect increased stress and lenders are gearing up to meet a fresh wave of NPAs.

 

HDFC Bank had said if it had classified accounts as NPA after August 31, 2020, the proforma gross NPA ratio would have been 1.38 per cent as on December 31, 2020 as against reported 0.81 per cent.

For Yes Bank, the proforma gross NPA would be nearly at 20 per cent as against the reported 15.36 per cent for the third quarter this fiscal.

In their pre-Budget interactions, setting up of a bad bank has been a key wish list for many stakeholders and experts. Industry chamber CII had urged the Finance Minister to consider such a proposal and allow multiple bad banks.

Explaining the rationale, veteran banker and CII President Uday Kotak had said, “In the aftermath of Covid-19 it is important to find a resolution mechanism through a market determined price discovery. With huge liquidity both globally and domestically multiple bad banks, can address this issue in a transparent manner and get the credit cycle back in action.”

Prashant Kumar, Managing Director and CEO, Yes Bank, also said it would be good for the economy. “We are the first ones to support the idea of a bad bank and we are working on our own ARC. I think a bad bank coming in any form would be really good for the economy,” he had recently told BusinessLine.

Analysts point out that a bad bank would lower the re-capitalisation need for public sector banks in the new fiscal year and boost incremental lending by banks.

Banks could become more cautious on lending if bad loans rise. The Survey highlighted that credit growth slowed down to 6.7 per cent as on January 1, 2021 from 14.8 per cent in February 2019.

Not a new idea

The idea of a bad bank is not a new proposal but has been revisited a couple of times in the last few years.

As the name suggests, a bad bank will buy the bad loans of financial sector entities so that they can clean up their balance sheets and move ahead with lending.

One such entity was set up in 1988 for US based Mellon Bank and other such agencies have been set up in countries including Ireland.

The proposal of setting up a bad bank in India had previously come up in the Economic Survey 2016-17, which had suggested setting up of a centralised Public Sector Asset Rehabilitation Agency (PARA) to take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.

In June 2018, then Finance Minister Piyush Goyal had set up a committee to examine whether transferring NPAs of PSBs to an ARC or a bad bank was a suitable proposal.

Many not in favour

But, there have also been many arguments against a bad bank, with reservations within the government and RBI at various points of time.

Funding could be an issue in a year when the government is hard pressed for resources. In its proposal submitted in May last year, Indian Banks’ Association had suggested an initial outlay of ₹10,000 crore.

But the main issue is that banks would have to sell the bad loans and take a haircut, which would impact its P&L. Until this issue is addressed, creating a new structure may not be as potent in addressing the problem.

A recent note by Kotak Institutional Equities had also said bad bank is perhaps well served in the initial leg of the recognition cycle.

“Today, the banking system is relatively more solid with slippages declining in the corporate segment for the past two years and high NPL coverage ratios, which enable faster resolution,” it said, adding that setting up such an agency today would aggregate but not serve the purpose observed in other markets.

As of now, the problem of NPAs are held at bay as the Supreme Court verdict is pending. Setting out a strategy to tackle the looming issue is critical – if not a bad bank, then via other options.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , , ,

Plan bad bank to whittle down and not transfer bad loans, BFSI News, ET BFSI

Banking & Finance

[ad_1]

Read More/Less


Bad loans which were 7.5% in September 2020 threatens to exceed 13% by September 2021 due to large scale disruption caused by COVID-19. The gravity of the situation is expected to unfold and surface once the suspension of IBC is lifted and later when loans liberally restructured or advanced to pandemic stuck companies become due for repayment .

Evidently, status -quo is not sustainable any more. The recent measures for infusion of capital in Punjab and Sindh Bank through questionable means i.e. issuance of government bonds to the bank – interest free and on -hold to maturity basis without actual cash flow and against accounting norms -is a pointer towards emerging grim situation.

Many countries world wide including US, UK, Germany have in the past successfully set up bad banks particularly post the financial crisis of 2008 ,to hold and manage bad loans till the underlying assets are restored to health and / or disposed off or liquidated .Notable amongst these is City Holdings which successfully managed bad assets worth $800 billion hived off from City Bank .The objective of the bad bank is undoubtedly laudable and experience world wide reassuring . It however needs to be subjected to the test of realism in the Indian context.

Managing bad loans is a different ball game then lending. However, without recovery of loans, the lending has no meaning. Lending activity has to be seen as a value chain in continuum till outstanding loan is recovered and if found necessary, through take over and realisation of underlying assets or businesses. The banks therefore need to create requisite capacity to manage bad loans by themselves . A bad bank in the normal course would therefore be a moral hazard incentivising banks to continue with their indiscreet lending practices.

The Indian Bankers Association justified a bad bank amongst others for the reason of lingering fear of enquiries and investigations in the minds of bank officials for the commercial decIsions taken for restoration of viability or disposal of bad loans. This argument is preposterous as the bad bank sponsored by the government, Asset Management Company (AMC) and Alternative Investment Fund (AIF) setup as a public private partnership may not either be able to escape external scrutiny for public accountability. The banks should be made to assume rather than abdicate their responsibility for managing bad loans.

As a sound management practice, banks should set up a Strategic Business Unit (SBU) as part of its core functions, designed to segregate bad loans and ring fence resultant risks on the balance sheet to focus on management of loans at SMA 2 or NPA stage. The SBU should for the purpose have commensurate autonomy, organisation structure, system and processes. Through SBU set up in 2003 as a part of Internal restructuring Dresdner Bank AG ,Germany ,was able to successfully resolve €35 billion portfolio. In case of banks with high level of NPAs ,the government can consider giving on- balance guarantee to protect the bank from loss on bad portfolios.

Pandemic has however created extraordinary situation with crippling effect on the economy in general and on solvency and liquidity of industry – across the board, in particular. It is akin to a force majeure event – not caused by actions of banks or the borrowers. The banks in order to ensure their continuing viability of operations and ability to meet financing needs of the trade and industry post pandemic need to be freed of burden of NPAs through on balance sheet or off balance sheet structures with the government support.

The Bad bank should better be set up as spin-off i.e. disposing bad loans into a legally separated entity and not as a special purpose vehicle used to off -load bad loans. On balance sheet structures though desirable may not be as efficacious given the urgency to tame and deal with the NPAs caused by the pandemic.

Further it would be advisable that government instead of setting up one monolithic bad bank , should set separate bad bank for infrastructure loans and for other loans. This would enable focused approach considering economic significance and specialised skill set required in nurturing, disposal or liquidation of underlying assets. Different bad banks can then be weaved in to a holding company structure for better governance and uniform approach, in managing bad loans. Transfer of bad loans should be at fair value for reflecting true financial health, and not at book value as mooted in some quarters. It would be imprudent to Tweak or overrule, through legal or regulatory diktat, internationally accepted accounting norms in this regard.

The government instead of setting up one monolithic bad bank , should set separate bad bank for infrastructure loans and for other loans .This would enable focused approach considering economic significance and specialised skill set required in nurturing, disposal or liquidation of underlying assets. Different bad banks can then be weaved in to a holding company structure for better governance and uniform approach.

The bad bank may offer a viable alternative structure as an extraordinary and onetime measure .It should however be confined to bad loans caused by pandemic the principle followed for granting moratorium for repayment of loans or suspension of IBC post pandemic.

Care should also be taken that the bad bank does not become a mere instrument of transfer of bad loan from one balance sheet to another. Learning from international experience the bad bank need to be fully autonomous, professionally managed and have systems and processes which facilitate initiatives and outcome oriented actions in a fair and transparent manner. This is a tall requirement in Indian context .However if not addressed before launch, the bad bank may remain bad causing irreparable distress in future.

Dr. Ashok Haldia, Fmr MD & CEO, PFS


The blog has been authored by Dr. Ashok Haldia, Former MD & CEO, PFS.

DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , ,

RBI open to examining bad bank proposal, says Shaktikanta Das; wants lenders to identify risks early

Banking & Finance

[ad_1]

Read More/Less


The RBI Governor said that the idea of a bad bank has been under discussion for a long time.

Reserve Bank of India Governor Shaktikanta Das today said that the central bank is open to looking at a proposal around setting up a bad bank. “Bad bank under discussion for a long time. We at RBI have regulatory guidelines for Asset reconstruction companies and are open to looking at any proposal to set up a bad bank,” Shaktikanta Das said while delivering the 39th Nani Palkhivala Memorial Lecture on Saturday. Das touched up on a range of issue during the event as he lauded the role played by the RBI during a pandemic.

Bad Bank for India?

The RBI Governor said that the idea of a bad bank has been under discussion for a long time now but added that the RBI tries to keep its regulatory framework in sync with the requirement of the times. “We are open (to look at bad bank proposal) in the sense, if any proposal comes we will examining it and issuing the regulatory guidelines. But, then it is for the government and the private players to plan for it,” Das said. He added that RBI will only take a view on any proposal only after examining it. 

Also Read: Rakesh Jhunjhunwala on selling spree; big bull cuts stake in Titan among other stocks

The Idea of setting up a bad bank to help the banking system of the country has picked up after Economic Affairs Secretary, Tarun Bajaj earlier last month, said that the government is exploring all options, including a bad bad, to help the health of the lenders in the country. However, earlier in June last year, Chief Economic Advisor Krishnamurthy Subramanian had opined that setting up a bad bank may not be a potent option to address the NPA woes in the banking sector.

Discussion the idea of bad banks, domestic brokerage and research firm Kotak Securities this week said that it may be an idea whose time has passed. “Today, the banking system is relatively more solid with slippages declining in the corporate segment for the past two years and high NPL coverage ratios, which enable faster resolution. Establishing a bad bank today would aggregate but not serve the purpose that we have observed in other markets,” a recent report by Kotak Securities said.

Banks, NBFCs need to identify risks early

Looking ahead, Shaktikanta Das said that integrity and quality of governance are key to good health and robustness of banks and NBFCs. “Some of the integral elements of the risk management framework of banks would include effective early warning systems and a forward-looking stress testing framework. Banks and NBFCs need to identify risks early, monitor them closely and manage them effectively,” he added.

Talking about recapitalising banks, the RBI governor said that financial institutions in India have to walk on a tight rope. The RBI has advised all lenders, to assess the impact of the pandemic on their balance sheets and work out possible mitigation measures including capital planning, capital raising, and contingency liquidity planning, among others. “Preliminary estimates suggest that potential recapitalisation requirements for meeting regulatory norms as well as for supporting growth capital may be to the extent of 150 bps of Common Equity Tier-I 10 capital ratio for the banking system,” Shaktikanta Das said.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , , , , ,

Open to look at proposal for setting up bad bank: RBI

Banking & Finance

[ad_1]

Read More/Less


The Reserve Bank of India (RBI) is open to looking at any proposal for setting up a bad bank, according to Reserve Bank of India (RBI) Governor Shaktikanta Das.

“A bad bank has been under discussion for a very long time. We have regulatory guidelines for Asset Reconstruction Companies (ARCs). If any proposal (for setting up a bad bank) comes, we are open to examining it and issuing required regulatory guidelines,” Das said in an interaction with participants after delivering the Nani Palkhivala Memorial Lecture.

 

The Governor emphasised that it is for the government and other private sector players to really plan for the bad bank.

“As far as RBI is concerned, we try to keep our regulatory framework in sync with the requirement of the times. If there is a proposal for setting up a bad bank, RBI will examine and take a view on that,” Das said.

Also read: Bad bank should have been set up 3-4 years back, not now: Kotak Securities report

The Economic Survey 2016-17 had suggested setting up of a centralised Public Sector Asset Rehabilitation Agency (PARA) to take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt. But no steps have been initiated so far to set up PARA.

Later, in 2018, the Sunil Mehta committee had recommended an Asset Management Company-led resolution approach for loans over ₹500 crore. This proposal too, has remained only on paper.

The need to set up a bad bank assumes importance in the context of macro stress tests for credit risks conducted by RBI showing that the gross non-performing asset (GNPA) ratio of Scheduled Commercial Banks (SCBs) may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario.

If the macro economic environment deteriorates, the ratio may escalate to 14.8 per cent under the severe stress scenario. These projections are indicative of the possible economic impairment latent in banks’ portfolios, according to RBI’s latest Financial Stability Report (FSR).

In his lecture, the Governor noted that the current Covid-19 pandemic-related shock will place greater pressure on the balance sheets of banks in terms of non-performing assets, leading to erosion of capital.

“Building buffers and raising capital by banks – both in the public and private sectors – will be crucial not only to ensure credit flow but also to build resilience in the financial system. We have advised all banks, large non-deposit taking NBFCs (non-banking finance companies) and all deposit-taking NBFCs to assess the impact of Covid-19 on their balance sheets, asset quality, liquidity, profitability and capital adequacy, and work out possible mitigation measures, including capital planning, capital raising, and contingency liquidity planning, among others,” he said.

Prudently, a few large public sector banks (PSBs) and major private sector banks (PVBs) have already raised capital, and some have plans to raise further resources taking advantage of benign financial conditions. He emphasised that this process needs to be put on the fast track.

Also read: RBI FSR: Bad loans can rise to 13.5% by Septemberas regulatory reliefs are rolled back

Das observed that the integrity and quality of governance are key to good health and robustness of banks and NBFCs.

“Recent events in our rapidly evolving financial landscape have led to increasing scrutiny of the role of promoters, major shareholders and senior management vis-à-vis the role of the Board. The RBI is constantly focussed on strengthening the related regulations and deepening its supervision of financial entities…Some more measures on improving governance in banks and NBFCs are in the pipeline,” he said.

Capital inflows

While abundant capital inflows have been largely driven by accommodative global liquidity conditions and India’s optimistic medium-term growth outlook, domestic financial markets must remain prepared for sudden stops and reversals, should the global risk aversion factors take hold, said Das.

Under uncertain global economic environment, emerging market economies (EMEs) typically remain at the receiving end, he added.

“In order to mitigate global spillovers, they have no recourse but to build their own forex reserve buffers, even though at the cost of being included in the list of currency manipulators or monitoring list of the US Treasury. I feel that this aspect needs greater understanding on both sides, so that EMEs can actively use policy tools to overcome the capital flow-related challenges,” Das said.

The Reserve Bank is closely monitoring both global headwinds and tailwinds while assessing the domestic macro economic situation and its resilience.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , ,

Bad bank should have been set up 3-4 years back, not now: Kotak Securities report

Banking & Finance

[ad_1]

Read More/Less


Establishing a bad bank today would aggregate but not serve the purpose that has been observed in other markets, Kotak Securities Ltd (KSL) said in a report.

Bad bank is perhaps well served in the initial leg of the loan recognition cycle, it added.

“While we are unaware of its probability and design, creation of a bad bank would have been most fruitful three-four years back (perhaps just after the Asset Quality Review) or earlier when the stress was just building up and banks were looking to delay recognition for various reasons.

“Today, the banking system is relatively more solid with slippages declining in the corporate segment for the past two years and high NPL (non-performing loan) coverage ratios, which enable faster resolution,” said KSL analysts M B Mahesh, Nischint Chawathe, Abhijeet Sakhare, Ashlesh Sonje and Dipanjan Ghosh.

Also read: Kotak Securities launches start-up investment and engagement programme

Based on insights gained from two key reports of BIS and IMF, the report observed that a successful bad bank needs a critical mass (healthy buy-in from lenders) of impaired assets, robust legal framework for debt resolution, along with strong commitment to reforms.

The analysts observed that segregation of impaired assets without sufficient recapitalisation has insignificant impact on future loan growth and NPL creation. A bad bank is expensive to establish, needs a well-defined mandate, and clear exit strategy.

Further, timing of formation and pricing of assets are crucial as the objective is to release stress from lenders early in the cycle so that they can refocus efforts in creating credit. Finally, there are instances of bad banks not achieving their desired objective, the analysts said.

After nearly a decade of elevated slippages, FY2019-20 saw a much lower slippage trend with evidence of it moving closer to normalisation before the impact caused by Covid-19, the report said.

The analysts said they are yet to assess the impact of Covid-19 but in their view the corporate portfolio appears to be holding quite well.

Also read: Rate of decline in fresh lending and deposit rates slows down: Report

Public sector undertaking (PSU) banks PSU, in particular, have gone through this with fresh equity (about ₹3.5-lakh crore over FY2016-21 by the government/Life Insurance Corporation of India) in the past three years and provision coverage ratio (PCR) improving to about 70 per cent from about 40 per cent in the past three-four years.

“A high coverage ratio ensures that faster consensus building is also no longer an issue. We have seen the introduction of IBC as well as consolidation in public banks. We had limited systemic risk from a liability perspective,” the analysts said.

The report observed that one of the key objectives of segregating impaired loans is to restore faith in bank balance sheets and help unlock funding market access. However, PSU banks control a large part of the banking system with a high contribution to NPLs.

“Managerial incentives across organisations are probably still fully not aligned to maximising value through early recognition of bad loans,” the analysts opined.

Also read: Kotak Securities launches platform for buying US equities

Further, given the high contribution of retail deposits, funding stability of these banks is uncorrelated with their financial performance for an extensive period of time.

The analysts said lack of credit growth, especially in the corporate segment, is often attributed to PSU banks’ risk aversion (low capital/high NPLs in the past).

“However, we do argue that corporate deleveraging has been quite slow and credit demand, especially by the better-rated and large wholesale borrowers, has been slower,” they added.

The behaviour of PSU banks has been different with respect to retail and micro, small and medium enterprise (MSME) lending, as these banks have been helping credit growth, especially in recent years and much higher than trend levels post the Covid-19 outbreak.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , , , ,

Centre mulls ‘bad bank’, PSB privatisation for Budget FY22, BFSI News, ET BFSI

Banking & Finance

[ad_1]

Read More/Less


New Delhi, The Union Government is considering several policy measures for the Indian banking sector, including setting up of a bad bank and privatisation of few state-run banks.

A bad bank is a bank set up to buy the bad loans and other illiquid holdings of another financial institution. Even though a custodian for the stresssed assets has been provisioned for long, but, it has never materialised.

According to sources, there are talks of reducing the number of public sector banks (PSBs) to four from the current 12.

This is likely to be part of the government’s new strategic disinvestment policy, which is also likely to include the insurance sector.

This would be a major move towards meeting the government’s disinvestment targets.

The most significant feature of the upcoming policy would be the inclusion of financial sectors under its ambit.

Though privatisation is on the cards, further recapitalistion of PSBs cannot be ruled out. According to people in the know, the government may go ahead with another round of recapitalisation, to enable the banks create a strong buffer amid the pandemic.

Last year, the Niti Aayog suggested the privatisation of three banks – the Punjab & Sind Bank, UCO Bank and the Bank of Maharashtra, according to people in the know.

Further, the talks of stake sale in banks under the new policy, came after the merger of 10 public sector banks came into effect on April 1, 2020.

With the merger coming into effect, India currently has 12 public sector banks, down from 27 in 2017.

During the announcement of the Aatmanirbhar Bharat economic package in May last year, Finance Minister Nirmala Sitharaman had said that the Centre will come up with a new Public Sector Enterprise Policy, and open up all sectors to the private sector.

She had said that under the new policy, a list of strategic sectors requiring presence of PSEs in public interest will be notified and in these sectors, at least one enterprise will remain in the public sector and the private sector will also be allowed.

In the Union Budget for FY21, the government had set a disinvestment target of Rs 2.1 lakh crore. The target has, however, been described as ambitious by many as the Centre was not able to reach anywhere near its target in the last fiscal.

The already lagging disinvestment plans have been severely impacted by the ongoing pandemic.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , ,
1 … 3 4 5