Tag: bad loans

CAG flags treatment of bank recap expenditure in FY18-19, BFSI News, ET BFSI

Banking & Finance

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The Comptroller and Audit General (CAG) has raised its concerns over treatment of expenditure of bank recapitalisation during 2017-18 and 2018-19, stating that it was against the provisions of the fiscal responsibility and Budget Management (FRBM) Act.

For recapitalisation of state-run banks, the government provided ₹80,000 crore in 2017-18 and of ₹1.06 lakh crore in 2018-19 respectively.

The CAG has flagged in the expenditure budget the above mentioned expenditure on recapitalisation of the PSBs, had been netted against receipts from issue of special securities, while in the receipt budget, receipts from the securities have been netted against expenditure on recapitalisation.

It said that during the two financial years, funds for these investments were raised by the government through issue of non-transferable special securities to the same PSBs.

According to CAG, the finance ministry had stated that bank recapitalisation was not fiscally neutral but cash neutral, as issue of securities would get reflected in the total government debt and coupon payments for the special securities when made would be reflected in the deficit of the relevant year.

The concept of recapitalisation bonds was first introduced in 2017. Earlier, the capital infusion was to done by the government to a bank through cash outgo from the Consolidated Fund of India led to fiscal pressure.In 2017, the government had introduced recap bonds.

Under this, the government issues recapitalisation bonds to a public sector bank which needs capital. In turn, banks subscribe to the bond against which the government receives the money. Now the money received goes as equity capital of the bank. So the government doesn’t have to pay anything from its pocket.

The national auditor also pointed out the deficit in operation of the National Small Savings Fund (NSSF), which comprises all collections of small saving schemes.

“The balances under NSSF do not explicitly disclose the substantial accumulated deficit in the fund, which would have to be made good by the government in the future. There is also inadequate disclosure that significant amounts were being provided from NSSF for funding revenue expenditure of the government which would have to be serviced through budgetary support. It also raised concerns over inadequacies in disclosure under the FRBM rules.

The CAG pulled up the union government for adopting an erroneous process of devolution of Integrated Goods and Services Tax to states and short-transfer of cesses to reserve funds, which resulted in under-reporting of deficit figures for the 2017-18 and 2018-19 fiscals. The IGST, which is levied on inter-state sale of goods and services, is shared between the Centre and states in the 50:50 ratio.

In its report on the union government accounts tabled in Parliament, the Comptroller and Auditor General of India (CAG) found that ₹13,944 crore was left unapportioned and retained in the Consolidated Fund of India (CFI) in 2018-19, even though the amended IGST Act now provides for a process for ad-hoc apportionment of IGST.



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Security receipts for past NPAs appear as lenders seek to avoid provisioning

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“Time is not the essence for transfer of SRs. In the event of non-realisation of amount out of SRs, the bank is not liable to refund anything in part or full,” SBI said in the notice.

Security receipts (SRs) issued against bad-loan sales from seven-eight years ago are set to enter the stressed assets market as lenders seek to avoid provisioning against them. Both banks and non-banking financial companies (NBFCs) are likely to start hunting for buyers for SRs, with State Bank of India taking the lead, industry executives told FE.

The country’s largest lender by assets has issued a notice seeking bids for SRs with a face value of Rs 38 crore issued against its exposure to CM Smith and Sons by Invent Assets Securitisation & Reconstruction. The securities were assigned in January 2015.

“Time is not the essence for transfer of SRs. In the event of non-realisation of amount out of SRs, the bank is not liable to refund anything in part or full,” SBI said in the notice.

Executives from the stressed assets industry said SRs issued during non-performing asset (NPA) sales are now expected to be put up for sale, as for many of them, recoveries have not happened and erosion in the net asset value (NAV) may demand additional provisioning.

“Until a few years ago, there used to be structured deals in ARC sales – first under 5:95 and then under the 15:85 structure. SRs from these years are going to enter the market now as NAVs for many of them have depleted and that means the purpose of selling them to ARCs hasn’t fructified. So, to avoid providing against them, banks and NBFCs will both come to the market,” said a senior executive from the industry.

Most NPAs sold to ARCs since 2018 have been assigned through full-cash deals, which means that there were no SRs issued during the sale. In SRs, underlying cash flows are dependent on realisation from NPAs. Reserve Bank of India guidelines say investments in SRs may be aggregated to arrive at net depreciation or appreciation of investments under the category. Net depreciation, if any, must be provided for.

Prospective buyers for SRs are also mostly ARCs. According to industry executives, the quality of underlying assets for each set of SRs and their vintage are the two important factors that will determine the terms of sale. The most coveted SRs will have residential properties as the underlying, followed by commercial properties, office properties and industrial properties.

Lenders may have to take substantial haircuts as these assets are old. “Most of these sales are likely to be priced at 25-30 cents to the dollar because of the vintage of the asset,” the person quoted above said.

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RBI asks banks not to standardise bad loans on just getting interest payments, BFSI News, ET BFSI

Banking & Finance

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In a significant move, the Reserve Bank on Friday tightened the norms for recognition of dud assets and directed lenders not to standardise an NPA account after getting only interest payment as well as to mandatorily mention the due dates along with details of interest and principal amounts.

The monetary authority has from time to time been issuing new/revised norms on dud asset classification as system-wide NPAs began to balloon.

Issuing some clarifications to all the extant provisions and including the ones issued on October 1, 2021, on the prudential norms on income recognition, asset classification and provisioning pertaining to advances (IRACP), the RBI asked banks not to upgrade an NPA account after getting only interest dues paid.

It has been observed that some lending institutions upgrade accounts classified as NPAs to standard accounts on payment of only interest overdue, partial overdue, etc. To avoid any ambiguity in this regard, it is clarified that loan accounts classified as NPAs may be upgraded as a standard account only if the entire arrears of interest and principal are paid by the borrower, the apex bank said in the revised notification this evening.

Lenders have also been asked to specifically mention in the loan agreements the exact due date of a loan and the breakup of the principal and interest, among others, instead of giving a description of the due dates, which leaves scope for interpretation.

Henceforth, all lenders have to clearly mention the exact due dates for repayment, frequency of repayment, break up between the principal and interest, examples of SMA/NPA classification dates etc, it said.

All these should be clearly specified in the loan agreement and the borrower shall be apprised of the same at the time of loan sanction and also at the time of subsequent changes if any, and till full repayment of the loan is done, the RBI said, adding this will be applicable immediately for new loans or before December 31, 2021, and for the existing loan as and when changes occur.

In cases of a loan under moratorium, the exact date of commencement of repayment shall also be specified in the loan agreements, it added.

Sticking to its due by the end of the day/one-day default norms, which has given many large borrowers heartburns, RBI further clarified that an account shall be flagged as overdue as part of the lender’s day-end processes for the due date, irrespective of the time of running such processes, reiterating that all extant IRACP norms specify that an amount must be treated as overdue if it’s not paid on the due date fixed by the lender.

Similarly, classification of an account as SMA (special mention account) as well as NPA (non-performing assets) shall be done as part of the day-end process and the SMA/NPA classification date shall be the calendar date for which the day-end process is run. Stated differently, the date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date, the regulator stressed.

The monetary authority further said these changes are being made to ensure that the IRACP norms are uniformly implemented across all lending institutions and are applicable mutatis mutandis (making necessary changes on a case to case basis but not affecting the main points) to all lending institutions.

On NPA classification, it said the lender must recognise incipient stress in a borrower account, immediately on default, by classifying it as SMA. Without any ambiguity, it clarified that the intervals are intended to be continuous and accordingly, loans other than revolving facilities like cash credit/overdraft will become SMA if the principal or interest payment or any other amount wholly or partly become overdue or if the outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for 0-30 days as SMA, for 30-60 days as SMA-1 and over 60-90 days as SMA2/NPAs.

Stated differently, the date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date.

For instance, if the due date is March 31, and full dues are not received before the day-end process, the date of overdue shall be March 31.

If it continues to remain overdue, then this account shall get tagged as SMA-1 on running the day-end process on April 30, on completion of 30 days of being continuously overdue.

Accordingly, the date of SMA-1 classification for that account shall be April 30. Similarly, if the account continues to remain overdue, it shall get tagged as SMA2 on running day-end process on May 30 and if continued to remain overdue further, it shall get classified as NPA on running day-end process on June 29.

However, for NBFCs, 90-days for SMA-2/NPA classification may be read according to the applicable norms.

The central bank has clarified that the instructions on SMA classification are applicable to all loans, including retail loans (excluding the Agri loans governed by crop season-based asset classification norms), irrespective of the size of exposure of the lending institution.

The RBI said from March 31, 2022, in case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rests remains overdue for over 90 days. If a borrower account becomes overdue on or after March 31, 2022, its classification as NPA shall be based on the account being overdue for over 90 days.

On the upgrading of accounts classified as NPAs, it said a loan account classified as NPAs can be upgraded as standard only if the entire arrears of interest and principal are repaid. But those accounts classified as NPA due to restructuring, or non-achievement of the date of commencement of commercial operations, etc, extant provisions shall continue.



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Suryoday Small Finance Bank reports net loss of Rs 1.9 crore for quarter ended September, BFSI News, ET BFSI

Banking & Finance

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Suryoday Small Finance Bank made a net loss of Rs 1.9 crore for the quarter ending September 30, as compared with Rs 27.2 crore net profit in the year ago period, owing higher credit cost following the pandemic-led stress on its borrowers.

This is the bank’s second consecutive quarterly loss after Rs 47.7 crore loss in the June quarter.

Its operating profit rose 62% at Rs 82.8 crore against Rs 51.1 crore over the same period. Its net interest income at 147 crore reflects a 34% rise, primarily on account of rise in gross advances over the period and lower cost of funds, the bank said in a regulatory filing to stock exchanges.

But a 6.6-fold higher provisions to cover bad loans and others led to the loss.

Its asset quality deteriorated with gross non-performing assets ratio rising to 10.2% at the end of September compared with 9.5% at the end of June. Net NPA remained flat 4.5%. Provision coverage ratio stood a tad higher at 71.2%.

The bank restructured loans to the tune of Rs 794 crore, which was 17.7% of gross loans, which grew 21% year-on-year to Rs 4470 crore.



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Suryoday Small Finance Bank reports net loss of Rs 1.9 crore for quarter ended September, BFSI News, ET BFSI

Banking & Finance

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Suryoday Small Finance Bank made a net loss of Rs 1.9 crore for the quarter ending September 30, as compared with Rs 27.2 crore net profit in the year ago period, owing higher credit cost following the pandemic-led stress on its borrowers.

This is the bank’s second consecutive quarterly loss after Rs 47.7 crore loss in the June quarter.

Its operating profit rose 62% at Rs 82.8 crore against Rs 51.1 crore over the same period. Its net interest income at 147 crore reflects a 34% rise, primarily on account of rise in gross advances over the period and lower cost of funds, the bank said in a regulatory filing to stock exchanges.

But a 6.6-fold higher provisions to cover bad loans and others led to the loss.

Its asset quality deteriorated with gross non-performing assets ratio rising to 10.2% at the end of September compared with 9.5% at the end of June. Net NPA remained flat 4.5%. Provision coverage ratio stood a tad higher at 71.2%.

The bank restructured loans to the tune of Rs 794 crore, which was 17.7% of gross loans, which grew 21% year-on-year to Rs 4470 crore.



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Banks want more provisions included as statutory capital, BFSI News, ET BFSI

Banking & Finance

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Banks have urged the sector regulator, Reserve Bank of India, to relax norms and allow more of the provision made towards unidentified losses to be reckoned as statutory capital.

At present, because of the regulatory cap, only provisions to the extent of 1.25% of the credit risk weighted assets are considered as tier II capital. If rules are relaxed, more funds can be freed up and made available for banks at a time when recovery is firming up and credit is expected to pick up.

On Wednesday, in its monthly economic report, the finance ministry said India is on its way to becoming the fastest growing major economy in the world and forecast a strong possibility of faster credit growth.
“There is a uniform view among banks that due to increased provision burden, the regulatory cap of 1.25% can be removed. We have also approached RBI to either remove the cap or increase eligible percentage so banks will benefit from the additional provisions made by them,” said an executive aware of developments.

As per RBI’s July 2015 circular on Basel III Capital Regulations -Elements of Tier II Capital for Indian Banks, under “General Provisions and Loss Reserves”, provisions held for currently unidentified losses, which are freely available to meet losses that subsequently materialise, will qualify for inclusion under tier
II capital. Accordingly, the general provisions on standard assets qualify for inclusion in tier II capital.

“With expected increase in standard assets provision on account of restructuring of stressed accounts under Covid-19 dispensations, ranging from 5% to 15%, substantial amount of provisions made will not be qualifying as tier II capital because of the cap,” said another bank executive, explaining the demand for removal of the cap on amount of provision reckoned as tier II capital.

Last month in a report, rating agency Crisil had said that gross non-performing assets (NPAs) of banks are expected to rise to 8-9% this fiscal from 7.5% as on March 31, but below the peak of 11.2% seen at the end of fiscal 2018.

“With 2% of bank credit expected under restructuring by the end of this fiscal, stressed assets – comprising gross NPAs and loan book under restructuring – should touch 10-11%,” it had noted in its report.



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NARCL may get first bad loans tranche of Rs 90,000 crore by January, BFSI News, ET BFSI

Banking & Finance

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The National Asset Reconstruction Company (NARCL), or bad bank, is likely to get the first tranche of bad assets worth about Rs 90,000 crore by January 2022, according to a report. In the first phase, fully-provisioned toxic assets will be transferred.

Finance Minister Nirmala Sitharaman in the budget for 2021-22 had announced that an asset reconstruction company or a bad bank would be set up to consolidate and take over existing stressed assets of lenders and undertake their resolution. A bad bank refers to a financial institution that takes over bad assets of lenders and undertakes resolution.

Last month, the Cabinet had approved a proposal to offer sovereign guarantee on the security receipts (SRs) issued by the NARCL, It is estimated to cost the govenrment Rs 30,600 crore over five years.

Recovery hopes

The bad bank hopes to recover between Rs 50,000 crore and Rs 64,000 crore through the resolution of bad loans amounting to Rs 2 lakh crore.

NARCL may get first bad loans tranche of Rs 90,000 crore by January

The lowest recovery is seen at 25 per cent or Rs 50,000 crore, while the highest recovery rate is pegged at 32 per cent, or Rs 64,000 crore. The most likely recovery has been pegged at 28 per cent or Rs 56,000 crore.

The NARCL will buy the assets around Rs 36,000 crore or, about 18 per cent of the book value of Rs 2 lakh crore assets. About 15 per cent of Rs 36,000 crore would be paid by NARCL to banks in cash and the remaining 85 per cent via security receipts guaranteed by the Centre.

Close to liquidation

Though banks have made 100% provision for these assets, Rajkiran Rai, MD & CEO of Union Bank of India, does not expect more than 20-25 per cent recovery from these legacy accounts, he told a television channel.

The State Bank of India has identified NPAs with Rs 17,000-18,000 crore outstanding to be transferred to the NARCL, while Punjab National Bank has identified Rs 8,000 crore worth of NPAs, Union Bank of India Rs 7,800 crore of NPAs to be transferred to the National ARC. The Bank of India has identified about Rs 5,500 crores of assets for transfer while Indian Bank about Rs 1,900 crore.

Assets

NARCL may get first bad loans tranche of Rs 90,000 crore by January

Banks have identified Rs 82,496 crores worth of bad loans that could be transferred to the NARCL, which has names like Videocon’s VOVL (Rs 22,532 crores total exposure), Reliance Naval and Engineering Ltd (Rs 8,934 crore), Amtek Auto (Rs 9,014 crore), Jaypee Infratech (Rs 7,950 crore, Castex Technologies (Rs 6,337 crore), GTL Ltd (Rs 4,866 crore), Visa Steel (Rs 3,394 crore), Wind World India Ltd (Rs 3,161 crore), Lavasa Corporation (Rs 1,424 crore), Consolidated Construction Consortium Ltd (Rs 1,353 crores).

Several assets such as Videocon have seen realisable value close to liquidation value in NCLT proceedings. Many big-ticket resolutions at IBC have seen haircuts over 90%. With most of the NPAs proposed to be transferred to the bad bank being old legacy NPAs, there has been an erosion in value, making them more likely to head to liquidation.

Lavasa Corporation has got bids worth Rs 700 crore for loan claims of over Rs 8,000 crore at NCLT.



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Lenders approach RBI after Rs 30,000 crore Srei loans turn NPA, BFSI News, ET BFSI

Banking & Finance

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A consortium of lenders led by UCO Bank has sought central bank directions on pursuing recovery of dues from the Srei Group after loans worth about ₹30,000 crore to the Kolkata-based financier officially qualified to be moved to the list of non-performing assets (NPA) this quarter, two people aware of the development told ET.

The Srei Group, however, said it expects banks to chalk out a debt recast plan that will map repayment milestones to future cash flows.

Since the group entities involved are non-banking financial companies (NBFC), the lenders concerned compulsorily need the Reserve Bank of India‘s (RBI) approval to take the Srei Group to the National Company Law Tribunal (NCLT) for insolvency proceedings.

In response to a query from ET, a Srei Group spokesperson said the economic downturn and loan moratoriums provided by the regulator had affected operations. The group is now in discussions with banks to implement a restructuring scheme.

‘NPA Ratio to Take a Hit’
“We hope banks will decide on the debt realignment at the earliest so that the company can pay all its bondholders and other creditors,” a Srei spokesperson said in the mailed response to ET. “We are very hopeful that banks will propose a payment schedule in consonance with the company’s cash flow that will enable payments to all creditors and help run the company smoothly.”

To be sure, Srei Infrastructure Finance may become the next big bankruptcy candidate from the financial services space after Dewan Housing Finance (DHFL). Banks are free to classify loans to Srei Group as NPAs after the National Company Law Appellate Tribunal (NCLAT) lifted a stay earlier this month on marking such exposure as bad, setting aside a lower bench order.

  • Srei Infra and its unit Srei Equipment Finance together owe lenders and debenture holders Rs 30,000 cr
  • UCO Bank, SBI have exposure of more than Rs 2,000 cr each
  • Srei Infra reported a loss of Rs 971 cr in the June quarter
  • Provisions on loans surged to Rs 439 cr from Rs 67 cr a year ago
  • In July, Srei disclosed that a RBI-directed audit had flagged Rs 8,576 cr of lending to ‘probable’ related parties of the group

“All banks will have to classify loans to Srei as NPAs this quarter and make the minimum provisions required,” said a person familiar with banking-sector exposure to the Srei Group. “Many banks have excess provisions; so, that should not be a cause for concern. But with such a big loan account slipping, the gross NPA ratio of some banks will increase at the end of the quarter.”Srei Infrastructure, and its subsidiary Srei Equipment Finance, together owe lenders and debenture holders a total of ₹30,000 crore. Kolkata-based UCO Bank is the lead lender, with more than ₹2,000 crore of exposure. State Bank of India (SBI)’s exposure to the group is also more than ₹2,000 crore.

Bankers say they have already set the ball rolling for recovery of loans by writing to the RBI and a regulatory nod to take the company through the bankruptcy courts could mean another DHFL-type insolvency process.

“Already two letters have been sent to apprise RBI of the conditions. If the central bank gives the permission, banks will go ahead with a court monitored process,” said a second person aware of the Srei-related banking-sector exposures. “It remains to be seen what the central bank’s response is.”



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IL&FS Financial Services to sell bad loans worth Rs 4000 crore, BFSI News, ET BFSI

Personal Finance

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IL&FS Financial Services, an arm of IL&FS, has put on the block Rs 4,297 crore of loans that have been classified as non-performing assets. The finance company has said that the 62 loans will be sold all together for an upfront cash payment. Interested parties have been given until October 19 to submit a binding bid.

Last week, the RBI allowed lenders to sell even those loan accounts that have been classified as fraudulent. The loans that IL&FS is trying to sell are those advanced to third-parties that are not part of the group. The financial services arm has also advanced loans to group companies which are non-performing.

According to sources, the scope of recovery in these loans is limited. In July the board had said that it expects to recover Rs 58,000 crore or 95% of the recovery target by March 2022. The group’s overall debt stood at Rs 99,000 crore as of October 2018, of which it expects to recover Rs 61,000 crore.

A presentation on the recovery update filed by IL&FS said the corporation plans to recover Rs 2,250 crore after September 2021. This included the recovery from sale of IFIN NPAs, recoveries from non-group investments, and release of non-fund-based limits.

Banks have classified loans to IFIN as fraud. The Serious Fraud Investigation Office (SFIO) had observed shortcomings in the operations, risk management and compliance of the company for years.



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Chairman, BFSI News, ET BFSI

Banking & Finance

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Bombay Mercantile Bank recovered bad loans worth over Rs 6 crore in 2020-21 and expects better realisation going forward, a senior official has said. Recovery of NPAs (non-performing assets) has been a major thrust area for the bank. The bank has taken specific steps for reduction of NPAs by formulating policy for recovery of NPA through personal follow-ups and other legal measures, Zeeshan Mehdi, Chairman, Bombay Mercantile Co-operative Bank, said in his address at the annual general meeting (AGM).

“These efforts have resulted in the bank posting a recovery of Rs 6.10 crore, in NPA accounts. Due to the pendency of cases in various courts whose functioning was hampered because of the pandemic, resulting in delays in final verdicts, the recoveries in many NPA accounts could not be achieved as targeted,” he added.

Mehdi said the bank expects a healthy recovery of NPAs during the ensuing year.

The bank’s gross bad loans stood at 6.61 per cent and the net NPAs were 5.11 per cent during FY21.

The NPA is slightly higher due to the pandemic, however, it is still within the permissible limit of the regulators, he added.

The CRAR (capital to risk-weighted assets ratio) stood at 17.26 per cent against 16.88 per cent in the preceding fiscal.

BMC Bank registered a net profit of Rs 3.78 crore in FY21. Mehdi said the bank posted a second consecutive year of profit, however, the target was much higher.

The total business of the bank during 2020-21 stood at Rs 3,467.55 crore, of which deposits were Rs 2,363.38 crore and advances Rs 1,104.17 crore.

“During the year, the bank has been allotted its own IFSC code by the RBI, with all branches using exclusive IFSC codes. The bank is now a direct member of IFTAS and has been given permission to use INFINET connectivity to provide a variety of services to our customers and our treasury department,” the chairman said.

These services are RTGS, NEFT, SGL account with RBI, NDS-OM, NDS-Call, SWAP, LAF and MSF. Earlier, the bank did not have such facilities, he added.

The implementation of these digital initiatives would result in the enhancement of the customer experience, he said.

“The bank is moving ahead digitally at a fast pace…we are launching Mobile-App to our valued customers to meet the emerging business challenges and be at par with the best in the industry,” Mehdi added. PTI KPM BAL BAL



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