Tag: India

Is there a case for a bad bank?

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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.

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Concerns ahead despite good Q3 results

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Third quarter results of banks have indicated banks show a rise in net profit but concerns are evident ahead. Bank of Baroda reported a standalone net profit of ₹1,061 crore in the third quarter against a net loss of ₹1,407 crore in the year-ago quarter. Private sector lender ICICI Bank reported a 19.1 per cent increase in its standalone net profit in the third quarter of the fiscal at ₹4,939.59 crore.

The bank had a net profit of ₹4,146.46 crore in the same period last fiscal. However, Axis Bank reported a 36.4 per cent drop in its net profit in the third quarter this fiscal despite a robust rise in net interest income as provisions rose sharply. For the quarter ended December 31, 2020, Axis Bank’s standalone net profit stood at ₹1,116.60 crore as against ₹1,757 crore in the same period a year ago.

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IRDAI panel for separate payments of vehicle, insurance premium

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Buyer of a new vehicle may have to pay cost of vehicle and insurance premium through separate cheques, if the recommendations of a committee to review MISP guidelines are accepted by the insurance regulator Irdai.

The Insurance Regulatory and Development Authority of India (Irdai) had issued MISP guidelines in 2017 with the intention of streamlining the process and bringing the practices of vehicle insurance, being sold by automotive dealers under the provisions of the Insurance Act, 1938.

 

Motor Insurance Service Provider (MISP)

Motor Insurance Service Provider (MISP) refers to an automobile dealer appointed by the insurer or the insurance intermediary to distribute and/ or service motor insurance policies of automotive vehicles sold through it.

In June 2019, the regulator had set up a committee to review the MISP guidelines. The panel has submitted report in which it has made various recommendations for orderly conduct of motor insurance business through MISP channel.

Among other issues, the panel examined the current practice of collecting the premium payment from the customer while soliciting the motor insurance policy.

Current process

Under the present system, it said there is a lack of transparency in the cost of insurance premium when the customer buys the vehicle for the first time through the automotive dealer and makes the payment through one single cheque.

As the MISP makes payment to the insurance company from his own account, “the customer does not know the insurance premium being paid as it is subsumed in the cost of the vehicle”, the committee said.

It suggested that this lack of transparency is not in the interest of the policyholders’ nterest as the true cost of insurance is not known to the customer. “The customer may not be aware of the coverage options and discounts available in the process. The customer also cannot negotiate with the MISP to get the best coverage at the optimal price.” The committee recommended that the customer should make payment to the insurance company directly which is facilitated by the MISP.

“MISP shall not collect the insurance premium amount in its own account and then transfer the same to the insurance company,” it added.

According to the report, the motor insurance business sourced by MISPs through brokers and insurers put together constitutes around 25 per cent of the total motor insurance business or around 11.25 per cent of the overall general insurance business.

In its report, the committee said that given the potential opportunity for motor insurance business through the MISPs, there is a need to develop and strengthen regulatory framework and supervision activities for this distribution channel.

The panel has also made recommendations on the original equipment manufacturers (OEMs).

It noted that OEMs wield tremendous influence over the automotive dealers.

“The OEMs should be brought into the regulatory ambit. Therefore, the definition of MISP should also include OEM,” the panel said.

The panel also suggested that an MISP should mandatorily disclose to the customer the remuneration and reward that it gets from the insurance company or the insurance intermediary.

In case of cashless settlement, it said the MISP should necessarily segregate the two functions of sales and servicing of motor insurance policies and ensure that there is complete arms-length relationship between the two. PTI

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Finance ministry looks at holding company for PSB recap, BFSI News, ET BFSI

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NEW DELHI: The finance ministry is looking at other avenues for affordable capital infusion, including setting up of a Bank Investment Company (BIC), as the RBI has raised concern over the issuance of zero coupon bonds for recapitalisation of public sector banks (PSBs), sources said.

Setting up BIC as a holding company or a core investment company was suggested by the P J Nayak Committee in its report on ‘Governance of Boards of Banks in India‘.

The report recommended transferring shares of the government in the banks to the BIC which would become the parent holding company of all these banks, as a result of this, all the PSBs would become ‘limited’ banks.

BIC will be autonomous and it will have the power to appoint the board of directors and make other policy decisions about subsidiaries.

The idea of BIC, which will serve as a super holding company, was also discussed at the first Gyan Sangam bankers’ retreat organised in 2014, the sources said. They added that it was proposed that the holding company would look into the capital needs of banks and arrange funds for them without government support.

It would also look at alternative ways of raising capital such as the sale of non-voting shares in a bid to garner affordable capital.

With this in place, the dependence of PSBs on government support would also come down and ease fiscal pressure.

To save interest burden and ease the fiscal pressure, the government decided to issue zero coupon bonds for meeting the capital needs of the banks.

The first test case of the new mechanism was a capital infusion of Rs 5,500 crore into Punjab & Sind Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with tenure of 10-15 years are non-interest bearing and valued at par.

However, the Reserve Bank of India (RBI) expressed concerns over zero-coupon bonds for the recapitalisation of PSBs.

The RBI has raised some issues with regard to calculation of an effective capital infusion made in any bank through this instrument issued at par, the sources said.

Since such bonds usually are non-interest bearing but issued at a deep discount to the face value, it is difficult to ascertain net present value, they added.

As these special bonds are non-interest bearing and issued at par to a bank, it would be an investment, which would not earn any return but rather depreciate with each passing year.

Parliament had in September 2020 approved Rs 20,000 crore to be made available for the recapitalisation of PSBs. Of this, Rs 5,500 crore was issued to Punjab & Sind Bank and the finance ministry will take a call on the remaining Rs 14,500 crore during this quarter.

With mounting capital requirement owing to rising NPAs, the government resorted to recapitalisation bonds with a coupon rate for capital infusion into PSBs during 2017-18 and interest payment to banks for holding such bonds started from the next financial year.

This mechanism helped the government from making capital infusion from its own resources rather utilised banks’ money for the financial assistance.

However, the mechanism had a cost of interest payment towards the recapitalisation bonds for PSBs. During 2018-19, the government paid Rs 5,800.55 crore as interest on such bonds issued to public sector banks for pumping in the capital so that they could meet the regulatory norms under the Basel-III guidelines.

In the subsequent year, according to the official document, the interest payment by the government surged three times to Rs 16,285.99 crore to PSBs as they have been holding these papers.

Under this mechanism, the government issues recapitalisation bonds to a public sector bank which needs capital. The said bank subscribes to the paper 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. However, the money invested by banks in recapitalisation bonds is classified as an investment which earns them an interest.

In all, the government has issued about Rs 2.5 lakh crore recapitalisation in the last three financial years. In the first year, the government issued Rs 80,000 crore recapitalisation bonds, followed by Rs 1.06 lakh crore in 2018-19. During the last financial year, the capital infusion through bonds was Rs 65,443 crore.



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HDFC Bank reports 18% rise in Q3 net profit

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Private sector lender HDFC Bank reported an 18.1 per cent increase in its net profit for the third quarter this fiscal at Rs 8,758.29 crore.

The bank had a standalone net profit of Rs 7,416.48 crore in the same period last fiscal.

For the quarter ended December 31, 2020, HDFC Bank’s net revenues (net interest income plus other income) grew to ₹ 23,760.8 crore from ₹ 20,842.2 crore a year ago.

Net interest income (interest earned less interest expended) for the quarter ended December 31, 2020 grew by 15.1per cent to ₹ 16,317.6 crore from ₹ 14,172.9 crore for the same period last fiscal.

In a statement on Saturday, the bank said this was “driven by advances growth of 15.6 per cent, and a core net interest margin for the quarter of 4.2 per cent”.

Provisions and contingencies for the third quarter this fiscal rose to ₹ 3,414.1 crore as against ₹ 3,043.6 crore for the quarter ended December 31, 2019. “Total provisions for the current quarter include contingent provisions of approximately ₹ 2,400 crore for proforma NPA as described in the asset quality section below,”it said.

The Gross and Net non-performing assets were at 0.81 per cent of gross advances and 0.09 per cent of net advances as on December 31, 2020 respectively. The restructuring under RBI resolution framework for Covid-19 was approximately 0.5 per cent of advances.

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China-backed AIIB to support Covid vaccine rollout

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The Beijing-backed Asian Infrastructure Investment Bank (AIIB) will follow other development banks in helping to finance the rollout of Covid-19 vaccines, its president said on Wednesday, while its total lending in 2021 will be similar to last year’s.

“The World Bank and ADB (Asian Development Bank) have allocated resources to finance (purchases of) the vaccine, which is in my view very, very important, and we will certainly do the same,” said Jin Liqun, speaking at a news conference in Beijing, without detailing plans.

Covid-19: Asian Infrastructure Investment Bank to offer loan of $500 million to aid efforts

The World Bank, in October, approved $12 billion to help developing countries buy and distribute Covid-19 vaccines, tests, and treatments. The Asian Development Bank launched a $9-billion vaccine facility in December.

Jin said he expects the bank’s total loans this year to be on a similar scale to last year, when it set up a $13-billion funding facility to help public and private sectors fight the pandemic.

Jin Liqun re-elected AIIB President

“This year the scale of our lending will perhaps be around the same as that of 2020,” he said. The AIIB approved 45 loans worth a total of $9.96 billion that year, according to Reuters calculations.

Social infrastructure

The epidemic has shown the importance of so-called “social infrastructure,” particularly in health, and this will continue to be a part of AIIB’s investments, said Jin, who did not give details on how much funding would be devoted to such projects in the future.

The pandemic also forced the bank — whose staff of a few hundred is still tiny compared to that of other development banks — to slow recruitment.

“Once Covid-19 is brought under control we will resume recruitment to enhance our in-house capacity,” said Jin.

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RBI raises concerns over zero-coupon bond for PSB recapitalisation

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The Reserve Bank of India (RBI) has expressed some concerns over zero-coupon bonds for the recapitalisation of public sector banks (PSBs) and discussion is on between the central bank and Finance Ministry to find a solution, according to sources.

The government resorted to recapitalisation bonds with a coupon rate for capital infusion into PSBs during 2017-18 and interest payment to banks for holding such bonds started from the next financial year.

To save interest burden and ease the fiscal pressure, the government has decided to issue zero-coupon bonds for meeting the capital needs of the banks.

The first test case of the new mechanism was a capital infusion of Rs 5,500 crore into Punjab & Sind Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with tenure of 10-15 years are non-interest bearing and valued at par.

However, the RBI has raised some issues with regard to calculation of an effective capital infusion made in any bank through this instrument issued at par, the sources said.

Zero-coupon bond

Since such bonds usually are non-interest bearing but issued at a deep discount to the face value, it is difficult to ascertain net present value, they added.

The discount calculation may vary, which could lead to accounting adjustment, the sources said, adding both the Finance Ministry and RBI are in discussion to resolve the issue.

As these special bonds are non-interest bearing and issued at par to a bank, it would be an investment, which would not earn any return but rather depreciate with each passing year.

Parliament had in September 2020 approved Rs 20,000 crore to be made available for the recapitalisation of PSBs. Of this, Rs 5,500 crore was issued to Punjab & Sind Bank and the Finance Ministry will take a call on the remaining Rs 14,500 crore during this quarter.

This innovative mechanism will help ease the financial burden as the government has already spent Rs 22,086.54 crore as interest payment towards the recapitalisation bonds for PSBs in the last two financial years.

During 2018-19, the government paid Rs 5,800.55 crore as interest on such bonds issued to public sector banks for pumping in the capital so that they could meet the regulatory norms under the Basel-III guidelines.

In the subsequent year, according to the official document, the interest payment by the government surged three times to Rs 16,285.99 crore to PSBs as they have been holding these papers.

Under this mechanism, the government issues recapitalisation bonds to a public sector bank which needs capital. The said bank subscribes to the paper 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. However, the money invested by banks in recapitalisation bonds is classified as an investment which earns them an interest.

In all, the government has issued about Rs 2.5 lakh crore recapitalisation in the last three financial years. In the first year, the government issued Rs 80,000 crore recapitalisation bonds, followed by Rs 1.06 lakh crore in 2018-19. During the last financial year, the capital infusion through bonds was Rs 65,443 crore.

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Bose, pioneer of investment banking in India, dies at 71, BFSI News, ET BFSI

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Veteran dealmaker Udayan Bose, who brought modern investment banking and venture capital to India in the ’80s and set up the second private Indian mutual fund, passed away on Friday. Bose (71) was suffering from heart and kidney-related issues.

Bose straddled the world of pinstriped bankers of London’s Lombard Street and the earthy stock markets of Mumbai and Kolkata. He threw away an opportunity to head Deutsche Bank’s Australia operations to turn entrepreneur by acquiring a vintage broking firm, which then he used to partner Lazard (a global investment bank) and create India’s first multinational investment bank.

A young achiever from Kolkata’s Presidency College, Bose started his career with Grindlays Bank where he rose to be a director of Asia-Pacific before moving on to European Asian Bank (which became Deutsche Bank). As a merchant banker (as investment bankers were known then), he helped movers and shakers of the ’80s and ’90s strike deals, like R P Goenka’s acquisition of HMV.

Uday Kotak, who has been part of the city’s capital market scene from the ’80s, says he has great memories of Bose. “I met him in the European Asian Bank, which later became Deutsche Bank. After Deutsche, he bought over a broking firm — Merwanji Bomanji and Dalal — and partnered with Lazard. An original merchant banker, and a professional-turnedentrepreneur… Time flies. Will miss him,” said Kotak.

Ravi Rangachari, former director (finance & corporate affairs) at Lazard India, said, “Bose was ahead of his time… he had great vision.” Another one of Bose’s Indian ventures was the British Tech Group, which pioneered the concept of licensing and adoption of foreign technologies for Indian companies.

In 1984, after he was appointed head of Deutsche Bank’s operations in Australia, he was swept by a “feeling of belonging to the soil” and gave up the prestigious assignment and decided to start investment bank Credit Capital in India. His connections and knowledge brought him several board positions, prominent among them being the chairmanship of travel firm Thomas Cook.

Other companies where he was on the board included HMV, Reliance Capital, and JK Paper. A big believer in the India story, Bose took over as chairman of the Kolkata Stock Exchange in the hope of modernising it and bringing foreign investors.

An anglicised banker with a baritone, Bose would at times appear incongruous among desi stockbrokers, whether in Mumbai or Kolkata. But deep inside, he still had middle-class family values. Once when talking to a reporter on a major assignment that he was taking, he requested that his picture be carried in the Kolkata edition as that would make his mother happy. An epicure, he enjoyed cooking for, and feeding, people. And he loved a good adda.



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Ground seems ready for new options to resolve stressed assets: IBBI chief

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The ground seems to be ready to experiment new options for resolution of stress and the market is anticipating a hybrid framework between a court-supervised insolvency framework and an out-of-court restructuring schemes, IBBI Chairperson M S Sahoo has said.

In place for more than four years, the Insolvency and Bankruptcy Code (IBC) is helping in resolution of stressed assets in a market-linked and time-bound manner, and the proposal for “pre-pack” framework is also in the works.

“Since some tasks of an insolvency proceeding are completed before the formal process begins, and some elements of formal process are avoided, pre-pack saves both on costs and time,” Sahoo told PTI.

The Insolvency and Bankruptcy Board of India (IBBI), a key institution in implementing the IBC, has also taken various steps to address difficulties of stakeholders concerned.

According to him, insolvency regimes in most jurisdictions are not designed to address delinquencies arising from the COVID-19-like crisis when several viable businesses simultaneously fail to stand on their feet for force majeure conditions. Also, the availability of resolution applicants to rescue them remains a concern.

“This has highlighted the need for pre-pack which is considered fast, cost efficient and effective in resolution of stress, with the least business disruptions.

In an e-mail interview, Sahoo also pointed out that with considerable learning and maturity of the ecosystem, and a reasonably fair debtor-creditor relationship in place, the ground seems ready to experiment new options for resolution of stress.

“The market has been advocating and anticipating a resolution framework which is a hybrid between the court-supervised insolvency framework and out-of-court restructuring schemes that incorporates the virtues of both the worlds sans their demerits. The most popular form of such dispensation is pre-pack,” he noted.

Generally, under a pre-pack (pre-packaged) process, main stakeholders like creditors, shareholders and the existing management/ promoter can come together to identify a prospective buyer. Then, they can negotiate a resolution plan before submitting the same to the National Company Law Tribunal (NCLT) for formal approval.

Corporate Insolvency Resolution Processes

From December 1, 2016 till the end of September last year, total 4,008 CIRPs (Corporate Insolvency Resolution Processes) have commenced under the IBC.

Out of the total, 473 CIRPs have been closed on appeal or review or settled, 291 have been withdrawn, 1,025 have ended in orders for liquidation and 277 have ended in approval of resolution plans, as per data compiled by the IBBI.

The provisions relating to CIRP came into effect from December 1, 2016.

In the wake of the Covid-19 pandemic, the government has suspended fresh proceedings under the IBC since March 25 last year. Last month, the suspension period was extended till March, which means that fresh cases cannot be filed under the IBC for almost the whole of the current fiscal — April 2020 to March 2021 period.

On whether there is a possibility of a flurry of insolvency cases coming up once the suspension is done away with, Sahoo said the number of applications for initiating insolvency is likely to increase but the increase may not be significant.

He noted that stakeholders are continuing to resolve stress through various modes such as scheme of compromise or arrangement under the Companies Act, 2013, and the RBI”s prudential framework. Entities are also going for corporate insolvency resolution process in respect of stress other than related to Covid-19.

According to him, stakeholders are exploring innovative options for resolution of stress while taking several cost cutting measures to avoid stress.

Also, Sahoo said viable companies would have normal business operations after the pandemic subsides, higher threshold of default for initiation insolvency proceedings keeps most MSMEs out of insolvency proceedings and Covid-19 period defaults remain outside insolvency proceedings forever.

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