How far Banks are Safe

Rating OF Corporation Bank Downgraded

2014-07-05T15:39:00.000-07:00

CARE downgrades Corporation Bank's perpetual bonds-Business Standard

It reaffirmed a "AAA" rating for lower tier-II bond

During FY14, the bank reported a net profit of Rs 562 crore, down from Rs 1,435 crore in 2012-13. Its total income rose to Rs 19,606 crore in FY14 from Rs 16,942 crore in FY13

CARE Ratings has downgraded Corporation Bank’s perpetual bonds and upper tier-II bonds from “AAA” to “AA+” on weak profitability. It also flagged concerns over moderate resource profile due to drop in the share of show-cost deposits.

It reaffirmed “AAA” rating for lower tier-II bonds.

The revision in ratings reflects the weak profitability during FY14 impacted by deterioration in its asset quality and moderate resource profile characterised by declining proportion of low-cost deposits, CRISIL said.

The ratings, however, continue to derive comfort from capital support and majority ownership of bank by the Centre (63.3 per cent holding), adequate capitalisation levels and stable asset growth.

The bank’s ability to improve its resource profile and asset quality, enhance its profitability and maintain stable capitalisation levels would be the key rating sensitivity, the rating agency added.

The upper tier-II bonds and perpetual bonds are rated one notch lower than lower tier-II bonds. It is due to their increased sensitiveness to capital adequacy ratio (CAR), capital raising ability and profitability during the long tenure of instruments.

During FY14, the bank reported a net profit of Rs 562 crore down from Rs 1,435 crore in 2012-13. Its total income rose to Rs 19,606 crore in FY14 from Rs 16,942 crore in Fy13.

The bank had 2,021 branches and 2,264 ATMs as of March this year. The bank also has its representative offices at Hong Kong and Dubai. The bank has a wholly-owned subsidiary — Corp Bank Securities Ltd.

Link Business Standard

Pakistani Banks May Now Open Their Branches In India

2014-01-30T06:58:00.004-08:00

Our Government could not stop cross border terrorism. India could not stop infiltration from our borders attached with Bangladesh, Pakistan and others. India could not stop introduction of fake notes in India from Pakistan and through neighboring countries.

Indian government started Bus service from Indian cities to cities in Pakistan but could not safeguard Indian interest and could not stop entry of terrorists from Pakistan to India in disguise. Indian government started train service from India to city in Pakistan but could not develop love and affection between citizens of two countries.

Indian government allowed several cultural programme between artists of India and that of Pakistan but could not dilute intensity of animosity in the hearts of Pakistani people against Indian people.

There are custom offices around border with Pakistan but Indian officials could not stop supply of arms and ammunition s from neighboring countries to Indian territory. It is open secret that India based naxal groups or anti national terror groups have huge stock of arms and ammunition which they use from time to time to kill innocent rural folks, to disturb Indian cities and to attack Indian armed forces.

Training camps are reportedly functioning all over the country to promote anti national activities and to promote naxalism and terrorism in India to destabilize India. People of India are being trained by Pakistan based terrorist organizations to create communal disharmony, to provoke riots and to weaken the country by hook or by crook.

Indian rulers are in dialogue with rulers of Pakistan for decades together but could not stop terror attack on Indian territory by Pakistan based terrorist and could not stop growth of Indian brand of terrorism called as Indian Mujahidin or SIMI or similarly other Indian brand terrorist organizations under the patron and guardianship of Pakistan based terror camps.

India has hundreds of bitter experiences with Pakistan rulers when Pakistan has cheated India in the name of friendship. India gave status of 'Most Favoured State' to Pakistan but failed to change the heart of Pakistani rulers , Pakistani armed forces and ISI who are bent upon disturbing India.

Indian government imposed faith in Nawaz Shariff, but Kargil War happened, head of Indian army Jawan cut off and taken away and there are frequent violation of line of control by Pakistan based armed forces. Rather cross border firing from the side of Pakistan has been found to be in increasing trend in recent past.

All above bitter truth is not my saying but the facts which appear in newspapers of India, which our leaders use to say in their speeches, which TV media use to say in their programmes and news broadcasts..

In spite of all these threats India has been facing from neighboring country like Pakistan, Our government is in process of starting three Indian banks to work in Pakistan and allowing in lieu of that three Pakistan based banks to start functioning in India.

Is this not a direct threat to Indian economics, direct invitation to terrorists to disturb India economically and in brief, a direct step to add fuel to fire?
I am unable to understand how Indian regulators like RBI will be in a position to ensure hundred percent compliance of KYC norms prescribed by RBI (Know Your Customers) from Pakistan based banks when they failed to do so for even Indian Banks even after decade long efforts and vigorous follow up in this regard.

I am unable to understand how RBI will safeguard India from money laundering which is more likely to take place from proposed Pakistan based banks working in Indian territory as RBI and Government of India completely failed to stop the same even from some of private banks in India which were exposed by Kobra Post sting operation in recent past.

I am unable to understand how RBI or for that matter Government of India will stop lending in India by Pakistan based banks for promotion of terror acts, for purchase of arms and ammunitions to disturb Indian towns and cities in the name of fake business identities formed by India based anti nationals who are said to be working in nexus with Pakistan based terror camps.

There are several cases of advances made by Indian banks based on fake deeds, or for fake business on fake identities, when India is not fit to control and properly monitor even Indian banks, how will they stop Pakistan based banks in doing and promoting ill-motivated activities to weaken India .

The casual approach and corrupt minded officials sitting in custom and excise departments or at borders has failed or you can say willfully allowed Pakistan based terrorist to send drugs, arms and other dangerous weapons to Indian counterparts in disguise of potatoes and food grains to serve their self interest.

GOI should understand how majority of officials in government offices are bought by bribe and how do they indulge in activities which harm the country.

And now allowing Pakistan based banks to function in India will do nothing but add fuel to fire. There is no doubt to me keeping in view the working style of Indian bosses and Indian politicians that India is inviting more problems from Pakistan than solving anyone by taking a decision to allow three banks from Pakistan to function in India and vice versa..

Lastly II may say an old proverb in Hindi “ Aa Bel Mujhe Mar”

There may be apprehension in the minds of a large section of Indian mass that Pakistani banks will collect deposits from Indian people and may use the same to kill Indian people, may use Indian base to destabilize Indian economy and may use the Indian money to propagate and promote their terrorism against India from India's land. Pakistan based banks may use banking channels to distribute fake currencies and thus strike at the root of Indian economy.they may sanction personal loans to buy arms and ammunition and to buy explosives and drugs etc.they may sanction loans to manufacture arms and illegal weapons in India and so on.

What will be the checkpoints is a million dollar question which Indian rulers are supposed to give to Indians?

India, Pakistan to allow 3 banks in each other's country: Minister--Economictimes 17.01.2014

ISLAMABAD: India and Pakistan are working to allow three banks to set up branches on each other's soil to normalise trade relations and boost commerce, Minister of State for Commerce Khurram Dastagir Khan has said.

The two sides had agreed in August 2012 to issue a full banking licence to two banks from each country. However, normalisation of trade was hit after Pakistan failed to deliver on a commitment to grant Most Favoured Nation-status to India in January last year

"We were told that the Reserve Bank of India had since, I would say, lessened its restrictions, it is no longer two banks. Any bank that fulfils the requirement can apply. For the time being, we are working on three banks each," Khan told PTI here.

The issue of setting up bank branches on each other's soil was raised with Indian Commerce Minister Anand Sharma by Pakistan's Punjab Chief Minister Shahbaz Sharif when he visited New Delhi recently.

Khan, who left for India today to participate in a SAARC business meet, said, "The State Bank of Pakistan has just written to the RBI that three banks would like to open their branches in India. I don't know when but it will happen. Some movement has taken place."

In 2012, the two Indian banks allowed to operate in Pakistan were the State Bank of India and Bank of India. On the Pakistani side, the quasi-state owned National Bank of Pakistan and privately owned United Bank Ltd were selected for running full banking operations in India once they obtained licences.

However, there has not been much forward movement on the issue.

Khan, a top leader of the ruling PML-N party, argued that the biggest hurdle to normal trade ties was the "very restrictive visa regime".

"People cannot travel to the other country. Visa is not something that appears on trading figures but is very substantial. If businessmen from one country cannot travel to another country and see firsthand and analyse the economic opportunities that are there, then trade is severely hampered," he said.

"Visa restriction is what we call a non-tariff barrier," he added.

Khan pointed out another issue not reflected by trade figures was the lack of bilateral banking relations.

"That is also not a trading issue but is a necessary facility required for trading. So banking relationship has to be there. Another issue that we will talk about, maybe not in this trip, is to allow communication network. Allow roaming," he said.

"And here I am quite definite that obtaining a SIM in Pakistan is miles easier than it is in India. So if people can't communicate and use the banking channel, and if they can't travel, it is a hurdle to trade," he said.

http://articles.economictimes.indiatimes.com/2014-01-16/news/46264412_1_united-bank-ltd-most-favoured-nation-status-state-bank

RBI Report On Probable Risk On Banks

2013-12-30T18:20:00.002-08:00

The Reserve Bank of India today released the Financial Stability Report (FSR) – December 2013. The eighth in the series, the FSR – December 2013 is being released against the backdrop of a mild positive market reaction to the announcement of tapering in the US Federal Reserves’ bond purchase programme from January 2014. The commencement of the taper should signal a calibrated return to normal liquidity and credit conditions in the global markets and also better pricing of risk. This will mean a repricing of certain assets with consequent volatility. Efforts during the past few months have been directed to make the Indian economy more resilient to the ultimate withdrawal of liquidity from the system and less reliant on unstable external capital for growth.

The FSR, published every six months, aims to create awareness about the vulnerabilities in the financial system, to inform about the resilience to stress of the financial institutions and to generally serve as a health check on the financial system.

The Report reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability.

Highlights:

The US Federal Reserve has now laid to rest the uncertainty on timing of the exit and tapering in its bond purchase programme, which is set to begin from January 2014. However, financial market volatility will be conditioned by the pace of tapering going forward.

(Paras 1.1 – 1.2, Chapter I)

Realignment of global growth as well as high inflation differential between advanced economies (AEs) and Emerging Markets and Developing Economies (EMDEs) is a potential source of exchange rate volatility and may result in volatile cross-border flows with every repricing of risk.

(Paras 1.4 – 1.5, Chapter I)

The delay in tapering allowed India to bring about adjustment in the current account deficit (CAD) and build buffers by replenishing its foreign exchange reserves. However, macro-economic adjustment is far from complete, with persistence of high inflation amidst growth slowdown. Fall in domestic savings and high fiscal deficit are other major concerns for India.

(Paras 1.8 – 1.23, Chapter I)

Corporate performance continues to be weighed down by boom period expansions and excess capacities, amid shifting asset composition towards financial investments.

(Paras1.24 - 1.27, Chapter I)

House prices and outstanding loans for housing by housing finance companies have grown relatively faster during the last few years.

(Para 1.32, Chapter I)

Inadequate social security coverage in India against a backdrop of changing demographics will pose challenges for expanding the pension system given the fiscal constraints. The National Pension System (NPS) was created to serve Government employees and private sector workers.

(Paras 1.35 – 1.37, Chapter I)

(Para 2.1, Chapter II)

Network tools have been used to assess impact of contagion due to risk of credit concentration. Failure of a major corporate or a major corporate group could trigger a contagion in the banking system due to exposures of a large number of banks to such corporates.
The risks to the banking sector have further increased since the publication of the previous FSR in June this year. All major risk dimensions captured in the Banking Stability Indicator show increase in vulnerabilities in the banking sector.

(Paras 2.4 – 2.17, Chapter II)

Asset quality continues to be a major concern for Scheduled Commercial Banks (SCBs). The Gross Non-performing Assets ratio of SCBs as well as their restructured standard advances ratio have increased. Therefore, the total stressed advances ratio rose significantly to 10.2 per cent of total advances as at end September 2013 from 9.2 per cent of March 2013.

(Paras 2.28 – 2.29, Chapter II)

Five sectors, namely, Infrastructure, Iron & Steel, Textiles, Aviation and Mining together contribute 24 percent of total advances of SCBs, and account for around 53 per cent of their total stressed advances.

(Paras 2.34 – 2.37, Chapter II)

Macro stress tests on credit risk suggest that if the adverse macroeconomic conditions persist, the credit quality of commercial banks could deteriorate further. However, under improved conditions, the present trend in credit quality may reverse during the second half of 2014-15.

(Paras 2.51 – 2.61, Chapter II)

India stands committed to the implementation of the global regulatory reforms agenda and has made considerable progress on this front. Although firms and markets are beginning to adjust to the regulatory approach towards ending too-big-to-fail (TBTF), recent research indicates continued expectation of sovereign support to such institutions.

Paras 3.1 – 3.5, Chapter III)

Due to the interconnectedness with banks, liquidity pressure is felt by the money market mutual funds (MMMFs) whenever redemption requirements of banks are large and simultaneous. Regulatory measures taken to reduce the degree of interconnectedness seem to have been successful in reducing the liquidity risk in the system.

(Paras 3.13 – 3.17, Chapter III)

India’s domestic markets for interest rate derivatives have not taken off due to the absence of some of the basic building blocks. Efforts are on to address these issues.

(Paras 3.22 – 3.26, Chapter III)

Action to create central repositories for the banking sector, corporate bond market and insurance sector has been initiated. This move is expected to break the information asymmetry in those markets.

(Paras 3.31 – 3.37, Chapter III)

It has been observed that the equity prices of the companies in which the promoters had pledged significant portions of their shares, are relatively more volatile than the broader market during times of correction.

(Paras 3.51 – 3.55, Chapter III)

Alpana Killawala
Principal Chief General Manager

Press Release: 2013-2014/1294

Bankd Union Blows Whistle On Bad Loans

2013-12-10T17:08:00.000-08:00

AIBEA blows the whistle on bad loansof Indian banks-Money Life

Bank union, AIBEA, demands that banks recover bad loans from wilful defaulters

Trade unions are usually quick to announce protests to demand higher wages or better working conditions. This time, however, the All India Bank Employees Union (AIBEA), one of the biggest employees unions in India, has decided to turn into a powerful whistleblower. On 5th December, AIBEA gave a call to ‘stop the loot of public funds’ and start recovery of bad loans. This is a welcome development. I have always held that the destruction of giant entities, such as Air India, Unit Trust of India, and giant public sector entities in telecom and engineering, is as much due to employee apathy as it is due to the loot by politicians and bureaucrats. AIBEA has signalled that it will name and shame defaulters, if necessary, to force banks to start acting tough and recover bad loans. The Reserve Bank of India (RBI), as the banking regulator, is fully aware of what is going on; but now, the unions are asking it to move from rhetoric to action. The AIBEA cites the overused quote about India having sick industries but no sick industrialists. It also quotes RBI governor, Dr Raghuram Rajan, who recently told banks, “You can put lipstick on a pig but it doesn’t become a princess. So dressing up a loan and showing it as restructured and not provisioning for it when it stops paying, is an issue. Anything which postpones a problem (rather) than recognising it, is to be avoided.” AIBEA points out that the top four bad loan accounts add up to a massive Rs22,666 crore, which include Kingfisher Airlines and Winsome Diamond and Jewellery Co. Will RBI stop the “systematic loot of public money” by recognising these as pigs with lipstick?

The data collated and released by the AIBEA is a frightening indictment of the banking regulator and the finance ministry. While the government has been boasting about India having escaped the global financial crisis, how does it explain the four-fold increase in bad loans—from Rs39,000 crore in 2008 to Rs164,000 crore today? The creation of new bad loans is a mind-boggling Rs495,000 crore, according to AIBEA. And, corporate debtrestructuring through provisioning, concessions, waivers, write-offs, concessions, one-time settlements (which are done multiple times), compromise proposals, etc, add up to a massive Rs325,000 crore.

Write-offs of bad loans by PSU banks in the past seven years amount to a massive Rs140,000 crore. If we include the bad loans of private banks and foreign banks and other financial institutions, the total bad loans are more than Rs2,50,000 crore, says the AIBEA statement. Worryingly, it says, things have reached a point where management is making banks vulnerable by reducing the provisioning of bad loans. RBI has pointed out, and is aware, that the provision coverage ratio of India’s banking system has dropped from 55% to 45% as against a global average ratio of 70% to 80%.

AIBEA’s demand will resonate with depositors who are being asked to pay higher charges for every service, to ensure higher profits for banks every quarter. AIBEA, for once, is on the same side as two big stakeholders of banks—bank customers and shareholders. Clearly, the call to publish the names of defaulters, to make wilful default a criminal offence, investigate collusion between banks and borrowers and the demand not to ‘incentivise corporate delinquency’, will find huge support among ordinary people.
http://www.moneylife.in/article/aibea-blows-the-whistle-on-bad-loans-of-indian-banks/35554.html

Banks See No Quick Fix For NPA Pain

2013-09-09T18:37:00.001-07:00

If government is really interested to know the ongoing fraud in bank in sanction of high value or low value loans for last two decades, CBI should first investigate the wealth of retired CMD and current CMD, ED and all General Managers of all public sector banks and try to compare the same with their total income earned during their entire service. Then only CBI and GOI can assess the volume of corruption rampant in this sector in the name of credit growth or achievement of set targets or to please the politicians especially ministers who hold the key of promotion of bank officers.

Unfortunately Ministers are Godfather of all such corrupt officers who have spoilt the future of banks. When the head of any institute is inefficient, inactive and corrupt, one cannot dream of good governance and similarly when government is formed of corrupt ,inactive and ineffective ministers , one cannot imagine of clean administration.

Until we get success in getting rid of rampant flattery and bribery culture and until we stop whimsical transfers and arbitrary promotions in all government offices and public sector undertakings we cannot imagine of improvement of health of any bank or any PSU or any government office. The culture of flattery is the root of all maladies prevalent and rooted in the entire system.

Bank staff who are wondering in dreamland expecting wage hike of 20 or 30 percent should keep in mind that until they save banks from corrupt executives and corrupt officials they cannot expect earning high profit and when profit is low , banks cannot think of giving respectable wage hike.Politicians have spoilt banks by their dirty vote bank politics and when banks incur losses they will blame bank staff only.

Assets in banks will continue to move from standard to Non performing assets and none can stop it without changing the mindset of rulers. Now stress assets are reflected as 5 to 6 percent and it will move to 20 to 30 percent of total advances if the system is not changed immediately. FM or RBI can prescribe hard dose of medicine but they cannot yield fruitful result without the support of all involved in the process. Dirty politics of vote bank has damaged not only the economy of the country but badly affected the social harmony, regional harmony and communal harmony.

This is why why there is Free Fall of Indian rupee In Free Market despite all efforts made by learned FM, PM and RBI governor.Because the fall is not due to fault occurred in last few days or few months, it is the consequence of bad policies followed by team of economists ruling this country from Delhi. Similarly accumulated bad assets in public sector banks are not due to global recession or due to natural calamities, they are the bad consequences now precipitating due to bad policies and bad execution of good policies by bad officials sitting at top posts in these banks in nexus with corporate and politicians.

Banks expect no quick fix for NPA pain despite RBI warning--ET 10.09.2013

KOLKATA: Despite the Reserve Bank of India's (RBI) hard talks against loan defaulters, banks are expecting more pain in terms of asset quality as the systemic gaps allow bad borrowers to divert funds and go scot-free under the garb of economic slowdown.

Bankers said this trend has almost become viral and put an added stress on the bad loan scenario which has anyway been weighed down by slower economic expansion. It's also a common refrain from bankers that borrowers misuse the debt restructuring facility and use the banking system to recapitalise their failed ventures.

Rajan has declared a war against defaulters by saying that promoters do not have a divine right to continue if an enterprise flops, but the existing legal and administrative gaps have created enough doubts in the mind of a banker that nobody is expecting a quick-fix solution to the spiralling NPA situation.

"Although RBI governor's statement on NPA has sent a strong signal to defaulting borrowers, banks are facing difficulties at the field level in implementing SARFAESI Act and taking physical possession of mortgaged properties due to administrative gaps. This needs to be addressed first, otherwise bad borrowers will continue to use the loopholes and make mockery of the system," United Bank of India executive director Deepak Narangsaid.

Rajan has mandated deputy governor KC Chakrabarty to take a close look at rising NPAs and the restructuring process. The central bank has proposed to collect credit data and examine large common exposures across banks to create a central repository on large credits. "Nothing can change overnight," said South Indian Bank managing director & chief executive officer VA Jospeh. "There are gaps in the system and hopefully the committee finds out the lacuna in the system and address it."

Some suggest that the RBI may use its RTGS network to find the trail of the diverted money. "Even if we know that bank loans are being diverted, we don't have the ammunition to find the trail and create charge on the asset, limiting our ability to recover loans. The RBI's RTGS network can be used in such cases effectively," a senior bank executive said in the condition of anonymity.

The sluggish economic growth has already led to a sharp rise in NPAs, with the gross ratio touching 3.9 per cent in June. The RBI has estimated that gross NPA may rise to 4.4 per cent if the macro-economic situation does not improve. Besides, banks are sitting on a pile of restructured loans.

The Corporate Debt Restructuring Cell has approved 415 accounts amounting to Rs 2.5 lakh crore in the past eight years. By a very conservative estimate, even if 10 per cent of it turns bad, a whopping Rs 25,000 crore worth of loans will add to the NPA list.

With the first quarter GDP growth slowing to 4.4 per cent, a four-year low amid a contraction in mining and manufacturing sectors, banks have every reason to lose sleep. The future looks grim, with global investment bank Nomura cutting India's real GDP growth estimates to 4.2 per cent for 2013-14 from 5 per cent earlier.

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/banks-expect-no-quick-fix-for-npa-pain-despite-rbi-warning/articleshow/22449750.cms

Bad Debts AND NPA

2013-09-07T08:39:00.002-07:00

Bad debt and NPA: making sense of banking mess--By Alam Srinivas

FM asked banks to go after loan-defaulting promoters. But the public fund siphoning will continue unless deeper, systemic solutions are put in place

In 2008, Indian policy makers boasted that the global financial crisis would not affect the future growth in this country. In November the same year, the then finance minister P Chidambaram told an international business audience that “we will be back to a high growth rate (of nine percent)” by the end of 2009. He, along with a few economists, insisted that the country’s financial system, especially the banking one, was fairly insulated from the global catastrophe.

Almost 52 months later, the FM sang a different tune. In March 2013, he told parliament that “it is not a correct assessment that we were not affected by the 2008 banking crisis.” He added that the crisis “did not end in 2009. It deepened in 2011-12”. This was the reason that Chidambaram publicly asked the banks to go after ‘willful defaulters’, or those (corporate) borrowers who have made a habit of not repaying their loans and allowing their companies to go bankrupt.

The ugly fact is that the Indian banks are in shambles. In the past year or so, their levels of bad loans, or those that may never be repaid, have shot up alarmingly. Total NPAs (non-performing assets or bad debt) of 40 listed Indian banks have zoomed by over 40% -- from Rs 1.25 trillion in December 2011 to Rs 1.79 trillion in the same month in 2012. In a few cases, like Punjab National Bank and Indian Bank, the overall NPAs have doubled; in the case of Central Bank of India, they were up over 50%.

More importantly, experts question the ability of the banks, the regulator (RBI) and the finance ministry to recover this debt. The reason: apart from the large borrowers, like powerful business persons, the fault for this financial mess also lies with the policy makers and RBI. All three are equally responsible. However, in a bid to distance from the problem, each section blames the other. Thus, Chidambaram’s diktat on ‘willful defaulters’ may be an exercise to divert attention from his blunders.

Banks: From NPAs to CDRs

For several years, the banks found an easy way to hide their bad loans. They neither wrote off the loans, nor admitted they would not be repaid, nor did they force business persons to pay up. Instead, they opted for what is termed corporate debt restructuring (CDR). In such cases, the loans were merely restructured – the promoters were given a moratorium and asked to repay after a couple of years, interest rates were reduced, and part of the loans were converted into equity. This ensured that the loans did not become part of the banks’ NPAs.

According to government officials, Rs 3 trillion worth of debt in only the infrastructure sector has been restructured in the past few years. Bankers complain that the number of proposals they received for CDR packages has risen in the past few months. In a recent interview, the CMD of Allahabad Bank, Shubhalakshmi Panse, claimed that the number of CDR packages would increase over the next 6-9 months, and many promoters have asked for a second round of debt restructuring.

In retrospect, CDRs delayed the inevitable in most cases. Several companies that got two rounds of CDRs – loans have to be classified as NPAs after the second round of CDR – ended up being sick or had to be sold to a new owner. The classic case is that of Ispat Industries, which was owned by the Mittals and, in end-2010, sold to Jindal Steel. Its debt history in the past 10 years proves the complicity of the lenders to bail out the promoters. Instead of trying to get back their money lent to Ispat, the banks helped the promoters to continue with their unviable ways.

The first CDR of Ispat Industries was finalised in 2003 and, six years later, as the company continued to be in trouble, the debt restructuring package was reworked to give the company more time. Nothing worked. The company remained in the red and asked for the third CDR in 2010. That’s when the banks said enough was enough, and forced the Mittals to sell out to Jindal Steel. Shockingly, now the Jindals may get a new CDR package, expected to be finalised within a few months.

However, the Mittals took the banks for a long ride. Both in 2003 and 2009, they promised the lenders that they will mend their ways. They claimed that they would achieve quick financial closure for their several stuck projects such as the captive power plant, one million ton capacity coke oven, and the 2 million ton pellet plant. The Mittals said that they would sell the flats at their Pedder Road (Mumbai) property to infuse cash into the company. They reneged on most of these promises.

It was not only the fault of the banks, which refused to force the promoters to implement these decisions, and the Mittals, who found excuses. The company was not in a position to do well because it had inherent problems. Even if the Mittals had delivered on their commitments, the adverse scenario in the steel sector would have pulled down Ispat Industries. Therefore, it was incredible that once Jindal Steel purchased it, the banks were willing to give it another chance.

Today, the Jindals have decided to refinance the Rs 75 billion debt through another set of banks. So, new lenders will pay off the older ones, and restructure future payments along with a moratorium. It is shameful that a company, which has underperformed, gets three CDRs in a decade. This reflects poorly on the Indian banks. “Maybe the banks’ representatives on boards of several companies should be pro-active to prevent defaults or bad loans,” feels economist Bibek Debroy.

RBI: Policy sops to defaulters

Obviously, the regulator should have stopped the banks’ practices. Instead, it encouraged it; in fact, the RBI gave more freedom and flexibility to the banks to offer CDRs to corporate entities. First, it set no limits on the number of debt-restructuring packages given to a single company. Second, there were no restrictions on a single promoter, who got several CDRs for different firms in his/her group. There was, thus, no concept of a group approach in debt recast, although a formula is in place for loans. For example, a bank’s loan exposure to a sector or a group is defined.

Thirdly, as per its May 2005 guidelines, the RBI washed its hands off CDRs. The regulator stated that its role in debt restructuring would be “confined to providing broad guidelines” and its officials would not participate in the actual discussions and negotiations between the banks and promoters. The entrepreneurs were thus free to politically and otherwise influence the banks’ CMDs through their connections and get reprieves on repayments of their loans.

Fourthly, the May 2003 guidelines extended CDRs to even the ‘willful defaulters’, the same ones that the FM now wants the banks to take action against. The CDR Core Group, which was carved out of the CDR Standing Forum, which had representatives of the banks, could approve such debt recast to deliberate defaulters if the former felt that the latter would rectify their mistakes. Clearly, this left a huge window of opportunity for the promoters to get their way.

More importantly, in many cases the RBI has encouraged CDRs in a specific sector. For instance, in mid-2010, the central bank approved a package for the aviation sector since it believed that most airlines were, or on their way, in financial trouble. Since then, only one carrier, Kingfisher Airlines, has taken advantage of the RBI decision. In October 2010, Kingfisher’s debt was restructured with a moratorium, lower interest and part conversion of loans into equity. Since then, the financial fortunes of the Vijay Mallya-owned airline have only become worse, and it has shut down its operations.

“As part of CDR committees, the banks have a conflict of interest. They are under pressure to show lower NPAs, and thus restructure the loans, and lend more each year. So, one can build a case for an independent authority, and not the RBI, to decide whether to sell the company’s assets, force a change in management, or push the existing owner to initiate critical decisions,” says Debroy.

Policy makers: Crony banking

The central and state ministries contributed to the NPAs. Many projects, especially in infrastructure, get delayed or stuck due to lack of official clearances, like land acquisition and those related to environment and forests. This trend will get accentuated in the near future. Analysts says that several projects are due to hit project completion deadlines in 2013-14, when they have to technically begin to repay their loans. If these projects are delayed, their promoters may not be able to do so. One hopes that the new cabinet committee on investments (CCI) can deliver results.

In addition, Chidambaram has decided to take on debt defaulters for budgetary reasons. “His concerns for revenues and expenditure and, hence, fiscal deficit, have forced him to take this decision. But what we require is mindset and systemic changes,” explains Barun Mitra, founder, Liberty Institute. The FM realises that the government may have to extend huge sums to the banks – some contend the bailout amount to be $1.7 trillion – over the next few years in a worst-case NPA scenario.

Moreover, it is difficult to define ‘willful defaulters’. “In India, we consistently see that companies become sick, but not the promoters, whose personal wealth grows. This is unlike the US, where many entrepreneurs become bankrupt. Legally, it may be difficult to have a group concept for debt repayments. One should also not forget that many defaulters have political backing; the part of the reason is crony capitalism and the way it is practiced in India,” says Mitra.

Policy makers make it more difficult for the public sector banks because they have a huge say in the selection of their CMDs. Since these are political appointments, the CMDs operate with different mindsets. For example, towards the end of their tenure, they tend to lend more liberally or restructure debt more easily in a bid to show a better balance sheet. The new occupant does the opposite; he/she hopes to start with a clean slate. Normally, a change in chairperson leads to an increase in NPAs.

So, it is not just the chairperson of the bank who is responsible for NPAs; it is also the promoters with political connections, and the politicians, who have a huge say in the functioning of most banks, including the private ones. The RBI too with its hands-off approach, which cannot work without adequate regulation and monitoring, has to share the blame. Willful defaulters are a small part of the problem; lack of will and faulty regulations constitute the remaining portion.

http://www.governancenow.com/news/regular-story/bad-debt-and-npa-making-sense-banking-mess

Yet ad hocism still rules the roost in the selection process, and most public sector bank chiefs have a short tenure of two years or a little more. This means many of them spend the first few quarters cleaning up the balance sheet to prove that their predecessor was not a prudent banker - but as their retirement approaches, they fall into the same trap and stop declaring bad assets to show better profits.

http://importantbankingnews.blogspot.in/2013/09/non-performing-managers-creat-non.html

Moody Downgrade Bank's Rating

2013-09-05T07:03:00.001-07:00

Moody’s downgrades subdebt, junior subdebt ratings of 11 Indian banks--Business Line 05.09.13

MUMBAI, SEPT 5:

Global ratings agency Moody’s Investors Service has downgraded the subordinated debt (subdebt) and junior subordinated debt ratings of 11 Indian banks.

“Moody’s removed one to two notches of the two to three notches systemic support uplift previously incorporated in the public sector banks’ subdebt and junior subdebt ratings, concluding a review started on June 3, 2013,” Moody’s said in a statement.

The 11 banks are State Bank of India, Bank of

Baroda, Bank of India, Canara Bank, IDBI Bank,

Indian Overseas Bank, Syndicate Bank, Union

Bank of India and top three private banks ICICI

Bank, HDFC Bank and Axis Bank.

Creditor 'bail-in'

The statement said that Moody’s downgrade reflects the increasing international trend of imposing losses on the holders of subdebt securities (creditor “bail-in’’) as a pre-condition for distressed banks to receive government support.

As a consequence, Moody’s assumes that Indian government support is less likely to be forthcoming for the holders of such securities.

“The global financial crisis has demonstrated that support can be provided selectively, with the costs being shared with subordinated creditors of a bank, without triggering any contagion, as it was previously feared,’’ Gene Fang, Vice-President at Moody’s, said.

Moody's analysis observes that India has a modern and progressive approach to bank regulation. There is no explicit legal power allowing Indian regulators to selectively impose losses on the subdebt holders outside of a liquidation process.

However, as a member of the G20 and Financial Stability Board (FSB), India could move towards adopting a bank resolution framework which imposes losses on subordinated debt holders.

On balance, Moody’s assumes that Indian government support will be less likely in the future. “Nevertheless, we believe for public sector banks a high probability of support is still justified, resulting in a one notch subdebt rating uplift,’’ it said.

http://www.thehindubusinessline.com/industry-and-economy/banking/moodys-downgrades-subdebt-junior-subdebt-ratings-of-11-indian-banks/article5096346.ece

NPA In Banks Will Go Up AND UP

2013-08-22T01:57:00.001-07:00

If government is really interested to know the ongoing fraud in bank in sanction of high value or low value loans for last two decades, CBI should first investigate the wealth of retired CMD and current CMD, ED and all General Managers of all public sector banks and try to compare the same with their total income earned during their entire service. Then only CBI and GOI can assess the volume of corruption rampant in this sector in the name of credit growth or achievement of set targets or to please the politicians especially ministers who hold the key of promotion of bank officers.

Unfortunately Ministers are Godfather of all such corrupt officers who have spoilt the future of banks. When the head of any institute is inefficient, inactive and corrupt, one cannot dream of good governance and similarly when government is formed of corrupt ,inactive and ineffective ministers , one cannot imagine of clean administration.

Until we get success in getting rid of rampant flattery and bribery culture and until we stop whimsical transfers and arbitrary promotions in all government offices and public sector undertakings we cannot imagine of improvement of health of any bank or any PSU or any government office. The culture of flattery is the root of all maladies prevalent and rooted in the entire system.

Bank staff who are wondering in dreamland expecting wage hike of 20 or 30 percent should keep in mind that until they save banks from corrupt executives and corrupt officials they cannot expect earning high profit and when profit is low , banks cannot think of giving respectable wage hike.Politicians have spoilt banks by their dirty vote bank politics and when banks incur losses they will blame bank staff only.

Assets in banks will continue to move from standard to Non performing assets and none can stop it without changing the mindset of rulers. Now stress assets are reflected as 5 to 6 percent and it will move to 20 to 30 percent of total advances if the system is not changed immediately. FM or RBI can prescribe hard dose of medicine but they cannot yield fruitful result without the support of all involved in the process. Dirty politics of vote bank has damaged not only the economy of the country but badly affected the social harmony, regional harmony and communal harmony.

This is why why there is Free Fall of Indian rupee In Free Market despite all efforts made by learned FM, PM and RBI governor.Because the fall is not due to fault occurred in last few days or few months, it is the consequence of bad policies followed by team of economists ruling this country from Delhi. Similarly accumulated bad assets in public sector banks are not due to global recession or due to natural calamities, they are the bad consequences now precipitating due to bad policies and bad execution of good policies by bad officials sitting at top posts in these banks in nexus with corporate and politicians.

http://importantbankingnews.blogspot.in/2013/08/though-late-cbi-smells-fraud-in-rising.html

NPAs of banks could rise on account of slowing economy: PMEAC--ET

NEW DELHI: Prime Minister's key economic advisor C Rangarajan today indicated banks may have to deal with higher non performing assets (NPAs) on account of poor economic performance.

"NPA also increases because of the way economy behaves. If rise in bad loan is beyond control of banks, then banks need to be very careful in identifying NPAs," Rangarajan said.

He was speaking at the 5th Conference of Central Bureau of Investigation (CBI) officials and Central Vigilance Officials (CVO's) of Public Sector Banks.

"While judging increasing NPAs, banks should also take note of what is happening in the environment. Some amount of loan can for a time become NPA," Rangarajan added.

Non-performing Assets (NPAs) of banks have been going up for the last two years due to slowdown in the economy. The gross NPAs of some public sector banks, including State Bank of India and Punjab National Bank have crossed 4 per cent of the total assets at the end of March, 2013.

Pulled down by poor performance of farm, manufacturing and mining sectors, Indian economy slowed to 4.8 per cent growth rate in the January-March quarter of last fiscal year and fell to a decade's low of 5 per cent for the entire 2012-13 fiscal.

Gross non-performing assets (NPA) of public sector banks rose to Rs 1.76 lakh crore at the end of June quarter from Rs 1.55 lakh crore at March 31, 2013.

According to global rating agency Standard & Poor's, India's banking sector's non performing assets (NPA) ratio is likely to surge to 3.9 per cent of total loans in 2013-14 and to 4.4 per cent in 2014-15, compared with 3.4 per cent in fiscal 2012-13.

Recently, Minister of State for Finance Namo Narain Meena, in a written reply in the Rajya Sabha, said the NPAs of banks have shown a rising trend.

The stress on the asset quality is a reflection of the stress in the economy of the country.

Public sector banks had recovered Rs 1,905 crore by filing 97,701 suits in 2012-13 and Rs 1,700 crore through 79,117 suits in the earlier fiscal.

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/npas-of-banks-could-rise-on-account-of-slowing-economy-pmeac/articleshow/21953894.cms

Yet ad hocism still rules the roost in the selection process, and most public sector bank chiefs have a short tenure of two years or a little more. This means many of them spend the first few quarters cleaning up the balance sheet to prove that their predecessor was not a prudent banker - but as their retirement approaches, they fall into the same trap and stop declaring bad assets to show better profits.

http://importantbankingnews.blogspot.in/2013/09/non-performing-managers-creat-non.html

RBI Should Clear Stand On Rising NPA in Banks

2013-08-13T02:06:00.002-07:00

RBI needs to come out clean on NPAs--Money Life

If NPAs are not curbed effectively, it will not be long before India heads the Greek route. The Ministry of Finance has to necessarily leave micromanagement of the banking sector to the RBI

Dr KC Chakrabary, deputy governor of Reserve Bank of India (RBI) while speaking in the capital on 26th July at an Assocham Conference on Financial Frauds, very rightly rued –“Many of the frauds are wrong sanctions at the highest level of banks. The problem is, we are not able to take definite action in definite period. Banks are indifferent to monitoring large frauds and whatever fraud reporting was happening, was in silos. Some of the reporting in large transactions happened only after they had been recognized as NPAs (non-performing assets)… While the numbers have not gone up significantly, the quantum has increased manifold… Loan-related frauds are a major concern for the RBI. Over the last ten years, there have been 1.77 lakh frauds, amounting to Rs31, 400 crore. In the last 25 years, 61 fraud cases involving Rs50 crore or more have happened through 208 bank accounts and accounted for a whopping Rs13,000 crore. When the times are good, the rich steal. When the times are bad, the poor also steal. But this means that the rich are stealing more.”

This was amply substantiated by the Hindu Business Line study of companies’ latest balance sheets of top distressed debts of banks (Rupees in crores):-

•Jindal Steel & Power Rs14,372
•Kingfisher Airlines Rs8,030
•Suzlon Energy Rs6,416
•Electrosteel Steel Rs5,232
•HCC Rs4,574
•Bharati Shipyard Rs3,862
•Leela Ventures Rs3643
•GTL Infrastructures- Rs3,190
•Tulip Telecom Rs.2,175

At the meeting of public sector banks and financial institutions on 4 July 2013, the RBI asked the banks to focus on the top defaulters and take action against them. About 30 top non-performing accounts form bulk of bank NPAs – gross NPAs (GNPAs) of banks rose to 39.7% from 34.5% a year ago. For nine public sector banks, GNPAs have gone up by more than 50%, for those of SBI group and PNB have crossed 4%, the GNPAs as a percentage of gross advances has gone up to 3.78% from 2.32%.

In the west, post-Lehman brothers, new financial jargons like bailout for stressed assetshave come up. But here in India, they are termed as Non Performing Assets or NPAs, both meaning the same-bad or irrecoverable loans/ debts by whatever name called.

Moneylife had carried a cover page report and a series of articles on bad loans, done by a veteran banking analyst. I wish to add another angle to the analysis, arising out of my experience of over four decades as a Central Statutory Auditor on RBI’s Panel, auditingmajor banks, both domestic and foreign.

On 16 December 2012, Dr Chakrabarty, the senior most deputy governor in charge of Banking Supervision and a former CMD of a PSB, in an interview to PTI rightly lamented, “Knowingly, you give money to some unviable projects. In many cases, our PSBs have forgotten to say ‘no’, except to small borrowers…The agricultural loans are not as bad as loans to big corporates. The poorer borrowers are subsidizing the rich. It is not the small borrower who is a threat to banking -his track-record is much better than the larger ones. So long as corporates can pay, they all deal with private sector and foreign banks. But when they are vulnerable, they come to the state-run banks. Unfortunately, a combination of factors is responsible for this. Fundamentally, it is a structural and governance issue. The problem of rising bad debts can be attributed to poor administration and low risk management practices.” He cited examples of the PSBs taking bad decisions that resulting in stressed assets and said that lower risk assessment capabilities in comparison to their counterparts in the private sector and foreign banks is their fundamental problem.

In March 2013, the finance minister informed the Lok Sabha that bad loans amounting to Rs68,000 crores were up, to nearly 7,300 accounts by end-March 2012. Leading the pack were SBI, PNB, IDBI Bank and BoI. A financial journalist rightly reported that the data given in support of statements made in the Parliament does not support the statements. The FM’s Parliamentary statement mentioned mechanisms for early detection of signs of distress, prompt restructuring of viable accounts and a loan recovery policy. This includes norms for permitted sacrifice, waiver and other factors like monitoring of write-offs, waiver cases and valuation of securities including collaterals.

It needs to be pointed out that no bank loan goes bad overnight, but happens over a longer period. Some of them commence at the sanction and disbursement stages, to begin with. Loans and Lines of Credit are inadequately and badly appraised, approved by the topmost management and are pushed down to disbursing branches with orders to proceed without proper documentation, securities and guarantees. When they do go sour, inadequacies crop up but it is too late to enforce recovery proceedings effectively. This gives the defaulting borrowers an upper hand.

Next, laxities in monitoring processes followed at the branch level play their role- the incipient bad borrowings arise more out of the branch officials’ negligence towards acting promptly to the red signals, leading to irregularities- borrowers exceeding drawing powers and not submitting inventory or debtors security statements, being one example. If only the branch had curbed them and also reported to the controlling authorities, all these could have been taken as warning signals of impending NPAs. Branches tend to take such operational irregularities lightly, only to wake up when the outstandings mount.

The RBI Panel under its executive director, B Mahapatra, in its report, observes that restructuring amounts to an ‘event of impairment’ irrespective of whether it is asset classification or not, undergoes a downgrade. It has rightly recommended that all loans that are subjected to restructuring should be classified as NPAs, since they are alreadySub-standard. This is particularly true when restructuring requires banks to grant concessions like substantial reductions in interest rates, moratorium or elongation of repayment schedule, part waiver of principal and/or interest or converting debt into equity at inflated values a la Kingfisher. There is absolutely no valid justification to make any such distinction that obfuscates the underlying problem of mounting bad debts!

When internationally accepted accounting standards treat restructured advances as impaired, there is no reason for the Indian banking system to deviate from the internationally accepted prudential accounting practices, primarily from the transparency perspective.

The RBI’s suggestion of a two-year “Regulatory forbearance” for withdrawing standard classification benefits has had a change for the better. By recognizing these loans as NPAs, we have kept up with prudent and accepted international accounting practices.

The banks’ statutory auditors, in helping the bank managements to window dress their annual accounts to overstate the profits for the year, have, in my considered opinion, wrongly misinterpreted the RBI guidance for deferrals. This is equally applicable to the RBI guidelines for recognizing and providing for the accrued gratuity and pension liability.The bank auditors are under a wrong impression that they can get away by merely stating in their auditors’ report - “Without qualifying our opinion/report, we draw attention to Note...” This is no qualification, as it does not explicitly state that the liability did and does exist on the date of the balance sheet and that not providing for it impacts the profits for the current year. The RBI’s advisory merely directs them to defer it over a period of time and in no way absolves them from providing for and disclosing the liability from subsisting and existing. The RBI, the banking regulator and the Institute of Chartered Accountants of India (ICAI), the accounting regulator, ought to review this unhealthy practice of window dressing that only results in overstating the profits. The regulatory forbearance certainly cannot exceed its brief!

In the two years between March 2009 and March 2011, the gross NPAs of our banks shot up from around Rs68,000 crore to Rs94,000 crore. By bringing in so-called restructuring, NPAs had wrongly been classified as standard. They have actually soared from just over Rs60,000 crore to almost Rs1.07 lakh crore. According to a statement laid on Lok Sabha in March 2013, gross NPA in 7,295 accounts rose to over Rs1 crore in March 2013 from Rs68,262 crore in March 2012. In March 2011, the figure for 4,589 accounts has risen to Rs34,633 crore from Rs26,629 crore for 4,099 accounts in March 2010.

The Sick Industrial Companies Act (SICA) has been on the statute books for long. Companies are invariably rendered sick by the promoters who themselves continue to remain hale and hearty having skimmed the cream from bank funding. Bankers have been dealing with them with kid gloves, hesitating to make demands on large industrial chronic defaulters. The Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest Act 2005 (SARAESI) empowers lending banks to seize mortgaged assets of recalcitrant borrowers to realise the best prices without having to resort to court sanction. It is most commonly applied to small-time borrowers, who have defaulted on EMIs for home loans, vehicles loans and small time traders-it tantamount to using a sledge hammer to swat a fly and not touch the large chronic defaulters like Kingfisher Airlines.

The big-ticket defaulters manage to keep out bank attachment orders by obtaining court stay orders. This is simply because the banks and the RBI are found to be speaking with forked tongues. They blow hot and cold at the same time and are caught pussyfooting – a case of willing-to-push-but-afraid-to-hurt attitude, not touching big guns, but attaching tiny factory owners or traders. This proves right the good old Hindi adage – Hathi janey dega, magar doom pakad ke baitega - translated letting the elephant pass through only to cling on to its tail.

The standard of toughness of recovery proceedings are high with small retail borrowers, where flats and vehicles are attached with ease. The banks’ attitude generally signifieswhen one small entity borrows a couple of lakhs from a bank, the borrower will be in trouble, but when one big ticket borrows crores, it is the bank which is in trouble. Banks mollycoddle the big time borrowers to collect their dues.

To minimize NPAs, the RBI needs to direct the banks to put in place, tough measures of going for the defaulters’ jugular. Personal guarantees and not dud corporate guarantees should be insisted upon and the promoter-directors of public companies should also be called upon to sign personal guarantees, similar to what is followed for private unlisted entities. This is because the promoter clan takes the company stakeholders and bankers for a ride after collecting money from IPOs. They should be required to bring in margin money in hard cash and not by pledging shares of group companies and/or providing their equally dud corporate guarantees. They should be asked to cough up not less than 25% of the value of the diminution in the value of securities and/or 10% of the sanctioned limits, before considering any rescheduling / rescue act. The end use of the borrowed money has to be strictly monitored to ensure there is no misuse thereafter.

The rising NPAs call for strong arm-twisting. The RBI should call upon all banks to furnish a listing of their top 100 defaulters with a brief on their ages, causes and steps initiated to effect recoveries. The banks and RBI should make available the listing along with the progress report on the reduction or otherwise, on their websites. Most of the defaulters would be big names with strong pull, right up to the Ministry of Finance, capable of pulling all strings to keep action at bay. The banks should not stop short of opting for strong coercive proceedings under the securitization laws rather than yield to the mirage of corporate debt restructuring.

If NPAs are not curbed effectively, it will not be long before India heads the Greek route. The Ministry of Finance has to necessarily leave the micromanagement of the banking sector to the RBI.

This oversight task is best assigned to Dr YV Reddy, the tough acting former RBI Governor!

(Nagesh Kini is a Mumbai based chartered accountant turned activist.)

http://www.moneylife.in/article/rbi-needs-to-come-out-clean-on-npas/33966.html

Avoid Public Sector Banks

2013-07-29T20:16:00.000-07:00

Avoid PSU banks: Analysts--Business Standard

Including, SBI, PNB, Dena Bank and Federal Bank, a total of 18 banks mostly from public sector are trading at their 52-week lows on BSE

When it rains, it pours. The rupee’s slide against the dollar and the Reserve Bank of India (RBI)’s attempts to curtail this fall have hit the markets hard, especially the banking counters, with most stocks hitting their respective multi-year lows.

The last 15 days have seen the central bank adopt aggressive measures to curtail the rupee’s slide such as tinkering with the daily borrowing limits by banks, reducing the liquidity adjustment facility (LAF), raising the marginal standing facility (MSF) rate, etc.

“Although we think these changes are meant to shore up the rupee and be short-term in nature, the market movement (equity and debt) suggests there could be a longer term shift in the monetary policy stance. Unless the government steps up to the plate and passes much needed reforms, we may even see RBI formally raising rates to shore up the rupee. Clearly the most exposed stocks to interest rate reversals would be those with excessive reliance on wholesale funding,” said Santosh Singh, analyst, Espirito Santo Securities.

Hit hard
Including State Bank of India (SBI), Punjab National Bank, Dena Bank and Bank of India, 18 banks, mostly from the public sector, are trading at their 52-week lows on the BSE. As many as 11 are trading at four-year lows, while Punjab and Sind Bank and United Bank of India are quoting at their lowest level since their listings. Corporation Bank, Oriental Bank of Commerce, Bank of India, Indian Overseas Bank, Andhra Bank and Central Bank of India are among notable banks trading at their lowest level since July 2009.

ICICI Bank, YES Bank, IndusInd Bank, Axis Bank, ING Vysya Bank, Karnataka Bank and City Union Bank are among few banks that declined between 12 and 27 per cent since July 15. The BSE banking share index, Bankex, has underperformed the market, by falling 12.4 per cent, compared to 2.2 per cent decline in the benchmark S&P BSE Sensex during the same period.

Stock strategy
Given the uncertain environment and macro headwinds, analysts suggest avoiding PSBs for now. “The Bank Nifty had broken a major key support zone of 10,850 levels and is moving in direction on below 10,000 levels in the August series. The volatility skew on Bank Nifty options is suggesting more downside, as the demand for protection using put options is more than compared to call options. Short-term traders should sell the Bank Nifty with stop-loss of 10,800 on the upside,” says Navneet Daga, derivative analyst, KR Choksey Securities.

“From the public sector banking space, heavy shorts have piled up on counters like Syndicate Bank, Union Bank of India, and Dena Bank. Among the private sector banks, is ICICI Bank can be sold,” he adds.

“As regards mid-cap private banks, the near-term pressure on net interest margins (NIMs) could be higher than earlier envisaged, though ability to maintain asset quality metrics could support above average return ratios,” suggest Nilesh Parikh, Kunal Shah and Prakhar Agarwal of Edelweiss Research in their July 23 report.

“Despite valuation comfort, headwinds in the form of margins, operating expenses, asset quality risk takes centre-stage for PSBs. We suggest investors avoid the PSBs for now,” they add.

Given uncertainty around how long the policy shift will last, and whether RBI will also formally raise headline rates to further defend the rupee, Singh of Espirito Santo Securities advises that investors take a defensive stance, in which case HDFC Bank and Mahindra and Mahindra Financial Services look best positioned among banks and non-banking finance companies, respectively. He has a ‘buy’ rating on both these counters.

http://www.business-standard.com/article/markets/avoid-psu-banks-analysts-113072900171_1.html

Future OF PSU Banks Will Be Like BSNL, Indian Airlines

2013-07-10T17:33:00.002-07:00

PSU Banks may face the same fate as state-run peers in telecom, aviation -ET

11th July 2013 ( Similar opinion express by me in my past blogs , links given below )

Indian banking is experiencing a tectonic shift. Holding a stick to state-run bank chairmen to revive the economy will do more harm than help the nation's cause. PSU banks may face the same fate as state-run peers in telecom and aviation. If the government does not change its way and banks don't focus on service, both may end up as losers.

Finance Minister P Chidambaram might not have directed public sector banks to reduce lending rates citing State Bank of India example if only he had had a detailed look at the deteriorating financial ratios of other banks over the past few years.

There is a transformation which is happening in the Indian banking scene where state-run companies dominate three-fourths of the market. That is the best part of the story. The disturbing factor is that barring State Bank of India, all other state-run banks are staring at a low-cost funding crunch that could change the banking landscape forever.

Corporation Bank's annual analysts' presentation for the last fiscal year tells the story. A few inches at the bottom right of page 16 in the presentation is a diagram which is hard to identify — it is hard to tell whether it is a tree or a stick. That is the space which should have indicated the percentage growth or fall of its lowcost deposits — known popularly in banking circles as CASA (current account savings account).

If 26 entities have applied to own a bank including non-banking Finance companies, the dominant thought was they could get access to CASA which will help them earn more profits.

However, what is plaguing state-run banks is exactly the opposite. Over the last few years the likes of Punjab National Bank (PNB), Bank of Baroda, Canara Ban and Corporation Bank have been losing CASA market share to nimble, technology-savvy private sector peers such as HDFC Bank and ICICI Bank.

The New Delhi-based PNB's CASA has fallen to 39% of its total deposits in 2013, from 46% in 2005, squeezing its profitability. But ICICI Bank's has risen 24% in 2005, to 41% in 2013, helping it raise its profitability.

"If you have low-cost deposits then you don't need to take as much risks on the lending side to make the same amount of profits," says Anish Tawakley, director, equity research,Barclays Capital. "If you start with a high-cost deposit base then to earn a profit you have to lend at a high rate, effectively taking on more risks. These earnings are seen as riskier."

When low-cost deposits for state-run banks in general have fallen to just about a quarter or in some cases even lower, State Bank of India has its CASA at 44.8%. Indeed, it has also improved as it is seen as a proxy for the government and, therefore, considered the safest, even though other state-run banks have similar profiles.

SBI's base rate is at 9.7%, the lowest among the lenders and PNB's is at 10.25% and Bank of India's is at 10%. These banks have since their meeting with Chidambaram reduced interest rates. But one could be sure that their profitability could be squeezed if their low-cost deposits do not rise which looks the most likely possibility.

"Eventually, banks will have to settle for lower NIMs (net interest margins)," says BA Prabhakar, chairman and managing director at Andhra Bank. "But if they can migrate from compliance to business opportunity in rural India, they have a better chance of improving CASA."

Private lenders such as HDFC Bank andAxis Bank have been gaining a higher share of low-cost deposits due to their service offerings to individuals and corporates which many state-run banks have been slow to realise.

Absorption of technology has been an important factor. Taking strides in internet banking, mobile banking, facilitating bill payments, online trading, credit card payments and electronic clearing system payments are some of the features that induce the salaried class to keep cash with private sector banks. Corporates are also lured with facilities such as cash management and portfolio management.

"Given the network and presence that PSU banks have in our country, they should at least have maintained their market share," says Vaibhav Agrawal, vice-president, research, banking, Angel Broking. "Building and maintaining a sustainable CASA profile is easier said than done as it involves significant execution challenges. With a customer-centric approach, right from the branch level, private banks have managed to gain a sizeable market share from state-owned banks." Rising bad loans, the prospect of new banks and the option of keeping surplus money with mutual fund schemes would not help public sector banks improve their positions any time soon.

Although the Reserve Bank of India has cut policy rates in the last one year, many banks have been raising fixed deposit rates. Since companies are defaulting or falling behind on payments, banks have to keep attracting new funds to maintain the assetliability mismatch.

Since low-cost funds are with private sector banks, PSUs such as Bank of Baroda, and Indian Overseas Bank have no option other than to raise rates on fixed deposits. That raises the overall cost of funds, limiting their ability to lower lending rates. Furthermore, attractive rates from liquid schemes of mutual funds are also luring corporates away from banks. "Liquid funds offer 8-9% against the current account balance of zero percent. So, more and more corporates are parking their surplus funds with mutual funds," says Andhra Bank's Prabhakar.

The prospect of lowering lending rates appears to be distant if managers just go by their cost of funds. But if the government coerces banks to do so as it did in forcing them to lend, it would weaken their finances further. For policy-makers who are looking to revive the economy, the choice may be to swallow the fact that the banking system, after years of abuse, is not in the pink of health. So, one might have to wait for the rottenness in the system to be purged before getting back to normal.

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/psu-banks-may-face-the-same-fate-as-state-run-peers-in-telecom-aviation/articleshow/20995640.cms?curpg=2

My Blogs of the Past are in following links

Average Pay Per employee in Private And Government Banks

RBI DY Governor compares average pay per employee in public sector banks with that in private sector banks.

( Please also read latest submission dated 28th March 2013 on this subject http://importantbankingnews.blogspot.in/2013/03/pubic-sector-banks-policy-of-branch.html)

In public sector banks, clerks are not given promotion in two to three decades. If clerks are promoted to officer cadre, the promotee officers continue to perform the duty of clerk or that of cashier as he or she used to do before becoming officers. Not only this, there are many scale II, scale III or scale IV officers who are constrained to perform the duty of cashier or a dispatch clerk or front line officer.

http://dkjain4970901092007.blogspot.in/2012/06/average-pay-per-employee-in-private-and.html

Public and Private Sector Banks

Reality of stimulus package is now visible; Fiscal deficit is increasing , trade deficit is increasing, current account deficit is increasing and GDP is coming down, IIP figure is coming down, rating of banks is coming down rating of country is at alarming position and so on ….Borrowing by government has been consistently increasing, public debt has reached to the level of 46 lac crores i.e. around 40% of GDP. Still government is allowing one after other subsidies to big corporates, exporters and importers.

Total subsidies , interest relief, and tax relaxation provided per year to high profile corporate comes to the tune of ten lac crores which is at least four times more than the total of subsidies provided to common men in the name of fertiliser subsidy or fuel subsidy.How can one dream of good results for common men when the present government continues such pro rich policies in the name of reformation.

http://dkjain497091112006.blogspot.in/2012/03/public-and-private-sector-banks.html

http://importantbankingnews.blogspot.in/2013/03/pubic-sector-banks-policy-of-branch.html

http://importantbankingnews.blogspot.in/2012/12/psu-banks-are-sick-due-to-poor.html

http://dkjain4970901092007.blogspot.in/2012/05/public-sector-banks-in-crisis.html

http://dkjain497091112006.blogspot.in/2012/05/all-is-not-in-government-banks.html

http://dkjain4970901092007.blogspot.in/2012/05/public-sector-banks-in-crisis.html

Banks Are In Debt Trap , Crisis Is Inevitable And Unsurmountable Until Real Guilty Are Trapped

2013-03-27T16:47:00.002-07:00

Nationalised banks in Rs 1.55 lakh crore debt trap

An alarming rise in the non-performing assets (NPAs) of public sector banks has become a major cause of worry for Union Finance Minister P Chidambaram. At a recent meeting with PSU bank chiefs, Chidambaram expressed concern over the unmitigated surge in bad loans at state-owned banks. His fear is justified. Recent figures from the finance ministry show that gross NPAs of PSU banks had gone from Rs 71,080 crore in March 2011 to Rs 1.55 lakh crore in December 2012.

PSU banks have shown an exponential increase in NPAs and restructured loans from 2011 to 2012. NPAs rose from 6.7 per cent in 2011 to 11.6 per cent in 2012. The State Bank of India (SBI), Central Bank, Punjab National Bank (PNB), Oriental Bank of Commerce, Punjab & Sind Bank and Indian Overseas Bank are currently reeling under the worst debt burden. Central Bank showed the highest rise in NPAs from 4.9 per cent to 18.1 per cent, followed by PNB from 4.5 per cent to 15.5 per cent.

Marking the worrying movement, the Reserve Bank of India said in its Report on Trend and Progress of Banking in India (2011-12) that “during 2011-12, the NPA stock has risen. The slippage ratio of the banking system, which showed a declining trend during 2005-08, increased during 2008-12. Banks need to not only utilise effectively the various measures put in place by the Reserve Bank and the Government of India for the resolution and recovery of bad loans, but also have to strengthen their due diligence, credit appraisal and post-sanction loan monitoring systems to minimise and mitigate the problem of increasing NPAs”.

Chidambaram has now directed banks to clamp down on affluent promoters of sick units to recover loans. In the case of Vijay Mallya-promoted Kingfisher Airlines, a group of 17 banks, including SBI, has dues of over Rs 7,000 crore. The account has turned non-performing for most banks, who are mulling attaching some of Kingfisher’s grounded properties and liquidating the securities towards loan recovery. “We are blazing all guns and taking all steps for recovery (of Kingfisher loans)… There is a core group. It is assessing what are securities, what can be disposed of quickly, (and) then put on auction,” SBI Chairman Pratip Chaudhuri said recently. While SBI has an exposure of Rs 1,600 crore in Kingfisher, PNB and IDBI Bank have Rs 800 crore each. Bank of India and Bank of Baroda have exposures of Rs 650 crore and Rs 550 crore respectively.

SBI, as the country’s largest lender, also has the greatest exposure to risk and bad debt. “SBI is worse placed than the industry average vis-a-vis NPAs,” Diwakar Gupta, Managing Director and Chief Financial Officer (CFO), SBI told The Sunday Standard. The state-owned bank currently has NPAs of around `33,000 crore with gross NPAs at 5.3 per cent and net NPAs at 2.44 per cent of advances. “NPAs have been the single biggest challenge for us and we are trying to better the situation,” Gupta added. The largest Indian bank has reduced its bad debt stock by Rs 10,000 crore; however, the battle to curb NPAs still continues. “We’re going for better secured lending and focusing on home and gold loans. We’re also trying to collateralise our lending,” Gupta said.

In a growing trend, several government-owned banks are resorting to settlements and write-offs rather than actual recovery. Canara Bank and Corporation Bank are trying to opt for the settlement and write-off route. Gupta, however, cautions that write-offs are hardly the way out of this precarious situation. “The moment you write-off (bad stock), your PCR (Provision Coverage Ratio) comes down. There is a limit to how much you can write off,” he said. (PCR is the percentage of the loan amount that the bank keeps as provision in the case of bad debt.) Therefore, SBI isn’t writing off the Kingfisher loan and the priority remains to see whether the carrier can be saved. SBI has at least eight accounts, apart from Kingfisher Airlines, that are large and currently stressed.

The PSU banks are facing most trouble from stalled infrastructure projects in power, coal, iron, steel and road transport. RBI said in the same report. “Though Indian banks remained well-capitalised, concerns about the growing non-performing assets loomed large. Banks’ exposure to the stressed power and airline sectors particularly added to deterioration in their asset quality.”

Chidambaram accepted that at least 215 projects with investment of Rs 7 lakh crore have been delayed in the infrastructure space. Banks have disbursed around Rs 54,000 crore loans towards these stalled projects. Of the 126 new projects worth Rs 3.55 lakh crore, banks have sanctioned Rs 43,000 crore as loan.

“The underwriting and credit assessment skills of private sector banks are different from PSU banks. The private sector is particular about which sector they want to lend to or what collateral they’ll accept,” says Akeel Master, head of Financial Services, KPMG India. Private bank HDFC, for instance, had a gross NPA of only 1 per cent and net NPA of 0.2 per cent as of December 31, 2012. “One of the reasons for a higher NPA among the public banks could be a corporate heavy portfolio compared to a relatively balanced mix between corporate and retail exposures for most of the private sector banks that perhaps may reduce the concentration risk. Further, the retail portfolio, mostly being secured, does not indicate as much stress as the corporate exposures,” says Chief Managing Director of Care Ratings and Research D R Dogra

http://newindianexpress.com/business/news/article1514419.ece

24-03-2013 NPAs have tremonsously increaesd due to competition of banks in sanctioning loans. Many a time loans are sanctioned without regard to the repaying capacity of borrowers also. I am giving this information as I am an approved valuer for 7 Public Sector Banks and a few co-operative banks. Three banks VIJAYA, INDIAN and Andhra refuse empanelment of valuers saying their funny rule of age above 60 years not eligible but can allow growth of NPAS. When politicians who handle crores of public money have no age limit, it not a mockery to insist age limit for valuers whose job is nothing but a casual educated servant of good experience approved by the Income Tax dept, Institution of Valuers and Indian Banks' Association who have specified only minimum age of 25 years and no higher age. I am on the panel of SBI, Canara, Syndicate, UCO, Bank of Maharastra, Punjab National, Bank of India and many Co-operative banks. B S GANESH

Not Easy To Recover Bad Loans And Contain Rise in NPA

2013-03-23T19:26:00.000-07:00

Road to loan recovery tough for banks

Many firms' debt far exceeds their market cap----Business Standard

Bankers have a reason to worry. Nearly two-thirds of all corporate borrowings are by companies whose stock prices are languishing at multi-year lows.

Finance Minister P Chidambaram recently asked public sector banks to get tough on wilful defaulters, saying: “We cannot have an affluent promoter and a sick company.” However, banks would find it tough to recover their dues even if they resorted to selling the shares pledged with them.

Worse still, the gap between outstanding liabilities of these companies and their market value of assets has been growing over the past few quarters. So, banks could recover only a fraction of their dues, even if they went for wholesale selling of pledged promoter shares. (TEN MOST INDEBTED CORPORATE HOUSES*)

A BS Research Bureau analysis of 2,800 listed companies shows 1,200 firms account for nearly two-thirds of the total loans given to the corporate sector. The current market capitalisation of all of these companies is far less than their liabilities.

The ten most indebted groups (in terms of the gap between market value and borrowings) account for 21.6 per cent of the total borrowings by all listed non-financial private-sector firms. However, the market capitalisation of these ten put together is only five per cent of the combined market cap of all private-sector firms (see table). The BS analysis excludes Indian subsidiaries of MNCs.

In the private sector, the combined market cap of 174 business groups is lower than their consolidated debt. These include the names such Adani Group, Jaypee Group, GMR, GVK, ADAG and Videocon.

Interestingly, the market cap of Vijay Mallya-owned UB Group is higher than its liability, mainly due to a sharp rally seen over the past 12 months in the share price of the group’s flagship United Spirits. At its current stock price, UB Group’s total market capitalisation stands at nearly twice its consolidated borrowings of around Rs 23,000 crore (at the end of 2011-12). This could offer banks a chance to recover their dues.

The phenomenon of debt being higher than market cap is not unique to the private sector. Among the public-sector companies, loans of large ones like Indian Oil Corporation, BPCL, HPCL, MTNL, Power Grid Corporation, MMTC and Shipping Corporation of India are higher than their respective market caps. However, these companies are less likely to default on their loans.

The total borrowings of the 1,200 companies analysed, at Rs 16.2 lakh crore as of the end of March 2012, account for 67.2 per cent of the total corporate borrowings in India. There are worries that if the economy does not recover soon, a number of these loans might either turn into non-performing assets or go for restructuring. Obviously, the market sees this looming threat over the banking sector. No wonder, banking stocks have been getting a drubbing for some time.

http://www.business-standard.com/article/companies/road-to-loan-recovery-tough-for-banks-113032000373_1.html

Bengal govt to bring new legislation to curb chit funds

The bill, which proposes a life term for convicts, however, is still awaiting Presidential assent since January 2010

In an effort to control the proliferation of chit funds, the West Bengal government is planning to introduce a new legislation to crackdown on such companies and ponzi schemes.

The new legislation will be an updated and stronger version of the West Bengal Protection of Interest of Depositors in Financial Institutions Bill, passed unanimously on December 23, 2009.

The Bill, which proposes a life term for convicts, however, is still awaiting Presidential assent since January 2010.

“The earlier Bill was prepared in 2008. The entire base of collecting money and investing money has changed drastically since 2008. The state government is trying to recast the Bill. The new Bill will have more teeth, so that there could be a proper regulation,” West Bengal finance secretary HK Dwivedi said.

“Right now, economic offences wing of state finance department are pursuing all the complaints. The state will go hand in hand with the Centre on the issue. Also, steps are being take to create awareness in small towns and rural areas about risk involved in the promise of high returns,” he added, while speaking at an investor awareness programme of the ministry of corporate affairs.

Later speaking on the issue, “The Centre is looking into the issue, we would also encourage state governments to take necessary action against these firms. These firms are currently misusing the loopholes in law. If state starts taking action, Centre is ready to provide all kind of assistance,” Minister of Corporate Affairs Sachn Pailot said during the event later.

Incidentally, Reserve Bank of India had earlier directed the government to take action againsst mushrooming chit funds in the state. Opposition too have been mounting pressure on Trinamool-Congress government on the issue.

Leader of Opposition Suryakanta Mishra, had recently alleged that some multi-level marketing companies siphoned off about Rs 15,000-16,000 crore from the people in the state in the past few years and have invested in real estate and media organisations.

Also, small saving collections in the state have lost the edge to high-yielding saving instruments like chit funds. According to Gautam Deb, leader of CPI(M), the small savings and post office collections in West Bengal during the April-October period were merely Rs 194 crore, against the targeted amount of Rs 8,370 crore.

http://www.business-standard.com/article/economy-policy/bengal-govt-to-bring-new-legislation-to-curb-chit-funds-113032300170_1.html

Govt wants PSBs to consider separate credit limit

Wind power projects face hurdles in getting bank finance

The government wants the public sector banks (PSBs) to consider a separate exposure limit for credit to renewable energy projects to improve fund flow into this capital-intensive industry.

The finance ministry took this issue up with the chiefs of state-run lenders in a meeting held in Delhi on March 18, said a top PSB executive, requesting anonymity.

Loans to the power sector have seen consistent growth, but banks traditionally give preference to conventional power projects rather than renewable energy units. Banks' exposure to the power sector rose to Rs 4.07 lakh crore in January 2013 from Rs 3.28 lakh crore in March 2012, according to the Reserve Bank of India (RBI).

Considering the importance of promoting renewable energy sources, banks could consider carving out a separate sectoral exposure limit. This, according to the finance ministry, could be either through prescribing an independent exposure limit, or having a sub-limit within the exposure limit for the power sector.

Banks prefer financing conventional power projects due to their large size and financing requirements, but this has led to crowding out of finance for the renewable energy sector, feels the finance ministry.

The investment requirement for the renewable energy sector for the next five years has been projected at around Rs 3 lakh crore and over 90 per cent of it is expected to come from the private sector.

According to the finance ministry, renewable energy production is a capital-intensive business. The risks involved are high and the viability of the project is dependent upon factors such as regulatory support and technology trends. Banks charge higher interest rate for loans to the industry due to high perceived risks.

With the smaller project size, tapping overseas markets for funds is not an attractive option for renewable energy companies, according to another bank executive. Moreover, the financial distress faced by state power distribution companies (discoms) pose offtake risk (beyond the renewable purchase obligation) and repayment risk for such projects.

In recent times, bankability in the solar segment has emerged as a major issue mainly due to aggressive bidding for projects. This has raised concerns about the viability of such projects. Further, in many states, evacuation infrastructure for renewable energy projects is not available, the official added.

Super-regulator for financial sector mooted

B N Srikrishna commission spares RBI for now

Risk By E-Banking Is Rising Due To Rise In Cyber Crime

2013-02-11T16:28:00.001-08:00

RBI moves to Raise Banking Risk In India

Posted on February 10th, 2013

by naavi

Indian Banking industry is already reeling under the increasing Cyber Crime risks. The recent US $ 200 million Credit card fraud exposed in USA and a series of Bank frauds in RTGS and NEFT systems have exposed that the Banking system in India is lacking the fundamental ingredient of “Safety”. The much hyped “OTP” system has failed. The legal system which endorses the use of “Digital Signatures” is being ignored by rogue Banks and RBI has not been able to bring such Banks to the right tracks.

The Judiciary had an option to bring Banks to track and the adjudication verdict in the case of S.Umashankar Vs ICICI Bank in Chennai had paved the way for reforms in E Banking security through judicial intervention. However, the erring Banks conspired with the regulators in the Government of India and removed the functionality of the Cyber Appellate Tribunal which was a key judicial authority for examining the E Banking related frauds through the eye of ITA 2000/8. Additionally some Banks conspired to hit at the adjudication system itself and with obliging IT Secretaries such as the one in Karnataka shut off the adjudication option for E Banking victims. Similarly they have ensured that the ombudsman of RBI does not come to the assistance of E Banking victims by getting some key provisions of the Bankign Ombudsman scheme amended.

RBI has not been able to make intended changes though they did put in efforts through the G Gopalakrishna Working Group report (GGWG Report on E Banking Security) and Damodaran Committee report on Customer Service. However, rogue Banks who want to propfiteer from technology even at the expense of security of banking have through the institution of Indian Banks Association challenged the RBI and prevented it from notifying Damodaran Committee recommendations and going slow on the implementation of GGWG recommendations.

In this background the Reserve Bank of India has now released a discussion paper on a plan to disincentivise usage of cheques. Public have been asked to send their comments before February 28, 2012.

Disincentivisation of cheques automatically means greater push to the elecronic banking along with the attendant risks.

It is my observation that the risks in Electronic Banking in India have not so far been adequately addressed by Banks I therefore feel that the time is not ripe to push Indian Bank customers towards a forced adoption of E Banking. This may lead to higher risks in Banking and the responsibility for further endangering the Indian Banking system will be on RBI.

Public comments for the discussion paper are to be submitted before February 28, 2013.

I will be submitting my views through Naavi.org.

I urge public to also submit their response on whether the use of cheques need to be disincentivised by positive action or be left to market forces.

Copy of the discussion paper is available here

Reserve Bank of India

Head Office

Mumbai

Dear Sirs

With reference to the discussion paper released by RBI for public comments on January 31, 2013, I am submitting my views on the subject for due consideration.

Background

RBI is the Central Banking Authority in India and is also responsible for the regulation of the Indian Banking system. “Regulation” is not “Promotion” and hence the policies supported actively by RBI has to ensure that Banking is carried out by licensed Bankers in a manner that is beneficial to the citizens of India.

There are other organizations such as Indian Banking Association (IBA) who have a different role which may include lobbying for the commercial interests of the Banks. At no point of time RBI should become a tool in the hands of the commercial Banks for profiteering.

The proposed policy of “Disincentivisation” of the use of Cheques by Indian Banks has to be therefore viewed in the context of the responsibilities of RBI for “Regulation” and should not be viewed with the promotional interests of the commercial banks or the technological developments in the globe.

“Disincetivisation of the use of cheques” means “use of the statutory powers vested with RBI for the promotion of electronic forms of banking in India”.

The discussion paper has clearly indicated that the main objective of the proposed policy is to shift the customer preference from “Cheques” to “NEFT/RTGS” while handling payments in the banking system and also to move from personal withdrawals at the Banking counter to ATMs. NEFT, RTGS and ATM are the E-Channels that RBI is intending the customers to use. This also indirectly promotes the use of “Debit Cards” which interalia promotes the sister product of “Credit cards”.

Hence the “Disincentivisation of use of cheques” is directly equivalent to the “Incentivisation of E Channels of Banking”.

RBI by adopting this policy will be considered solely responsible for the consequences that follow this shift of Indian Banking to the E Banking environment.

If therefore E Banking in India is fraught with higher risks, then RBI will be considered as pushing the Indian Banking customer towards higher risks in Banking.

Secure E Banking has been in discussion for some time in India and RBI will have to admit that the current situation of E Banking security in India is grave. Not only that there are over Rs 8000 crores of E Banking frauds each year in India, RBI and the Banks are guilty of not informing the public about the actual E Banking losses in the country. This is a “Fraud” on the Indian Banking public.

The S.R.Mittal Group on Internet Banking and the guidelines which followed in 2001 required Banks to assume Cyber Fraud risks and obtain insurance to cover their own risks. This was never implemented and RBI remained a silent spectator.

G.Gopalakrishna Working Group (GGWG) of RBI endorsed the previous Internet Banking guidelines in 2011 and suggested several security measures to be followed by Banks. RBI has not effectively followed the implementation of these guidelines also except for asking a few questions during the RBI inspections.

RBI has not made any public disclosure of the status of the implementation of GGWG recommendations in Banks though two years have passed since then. The annual reports of Banks in 2012 ought to have indicated the status of implementation in each Banks and I am not aware of any significant disclosures in this regard so far. I am not hopeful that the March 31, 2013 annual reports are likely show any improvements.

The Damodaran Committee on Customer service in Banks made many significant recommendations regarding the use of Internet Banking and ATMs. RBI has not so far notified the recommendations and the perception is that RBI is holding back on the recommendations because of the pressure from IBA. This itself is an “anti consumer” action of RBI which it has failed to explain.

Before issuing the discussion paper, it was imperative that RBI makes a public disclosure on the status of “E Banking security in India” including the mobile banking introduced recently by some Banks.

The recent cyber crimes reported in the country have indicated that Banks are conducting illegal banking by ignoring the need to use “Digital Signature” as a replacement of “physical signatures”.

RBI has allowed the illegal banking system to prevail which is a failure of its constitutional duty to ensure prevalence of a legal banking system in India.

OTP system on which RBI has placed faith is not able to prevent occurrence of frauds since it is dependent heavily on the KYC system in the Mobile industry on which RBI has no control. Now RBI is also trying to rely on the Aadhar system which again is yet to pass the legal validity test.

Since “Disincentivisation of the use of cheques” is equivalent to “Incentivisation of the use of E Banking” and RBI has failed to ensure the legal functioning of the E Banking nor able to provide insurance to the Bank customers against E Banking frauds either through its own as say an E Banking Fraud Guarantee scheme or through the insurance which Banks had to obtain as per the Internet Banking guidelines of 2001, the current move is not keeping with the constitutional responsibility of RBI to ensure that Indian Banking system is safe and legal.

The very concept of “Disincentivisng” an age old Banking practice of the use of cheques which are considered as a “Negotiable Instrument” capable of creating a “Holder in Due Course” in business transactions is against the mission of vision of RBI. Additionally if it is promoting “Unsafe Banking”, the concept amounts to colluding with Banks and assisting in their profiteering ambitions against the interests of the common man.

The discussion is therefore against the constitutional obligations of RBI and has to be dropped.

If Banks propose to use technology, RBI must worry about the security risks and how they are addressed before each new technological innovation is permitted. RBI should take its role as a “Regulator” seriously and should keep itself far from the role of “Promotion”. At present RBI has done enough for “Technology Enablement” and the rest of promotion is for Banks and IBA to do and not for RBI. Disincentivisation is a direct interference by the regulator and is unethical and illegal.

Technology should be adopted by the community on its own and after the understanding of the risks in full. At present Indian Banking community is not ready to absorb Technology and already Bankers are pushing Debit cards and ATM transactions as default banking practices. Internet Banking is offered on the basis of a “Tick” mark in a corner of an application form. There are many customers of Indian Banks who are still using thumb impressions as their signatures since they are illiterate. Such persons cannot understand the implications of “Direct transfer” or “ATM withdrawals” as much as they can understand the “Cheque”.

By trying to avoid the use of cheques beneficiaries of cheques are denied the statutory right to be “Holders in Due Course” as per the Negotiable Instruments Act, against their wish and by regulatory interference. This amounts to denial of statutory rights by an administrative interference and is illegal.

By trying to move customers from “Signature based physical instruments” to “No digital signature based electronic messages”, the move acts contrary to Information Technology Act 2000/8 as well as RBI’s own banking instructions of the past and hence is illegal and unacceptable.

I am sure that RBI has not made any survey of “Illiterate” and “Semi literate” (those who can sign only and not read or write) customers in the country as well as “Technology illiterate” (Those who can write and read English or other languages but are unaware of cyber crime risks) before releasing the discussion paper.

Hence the discussion of “Disincentivisation” should be considered unethical and unacceptable ab-initio.

..To be continued

Naavi

(This is part of a draft letter to be sent to RBI and has been released so as to stimulate discussion. Last date for submission of comments for the discussion paper is 28th February 2013. Please refer to my previous article for more information on the discussion paper and how to send your views.)

http://www.bloggernews.net/128911

Risk In Public Sector Bank Unabated

2013-02-06T16:08:00.004-08:00

Since bank nationalisation, banking in India has become increasingly politicised. Non-performing assets will become worse before the general election in 2014. There is already an expectation of yet another write-off of loans by a government desperate to improve its image after being riddled with scams and scandals. In that context, stress tests based on different probabilities of defaults described in the book are useful.

To read more click on following link

http://importantbankingnews.blogspot.in/2013/02/banking-for-braveheart.html

It is more relevant at an economy's macro level to address issues such as systemic risk, market discipline, liquidity and transparency in the risk-management framework. It is interesting to note that though risk capital may be the necessary safety cushion for banks, capital alone may not be sufficient to protect them from any extreme unexpected loss events. In reality, risk capital will remain only a number and may not be effective if banks do not assess their risk periodically and take timely corrective action when the risk exceeds the threshold limit. Thus, whether it is Basel II or Basel III, it is crucial that a bank does not depend solely on "regulatory capital". What is needed is a dynamic risk mitigation strategy, where all employees act as risk managers in their own area. A proper risk culture needs to be developed across the organisation and " risk" should be an input for future business decision-making. Risk management should not merely be an activity to comply with regulatory requirements.
To read more click on following link

http://importantbankingnews.blogspot.in/2013/02/basle-iii-burden-on-banks.html

The overall bad loan burden of the Indian banking industry has risen sharply in the past one year. Gross NPAs of 40 listed banks rose 46.85% to Rs.1.67 trillion in the September quarter from Rs.1.14 trillion in the year-ago period.

SBI had bad loans equivalent to 5.15% of the total loan book in September 2012. Central Bank of India (5.64% in December), UCO Bank (5.53% in December) and PNB (4.61% in December) are other lenders that have reported a significant rise in bad loans.

The banking industry is witnessing a sharp increase in restructured assets, which have reached about Rs.4 trillion, and analysts estimate that 25-30% of these loans may turn bad.
To read more click on following link

http://importantbankingnews.blogspot.in/2013/02/npa-rises-also-in-overseas-branches-of.html

Even if loan accounts became bad , such bad accounts were not considered bad by bankers during last ten years . It was the habit of top bankers to punish officers who insisted for treating bad loan accounts as Non Performing asset as per prevalent RBI prudential norms for recognition of income and for classification of assets. Officers not listening to oral advice of top bankers to treat even bad asset as Standard assets were transferred to most critical place and never promoted in promotion processes. Many senior officials have lost the hope of good career in banks and passing their bad days somehow or the other.
To read more click on following link

http://dkjain497091112006.blogspot.in/2013/02/are-banks-really-safe.html

Are Banks Really Safe ?

2013-02-02T17:29:00.003-08:00

Most of the bankers are officially or unofficially and openly or secretly have resorted to restructure of bad loan accounts to keep them standard and to avoid load of provisioning. For last ten years and more ,these corrupt bankers have sanctioned loans to only those persons or companies who used to offer them handsome amount of bribe and offer valuable golden and diamond gifts from time to time..

It is undoubtedly true that Bankers have been consistently earning bribe money and precious gifts from loan seekers without caring for future of these loans. To add fuel to fire these corrupt bankers have booked false profit , distributed unjustified dividends at the cost of tax payers money and got elevation in their career by ill methods. And ultimately it is as tax payers’ money which is infused in these sick banks in the name of capital infusion.

Even if loan accounts became bad , such bad accounts were not considered bad by bankers during last ten years . It was the habit of top bankers to punish officers who insisted for treating bad loan accounts as Non Performing asset as per prevalent RBI prudential norms for recognition of income and for classification of assets. Officers not listening to oral advice of top bankers to treat even bad asset as Standard assets were transferred to most critical place and never promoted in promotion processes. Many senior officials have lost the hope of good career in banks and passing their bad days somehow or the other.

It is undeniably true that corrupt bankers never applied prudential norms honestly and never applied proper monitoring tools sincerely to keep their loan portfolio in good condition.

Each ED, CMD, GM, DGM and top ranking other powerful officials including that from RBI and Ministry have become wealthy and banks managed by them have become poorer year after year. Owners of big Corporate houses are billionaire but the loans sanctioned to them are bad in the books of bank accounts of banks. If Income tax authorities are asked to verify the assets of these powerful bankers, at least of all EDs and CMDs , the true story of large scale corruption will be exposed.. But it is not possible for IT officials or Ministry of Finance or Government of India because they are all participant and beneficiary of evil works of bankers directly or indirectly.

It is now when entire exercise of recognition of assets is being done by online CBS technology , bankers are constrained to declare their decade old bad accounts as Non Performing Assets. However clever bankers continue to resort to unofficial restructure of loan to conceal bad accounts in various branches .There are many branches where more than 25% of their total loans are truly NPA and at many branches even more than 50% to 75% of their total loan portfolio is bad . Even RBI officials do not want to read the truth and they become satisfied only getting a certificate of health from corrupt bankers.

This is the reason that slowly and year after year , quarter after quarter volume of NPA in public sector banks and that of restructured loan accounts in these banks have been increasing despite tall claim made by Government of India that banks in India are safe.

It is to be understood that if new guidelines of provisioning is implemented in true spirit , banks will be required to make addition provision amounting to Rs.15000 crore as per rough estimate of CRISIL . It means there are at least Rs.300000 crore ( 5% provision is needed on restructured loans as per RBI guidelines ) valued bad loan account hidden in the system using restructuring or are on the verge of restructure of loan or likely to slip into NPA category.

Debt recast norms may push banks’ provisioning up Rs 15,000 cr

The Reserve Bank of India’s (RBI) draft guidelines on corporate loan restructuring, if implemented in the current form, would increase banks’ provisioning requirement by Rs 15,000 crore in the next two years and lower their profit around 7 percent.

According to the draft proposals from the RBI, banks’ provisioning on loan restructuring has to at 5 percent, a sharp increase from the present requirement of 2.75 percent. The deadline for the implementation is April 1.

Crisil, however, sees two positives from the guidelines: withdrawal of regulatory forbearance for restructured loans from April 2015 and the tightening of the process of restructuring.

“These stipulations will enhance the confidence of stakeholders in banks’ asset quality and discourage large-scale restructuring activity,” it said in a press release.

The rating agency had earlier projected loan restructuring to reach Rs 3.25 lakh crore by March 2013.

The cumulative loan restructuring from April 2011 touched Rs 2.25 lakh crore by December 2012, it said.

It expects loan restructuring to continue over the near term, albeit at a slower pace.

The provisioning requirement of Rs 15,000 crore has been arrived at by taking into account the combined impact of higher provisioning on existing stock of restructured loans and expected incremental restructuring.

It sees a greater impact on public sector banks as they account for around 85 percent of the total loan restructuring.

The cumulative loan restructuring from April 2011 touched Rs 2.25 lakh crore by December 2012. Reuters

The guidelines also provide an adequate transition period for banks to adapt to the new regulations.

“The continuation of asset classification benefits to banks for their restructured under-construction infrastructure project loans beyond March 2015 provides them with some breathing space,” Suman Chowdhury, director, Crisil Ratings, was quoted as saying in the press release.

http://www.financialexpress.com/news/rbi-wants-special-force-to-guard-banks-currency-chests-in-state/1068268

Can Public Sector Bank Remain Safe With Bad Policies and Bad Bankers?

2013-01-23T17:23:00.003-08:00

Bank for the buck ( From Indian Express )

BY:-----Ila Patnaik : Thu Jan 24 2013, 03:19 hrs

This year the government will put in Rs 12,500 crore for recapitalising public sector banks. Year after year, the ministry of finance puts more money into PSU banks. To expand banking in India, the government has chosen a two-pronged approach: putting more money into public sector banks while giving new licences for banking to private companies. In the present Indian system — with its lack of transparency, absence of the rule of law and pervasive corruption — a better policy to expand banking in India would be to divest public ownership of banks and convert them into widely held private banks.

Such a policy would address some of the RBI’s concerns about industrial houses owning banks, limit the use of taxpayer money to support inefficient banks and give the country a competitive banking system. India’s experience with public banks that have become widely held private banks, such as HDFC and ICICI, has been better than with new private banks, where family-dominated firms obtained licences.

Policy-makers in India like to claim that we have not had a banking crisis for a while. This claim is called into question when we witness the stream of money that has gone into PSU banks. Almost every year over the last two decades, the government has injected taxpayer resources into PSU financial firms. If we had done a recapitalisation of Rs 100,000 crore at one shot, it would have been obvious that there were big failures of financial regulation and policy. But when we dribble it out as Rs 10,000 crore per year for 10 years, it is not seen as rescuing a failing financial system.

PSU banks are not profitable enough to grow on their own steam. This reflects the failure of bureaucrats as bankers. Normally, profits are reckoned after paying for bad loans, and retained earnings are ploughed back into the equity capital of the bank. The equity capital with a bank determines how much of deposits it can take. A PSU bank that does not have equity capital will be forced to not take more deposits from the public. This constraint does not bind it as much as it should, as the RBI has often been lenient, tolerating the inadequacy of equity capital.

Indian banking has been rigged in favour of PSU banks in numerous ways. The RBI has blocked the entry of foreign banks and new private banks in an attempt to protect the cosy domination of PSU banks. A man who deposits money in a PSU bank knows it has the backing of the government. This is not the case with their competitors, and that helps increase the market share of PSU banks. Despite these violations of competition policy, PSU banks have failed to be adequately profitable. This makes them go back to the finance ministry for more equity capital.

At present, we have a finance ministry that is tightfisted when it comes to putting equity capital into PSUs owned by other ministries and discusses disinvestment of its holdings, but it is willing to put in additional capital when it comes to banks that are in its domain. The finance ministry needs to be as sceptical about putting equity capital into PSU banks as it is about putting equity capital into any PSU. If Air India does not get money, why should the SBI?

India is in a dire fiscal crisis and every single opportunity for cutting expenses should be harnessed. Even if there was money available for spending, it has better applications. In recent years when we have typically been lavishing Rs 10,000 crore every year into PSU financial firms, India would have done better if this same Rs 10,000 crore had been spent on building 2,000 kilometres of highways, or a metro system for a mid-size city like Nagpur.

A better option is to dilute government ownership in PSU banks and allow them to run and grow as normal private banks. In 1969, when banks were being nationalised, Indira Gandhi’s economic policy team thought it was wise for government to have 51 per cent ownership of PSU banks. We have reversed almost every element of Indira Gandhi’s economic policy framework, and this should be no exception.

We have two successful privatisations of PSU financial firms before us: HDFC and ICICI. Both were once controlled by the government and both are now dispersed shareholding companies. They were not sold off to some family, they became modern corporations. This roadmap — building dispersed shareholding private companies that are controlled by no family — should be followed for all PSU banks. This will require carrying legislation through Parliament, and it would make good use of the scarce political capital that the UPA possesses.

The government has made a case for giving out new licences for private banks. The RBI has rightly expressed concerns about banks run by industrial houses. In the past, Indian banking has suffered as the mechanism to prevent theft of depositor money by private banks lending to their business interest has been an issue. Banks must be dispersed shareholdings with professional managers — as is the case with ICICI or HDFC. In an ideal situation one would argue that the banking regulator should give licences to firms that it deems fit to run banks, but in today’s India, most people, and perhaps the regulator itself, is correctly concerned about the political pressure that may be brought to bear on the regulator if it opens up the gates to new private bank licencing. It would be wise to gather experience with enhanced supervision of lending to conglomerates before venturing to give bank licences to large industrial houses, who are often the ones with the money to apply for such licences. As the recent IMF financial stability assessment report also points out, in the current context, the risks of this policy may outweigh its benefits.

Another option to expand banking in India is to open up the sector to the entry of foreign banks. At present, India limits foreign banks, in all, to 18 bank branches per year. A much more open policy framework is required, through which foreign banks can build subsidiaries in India, who are then regulated by the banking regulator on the principle of ownership neutrality and given national treatment, including the lifting of all restrictions on opening branches.

The government should consider these policy options more carefully to give India a safer and more competitive banking system.

The writer, professor at the National Institute of Public Finance and Policy, Delhi, is consulting editor for ‘The Indian Express’, express@expressindia.com

http://www.indianexpress.com/news/bank-for-the-buck/1063781/0

24 JAN, 2013, 05.39AM IST,

Stabilising Indian Banks through coercive rights

Economic Times

By Yakov Amihud & T Sabri Oncu

Indian banks are reported to be experiencing an increase in non-performing assets (NPA) in their loan portfolios due to loans that went awry. This may considerably weaken banks' solvency. For example, NPA of 4% of assets, with recovery rate of 50% and capital ratio of 10%, means that the bank capital — including provisions — will decline by about 20%. While this is not a cause for alarm, it induces a repair of the banks' balance sheet. The best way to do it is by forcing banks with large NPA to issue coercive rights.

Banks should offer existing shareholders rights to buy additional shares at a discounted price. Suppose that a bank whose stock price is Rs 200 offers its shareholders one-for-one rights with an exercise price of Rs 100. After the rights are exercised, the share price will drop to Rs 150 because there are two shares that are claims on the former Rs 200, plus the newly-injected Rs100. Stockholders will be indifferent because their wealth has not changed. They now own two shares that are together worth Rs 300, whereas earlier, they had one share worth Rs 200 and an additional Rs 100 in cash.

Those who do not wish to take up the Rs 100 right can, instead, sell it in the market, where its price will be Rs 50, which exactly covers the decline in the stock price (from Rs 200 to Rs 150). The rights are coercive because a stockholder who does not contribute the Rs 100 of exercise price — or does not sell the right to someone who will do so — will suffer a price decline of Rs 50 without the offsetting gain of Rs 50. Therefore, existing shareholders will either exercise the rights themselves or sell them to someone who will. As a result, the rights offering is guaranteed to raise the desired amount of capital, which equals the number of rights issued times the exercise price per right.

An example of that is the rights issue of Banco Santander, the largest bank of Spain, which announced on November 10, 2008, that it would raise 7.2 billion euros through a rights issue.

The bank would issue one rights for each four existing shares, with the exercise price set at 4.50 euros, while the stock price was 8.34 euros. The bank said that the rights issue, which represented almost 14% of the bank's capitalisation, was intended to boost its core capital ratio. At that time, the bank's core capital stood at 6.31% of assets and was expected to drop. On November 28, 2008, the bank announced that investors had signed up for the entire issue.

Other major banks used coercive rights issues to raise capital. Among them are HSBC in 2009, where 97% of the issue had been subscribed, and Banca Popolare di Milano, with a subscription rate of 94%.

Importantly, selling the rights at a discount to the market value or the book value of the bank does not make the existing shareholders worse off because after they exercise the rights, they retain the same proportional ownership of the banks' assets. This is particularly meaningful in public sector banks, where the government is expected to exercise the rights and, thus, retain its share of control of these banks. The only purpose of the deep discount is to guarantee that the public shareholders contribute the desired amount, too, to shore up the banks' balance sheets and enhance their solvency.

From the government's viewpoint, this method of raising capital saves on its cost in keeping the banks solvent. Suppose a public sector bank is in a precarious situation. If it fails, the government alone will have to bail it Banout, thus, the entire onus of injecting new capital will be on the government. The public stockholders will, in fact, take a free ride on the government's guarantee.

In contrast, the rights issue ensures that the public stockholders too contribute — right now, ahead of the potential bank failure — to the stability of the banks. That is, the rights ease the government's burden in case of a bank failure by making more private equity capital available to the bank. To illustrate, the Union government has recently approved a capital infusion of Rs 12,517 crore into state-run banks over the coming fiscal year.

The government ownership in these banks is nearly 60%. Usage of coercive rights means that the government will be able to reduce its contribution to less than Rs 7,500 crore while retaining its ownership share intact, with the remaining amount in excess of Rs 5,000 crore coming from public shareholders. Suppose, on the other hand, a state-owned bank turns out to overcome the financial difficulty and the capital injection has been unnecessary. Then, the bank can distribute the excess equity that it has back to shareholders by way of dividend.

Because the government's share of the bank's equity remains unchanged before and after the rights' exercise, it will receive back exactly the amount it has contributed, with no loss to itself.

In summary, forcing troubled state-run banks — or any bank — to issue coercive rights to their shareholders can only help the government and not hurt it. It will greatly relieve the onus that the government is now subject to in its guarantee of the banks' solvency. It is desirable to do it now before problems erupt, because greater equity will preempt insolvency problems. The major benefit is having stable banks and a dependable financial system that will foster economic growth in India.

(Y Amihud is Ira Rennert Professor of Finance at the Stern School of Business, New York University, and T S Oncu is head of research at Cafral, RBI)

http://economictimes.indiatimes.com/opinion/comments-analysis/stabilising-indian-banks-through-coercive-rights/articleshow/18157343.cms?curpg=2

Golden Gold Policy

2013-01-22T01:22:00.002-08:00

Permit banks to buy back gold coins from public: RBI report

MUMBAI, FEB 6:

Reviewing import duty on gold from time to time, allowing banks to buy back gold coins and imposing export obligation on importers are among a host of suggestions made by a central bank panel to manage gold demand.

The final report of the Reserve Bank of India’s working group to study the issues related to gold imports and gold loan non-banking finance companies has recommended revisiting fiscal measures to reduce gold imports.

Last month the Government had upped the Customs duty from 4 per cent to 6 per cent on gold imports to moderate demand.

The group said import duties on gold imports will have to be reviewed from time to time to dissuade gold imports as warranted by evolving Balance of Payments (BoP) situation.

BoP is a record of all transactions of a country with all other countries during a specified period of time. It is an indicator of economic and political stability.

The group said: “While sharp increase in import duties is counterproductive, a well-modulated increase in import duty may reduce the demand.”

When the external sector situation is deteriorating, the group suggested raising import duties.

When the external situation eases to a sustainable level a review of the hiked import duties may be undertaken.

BUY-BACK OF GOLD

To reduce the demand for gold imports and recycle the domestically available gold (estimated at 18,000-20,000 tonnes), banks may be permitted to buy back gold coins from the public by offering buy-sell quotes.

Further, the group said banks could be allowed to use the futures markets to hedge risks in bulk gold purchases.

To contain gold demand, the group recommended differential pricing of banking services and finance for gold imports.

These could include stipulation of high cash margin on opening letter of credit for import of gold and imposition of surcharge on interest on gold metal loans to domestic jewellery manufacturers.

The group felt that entities importing bulk gold through banking and non-banking channels could be asked to have an export obligation based on a certain percentage of imports of the gold.

The aforesaid recommendation comes in the backdrop of the share of gold re-exported with value addition from the country as a proportion to gold imported declining steadily.

The RBI group observed that while all investments in financial savings instruments are recorded and lead to a clear trail for tax purposes, investment in gold generally eludes such tax traps.

No one really knows how much gold or gold ornaments an individual possess. Similarly, it is assumed by the investors that there is no need for paying any capital gains tax on the deals and no irritants like tax deducted at source during the sales and purchases of gold.

Though the current rules stipulate that permanent account number has to be given beyond a limit of Rs 5 lakh for ornament purchases, the group said many jewellery shops flout that norm with impunity.

Hence, there is a strong need for plugging these loopholes to increase transparency in gold deals.

GOLD-BACKED PRODUCTS

The group said the policy challenge is to invent and introduce gold-backed financial products sooner than later to reduce the demand for physical gold.

These products should be such that they can fetch real effective interest rates (adjusted for inflation) that can match returns on gold with adequate liquidity.

http://www.thehindubusinessline.com/industry-and-economy/economy/permit-banks-to-buy-back-gold-coins-from-public-rbi-report/article4386289.ece

Shri.Palaniappan Chidambaram Date: 15-01-2013

Finance Minster

Government of India

Ministry of Finance

Room No.134, North Block

New Delhi 110001

Your Excellency,

A suggestion from NUBE

On The Golden Paradox



    The fact that Indians, through generations, have loved gold, is well known. But off-late, the Government of India's attitude to the role what Gold plays in the Indian economy has been mixed. Gold is being seen in a negative light by policymakers who shake their heads at the public's obsession with it and the difficulties it creates for economic management. How to force Indians to disgorge some of the several thousand tonnes they hold in the form of gold jewellery or ornaments, some of it passed down generations, was a staple of economic debate for decades. With the dawn of a new calendar year, our finance Minister expressed concerns about the rising import bill for Gold. Certainly the economic slowdown seen in the past decade has only fuelled the strengthening of the confidence of the common man in gold. The finance Minister is currently contemplating making gold more expensive to be imported as that’s the only choice which would be left to curb its import while talking about the worrisome state of the current account deficit. Equally the government is also worried about resurgence of gold smuggling if import is curbed.
Time for some statistics:

40% of the world’s annual gold production is consumed by India and China alone.

Over the whole of the last financial year, India imported $60 billion worth of gold or 1067 tonnes, which forms the major chunk of the current account deficit.

In October 2012, the current account deficit jumped to a 12-year high of $ 21 billion thanks to an unprecedented rise in the imports of two of the hottest commodities: gold and crude oil.

Net gold imports constitute for 1.8 - 2.4 per cent of India’s gross domestic product.

The global output of has been around 4,000 tonne per year. But India’s domestic consumption of gold has more than doubled to 1,000 tonne annually since 1999.

An estimated 25,000 tonnes of bullion is held by Indians. While that is an impressive stock of wealth, it is unproductive and earns no interest. It has, however, been an excellent hedge against inflation.

    India does not have many gold mines and majority of its consumption is through imports. No doubt this has put a huge stress on the economy. And presently, the rising value of the dollar is only being a nail on the coffin. Also, sophisticated investors have opted for exchange-traded funds, or ETFs, rather than physical metal, leading to a 300 per cent rise in assets under management by gold ETFs since September 2010. In terms of quantity, imports may drop to 800 tonnes this fiscal year. However, rising prices, both of the metal and of the dollar, will ensure that this will still exert substantial pressure on the balance of payments.

      Thus it can be clearly seen that tones and tones of gold is lying in the Indian economy which is practically unproductive and are dead assets. Yet the herd mentality of the consumers has only worsened the scenario and has only pushed up the prices of gold without justification.

    Fundamentally today, gold is not being used by consumers for its true purpose but rather is being seen as an instrument to hedge inflation or as a safer security option in which their income can be invested upon. Due to this fundamental problem, the prices of gold, though determined by the market forces, is not truly reflective of its intrinsic value. Reforms have to be brought in not just to stabilize the prices of gold or to curb the import bill or current account deficit, but rather to change this fundamental attitude of the common man and to show gold its true place in the international market and thereby to the Indian household. This can be solely done by bringing the so called dead assets or rather the value of the dead assets in the mainstream economy. In the course of the implementation of such reforms, the value of the yellow metal is bound to correct and the import bill would decline.

    In this regard, a very interesting concept through creative financial engineering has been thought over to unlock the store of the 25000 tonnes of gold. It would involve very simple set of reforms or law making.

    Firstly, the government of India should introduce a scheme wherein any Indian or Indian entity can place their gold with the government for a stipulated period which should not be less than 10 years and he/she would get 70% of its value as interest-free loan for that period. The valuation of this gold should obviously be done on the basis on which the present gold loans are being offered. At the end of that period, if the person offering the gold intends to take physical delivery back of the gold that he/she had offerred, he/she should be given such an option provided they return the principle amount of the interest free loan.

Also, this scheme should take the form of a voluntary disclosure scheme for disclosure of gold assets. It would basically mean that no questions other than the PAN number and the Aadhar card number or Aadhar registration number should be asked. This would serve multiple purposes. It’ll bring out the gold reserves that people have hoarded upon through black money in the mainstream economy and also create a database of such individuals who have such increased quantities of gold with them without justification as it would be an indicator of their wealth and assets accumulated through fishy means.

    Certainly there would be questions as to why such a scheme would be successful. The answer to this is that, this scheme would be a getaway for black marketers and hoarders of gold and other assets to monetize their holdings, albeit the reduced value they would receive, as this monetization would ensue that the money they receive in lieu would be white money. Also it would be a safer option for genuine holders of gold who are in need of money or who want to securitize their assets as the money they would receive would be interest free over a period of 10 years or more. This scheme also ensures that the aged and the aging among the Indian population who are struggling to meet the two ends for survival would opt for it rather than keeping it in closets, in vaults after paying vault rentals and also spending sleepless nights.

In many cases, this has also been a major social friction amongst generations to get hold of this asset. The money raised as loan could be re-invested by the recipient either through schemes for monthly income for their upkeep and maintenance or for social and/or economic upgradation which otherwise takes place through the practice of gold loans which are anyway costlier and less remunerative as compared to this scheme. It is not out of place to mention here that the present youth is fast losing their gravity towards gold as an attractive asset as they are more consumerist oriented and are a spending lot. It is this growing change in attitude which the government can encash upon so that at the end of the decade of this scheme, gold as an investment would have undergone a paradigm shift in the value system of the Indian society. Since these loans are to be disbursed strictly through banks as transfers to the beneficiaries’ account and these are further invested or consumed by the recipients this would fuel economic activity resulting in higher consumption and investment.

    Furthermore, there would be justification needed as to why the government should offer interest free loans for a period spanning over 10 years and that to for 70% of the value. Once such a scheme is introduced, there can be a substantial presumption that many holders of gold, whether genuine or through black money, would want to monetize their assets whether to convert it to white money as a part of the voluntary disclosure scheme or for genuine purpose of raising a loan. If this happens, over a period of time, the value of the yellow metal will stabilize and will gradually correct as the supply of gold would increase as compared to the demand. The question arises as to what the government can meaningfully do with the gold so collected. The government of India should apply this asset that it acquires for multiple purposes.

First of all this stalk can be used for increasing the stock of rupee i.e. money, by printing currency to cater to the enhanced demand. This, people may argue, may fuel inflation. Infact it could be the other way round. The rush for gold monetization would reverse the psyche towards this metal and the prices would drop which in anyway is waiting for an opportunity to get towards the downward spiral. This trend of gold would reverse the trend of the rupee vis-à-vis the dollar as value imports would decrease thereby making it strong and positively helping the trade account. Plus, in these 10 years, the same stalk of gold can be used for supply to genuine jewelry usage to both domestic and export market.

There is also a possibility that the Indian economy could turn out to be a temporary exporter of this metal. This is bound to have a telling effect on the international prices of gold as India would be seen as a less active participant in the international gold import market. The resulting appreciation in the value of rupee will have a far reaching impact on the import bill including that of petroleum imports. This would have a cascading effect on reducing the inflation. All this put together is bound to have an enormous positive psyche in the economy and give a boost to the economic growth and activity. As in the case of the GST, this economic reversal towards the positive trajectory is bound to contribute atleast 2-3% in the increase in GDP if not more. It may appear to be a magic wand, but strangely it is actually so.

    As for the return of gold to the offerers at the end of 10 years, since the situation as it stands today, it is likely that many of them may not turn up to take delivery of the yellow metal after 10 years. The reasons being the attitude of the younger Indian generation today, the present attitude of pledging gold for loans and not being able to recover it and the fact that the aging and the aged would be offering it for their upkeep and maintenance resulting in the next generation of theirs who are very much unlikely to come up to claim the gold after repaying the loan taken by their predecessors and that too at a time when the metal itself had undergone a deep correction at the end of 10 years. This would ensure that not more than 10% would turn up to collect the gold and 10 year is a pretty long time for the government to be ready with this stalk of gold and that too at a lower price than what it had taken it which is only 70% of its actual value when the transaction took place. The fact that the offerer has the option of taking physical possession of the metal at the end of 10 years is in itself an incentive for the people to offer the metal for monetizing since in this process they are allowed to have the cake and eat it too. Hence this transaction is bound to be a sure shot success.

    The loan received by the aging and aged would be but obviously invested by them in high yield investments to make up for the inflation pressure faced by them in their day to day living. And the consumerist section of the society would use the funds for purchase of assets, durables, and non-durables etc all of which are positive economic activities. Presently these positive economic activities are pursued by pledging the gold to gold financing companies and banks wherein the borrower ends up receiving the short end of the stick.

    Also, the positive impact of the rupee value on our current account situation will also ensure that the government need not promote exports solely with a view to foot the ever increasing import bill as it is done today by offering export incentives which in turn will end up as savings for the government in the light of this scheme being successful.

    Simultaneously the government can also issue 10year 6% tax free bonds simultaneously so that a part of the monetized amount could flow into this. These could be like the benchmark 10 year bonds having similar features of SLR and fiduciary compliant compatibility for financial institutions and banks. This would ensure that over a period of time the governments’ effective borrowing rate would come down from 8% to 6% thereby saving trillions of rupees towards interest cost.

     The icing on the cake which the entire scheme provides is the vast data which would be available with the government as regards the wealth, the wealthy and their whereabouts how so official, unofficial, significant or anonymous they may be. The PAN number data and the UID data ensures that this task is achieved. This database can be used for widening of tax nets by the government especially in cases where presently the entities may be disclosing income and its exemption from tax in the guise of being agricultural income and thereby amassing wealth through gold. The monetization of the gold wealth will in turn make them eligible for tax payment through the income received by them out of the monetized proceeds and hence the net can be cast on them. Finally for the skeptics, the justification for this could be that gold as wealth in the Indian society need not and is not necessarily and always be through illegitimate means. In many cases it has been inherited through generations and in legitimate fashion. The stalk has grown over ages in the hands of the individuals and it is actually the present value and the inactivity which is the culprit. So the scheme can be justified as one to activate this stalk though it may also benefit illegitimate owners but so are the other schemes. Finally the engine of growth which this scheme can provide through the monetization of this wealth by fuelling economic development and GDP expansion through penetration of its reach to all sections of society is in itself a good enough reason for the scheme to be put in its place. As for the methodology of its operation and its implementation and the fine tuning thereof, it is better we leave it to the experts in the field of finance and merchant banking. Finally, this will be an excellent opportunity for the government to cleanse the Indian economy and the society of its dead weight of its golden treasure.

Eagerly awaiting your feedback and response

Yours sincerely

S.Srinivasan

President

Global Banks Now Agree To Keep More Cash

2013-01-06T16:57:00.001-08:00

Global regulators agree on bank asset rules

Banks will hold more cash, assets in hopes of lessening impact of future financial crises

International banking regulators agreed Sunday on global rules meant to ensure banks keep enough cash in hand to survive future market crises, and gave banks until 2019 to comply fully.

The rules will require banks in future to hold enough cash, and assets such as equities, corporate and government bonds that can easily be sold, to tide them over during an acute 30-day crisis.

The body that oversees the Basel Committee on Banking Supervision, which sets international rules, said Sunday that they will have to hold 60 per cent of that amount when the rules start being phased in on Jan. 1, 2015; that will increase by 10 percentage points every year until the standards take full effect at the beginning of 2019.

The oversight body’s head, Bank of England governor Mervyn King, said after regulators met in Basel, Switzerland, that the timeframe ensures the new standards “will in no way hinder the ability of the global banking system to finance the recovery.”

The hope is that it will prevent lenders from becoming over-reliant in future on help from central banks, which have stepped in over recent years to keep the financial system flush with cash.

King said that “the vast majority” of the world’s biggest banks “already hold liquid assets well above the minimum required by this standard.”

The rules are part of wider efforts to prevent another shock to the financial system like that prompted by Lehman Brothers’ 2008 collapse, which led to taxpayer-funded bailouts of banks in the U.S. and Europe.

They are part of the so-called Basel III package of reforms. That package will require lenders to increase their highest-quality capital — such as equity and cash reserves — gradually from 2 per cent of the risky assets they hold to 7 per cent by 2019.

http://www.cbc.ca/news/business/story/2013/01/06/bank-regulator-rules-assets.html

7 JAN, 2013, 04.00AM IST,

Public sector banks should monitor resolution of NPAs in a time-bound manner

The total stressed assets in our banking system today, including the ghost of 'restructured standard' loans, are as high as Rs 3.60 lakh crore, or seven times the gross non-performing assets (NPAs) level recorded five years ago (Rs 50,486 crore). Clearly, the situation is far grimmer than is being acknowledged.

The Reserve Bank of India's ( RBI) latest annual report points the finger at the 'cyclicality factor', and an address by its deputy governor at errors of omission and commission: from restructuring loans in order to hide NPAs, to inadequate due diligence, to a bias towards privileged borrowers and so on.

(Corporate Debt Restructuring: Issues and Way Forward, address by K C Chakrabarty, deputy governor, Reserve Bank of India, at the Corporate Debt Restructuring Conference, August 11, 2012). However, there is another problem at the root.

Over the period 2002-03 to 2005-06, for every year, the total reduction in all banks' gross NPAs during the year was higher than the total addition. The numbers got levelled in 2006-07 and, from the next year, total reduction during the year has been lower than total addition. How did this happen?

This happened on the back of two transformational changes: one, enactment of Sarfaesi Act — and spawning of the new institution of asset reconstruction company (ARC) to whom banks could sell their NPAs — and, two, a steady growth in the share of 'retail' loans: simplistically defined as all loans below Rs 10 lakh which, incidentally, is at variance with banks' definition, in total bank credit, from 8.3% in 1992-93 to about 40% (estimated), now.

Since small borrowers feel the threat of bank action, recovery from 'retail' NPAs is better than that from 'non-retail'/corporate NPAs and, therefore, the NPA position of public sector banks (PSBs) kept improving so long as the cascading positive effect of increase in share of 'retail' NPAs overshadowed the negative effect on account of the stock of 'non-retail' NPAs.

Since 2007-08, PSBs have virtually shut the door on the first remedy: sale of NPAs to ARC on security-receipts (SR) basis. And, the second one, steady growth in share of 'retail' loans, is not a feasible option any more. Hence, the steady deterioration in PSBs' NPA position, and the clamour for subterfuges. The ostensible reason for the logjam in sale of NPAs to ARCs — 'low price offered' — is a mere ruse.

For, a compilation of the cumulative all ARCs' recovery figures, since inception, shows that all ARCs put together have, over the seven years up to March 31, 2011, been able to recover only 86% of their own investment. Of this, as much as 45% is on account of an extraordinary fee income that could be earned because, in the initial few years of ARC's existence, one ARC that enjoyed a monopoly status then, could dictate terms for non-cash, SR-based deals, which is not feasible any more.

The real reason why PSBs are not able to sell their NPAs to ARCs is the 'system trap' they are caught in: a trap that forces them to lose money by allowing their NPAs to rot. (In two representative cases of NPA sale by banks, the weighted average age worked out to 8.61 years and 12.52 years, which meant a loss of as much as 52% and 75%, respectively, to the selling bank on account of time value of money.)

The three pillars of this 'system trap' are: 'going concern' valuation (totally inappropriate for sick unit cases), 'fear of vigilance' and 'no accountability for not doing'. Together, these ensure that sitting on the NPAs is a better option than resolving them. Since PSBs do not have a system, either to monitor resolution category-wise or for time-bound resolution of NPAs, they remain hidden under the carpet.

http://economictimes.indiatimes.com/opinion/comments-analysis/public-sector-banks-should-monitor-resolution-of-npas-in-a-time-bound-manner/articleshow/17918421.cms

Assets vs Risks: Banks walk red-eyed into 2013

S V Krishnamachari, Jan 7, 2013, DHNS

Risk taking may be the theme song of the banking sector, but banks were bogged down by the flip side of it last year. Non-performing assets, better known as NPAs, dominated the banking narrative for much of the last six months of 2012.
The much awaited passage of the Banking Regulation (Amendment) Bill expected to be issued by the Reserve Bank of India -- which will pave the way for new banking licences --, afforded some reprieve towards the end, along with rumours of takeover bids on old private sector banks by new private sector banks.

A senior analyst says that banks are mainly to be blamed for the NPA problem. "No doubt, the problem arose out of the macro-economic environment in the country and beyond," says Shinjini Kumar, Director, PricewaterhouseCoopers Pvt Ltd. It brought about greater focus on governance issues, both within borrowers and lenders.

"Weaknesses in processes such as appraisal of loans, selection of borrowers and ongoing monitoring of loans may not show up when the economy is booming and the rising tide effect persists. But when the economy is in a downturn, these things are accentuated and that’s what happened." Another industry expert at KPMG has a similar view. “Banks obsessed with topline growth do well when there is a boom, but when the slowdown sets in, such banks are hit hard,” says Narayanan Ramaswamy, Partner, KPMG Advisory Services Pvt Ltd. He adds that bankers with “banking instinct”, who can protect their capital and invest their assets wisely wouldn't encounter such problems.

With the economy showing no decisive signs of recovery as indicated by core sector numbers for the April-November 2012 period, NPAs will continue to stress banks in 2013 as well, though managing director of public sector lender State Bank of Mysore, Sharad Sharma, disagrees: "NPAs won't be as bad a story as in 2012. At our bank, we saw significant reductions in the last two quarters of calendar 2012." The MD and CEO of Karur-based private sector lender Lakshmi Vilas Bank, K S R Anjaneyulu, says that banks with a legacy of stressed assetes will find the going tough in 2013 and fiscal 2013-14.

According to him, growth prospects for such banks would be bleak, while the rest will do well. “I feel that overall growth for the banking sector will be in the region of 17-20 per cent in 2013-14.” He adds that given the easing of the fiscal cliff challenge in the US and the Eurozone crisis, the global economic situation augurs well for banks and that by March this year, the “difficult phase” for the sector should be over.

Deposits Growth Likely
According to Sharma, the mismatch between credit growth at around 16 per cent and deposit growth of about 13 per cent in calendar 2012, is bound to see improvement in 2013. "Deposit growth will be around 16 per cent this year led by retail deposits, even as we phase out bulk deposits. This will improve liquidity, which gave bankers a tough time in 2012." On the credit growth front, Sharma notes that with interest differentials being what they are, corporates will continue to prefer external borrowings.

"To that extent, there won't be significant pickup in corporate credit." He is optimistic on the retail side.

While the clutch of new players entering the banking space is perceived as a positive development for the sector, Shinjini says this will come with its own set of challenges.
"The competition landscape in the banking sector may change in the medium to long term, primarily in response to the changing economy. Post-liberalization growth in India received a boost from services and IT/ITES, while private sector banks licensed post-liberalization particularly benefited from the emergence of the middle class and the aggressive growth strategies of large corporates."

Private sector banks, including HDFC Bank, Global Trust Bank (GTB), ICICI Bank and Axis Bank took advantage of the first phase of relaxation in banking licence norms, followed by Yes Bank and Kotak Mahindra Bank in 2003-04. However, GTB was forced to merge with public sector lender Oriental Bank of Commerce after unduly high exposure to the stock markets led to its fall. Others managed to leverage the India growth story well to drive growth and business.

However, this will be hardly the case for new players, as and when they come, Shinjini says. "New banks will have to contend with the slowdown in these sectors and can no longer bank on the same theme to drive growth. They will have to build successful business models by driving entrepreneurship, and focusing on the 'emerging middle class', especially in Tier II and III towns and cities. Financial inclusion will also provide them opportunities if they can build a sound business case around it." Ramaswamy feels that going forward, banks that focus on SME lending will fare well without having to bother much about NPAs. According to him, the ability to keep down transaction costs will hold the key to driving bottomline growth for banks.

More Players
On new players entering the banking sector, Sharma says that given the long gestation process, any possibility of a new player entering the banking sector this year is unlikely. It's a view shared by Ramaswamy as well.

Mergers and acquisitions (M&As) will be a recurring theme in 2013, according to Shinjini and Sharma. "I do expect M&As to happen in a calibrated way in the long term, but no quick consolidation," says Shinjini. The rumours won't die down, but there won't be M&As as such, says Anjaneyulu. “Old private sector banks want to grow on their own strength.
They have been playing a vital role in their own way,” he says. The macro-economic situation is bright, according to Shinjini, given the demand for goods and services which is not adequately backed by supply. “This is a country where there are queues for everything. So demand is there. If we can address policy issues, the supply side will pick up and thus lead to buoyancy in growth.” Anjaneyulu says that given the empirical evidence that corporate credit grows at 2.5 times the GDP growth of a country, the credit growth rate should hover around 15 per cent.

On the possibility of a rate cut by the central bank this month, the bankers say this could indeed be expected. Anjaneyulu notes that after the Centre's positive moves on reforms and fiscal management, the Reserve Bank of India is likely to reciprocate favourably with a repo rate cut. Shinjini also wants to be in sync in with such a possibility, saying, “I have no reason to be a contrarian.”

http://www.deccanherald.com/content/303383/assets-vs-risks-banks-walk.html

Bitter Truth of Public Sector Banks AND UPA Government

2013-01-05T16:38:00.000-08:00

Former World Bank economist Percy Mistry, who authored a widely acclaimed report on making Mumbai an international financial centre, says state-run financial institutions need drastic changes in their working and the government should draw up a strategy to exit these institutions. Edited execrpts from an interview with Dev Chatterjee & Abhijit Lele.

After a lot of time, there is some clarity emerging in policy making under the leadership of the new finance minister… What’s your take on the recent policy changes?

The change in FM was long overdue for policy and GoI/MoF credibility to be restored. India had lost all credibility following prolonged macroeconomic mismanagement between mid-2009 and mid-2012. Thank God PC is back. We seem to be on the right track again. However we are not out of the woods by any means. For example, it was shocking to hear the kind of arguments made during the debate on FDI in retail and on the banking bill. I wonder whether the political class in India at the Centre and in the states is aware of economic realities as they are today.

Somehow the political class in India is still under the impression that they have to indulge in the politics of patronage. There is as yet little debate on the politics of development, governance or the delivery of services. The political class still believes that the Indian electorate comprises a bunch of babies that should be given jalebis at election time. In spite of every election which has shown that the electorate wants development and good governance, over 90 per cent of our political leaders seem proud to remain economic illiterates.

After last year’s anti-investor moves like GAAR, the vendetta conducted against Vodafone, and a series of corruption scams that resulted in reversing many licenses, foreign investors’ confidence and the credibility of the government had been completely eroded. But I have to give credit to the present finance minister and the restored vision of the PM – which seemed absent for too long -- for bringing back investors’ confidence both in India and abroad.

The reality is that without massively increased foreign and domestic investment, both FDI and FII over the next 5-10 years, India will be flirting with another severe economic crisis given trends in our current account and aggregate fiscal deficits. Without such investment growth will remain below 6%. The fragile dynamics of our twin deficits will spiral out of control leading to a debt crisis which will trigger a financial crisis leading to a broader economic crisis.

People do not realize that we are dancing at the precipice of our own fiscal and CAD cliffs and could tip over the edge quite easily if Parliament does not get its act together and move swiftly ahead with other financial reform bills; especially the pensions and insurance bills that are key to bringing in more FDI and FII with multiplier effects.

(MY Comment: After all who are those politicians who may be held responsible for creating such a insurmountable fiscal cliff?---Who are responsible for current fiscal crisis and growing CAD? Who are responsible for abrup rise in bad assets in state run banks?

It is wrong policies imposed on India in a bid to compete with developed countries without ensuring same level of sound administration, police system , judiciary,infrastructure, education , skill etc as characteristics of developed countries like USA and UK ))

In a few weeks, the government will be coming out with its budget at a time when elections are almost set to be declared. Do you think the finance minister will have enough courage to make bold economic reforms?

What bothers me is that he seems to have very little room for discretionary budgetary maneuver however hard he tries. And there is no appetite or time for making large and bold changes that we need in tax and expenditure policy. What also worries me is that in spite of a devaluation of rupee from a central level of 45 to 55 against the dollar, it has not had any of the positive impact it was supposed to have on the economy (like increasing exports, a higher level of import substitution and reducing aggregate demand for imports.

Today India’s imports are still very high and we are still not on track for import substitution. The government should also look at making Gold ETFs more advantageous to small investors. At present there is not much difference on the price between the gold and the ETFs and therefore there is not as much demand for gold ETFs as there should be.

Clearly we need to do what we can to reduce demand for physical gold and increase demand for paper gold derivatives. Any plans to increase import duties or have quantitative restrictions on gold imports will only encourage smuggling of gold in the country. That will be very difficult to control.

Besides don’t forget the current political scenario. The Congress is on the backfoot on corruption charges and given its performance from 2004-13 it does not really deserve to get re-elected if there is any justice in the real world. The BJP does not have a clear leadership plan and no one knows what it stands for when it comes to economic policy. What we do know it stands for is not very comforting for communal harmony. The third front strategy is not clear at all. Mulayam and Mayawati will always be available to the winning side. But it is almost impossible to see a third front being cobbled together that will have a cohesive and credible national economic policy, foreign policy, defense policy of home policy.

So I do not see the prospect of the kind of political stability that will provide the kind of comfort that investors (foreign and domestic) need and demand for the next few years… we are heading for either 1986-1991 situation or the 1996-99 situation when politics was so fractured that there was an election every year. I don’t think the finance minister has much space for maneuver in these circumstances. I see all kinds of constraints on him to take big, bold economic reforms measures.

RBI and government are working on giving new banking licenses for bringing more people into banking fold? Does that make sense?

No it does not. The problem in India is not that we do not have a sufficient number of banks. It is that 70% of our banking system is state-owned, inefficient, un-inclusive, and provides the means by which too cosy a nexus between the government and the wrong kind of private industrialists.

The state-owned banks ( SOBs) and insurance companies (SOIs) together provide the institutional mechanism to foster a dangerous and damaging type of crony capitalism regime in India as well as to indulge in electorally driven loan melas and loan write-offs. . That unfortunate nexus is decidedly kleptocratic in nature when it comes to looting the nation’s natural resources (whether spectrum or mineral or land) through the kind of public-private partnership that India does not need. Moreover the Indian fiscus cannot afford to keep meeting the capital needs of the state-owned banks. And the SOBs certainly do not serve the interests of the poor or the disenfranchised.

In fact quite the opposite is the case. Any proper cost-benefit study of the performance of state-owned banks would show that the cost of having these SOBs is far higher than the supposed benefits. The same is true of Air India by the way and a jost of other SOEs (or what we call PSUs).

In that context creating new private banks to compete for 30% of the banking pie does not seem to me the answer to the problem of making the banking system more capable, responsible, efficient and inclusive. The answer lies in privatizing the SOBs and SOIs and in giving far more room to foreign banks to enter and serve the Indian market without the extreme restrictions that the RBI imposes on them. Many people will look to the 2008 crisis and say that is exactly the wrong solution for India. They would be wrong and would be looking at the wrong lessons to learn.

I worry that many of the new licenses will be given to unfit and improper persons that are politically well-connected rather than potential bankers of judgment and probity. Look at the line up (of those interested in opening banks) and you would need to worry about the “fit and proper test”.

The problem is not also with how many banks we have. Many new banks were set up when RBI gave licenses in two rounds. Apart from Axis, ICICI and HDFC, there are no other solid private banks that have emerged as stronger or better.

In my view as long as Indian banking is dominated by SOBs we will not achieve any of the objectives of the banking system reform that we so urgently need.

What about giving licenses to industrialist to open new banks?

Although many in India regard me as the prime ayatollah of market fundamentalism I do not think large industrial houses should be allowed to run banks. There will be massive scope for malfeasance. It is only in Japan and Korea that industry/trading houses (zaibatsus and chaebols) have got banks under their vast and diversified umbrellas. Japan is still struggling with the two decade old financial crisis. It is when ownership of banks is distinct from that of industry, media and services that the economic and financial systems work best.

Banking space is dominated by state-owned banks in the name of serving public interest?

We in India refuse to accept that the state-owned banks (SOBs) and SOIs are not our strengths but our greatest weakness. They are transmission mechanisms through which government encourages crony capitalism, and entrenches its economic power.

If India was transformed after the 1991 reforms -- which in the light of recent history should be more appropriately referred to as the Narasimha Rao reforms than the Manmohan Singh reforms —it was because those reforms put some space and distance between our political system and the economy.

Where we have malfeasance, corruption and inefficiency it is directly correlated to situations where that space between politics and economic remains too narrow. The SOBs and SOIs bridge that space between politics and economics and diminish India and its prospects by doing so.

We have 18 public sector banks and one SOB (SBI group) that accounts for 25 per cent of market. Punjab National bank, which should be a pan Indian bank, is only strong in the Northern region. The FM should seriously consider privatizing all the SOBs other than SBI and PNB for the time being and examine the impact of that experiment.

And all the evidence suggests that the one thing that SOBs and SOIs do NOT do is serve the public interest. They serve the interests of their managements, staff, the public sector employees unions and of central and state governments that can exert influence over economic agents through them. SOBs and SOIs are our greatest source of systemic risk.

In India there is a huge hue and cry for financial inclusion? Is that a good thing?

A) That is partly so since state-owned banks are so dysfunctional and they do not work. All this euphemistic talk of expanding financial inclusion in India terrifies me. It is one factor which led to the global financial crisis in 2007-08 when Greenspan thought that the idiotic things that US banks were doing – by lending Mexican gardeners multiple mortgages at 130% of home value and classifying these loans as being made to ‘landscape architects’ -- were great in the name of financial inclusion. Mexican gardeners were being included in the wealth chain of California, Arizona, Colorado and New Mexico. Now we can all see what that led to.

It is not as if we have not tried inclusion before in India. Only then we called it agricultural and rural credit. The banking system has taken massive repeated losses with that type of lending. That has also been the experience of most developing countries around the world. That is not because farmers and rural dwellers are fundamentally untrustworthy. It is because they are poor and exposed to risks they cannot manage.

It is one thing to say we want to introduce more people to the formal payments and settlement system that banks provide. That is all to the good. But, I would be terrified about extending credit through the public banking system to the fundamentally uncreditworthy. It is not that they have bad intentions. They are affected by many vagaries and risks that are out of their control and they do not have the savings or income to manage.

What we need instead of issuing new banking licenses is a clear strategy on how the government exits from state-owned banks. The other institution that I have become very worried about is the Life Insurance Corporation of India (LIC). It is has become the largest institutional investor in the Indian economy and it functions in a manner that is not entirely publicly accountable, transparent or clear. Its investment decisions and their timing are a mystery to me and most others. Sometimes they seem to be driven more by political rather than fundamentally economic or cyclical decisions.

Given the way our state functions, it worries me. For me, real systemic risk in the Indian financial system is probably caused by the LIC and the state-owned banks.

You must have seen in most of the disinvestment program, LIC becomes an unofficial underwriter for the government?

It is not a disinvestment program. It is simply moving assets of from one side of government ownership to another side. The camouflage fools no one. In my view it is time to end all this nonsensical babble about disinvestment for reasons of political correctness. India does not need to proceed with creeping disinvestment. To secure its economic future it needs to proceed on a large scale with sensibly planned and phased privatization. Frankly I fail to see why anyone wants to buy shares in Indian SOBs or SOEs that are controlled and managed by government ministries and ministers. Time and again political decision-making and social policy intrudes in these organizations in what should be entirely commercial decision-making.

In effect, what you are doing with the failure of our disinvestment policy to attract private investors is shifting responsibility for ensuring good corporate governance, SOE accountability and transparency from the ministry concerned to an institutional investor like the LIC. What does that achieve?

No one is asking questions to LIC?

A) In that context I think that the IRDA Chairman was absolutely right in opposing lifting the investment ceiling for LIC from 10% to 30% in any single enterprise and the MoF was entirely wrong to ignore his advice and force the issue for the sake of expediency.

Is it transparent enough?

It is an extremely opaque. In fact, that is true of the entire public sector insurance sector. They are not required to report on actuarial risks by tenure or by sector.

It will be very nice to see if someone poses question to what degree LIC pose systemic risk to Indian financial system.

Supposing, the market for whatever reasons were to fall from current level of 19,500 to 15,000 what kind of hit would LIC take on its capital. What happens to its provision reserves? Would we simply say we will not mark-it-to market, which we always do?

LIC should be privatized. It is not just insurance company but also the largest asset management institution in India. But no-body regulates it properly either as an insurance company or as an AMC. I do not see at all IRDA being able to regulate LIC effectively. It is regulated by MoF under the LIC Act. That creates a distinctly unlevel playing field in the insurance sector.

How can you justify impartial arms-length regulation when you do not have a level playing field. The largest insurance company and asset manager is regulated under its own act. IRDA only regulates only 30 per cent of market (private insurers) and no-body asks serious questions about the other.

That is also true in some senses of banking regulation by the RBI. We have three-tiered regulation there as well. In our regulatory system the SOBs are favoured and protected. The private domestic banks are regulated in more draconian fashion and the foreign banks are throttled not regulated.

http://www.business-standard.com/india/news/new-banking-licences-make-no-sense-percy-mistry/497904/

Future of Public Sector Banks

2012-12-25T17:04:00.003-08:00

Risky futures that banks Should Avoid

Finance Minister sometimes talk of giving permission for opening of more and more new banks and some other times talk of consolidation of banks to compete with International Banks. He sometimes advises banks to concentrate on core banking activities and some other time tell them to trade in commodity future which is not core banking activity.

It is Pathetic that current sickness of public sector banks caused by huge bad assets has not opened the eyes and ears of FM. Every year Government has to infuse capital in banks to keep them in good condition. Neither small banks like Vijya Bank nor big banks like SBI or PNB are able to save their profitability and safeguard their assets and capital .It is only by manipulation and fraudulent method or by relaxation given in CRR that these banks book little profit and that too by keeping reduced provision coverage ratio below benchmark fixed by RBI .

Banks officials firstly lend to unscrupulous borrowers under political pressure and then write them off or enter into compromise settlement with recalcitrant and willful defaulters under pressure of the government . Both ways they are weakening not only the banks but adversely affecting the interest of investors ,customers and that of working employees too.

Health of banks is moving from bad to worse and they are surviving the crisis not at their own but mostly by ventilator provided to them by GOI. Complete lack of control , bad governance , bad Human Resource Policy, weak legal system and profuse political exploitation have already ruined the Public sector banks. Now FM is trying to further add fuel to fire by advising banks to trade in commodity future.

Finance Minister advised bank in last few days to focus on their core banking business and try to minimize their involvement in non banking business like insurance , mutual fund ,portfolio management etc. It is well known to all that after imposing non banking business targets on banks by government of India banks in general has already reduced lending to core sector of farming and industrial development which has resulted in poor GDP growth.

Not only this in want of adequate manpower in branches , bank officials are unable to attend customer service related to their core business in a satisfactory way. This has led to exodus of good customers from these public sector banks to private banks. It is important to note here that private banks have provided separate and adequate manpower for banking and non banking businesses whereas PSBs are forced to perform both banking and non banking business with one or two staff in most of towns.

It is further painful and astonishing too that the same FM who advises banks to focus on their core activity of lending and accepting deposit are advising banks to trade in Future in Commodities.

Is he bent upon spoiling the future of bank? There is an old proverb "A future is enough to spoil the future of an individual share trader".

Banker who are adequately trained and who do not have enough skill to do simple banking activity , they cannot be expected to hedge credit risk by buying commodity future as envisaged by FM while suggesting banks to trade in Commodity future.

It will not be wrong to say here it is only after introduction of commodity trading in India, Consumers of the country has to face the pain of relentless price rise and inflation has gone beyond control despite all steps taken by clever officials of Reserve Bank of India.

Last but not the least , When profit of banks will be adversely affected by rising bad assets and through losses in future trading , it will ultimately be bank staff who will have to bear the brunt of bad policies, It is staff whose wage are not rising at par with that of central government employees or state government employees .Poor wage structure of bank employees has also played negative role in maintaining health of banks , poor customer service and poor growth in bank's business and finally led to exodus of good performing staff and rise in attrition rate compared to that in private banks.

http://importantbankingnews.blogspot.in/2012/12/future-of-bank-in-commodity-future.html

26 DEC, 2012, 06.35AM IST, ET BUREAU

Both Finmin and RBI want banks to shed their non-core business ( Economic Times )

The Finance Ministry's eagerness to see banks shed their non-core business is not surprising. With Basel III norms kicking in from January 1, 2013, banks will need to not merely conserve their capital base, but beef it up to meet the additional requirements laid down under Basel III. That's a tough call even for private sector banks. But for public sector banks (PSBs) there is an additional challenge. Since the government is unwilling to countenance its stake in these banks falling to less than 51%, the option of tapping the market is virtually ruled out. Unless the government chips in to ensure it remains the majority shareholder, post-issue . But is that the best use of taxpayer money in a scenario where there are far more pressing claims on the exchequer — roads, primary schools, hospitals, to name just a few — and the fisc is already stretched. As things stand, the government seems unwilling to let economics triumph over politics and give up its fixation about majority ownership in PSBs. That being the case, the next best alternative is to conserve capital by hiving off non-core business.

This fits in with the Reserve Bank of India's (RBI) own thinking on ring-fencing the banking business. This is to ensure that adverse developments in other businesses do not impact the bank's balance sheet. Today, many commercial banks, including PSBs have diversified into related areas such as investment banking, mutual funds, insurance, broking, custodial business and primary dealerships. Such a model is fraught with risks. As the collapse of Lehman Bros, an investment ban

k has shown, non-bank businesses can also become large enough and inter-connected enough with the banking business as to have adverse systemic consequences in case of failure. This is the reason why the RBI, in its draft guidelines for new bank licences, has urged a different organisational structure for banks. Under the proposed structure, rather than banks spawning subsidiaries for related activities, these activities would be done by subsidiaries of a holding company that would also have a subsidiary banking company. Now for once the finance ministry and the RBI would seem to be on the same page.

http://economictimes.indiatimes.com/opinion/editorial/both-finmin-and-rbi-want-banks-to-shed-their-non-core-business/articleshow/17763585.cms#write

Bankers Should Learn To Say NO to Unviable Proposals

2012-12-16T08:13:00.001-08:00

Start saying say no to unviable projects, public sector banks told (From The Hindu Business Line)

MUMBAI, DEC 16:

RBI Deputy Governor K.C. Chakrabarty has said risk assessment capability of state-run banks is inferior to private sector banks and asked the former to develop the habit of saying “no” to unviable proposals.

“Knowingly you give money to some unviable projects. That is a governance issue... In many cases, our public sector bankers have forgotten to say ‘no’, except to small borrowers. A banker’s first characteristic should be to say no,” Chakrabarty told PTI in an interview.

The senior-most Deputy Governor, himself a commercial banker before being appointed to the Reserve Bank of India over three years ago, pointed out that “governance issues” in the functioning of public sector banks are leading to poor performance.

“The basic issue is that, the risk assessment capability and ability to price risks amongst the public sector banks is lower than the private sector banks or foreign banks,” he said.

“The governance capabilities for the state-run banks are definitely inferior (to their private sector counterparts),” Chakrabarty added.

According to the RBI data, gross NPAs of public sector banks (PSBs) rose to 3.3 per cent as on end March 2012, from 2.4 per cent a year ago, while for private lenders, the ratio declined to 2.1 per cent from 2.5 per cent during the same period.

A recent ICRA report warned that the bad assets book of banks are set to cross the Rs 2-lakh crore mark or about 3.8 per cent of the total asset book this fiscal, driven mostly by public sector bank.

http://www.thehindubusinessline.com/industry-and-economy/banking/start-saying-say-no-to-unviable-projects-public-sector-banks-told/article4206470.ece

Banks need to move into integrated risk management systems: Crisil

MUMBAI, DEC 16:

With the emphasis on risk management at banks growing globally, there is an urgent need for banks to integrate risk management processes with business and operating models, says rating agency Crisil.

Along with these, banks will also have to significantly enhance its stress testing capabilities and also increase their know-how on risk management related data requirements and analytics, the agency said in a report.

“The risk management processes at banks need to be better integrated with their business and operating models.

For this, risk management needs to be viewed as a key part of strategy and operations and go well beyond merely being a compliance exercise,” the report said.

Besides, there is a need to incorporate risk-based capital performance measures and stress testing more centrally into business decision-making processes, it said.

Also, banks need to do more in the area of integrated stress testing, including market, credit, liquidity and operational stress testing, besides testing their portfolios.

“Stress testing also needs to be forward-looking, with several tail risk scenarios and take into account the interconnectivity of the global financial systems and economies,” it said.

The outcome of integrated stress testing scenarios should be a key input for the management and boards of banks, while deciding on their risk appetite, capital and liquidity planning, the report said.

http://www.thehindubusinessline.com/industry-and-economy/banking/banks-need-to-move-into-integrated-risk-management-systems-crisil/article4206375.ece

MY OPINION:

It is unfortunate that bankers instead of curing the sick system , instead of removing corrupt officers from top posts, instead of improving Human Resource policy to make it friendly for real performers, instead of accelerating recovery process, instead of providing adequate manpower , instead of strengthening risk management , instead of gearing up skilllevel of loan processing officers , instead of monitoring tools for keeping their asset healthy , instead of saying spade a spade in time and taking corrective action in time against defaulting borrowers or corrupt loaning officers ------------------------------------------------ Bankers always blame interest rate for worsening asset quality or blaming global recession for rise in bad debts or requesting RBI to reduce Repo rate , reduce CRR or pay interest on CRR to earn profit.

It is important to say that even CRR is removed or government permits payment of interest on CRR or reduce repo rate, corrupt , unskilled officer and incompetent officer cannot ensure safety of their assets.These banks have already earned huge profit by reduction in CRR rate and after all liquidity generated by release of CRR or payment of interest on CRR will provide relief for few months and for few quarters only. After Entire CRR is released , bankers will have to accept the bitter truth and will have to cure the system to keep the asset in good condition.

Management of public sector banks want to earn profit by exploitation of their workforce and this is why they have stopped recruitment inspite of large scale. expansion of branch network. They do not like to promote real performers and this is why top executives who mostly are in charge of big branches and who sanction high value loans are responsible for abnormal rise in bad assets in these banks. Officers are promoted to top cadre but the health of branch or bank is going from bad to worse.

Government will have to make adequate step to ensure that adequate manpower is provided in all branches and corrupt top ranked officers are immediately punished even if he or she is ED or CMD of a bank. If more than 25 % of Branch Managers in a region do not perform , it means Regional Head is incompetent , If most of regional heads are failing in their performance , Zonal head or central office level officers are failure in their task and hence they must be taken to task in the same way these Regional Head or Zonal Head punish Branch Head of Branch officers for non performance.

16 DEC, 2012, 06.43PM IST, PTI

Bankers pitches for cut in rate by RBI in mid-quarter monetray policy review

NEW DELHI: Buoyed by fall in inflation, bankers have stepped up their demand for a cut in interest rate by the Reserve Bank in its mid-quarter review of monetary policy on Tuesday.

Industry leaders too have been demanding a cut in interest rate to prop up growth and investment. According to SBI Managing Director Diwakar Gupta,RBI should consider cutting both repo rate and the cash reserve ratio (CRR). "As a banker I can always say that our wish-list is that rate should change, they should reduce. Both repo and CRR," he said.

Repo is the rate at which RBI lends money to the banks. It stands at 8 per cent at present. "CRR has already been brought down significantly by the Reserve Bank, if they do a little more that will be great. Repo cut will actually bring down rate systematically in the system. So, deposits will be cheaper therefore people will lend cheaper. Overall there will be a downward bias which has been required," he said.

CRR is the portion of deposits banks have to mandatorily park with RBI, which is 4.25 per cent now. Meanwhileinflation declined to 10-month low of 7.24 per cent in November from 7.45 per cent in the previous month.

At the same time, the economic growth in the first half of the fiscal fell to 5.4 per cent, against 7.3 per cent in the corresponding period a year ago. The growth in 2011-12 fell to a nine-year low of 6.5 per cent. Indian Overseas Bank Chairman and Managing Director M Narendra said, "...as on date since liquidity still has been slightly tight, I think there will be some more support to liquidity."

"We will not be surprised if there will also be a symbolic repo rate cut now and a major cut in January also," he said. "I expect that there should be some reduction in policy rates. It will boost up the sentiment and economic sentiment," Union Bank of India Chairman and Managing Director D Sarkar said. There is expectation that repo rate or CRR could come down by about 25 basis points, he said.

On concerns of sticky inflation, the RBI had left key policy rates unchanged in its last quarterly review of the monetary policy in October but hinted at easing monetary policy further in the January- March quarter.

"As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory," RBI Governor D Subbarao had said in October policy review.

http://economictimes.indiatimes.com/news/economy/finance/bankers-pitches-for-cut-in-rate-by-rbi-in-mid-quarter-monetray-policy-review/articleshow/17638882.cms

All Managers Should Know "When to Say NO"

I am submitting below an article published in the newspaper The Economic Times Today, 6th November 2012.. This true Story of Mr. Aditya Puri has many lessons to learn not only for Manager of Public Sector Banks but for all individuals and Managers of all organisations and all political parties too.

Specially Manager of public sector banks should introspect and try to discover

Why private banks like HDFC can achieve such grand success in only two decades of their existence which hundred year old banks could not do?

Why bad assets have accumulated in such large volumes on PS banks , not in private banks?

Click on following Link to read more :------------------

http://dkjain497091112006.blogspot.in/2012/11/all-managers-should-know-when-to-say-no.html

Moody Dowgrades Bank's Rating Again

2012-12-13T16:41:00.002-08:00

Moody's lowers credit outlook of Punjab National Bank, Bank of Baroda and Canara Bank

Press Trust of India | Updated On: December 13, 2012 22:03 (IST)

New Delhi: Credit ratings agency Moody's today lowered the rating outlook of Punjab National Bank, Bank of Baroda and Canara Bank from stable to negative on account of rising bad loans.

"These Indian banks are particularly challenged by the prevailing operating environment, characterised by high inflation and high interest rates," Moody's said in a statement.

The revision in rating outlook, it said, "reflects the increased risk posed by current trends in asset quality, with continuing rise in gross non-performing loans and restructured loans pressuring profits and capital".

The prevailing economic conditions will reduce the repayment ability of some corporate borrowers and impact the banks, it said.

"Moody's analysis takes into account these bank's comparatively low provisioning, exposing their capital buffers to the risk of erosion in the event that those difficult conditions persist," the statement added.

The agency, however, has kept the foreign currency long term rating of the three PSU banks unchanged at 'Baa2' is a medium grade rating which reflects moderate credit risk.

http://profit.ndtv.com/news/banking-finance/article-moodys-lowers-credit-outlook-of-punjab-national-bank-bank-of-baroda-and-canara-bank-314710

Banks to remain stressed next year too: Fitch
(From Economic times )
MUMBAI: Maintaining negative outlook on the country'sbanking sector, Fitch Ratings today said gross bad assets of domestic banks could reach 4.2 per cent of advances this fiscal and the asset quality could remain stressed over the next year.

"There is a risk that our initial gross NPA ratio forecast of 3.75 per cent could rise to 4.2 per cent this fiscal due to a more protracted downturn, the impact of which should be felt over the next three-four quarters," Fitch said in a report.

"The stress is not yet completely visible in the reported NPAs, but is clear in the performing restructured loans," it added.

On the negative outlook for the sector, Fitch said it is closely aligned with those of the sovereign, and could be affected by any change in the sovereign rating/outlook.

On Monday, the world's largest rating agency S&P warned of a one-in-three chance of a sovereign downgrade within the next 24 months, citing bloated government finances and poor chances of an improvement in revenue generation and thus narrowing the fiscal gap, which is projected to touch 5.5 per cent this year.

Fitch also said that it believes the slowdown would be more protracted than previously envisaged, compounded by global economic weakness and domestic concerns such as a weak fiscal position and persistent inflation. It further noted that the Q2 GDP numbers are at their lowest in seven years.

About the banking system worries, it said the rising risks come primarily from concentrated exposure of banks to the infrastructure sector which could prove to be a long term challenge if structural bottlenecks are not cleared swiftly.

"The risk of asset quality deterioration is higher for medium-sized banks and is weakening their credit profiles," said the report.

The restructured assets problem is also partly cyclical, which should be largely alleviated by an economic recovery, as in previous years. However, Fitch believes that the level of slippages from restructured assets could be higher as the level of stress is higher this time around.

On the flurry of reform measures in the recent months, it said though these steps may provide the much-needed boost to investor sentiment, timely implementation is critical to put the economy back on a recovery path.

On the positive side, the report notes that the core capital of the banks is largely protected.

"The government's commitment to a minimum 8 per cent Tier 1 capital for its banks underpins the capital position of the overall banking system. The capital of most large banks is well protected, as profit and general reserves should absorb stressed credit costs," the report said.

http://economictimes.indiatimes.com/news/economy/indicators/banks-to-remain-stressed-next-year-too-fitch/articleshow/17602271.cms

Liquidity Crisis in Banks Is Creation of Government Policy

2012-12-12T19:30:00.003-08:00

It is unfortunate that all policies framed by RBI and government of India in last two decades are directed to reduce savings and increase spending.

First and foremost is policy to reduce interest rate in banks during reformation era started from 1991 under the guidance of economist Mr. Manmohan Singh has made credit delivery from banks comfortable for corporate sector and small traders but reduction in interest rate on deposits has played more damaging role in last two decades.

Due to decline in interest rate on deposits made in banks, people are no more interested in keeping their idle money in banks but searching other avenues like gold or real estate to park their surplus income. This is why there has been continuous fall in growth of savings and due to which government has very little room to increase investment, neither in infrastructure nor in manufacturing sector or in social welfare schemes.

Due to fall in savings and resultant fall in growth in deposits received by banks, there is always liquidity crisis in banks. RBI and Government of India is forced to provide liquidity to banks by reducing CRR, SLR and by by lending at Repo rate or by other monetary measures. Besides banks is constrained to depend on sources of money like call money or bonds.

Due to liquidity problems, banks are not in a position to lend money to needy business men .Though banks are making best efforts to make more and more credit growth, their hands are tight. To add fuel to fire banks are not able to recover the money they lend as per schedule which further create mismatch in asset liability .Banks are not able to recycle money to create more and more money by sanctioning more and more loans.

Secondly government has policies more favourable for real estate builders, less for home seekers. GOI has given more concessions in tax in such a way that real estate builders get more and more opportunity to grow in wealth but adversely affects the purchasing capacity of home buyers. Cost of a house has gone up manifold during last decade than that in preceding five decades. Poor and middle class persons cannot afford buying a new house or a flat. Upper middle class may afford buying a house after taking loan from banks.

Due to continuous rise in prices of all commodities required for survival of life, common men without any rise in their income, 95 percent of Indian population is not in a position to taste the so called fruits of reformation era.

Further due to addition of more and more retail marts in urban areas, big towns and metros, public tendency to spend more and more has grown up without commensurating rise in their income. This is why saving capacity of middle class and rich class of India is also shrinking day by day. Further to add fuel to fire, GOI has allowed foreign companies to open their shops in Indian towns to give dangerous boost to spending habits of Indians as a whole.

Negligible portion of Indian population who can afford buying new and new electronic and other luxurious goods and services are also not bothered of making savings for rainy days. As in America, people of India are also now getting hassle free personal and consumer loans from banks which again cause erosion in savings growth.

It is important to point out here that banks are also promoting more and more retail loan because they consider these loans safer than other commercial loans. Due to this, capacity of businessmen to increase manufacture and increase their contribution in service sector has also decreased year after year.

In brief , until GOI changes it s policy and make them conducive for growth in savings and for growth in investment in manufacturing and agriculture sector , Indian cannot dream of solving its financial problems , it cannot dream of real welfare of common men , it cannot increase GDP growth on permanent basis , it cannot save sinking banks and what not.

Sooner or the later, GOI will have to frame uniform interest rate structure conducive for growth in savings and growth in capacity of banks to lend more and more in agriculture and manufacturing sector. Efforts of Government to distribute cash subsidy to poor may enrich their vote bank for a short period but in the long run this dirty policy will turn the poor as beggar and they will develop a habit of not working but depending on alms they will receive freely from politicians.

GOI may give free mid day meal to students but cannot force them to read until there is quality teaching in schools.

GOI may feel pride for MANREGA scheme but ground reality that rural mass are getting alms for few days but not in a position to work hard for earning real permanent income .

GOI may distribute subsidy in cash directly in bank but cannot inculcate good habits of work in rural and urban poor.

GOI will have to formulate and activate policies whic will help in creating more and more employment opportunities as their forefather created by SAIL, BHEL and other PSUs.

NPA In Banks Cannot Come Down Until Improvement IN HR Policy

2012-12-03T07:28:00.000-08:00

S Ravindranath: Dark clouds for India's public-sector banks

The next few quarters will be equally turbulent for PSBs. Maintaining profitability and containing NPA levels will be severely challenging

S Ravindranath / Dec 02, 2012, 00:35 IST

By now, all of India’s banks have published their unaudited but limited review financial results for the quarter/half-year ending September 30. They clearly indicate that all is not quite sanguine with the banking industry, particularly for public-sector banks (PSBs).

The Reserve Bank of India has mandated that, as a measure of prudence, all banks shall maintain a minimum of 70 per cent provision cover vis-à-vis gross non-performing assets, so that the balance sheet remains healthy even when there is an adverse environment. Barring a handful of banks, most maintained the provision cover ratio (PCR) above the threshold limit in 2010. However, maintaining the level became difficult for some of them, which kept seeking further time from theRBI to fulfil the requirement. For the past year or a little more, banks have been experiencing severe stress on their asset quality and slippages are rising alarmingly, ever since the RBI mandated that banks should transparently declare their level of non-performing assets ( NPAs). As a result NPA levels, both gross and net, are rising — and the profits generated are not quite adequate to provide PCR as per the RBI’s mandate.

As on March 2012, eight out of 25 PSBs maintained a PCR at above the 70 per cent level; for another 11 banks, it was between 60 per cent and 70 per cent. However, the number has shrunk to five and seven respectively as on September 2012. The data for six other banks, most of them being from the SBI Group, is not available even in their respective websites, and therefore their position is not clear.

More, only three banks’ net NPAs are below one per cent. All these banks have better security cover as well as a high percentage of PCR. Another particularly noticeable case is that of the Bank of Baroda. Although its gross as well as net NPAs have risen significantly, PCR is at a comfortable level above 75 per cent — and the bank has boldly shown lower net profits (less than 50 per cent of the March 2012 net profits). In the case of Dena Bank and Indian Bank, whose PCR is also higher than 70 per cent, their respective gross and net NPAs have gone up — but the corresponding provisions seem to be a tad lower. Had they, too, made a slightly higher provision, their PCR level may have gone marginally below 70 per cent. Syndicate Bank has exhibited a different and interesting trend. With the highest provision coverage ratio, 82 per cent among PSBs, it has made more than adequate provision. Its gross and net NPA levels are flat — and it still has managed to show substantial net profits for the half year.

A few banks, on the other hand, have declared higher net profits despite substantial rise in gross as well as net NPAs — by not providing adequately, so as to show higher PCR. This is clearly visible in the case of the State Bank of India, the Union Bank of India, Andhra Bank and the Central Bank of India. All these four banks could have improved the PCR rather than showing higher net profits. At the same time, banks like Allahabad Bank, Canara Bank, Bank of India and Punjab National Bank, with significantly higher gross and net NPAs, have made large provisions and shown lower net profits — although that has still not helped them in improving their PCR ratio (the PCR of Canara Bank for September 2012 is not available in the public domain). Central Bank of India is the laggard among those declaring — its PCR is at a dismal low of around 40 per cent.

PSBs are indeed facing asset quality stress. With tough Basel-III requirements ahead, it would be a herculean task for most of them to emerge unscathed from this precarious period. They will have to strengthen their monitoring and recovery mechanism and arrest the cascading slippages, while using all the tools at their command to upgrade restructured and other big-ticket accounts. They should also create a robust risk management architecture, so that new loans are assessed with deeper scrutiny.

The RBI has repeatedly advised banks to strengthen their credit monitoring mechanisms. All the PSBs have thus put in place dedicated credit monitoring departments at the corporate as well as at the secondary and tertiary levels to monitor accounts at an early stage of showing stressed signals. Regardless of these efforts, cash recoveries together with upgradation to standard category have been overshadowed by a higher level of slippages. In the case of the top five to ten banks, the sharp rise in NPA levels is on account of a few big-ticket advances and because some restructured accounts have not turned at the pace anticipated.

Adding to banks’ woes, the new kids on the block, as it were, are education loan borrowers who are defaulting in large numbers. This is due to a large number of engineering graduates not finding suitable jobs, coupled with the stagnation in IT industry due to the global slowdown.

The next few quarters will be equally turbulent for PSBs. Maintaining profitability and containing NPA levels will be severely challenging. It will not be easy to increase provisioning ratios to 70 per cent-plus levels without hitting profits. While ideally the banks should evaluate their financial position and go for consolidation, they will also be pushed to provide adequate credit to productive sectors. How they can simultaneously balance their credit growth, arrest further slippage, make substantial recoveries and improve PCR levels only time will show.