Small borrowers immediately have their collaterals confiscated on default, but big industrial borrowers don't seem to suffer the same fate
The state of India's banking system does not garner as much attention as it should. With our layers upon layers of public sector banks and lending practices, our banking system is heading into troubled waters, if something drastic is not done soon.
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Consolidation of public sector banks
All 26 public sector banks including State Bank of India (SBI) and it’s subsidiaries and associates should be merged and consolidated into 6 Banks as under:-
A. Central India Bank Ltd.
B. North India Bank Ltd.
C. South India Bank Ltd.
D. West India Bank Ltd.
E. East India Bank Ltd.
F. North Eastern India Bank Ltd.
The initial cost of such consolidation will pay back handsomely in no time, in terms ofbetter efficiency, lesser operational costs and scale of operations besides other benefits.
RBI's core functions:
Reserve Bank of India (RBI) has to perform multiple and numerous functions single handily and is extremely overburdened despite having one full time Governor and four Deputy Governors.
It may be better if some of its following secondary functions are devolved upon a separate banking & financial regulatory authority.
a. Regulation and control of regional rural banks.
b. Co-operative rural banks.
c. Regulation and control of chit fund and Nidhi companies, money circulating and mobilising schemes.
d. Regulation of micro finance companies and gold finance companies.
e. Regulation and control of non banking finance companies etc.
Massive irregularities in disbursement of loans by PSU banks
Financial Express reported in March that for every rupee lent by banks in India, 13 paise have turned into bad loans. No strict actions seem to be forthcoming for the known defaulters or the bankers. Especially considering that small borrowers immediately have their collaterals confiscated on default, but big industrial borrowers don't seem to suffer the same fate.
The various and scattered laws on banks and financial institutions as under should be consolidated in to two laws namely INDIAN BANKING ACT and INDIAN FINANCIAL INSTITUITIONS ACT, with adequate and effective provisions, and strict rules for quick recovery of bad or sticky loans.
1. Banker’s books evidence act 1891
2. Agriculturist loans act 1884
3. Banking regulation act 1949
4. IDBI bank act 1964
5. State bank of INDIA act 1955
6. SBI (subsidiary banks) act 1
7. State bank of Hyderabad act 195
8. State associated banks act 1
9. Exim bank act 1981
10. National housing bank act
11. Regional rural banks act 1976
12. SIDBI Act 198
13. Banking Companies acquisition and transfer act 1970/1980
14. State financial corporation act 1951
15. Unit trust of INDIA act
16. Recovery of Debts due to Banks & Financial Institution Act, 1993
17. Securitization and Reconstruction of financial Assets and Enforcement rules 2002
The nexus between bankers and businessmen needs to be broken or atleast addressed, Moneylife has written before about how rising NPAs are affecting the solvency of India's prestigious public sector banks. For a more detailed view on this specific issue please read our previous article here.
Link Money Life
RBI flags stability risks for banks as asset quality still a concern In Financial Stability Report, RBI says banks weighed down by high inflation, and slow domestic growth--LiveMint
Mumbai: Risks to the stability of Indian banks have increased in the six months ended 30 March as asset quality stress remains high and lenders are weighed down by the slow pace of economic expansion and high inflation, the Reserve Bank of India (RBI) said in its bi-annual Financial Stability Report released on Thursday.
The central bank predicts that gross non-performing assets (NPAs) of lenders will remain steady at 4-4.1% by the end of fiscal 2015, compared to 4% at the end of March 2014. However, there are chances that the NPA ratio could increase further to 5.5% if macroeconomic conditions deteriorate. The central bank also highlighted the risk of increased lending by insurance companies. RBI has assumed a baseline scenario of 5.5% economic growth in 2014-15, which could drop to 3.6% in case of “medium stress”, and to 1.7% in case the stress is severe.
Wholesale prices are assumed to rise 5.3% under the baseline assumption, but could rise more rapidly by 7.5% and 10.7% in case of medium and severe stress, according to RBI. Indian banks, particularly state-controlled lenders, are facing rising loan defaults as the nation’s economy expanded near the slowest pace in a decade amid high interest rates, making it difficult for borrowers to repay loans. The economy grew 4.7% in the year ended 31 March, after expanding 4.5% in the previous fiscal, the slowest in a decade.
The increase in defaults has, in turn, crimped profits of the banks and increased their need to boost capital. State-run banks are more vulnerable than their private sector counterparts. The stress tests indicated that under a severe stress scenario, gross NPAs for public sector banks may rise to 6.1% by March 2015 from 4.6% in March 2014, the RBI report said. A stress test of sectoral credit risk conducted by RBI revealed that the iron and steel sector is expected to register the highest NPAs of around 6.7% by March 2015, followed by the construction and engineering industry.
Though the stress on banks has eased, NPAs continue to pose a “systemic risk” to the banking sector, said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd. “The government needs to take steps to address the infrastructure issue and unless the bottlenecks are cleared, asset quality will not improve. Banks are clearly not seeing any improvement on the ground.”
However, there are some indications that corporates with stressed balance sheets could see some relief in the coming months as companies take advantage of improved sentiment in the capital market to raise equity to cut their debt. This, in turn, will benefit banks. Indian companies are increasingly resorting to qualified institutional placements to raise funds. At least four companies have raised about Rs.10,390 crore through share sales to qualified investors since late May, when the new government took over, according to Mint’s estimates.
But new risks are emerging. Highlighting the increased lending by insurance companies, RBI said that any regulatory arbitrage needs to be plugged and a coordinated approach is needed to monitor exposures of large borrowers. “This is an issue of increasing overlaps between regulatory domains. For instance, banks may have loan exposure to the same companies which raise debt from insurance firms.
There is potential for companies to engage in “regulatory arbitrage”, arising from, for example, tighter operating environment for banks under Basel III norms, which are not yet applicable to insurance companies,” said Saugata Bhattacharya, chief economist at Axis Bank. RBI, however, said that the quantum of lending by insurance companies, which stood at Rs.88,870 crore at the end of March, is less than 5% of the assets under management.
RBI also remains mindful of the enormous need for capital from state-owned banks. “India’s financial sector remains stable, although public sector banks face challenges in coming quarters in terms of their capital needs, asset quality, profitability and more importantly, their governance and management processes,” said RBI governor Raghuram Rajan in the foreword to the report.
RBI calculations project the total capital requirement of public sector banks at Rs.4.15 trillion between now and March 2019 when the new international banking capital norms—Basel III norms—are set to be applied in India. Of the total capital required by state-owned banks, Rs.90,000 crore will have to come from the government if it intends to maintain its current stake in these banks.
“Amidst the government’s fiscal position constraints, PSBs’ (public sector banks) ability to raise additional capital from the market depends on the conditions in capital markets and the ‘market perception’ of their relative strengths and weaknesses,” noted the RBI report, while highlighting the undervaluation of public sector banks in the market. Private sector banks have commanded a stronger valuation in the market. For instance, the one-year forward price-to-book ratio of ICICI Bank Ltd is 2.02, while that of State Bank of India is 1.54.
The price-to-book ratio is a valuation measure commonly used for banks. RBI argued in its report that an implicit government guarantee should allow the valuations of public sector banks to broadly converge with industry averages. “To maintain its majority share in banks and infuse close to Rs.1 trillion, the government does not have much of an option but to float a holding company for banks.
This company will hold all banks and raise money on a portfolio basis. Government can then dilute the stake in this company as required,” said Abizer Diwanji, National Leader, Financial Services, Ernst and Young India. The report, which includes the results of a stress test conducted on banks, showed that the present level of provisions made by scheduled commercial banks may “fall short in meeting the expected losses under such a (extreme but plausible) scenario”.
While the capital adequacy ratio of banks improved to 12.9% in March 2014 from 12.7% in September 2013, in case of a severe stress, this ratio could fall to 10.6%, RBI said. The report also noted that as the liquidity capital requirements (LCR) under Basel III norms progressively increase, RBI may consider it desirable to further reduce the SLR (statutory liquidity ratio) requirement for banks from the current 22.5%. “Given the roadmap for fiscal consolidation to reduce fiscal deficit to 3% of GDP (gross domestic product) by 2016-17, any decline in incremental availability of government securities may not thus impinge on SLR and LCR requirements,” said the report.
Rajan added that while India remains committed to implementing global regulatory reforms, priorities may differ as the Indian financial system faces a different set of challenges as compared with those jurisdictions which faced financial or banking crisis. Meanwhile, addressing the prevailing macro economic situation in India, RBI said that the moderation in consumer price inflation and the reduction in twin deficits (fiscal deficit and current account deficit) have provided some breather. “However, adverse growth-inflation setting obtained over the last two years which continue to affect saving investment dynamics, poses a major challenge,” said RBI, while adding that with the formation of a stable government, the prospects of recovery appear bright.
“A strong push to implementing policy is expected to provide the necessary impetus to the investment cycle,” said RBI.
Read more at: http://www.livemint.com/Money/ZjmdpKy0DnZUboKpkGDxAM/RBI-says-economic-growth-inflation-banks-asset-quality-st.html?utm_source=copy
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