Health Of Public Sector Banks

Flawed risk assessment: Have Indian banks been underpricing corporate loans?-FirstPost
-By Sri Ajay Shah

In the 1990s, we had large-scale defaults on corporate loans, which felled IDBI and IFCI. For some time, we thought that we had learned our lessons, that micro-prudential regulation had improved, so that such failures would not recur. Has this happened? There is cause for concern.

1) After these bailouts of slightly over a decade ago, we haven't had a big banking crisis with a collapse of banks such as IDBI or IFCI. But there is a worrisome scale of regular injections of capital into public sector banks by the Ministry of Finance. If the government puts Rs 100,000 crore into an episode of bailing out banks, we say there is a banking crisis. This is not too different from putting Rs 10,000 crore every year for 10 years.

Have we had a chronic sub-clinical banking crisis for a long time?

Some will argue that all healthy banks raise equity capital as they grow. But there is an unmistakable element of bailout in the equity capital that has gone into PSU banks. On this subject, see Harsh Vardhan and me from October 2012, and this blog post from October 2011.

2) India did not have a big financial crisis in 2008. All we have had was a business cycle downturn that's come after a big credit boom. Yet, we've now got a serious mess in banking on our hands.

These two difficulties suggest that micro-prudential regulation has not improved adequately.

When we open the black box of Indian banking, two problems are visible. Most banks have little skill in credit risk assessment. What passes for 'risk management' in Indian banks, too often, is the mechanical adherence with RBI regulations -- regulations that micro-manage and are often wrong.

There is low ability in the essence of credit analysis: to understand a firm, and make forward-looking forecasts about default. In addition, all banks suffer from high levels of loss, given default owing to the lack of a bankruptcy code.

The objective of micro-prudential regulation of banks is to put down requirements through which the failure probability of banks stays at acceptable and low levels (though not zero). The heart of this is ensuring that the accounting value of each loan is aligned with market value. This was not done. Banks have systematically failed to recognise and provide for bad loans. I feel a distressing deja vu when I hear stories today about what has gone wrong in Indian banking; we heard those exact same stories in 1999. We did not learn; the problems weren't fixed.

Given these weaknesses of micro-prudential regulation, banks have had a merry time, showing accounting profits while giving out loans at artificially low prices, and building up an ever larger inventory of loans where the book value is in excess of the market value. Better micro-prudential regulation would have created a set of rules through which bad loans were valued at market price. Better micro-prudential regulation would have hindered, and not helped, banks in covering up bad news.

Better micro-prudential regulation would have created incentives for banks to charge higher prices for corporate lending, with interest rates that better reflected their own weaknesses in corporate credit risk assessment, and the high values of loss given default. Mistakes in micro-prudential regulation gave us a systematic under-pricing of risk.

The great credit boom of 2004-2007 has traditionally been interpreted as mistakes of macro policy: This came from the pegged exchange rate. The RBI bought dollars in order to prevent the rupee's appreciation, with incomplete sterilisation, which gave low interest rates at a time of a boom in business cycle conditions. This gave us the biggest ever credit boom in India's history. I would add one more ingredient in our understanding of that credit boom: Mistakes in micro-prudential regulation of banks. Mistakes of macro and micro came together to give that party.

Looking forward, improving the thinking in micro-prudential regulation of banks is an important priority. It will take years for India to reverse public sector domination of banking, and the consequential weaknesses of credit risk evaluation. It will take years for India to reduce the loss given default, by enacting an Indian Bankruptcy Code.

In the short term, these problems must be treated as given. For the coming two years, the agenda must be to break away from the failures of the last 20 years in banking regulation, while treating the presence of PSU banks and the lack of a bankruptcy code as a given. At present, the landscape of banking regulation is riddled with mistakes [example, example]. The fair price of a bank loan to a corporation is probably much higher than what we've thought it should be


http://firstbiz.firstpost.com/corporate/flawed-risk-assessment-indian-banks-underpricing-corporate-loans-112213.html

'NPA a Serious Woe for Indian Banking Sector' -Indian Express

KOCHI: Non Performing Asset(NPA) has been a serious  problem for the Indian banking sector, said South Indian Bank managing director and chief executive officer  V G Mathew. He was speaking at a felicitation  function jointly organised by State Forum of Bankers Clubs -(Kerala )and Bankers Club Greater Kochi.

The present situation is  same as that of 1995-96. “Earlier, banks were lending for working capital needs. But nowadays they have transformed into project lenders. This kind of transformation  is instrumental in NPA hike. Declining credit solution process is a major challenge for us. Merchant bankers are keen on removing the hurdles for lending. But  we need to concentrate on credit risk. We were able to overcome the NPA situation of 1995-96 by 2004-05 and do the same now. The government and RBI are taking steps towards this end,” he said. Corporation Bank Zonal Manager A M M G Nair, who has been promoted as the GM of the Bank was felicitated.  - 30. 10. 2014

Banks see no immediate end to NPA pain-Economic times Fab 2014

MUMBAI: Banks see little specks of revival as the December-quarter earnings season comes to an end, extending their credit-quality pain that began two years ago. Lenders expect profit growth to pick up momentum only two to three quarters after the economy starts turning around.

A double whammy of increased loan defaults in a slowing economy and lower fund demand from corporate customers for new investments has severely hit the banking industry, driving up their nonperforming assets (NPA) and denting profits. Total net profit of the country's 40 listed banks shrank more than 20% from a year earlier to Rs 15,164 crore in the third quarter ended on December 31.

"We still have pains left," said State Bank of India Chairperson Arundhati Bhattacharya. "Only after two quarters of economic growth, we will see NPA coming down. It would help if the economy turns around. If it does not, it would be a much more difficult situation."
To tide over the situation, banks are seeking the relative safety of retail loans and working capital funding for companies to meet daily requirements. Private sector banks have reported better results than their public sector rivals because of their increasing focus on retail loans, as demand from individuals to buy assets such as homes and vehicles is still growing at a healthy pace. Default rates in the retail segment are also lower compared with those on the corporate side.

"The domestic consumption story is still largely supporting working capital and retail loan demand," said HDFC Bank Deputy Managing Director Paresh Sukthankar. "In terms of loan growth and asset quality, there could be some improvement going forward. It is tough to generalise across the entire (banking) system."

India is projected to post a sub-5% economic expansion for the second straight year. If the real growth in gross domestic product recovers to around 6% in the next fiscal year starting in April from the 4.9% increase estimated for this year, that many believe would support a slightly higher growth rate for the banking system, while helping moderate NPA formation.
"The banking system is a direct reflection of the state of the economy," said KR Kamath, chairman and managing director at Punjab National Bank. "Banks' recovery efforts are being thwarted as there are limited buyers of assets due to overall economic conditions."
During the October-December quarter, the average net NPA ratio of banks worsened to 2.22% from 1.55% a year earlier.

"We are neutral to the sector although the outlook is still negative," said Ramanathan K, executive director and chief investment officer at ING Investment Management. Its asset under management stood at about 675 crore as on December 31, 2013. "Asset quality pain continues, but many stocks are available at cheap valuations as they have corrected a lot. Many PSU banks are trading at price-to-book value (ratio) in the range of 0.40-0.80."
A significant share of credit quality deterioration has come from small and medium enterprises or SMEs, which have limited wherewithal to withstand economic troubles.
"SMEs which are directly selling their products in the market are much better placed to repay their loans. Those which supply to large corporates are suffering," said Shubhalakshmi Panse, who retired as managing director of state-owned Allahabad Bank on January 31.
India Ratings expects bad-loan accretion to reduce from the second half of 2014-15 on the likelihood of faster economic growth driving corporate performance.
http://articles.economictimes.indiatimes.com/2014-02-17/news/47412290_1_loan-growth-private-sector-banks-npa

CVC refers cases of Winsome Group, Biotor to CBI: Jaitley--ZEETV

New Delhi: CBI has been asked to investigate Winsome Group of Companies for default of Rs 6,000 crore loan from lenders like Punjab National Bank.

Besides, CBI has also been asked to probe Rs 1,500 crore default by Biotor Industries Ltd.

"The Central Vigilance Commission (CVC) has not conducted any vigilance inquiries directly into any of biggest loan defaults," Finance Minister Arun Jaitley said in written reply to the Rajya Sabha.

"However, CVC has referred the case of Winsome Group of Companies (formerly Suraj Diamonds) and Biotor Industries Ltd to Central Bureau of Investigation (CBI) for conducting investigation," he said.

The CBI is looking into case of cheating and fraud against directors of Biotor Industries, manufacturer of castor oil, for allegedly submitting forged documents to three banks -- Bank of Maharashtra, Oriental Bank of Commerce and Central Bank of India.

The Finance Minister said the banks were advised by RBI on September 14, 2012 that they should review their existing Information Technology (IT) and Management information systems (MIS) framework and put in place a robust MIS mechanism for early detection of signs of distress at individual account level as well as at segment level (asset class, industry, geographic, size, etc).

"Such early warning signals should be used for putting in place an effective preventive asset quality management framework, for preserving the economic value of those entities in all segments," he said.

"The banks' IT and MIS system should be robust and able to generate reliable and quality information with regards to their asset quality for effective decision making," he added.

Jaitely said there should be no inconsistencies between information furnished under regulatory or statutory reporting and the banks' own MIS reporting.

Banks were also advised to have system generated segment- wise information on non-performing assets and restructured assets, he said, adding that as such the process of NPA identification and reporting by the system has been put in place.

In a separate response, Jaitley said the gross non-performing assets (NPAs) of the public sector banks (PSBs) on September 30, 2014 stood at Rs 2,43,043 crore.

PSBs have filed 5,501 cases of wilful default as of March 31, 2014. The amount involved in such cases are to the tune of Rs 35,712.92 crore, he said.

As per RBI master circular on wilful defaulters, action, including punitive action, is initiated against such wilful defaulters, he said.

"In order to prevent the access to the capital markets by the wilful defaulters, a copy of the list of wilful defaulters (non-suit filed accounts) and list of wilful defaulters (suit filed accounts) are forwarded to Sebi by RBI and Credit Information Bureau (India) Ltd respectively," he said.