Do Not Blame Public Sector Banks

Editorial: Don’t blame just PSBs-Financial Express- 09.02.2015
Much has been said about how NPAs have been piling up, especially on the books of PSU banks (or PSBs), and how lenders are to blame because of the poor quality of the appraisals they carried out. There is some element of truth in this; consortium-banking lending, where the lead bank shoulders the bulk of the responsibility, has left lenders a tad complacent. Also as speakers at the FE Best Banks debate pointed out, several loans were made without perfect due diligence—it was assumed, for instance, that coal linkages would be provided for power plants—since the economy was growing rapidly. Also, as SBI chairperson Arundhati Bhattacharya pointed out, a project that is viable when the economy is growing at 9% can become unviable when the ecosystem is sluggish, more so in the case of SMEs that are squeezed by their larger customers and don’t have any staying power.

The government too must accept its share of the blame since much of the damage has taken place in the infrastructure space where projects are stalled—and bank funds stuck—simply because the promised fuel linkages didn’t materialise and environment clearances didn’t come through. If banks went ahead and lent to power projects or road projects, it was because no one expected the government would not honour the letters of intent that it issued. Banks have also been hamstrung by regulations that don’t take cognisance of the situation on the ground.

For instance, they have been funding long-term assets, of 25-30 years, whereas their liabilities are short-term in nature. Apart from the fact that there is an asset-liability mismatch to begin with, since borrowers are being asked to make repayments in a compressed time frame, even a slight delay in the project or a minor cost overrun ensures the account gets into trouble. Indeed, had banks been permitted to accept a bullet repayment at the end of ten years and refinance the project, they might have been better off, but that is not allowed. Also, a large number of stalled projects can be kick-started with some extra funding but banks aren’t willing to lend more because RBI rules stipulate that any extra lending beyond 10% of the project cost means the asset will be classified as a restructured one.

Indeed, banks could have recovered much of their money from promoters if only the legal process had been more helpful; Debt Recovery Tribunals (DRT) have been extremely ineffective, frustrating the attempts of banks to get back their money. The legal system needs to be less skewed in favour of promoters who manage to keep a verdict on hold for years on the flimsiest of grounds. There are also rules that make it impossible for PSU banks to directly negotiate sale of a potential NPA with interested buyers. A system in which the equity provider is taking virtually no hit and the lending institution is being pushed into a corner cannot be a robust one.

http://www.financialexpress.com/article/fe-columnist/editorial-dont-blame-just-psbs/40493/




Every Bank staff must read following  article so that they may build pressure on IBA , and Government of India whose members are denying wage hike to bank employees on the ground of bad assets and lesser profits. It will give a good point to UFBU too to strongly place their demand. Bank Staff should share this article with all their friends who are in banks and make it a revolutionary step.

Chastising public sector banks for every failure is a Comedy of Errors-Economic Times ---------Written By By Soumya Kanti Ghosh

I never thought I had to invoke Shakespeare while writing about public sector banks (PSBs). A mistaken identity resulted in false accusations in the ‘Comedy of Errors’, as is the case with PSBs. It has become fashionable to chastise PSBs for all ills, based on the wrong interpretation of data, so much so that it is a comedy of (data) errors.

 

Let me start with the most discussed myth that PSBs are monoliths, which, over the past decade have been repeatedly bailed out through capital injections at the taxpayer’s expense. This is a bizarre data interpretation, to say the least. Consider this simple arithmetic. For the decade ended FY14, cumulative capital infusion into PSBs was at Rs 60,000 crore, but the dividend payout (at 20 per cent) was roughly Rs 64,000 crore and the cumulative income tax paid was around Rs 1.30 lakh crore. Thus, on a combined basis, dividend and tax paid to the government was more than 300 per cent during the past decade.

 

Also, no level-headed person would agree with the concept that capital infusion and bailouts are the same thing. If this was so, what about capital infusion into Chinese banks and even the US Fed asset sale? As per the limited information in public domain, China had injected $127 billion into the banking system during 2004-07, while the US Fed injected $2.27 trillion following the 2008 crisis. Interpreted differently and looking at the incremental GDP growth during the period, a 1 per cent growth in Chinese GDP was made possible by a $30 billion capital infusion, while for the US, the equivalent figure was $172 billion. So is it a crime if a country resorts to growth-supportive measures through capital infusion?

 

The second issue is that of asset quality and hence recoveries. A higher NPA number per se will not give the whole picture unless it is read along with the credit share contribution of PSBs to various sectors, including those of social importance and national priority. For example, the credit share of MSME in a non-PSB may be as low as 5 per cent, whereas the same in its PSB counterpart could easily be above 20 per cent. In a similar vein, corporate advances from PSBs to sectors other than retail may be close to three-fourths the lending pie, significantly higher than a non-PSB. In addition, close to 20 per cent of PSB advances are in infrastructure sectors.

 

The lending portfolio of a PSB is significantly different from a non-PSB and this, coupled with the relative underperformance of sectors like infrastructure due to economic slowdown (more than half of infrastructure sectors loans are stressed), have impacted the asset quality.

 

A logical question then is, why have PSBs gone into funding riskier areas such as infrastructure? It is known that these areas are the largest creators of employment besides being a priority for the nation. If this is the case, a better way to study efficiency of bank operations is to assess the number of jobs created per unit of loans disbursed, at least in a developing country like India.

 

Our strong sense is that for this to be treated as an investment, the upside needs to be factored into the future. So to rephrase the question, why is the credit share four times lower in a non-PSB for specific sectors?

 

As far as recoveries are concerned, strengthening the resolution mechanism towards a more effective legal framework is of utmost importance. Under the current dispensation, it may take even a year for getting just the permission to take possession of secured assets under the SARFAESI Act. And whenever banks or financial institutions invoke the Act’s provisions and make an attempt to sell the secured assets, the borrower, guarantor or owner of the property either approaches the DRT or the High Court, procures a stay and prolongs proceedings. PSBs are not allowed to enter into bilateral deals for disposing of weak assets without going in for a long drawn out process for discovering a market price. While such checks and balances are appreciated, at least create a non-level playing field in the area of resolution of stressed assets.

 

The third issue is the misplaced notion of PSBs working with a significantly higher margin. For the record, the difference in the interest income earned on loan advances and average earning assets of the bank, and the amount of interest paid to depositors is termed as net interest margins (NIM). India’s average NIM was at around 3.1 per cent in 2014, as compared to the world average of 5.9 per cent (US 3.6 per cent, China 2.9 per cent).

 

Further, the cost of funds in India for PSBs is higher as banks have to rightfully undertake social initiatives. For example, under the hugely successful Jan Dhan Yojna scheme, a total of 10.63 crore accounts were opened, 8.45 crores of which were by PSBs alone. If we do a rough arithmetic, the aggregate cost of these is more than 3 per cent of PSB profits. So, by this logic, will the banks leave aside such financial inclusion where the long term benefits are enormous?

 

Fourth, PSBs are regularly beaten up for their capability gap. Indeed HR is an area of concern for PSBs and was discussed in detail at the Gyan Sangam. It is generally accepted that the best of talent goes to government-funded institutions such as the IITs and IIMs.

Indian PSBs or FIs also fund some good institutions such as MDI, Gurgaon and NIBM, Pune. But surprise — PSBs are not able to recruit from these institutions supported by public funds as students of such institutions get jobs through campus recruitments. This opportunity is denied to PSBs through a judicial mandate. So intriguingly, public funds nurture talent for the private sector and PSBs need to do the entire hard work of developing their own talent post-recruitment.

 

Interestingly, MoUs with the government do spell out budgetary targets on important parameters, which over the past two years or so are no longer topline focused and are monitored on a periodic basis by the finance ministry.

 

In summary, I hope I have been able to convince the reader that even after being a part of a PSB, my views are rationally exuberant!

 

(The writer is Chief Economic Advisor, State Bank of India)
Link Economic Times

Asset quality concerns continue for private banks-Business Standard 27.01.2015

Higher loan restructuring in Q4 likely to increase stress

Bad loan ratios might have remained steady for most private banks in the  October-December 2014 quarter, but asset quality worries are still not over for these lenders. Bankers and industry analysts caution there could be a spike in loan restructuring cases in the current quarter, which will worsen the health of assets.

“It is too early to say that the worst (in terms of asset quality deterioration) is over for private banks. They are relatively better placed than public sector banks because of their focus on the retail segment, where asset quality risks are lower. But there could be some front-loading on the loan restructuring front in the fourth quarter, which could stress the credit quality. A lot will depend on a pick-up in economic growth and improvement in corporate profitability,” said Saday Sinha, banking analyst with Kotak Securities.

Private lenders, including Axis Bank, Kotak Mahindra Bank, IndusInd Bank and DCB Bank, have either improved or kept their non-performing loan ratios steady.

However, bankers remain wary. “The total stress addition might be lower than what we have guided, but we will continue with our guidance. Restructuring norms will be changing from the next financial year. Therefore, we expect more stress additions in the current quarter,” said Sanjeev K Gupta, executive director for corporate centre at Axis Bank. The third-largest private bank in India saw its gross and net bad loan ratios stay unchanged sequentially at 1.34 per cent and 0.44 per cent, respectively, in the October-December 2014 period.

While DCB Bank improved its non-performing asset ratios, its CEO Murali M Natrajan said improvement in the macroeconomic environment was essential to ebb bad loan worries. “We are confident of the quality of our retail mortgages, SME (small & medium enterprises)-MSME (micro, small and medium enterprises) and agri-inclusive banking portfolios. On the corporate side, unless the external environment improves, challenges will remain,” he said.

Uday Sareen, deputy CEO and CEO-designate at ING Vysya Bank, said while fresh bad loan additions had slowed, it was too early to conclude pains were over. The private lender's gross and net bad loan ratios deteriorated by 27 and 24 basis points, respectively, on a quarter-on-quarter basis.

According to analysts, private lenders such as Federal Bank and South Indian Bank, have not been able to stem credit quality deterioration last quarter. Besides, India’s top two private banks – ICICI Bank and HDFC Bank – are yet to declare their third quarter earnings.

“It is not as if slippages have been coming down drastically for private banks. But these banks are able to make adequate provisions to keep net non-performing asset ratios stable. Also, in the fourth quarter, we expect restructuring of loans to be higher,” said Vaibhav Agrawal, vice-president research for banking at Angel Broking.

A few bankers, however, remained optimistic. “Asset quality outlook has got better in recent months... If GDP (gross domestic product) growth picks up to 6.5 per cent or more, it will bring further relief on that front,” said Jaideep Iyer, group president for financial management at YES Bank.