Banking on a better tomorrow: Public sector banks scout for a survival kit- Financial Express 8th Jun 2015-
By: Shayan Ghosh
( Read my Observation below)
( Read my Observation below)
With private sector banks leading in fees, retail loans, savings and current accounts, public sector banks have a tough fight on their hands.
How PSU banks lose out to private peers-
By Sri Tamal Bandopadhyay
Private banks are surging ahead of their counterparts in the public sector who are starved of capital and suffering from a larger mound of bad assets
India’s public sector banks are heading towards bad times. We don’t need a soothsayer to say this—a close look at the earnings of banks in the quarter ending March makes it quite clear.
Among 39 listed banks in India—both private and public—four recorded net losses in the March quarter, and three of them are public sector banks. They are Bank of India, Oriental Bank of Commerce and Punjab and Sind Bank. At least nine other public banks recorded a drop in net profit compared with the year-ago quarter; and for a few of them, the drop has been pretty sharp. For instance, Punjab National Bank (PNB) posted a 62% drop in net profit; for Dena Bank, United Bank of India (UBI) and Indian Overseas Bank (IOB), the drop in net profit was even sharper—between 70% and 87%. Two private banks that posted a drop in the March-quarter net profit are Jammu and Kashmir Bank Ltd and South Indian Bank Ltd.
The sole reason for the losses and the drop in net profits is ballooning bad assets, for which banks need to set aside money. Fourteen Indian banks now have at least 5% or more gross bad loans and, barring two, all are public sector banks. UBI’s gross bad loans are 9.49% of loan assets and those of IOB, 8.33%. Similarly, the seven banks that have between 4% and 5% bad assets are all public sector banks. Of the five banks that have 3-4% gross bad assets, four are from the public sector. ICICI Bank Ltd is the lone private sector entry into this segment. After setting aside money for such loans, 13 banks have at least 3% or more net non-performing assets (or NPAs) and barring one, all are from the public sector.
Provisions on account of bad assets have eaten into their net profit, even though not too many banks have shown a drop in their operating profit. For instance, PNB’s provision for bad loans rose 161% in the March quarter over the December quarter—from Rs.1,468 crore to Rs.3,834 crore; for Punjab and Sind Bank, the rise has been 150% and for Syndicate Bank, 146%. Among others, IDBI Bank Ltd’s provision rose 80%, that of Bank of Baroda 44%, and Bank of India 43%.
Ideally, some of the banks should have set aside more money to take care of bad assets but they could not do so as that would have affected their profits even more. In absolute terms, gross bad assets of the 39 listed banks rose a little more than 25% over the past year to Rs.3.02 trillion and, after provisioning, net bad assets rose some 26% to Rs.1.68 trillion.
The larger story is this: The past two years have separated the men from the boys. Data collated by my colleagues Ashwin Ramarathinam and Ravindra Sonavane in Mint’s research wing show that private banks are surging ahead of their counterparts in the public sector who are starved of capital and suffering from a larger mound of bad assets. Going by the latest available data, there are 43 foreign banks in India, but they are not taken into consideration for this analysis. Collectively, they account for 0.33% of the branch network, a little less than 4% of bank deposits and around 4.5% of advances. There are a few unlisted small private banks too, but for this analysis, I am focusing on the 14 listed private banks and 25 listed public sector banks.
In almost every parameter, private banks are doing better than their peers in the public sector and their market share has been growing. In fiscal year 2014, private banks’ operating profit was almost flat, but in 2015, it rose 19%. In contrast, public sector banks’ operating profit dropped close to 6% in 2014 and rose about 8% in 2015. After setting aside money for bad loans, private banks’ net profit rose 17.66% in 2014, while in 2015, the growth was 18.11%. Public banks’ net profits dropped a little more than 26% in 2014 and just about 1% in 2015. Public banks’ gross NPAs grew close to 25% in 2015 after surging 37% in the previous year, while gross NPA growth for private banks was 30% and 15% in those two years respectively, albeit on a lower base. Post provisions, net NPAs of public banks grew 42% in 2014 and 26% in 2015. The comparable figures for private banks are 45% and 43%—again on a relatively smaller base.
What is more interesting to note is that public sector banks are lagging behind private banks both in deposits and advances growth. In 2015, public sector banks’ business growth has been almost half that of private banks. For instance, public banks’ deposit growth has been 9.13%, against private banks’ 16.16%; similarly, private banks’ advances grew close to 19%, compared to 8.13% for public banks.
As a result, private banks’ market share has been growing steadily. In the past two years, their share in operating profit has grown from 29.13% to 32.59%, while that of net profit has jumped from close to 35% to more than 50.5%, even as their deposits and advances continue to remain one-fifth of public sector banks’ despite steady growth. Public sector banks’ market share of deposits in the past two years has slipped from 81.82% to 80.92%, and that of loan advances from 80.72% to 78.72%.
In other words, with roughly one-fifth of market share in bank deposits and advances, private banks account for more than half the net profit of the industry. This is possible because their market share of gross NPAs is a shade less than 10% and net NPAs around 7%. Incidentally, the 14 listed private banks’ total net profit is about 25% more than their gross bad assets, while the 25 listed public sector banks’ gross bad assets are almost seven-and-a-half times their net profit.
Do we need to say more on why the market does not see value in most public sector banks?
Click Here To Readh How PSBs are Losing Ground Like Telcom BSNL and Indian Airlines
My Observation:
Bad debts or stressed assets or None Performing Assets , all are more or less same and they are all responsible for continuous downfall in profit and shrinkage in profitability , erosion in capital and they all add injury to sickness of banks. There are many internal reasons which cause creation and accumulation of bad assets. There are external reasons like political exploitation and shortcomings of remedial measures through legal recourse and administrative hurdles in smooth and timely recovery of dues from defaulters. There may be adverse affects on repayment culture due to high interest rate or loan waiver culture announced by politicians for vote purposes. There may be many more other reasons in the eyes of regulators or from the point of view of Chiefs of banks.
Whatsoever may be the reason behind growing sickness in PSBs, it is dead sure that health of public sector banks has been consistently deteriorating despite claim of Government and RBI that health of bank is improving or likely to improve from next quarter.
Manmohan Singh, former Prime Minister used to say every now and then that price rise will be contained in forthcoming quarters or government banks will be strengthened by infusing additional capital to improve the health of public sector banks. But he undoubtedly failed to do any thing good for betterment of PSBs and to ensure that further deterioration does not take place. He along with all his Finance Ministers got success in passing his tenure as Prime Minister of India. PSBs continued to face one after other impediments in containing sickness due to stressed assets.
Deterioration may stop only if banks are able to stop at least addition of fresh slippages and are able to improve the quality of lending and are able to alter and modify the dirty intention of politicians behind change in policies and quality of human resource .
On the one hand present government is talking of cleanliness in bank , talking of full autonomy and absolute operational freedom to banks and promising non interference in internal affairs of public banks, on the other they are fuelling the fire by imposing one after other non-banking workloads to already declared sick banks and thus contributing fresh damage to asset quality. Banks may earn few crores in insurance activities or may earn blessings of Modi by devoting full energy in execution of social welfare programmes of the government, but they are likely to loss many more times of income by causing standard assets to turn substandard assts.
I however feel pleasure that at least Reserve Bank of India and present government has at least publicly understood the gravity of risk due to ever rising bad debts in bank's books and risk inherent in hiding bad debts. They have understood well the bad impact of culture of window dressing in business, evergreening of loans to contain slippages to NPA, restructuring of bad loans to hide bad loans , the culture of loan waiver schemes and finally the bad ways and means used to achieve imposed target by clever bankers.
Government of India and RBI has taken some steps during last one year to improve health of ailing banks. Capital infusion has been linked to performance of banks. Provisioning on restructured loans has been increased, Process of recruitment of top officials like ED and CMD is getting new direction to stop corruption. All these measure may have short term benefits , but they have potential to add new wounds on sick banks. For example if weak banks are not given help of capital infusion , they will have to keep their interest rate high and they will lose business in the hands of stronger banks. Weak bank will thus grow weakness and face the risk of closure due to Basle norms. Similarly delay in posting of ED and CMD of banks may cause addition of fresh problems. Posting of officers from private banks as Head of PSBs may have greater repercussion down the line in a bank.
I welcome new steps taken by RBI to contain bad debts and to empower banks to acquire 51 % equity of chronic defaulters. It will have a deterrent effect on defaulting companies. It will have a positive impact on companies which are doing well and which are loyal borrowers of banks. But mere becoming owner of 51% equity of a defaulting company , banks will not be able to recover the bad money to a great extent. It is to be kept in mind that Ratio of capital in books of a company is microscopically small. A company with equity of Rs.10 crore only can get the loan of hundreds and thousands of crore of rupees from banks. Similarly premium on equity in stock market will also extinguish as soon as the news of taking over of 50% stake by lending bank goes into market. Further , as soon as bank become owner of 50% equity of a company , it is duty bound to take care of company's health, formulate plan for growth , stop leakage of income and improve operational capacity which banks will not be able to dream of in near future.
I am however happy that present government is not dead as previous government was dead . Current government under the leadership of Mr. Narendra Modi has done a lot of positive work and actively engaged in doing more and more to improve the intrinsic value of PSBs. Hundreds of projects which were languishing in corridors of government departments in search of statutory clearances or licenses have now got green signal and they can now at least go for erection of plant , start operation or think of expansion of their project. Companies which took loan for setting up a plant were paying interest but not able to their expansion work .Companies will no longer face the risk of escalation in project cost if all departments under GOI start functioning well. I hope Mr. Modi will give a real boost to banks in near future.
Real transformation and real reformation in banks will take place only by striking at the root of Human Resource in banks, administrative and legal set up. GOI will have to stop promotion, transfers and recruitment based on flattery and bribery. They will have to give value to seniors and respect experienced officers. Motivation in rank and file in banks will only help bank management in containing risk and in curing disease for good and for ever. Banks were better managed during seventies and eighties compared to what they are doing in the name of merit , in the name of reformation and in the name of freedom.
RBI mulling proposal to give lenders 51% equity control in company that fails to repay -
Economic times 8th June 2016
MUMBAI: Banks and the banking regulator are running out of patience as sticky loans soar. Last week, senior officials of Reserve Bank of India and five large lenders met to discuss what could till now be the most dramatic step to deal with truant borrowers. On the anvil is a harsh new rule — christened "strategic debt conversion" — that will automatically give lenders 51% equity control in a company that fails to repay even after its debts are rejigged to give the management a second chance.
My Observation:
Bad debts or stressed assets or None Performing Assets , all are more or less same and they are all responsible for continuous downfall in profit and shrinkage in profitability , erosion in capital and they all add injury to sickness of banks. There are many internal reasons which cause creation and accumulation of bad assets. There are external reasons like political exploitation and shortcomings of remedial measures through legal recourse and administrative hurdles in smooth and timely recovery of dues from defaulters. There may be adverse affects on repayment culture due to high interest rate or loan waiver culture announced by politicians for vote purposes. There may be many more other reasons in the eyes of regulators or from the point of view of Chiefs of banks.
Whatsoever may be the reason behind growing sickness in PSBs, it is dead sure that health of public sector banks has been consistently deteriorating despite claim of Government and RBI that health of bank is improving or likely to improve from next quarter.
Manmohan Singh, former Prime Minister used to say every now and then that price rise will be contained in forthcoming quarters or government banks will be strengthened by infusing additional capital to improve the health of public sector banks. But he undoubtedly failed to do any thing good for betterment of PSBs and to ensure that further deterioration does not take place. He along with all his Finance Ministers got success in passing his tenure as Prime Minister of India. PSBs continued to face one after other impediments in containing sickness due to stressed assets.
Deterioration may stop only if banks are able to stop at least addition of fresh slippages and are able to improve the quality of lending and are able to alter and modify the dirty intention of politicians behind change in policies and quality of human resource .
On the one hand present government is talking of cleanliness in bank , talking of full autonomy and absolute operational freedom to banks and promising non interference in internal affairs of public banks, on the other they are fuelling the fire by imposing one after other non-banking workloads to already declared sick banks and thus contributing fresh damage to asset quality. Banks may earn few crores in insurance activities or may earn blessings of Modi by devoting full energy in execution of social welfare programmes of the government, but they are likely to loss many more times of income by causing standard assets to turn substandard assts.
I however feel pleasure that at least Reserve Bank of India and present government has at least publicly understood the gravity of risk due to ever rising bad debts in bank's books and risk inherent in hiding bad debts. They have understood well the bad impact of culture of window dressing in business, evergreening of loans to contain slippages to NPA, restructuring of bad loans to hide bad loans , the culture of loan waiver schemes and finally the bad ways and means used to achieve imposed target by clever bankers.
Government of India and RBI has taken some steps during last one year to improve health of ailing banks. Capital infusion has been linked to performance of banks. Provisioning on restructured loans has been increased, Process of recruitment of top officials like ED and CMD is getting new direction to stop corruption. All these measure may have short term benefits , but they have potential to add new wounds on sick banks. For example if weak banks are not given help of capital infusion , they will have to keep their interest rate high and they will lose business in the hands of stronger banks. Weak bank will thus grow weakness and face the risk of closure due to Basle norms. Similarly delay in posting of ED and CMD of banks may cause addition of fresh problems. Posting of officers from private banks as Head of PSBs may have greater repercussion down the line in a bank.
I welcome new steps taken by RBI to contain bad debts and to empower banks to acquire 51 % equity of chronic defaulters. It will have a deterrent effect on defaulting companies. It will have a positive impact on companies which are doing well and which are loyal borrowers of banks. But mere becoming owner of 51% equity of a defaulting company , banks will not be able to recover the bad money to a great extent. It is to be kept in mind that Ratio of capital in books of a company is microscopically small. A company with equity of Rs.10 crore only can get the loan of hundreds and thousands of crore of rupees from banks. Similarly premium on equity in stock market will also extinguish as soon as the news of taking over of 50% stake by lending bank goes into market. Further , as soon as bank become owner of 50% equity of a company , it is duty bound to take care of company's health, formulate plan for growth , stop leakage of income and improve operational capacity which banks will not be able to dream of in near future.
I am however happy that present government is not dead as previous government was dead . Current government under the leadership of Mr. Narendra Modi has done a lot of positive work and actively engaged in doing more and more to improve the intrinsic value of PSBs. Hundreds of projects which were languishing in corridors of government departments in search of statutory clearances or licenses have now got green signal and they can now at least go for erection of plant , start operation or think of expansion of their project. Companies which took loan for setting up a plant were paying interest but not able to their expansion work .Companies will no longer face the risk of escalation in project cost if all departments under GOI start functioning well. I hope Mr. Modi will give a real boost to banks in near future.
Real transformation and real reformation in banks will take place only by striking at the root of Human Resource in banks, administrative and legal set up. GOI will have to stop promotion, transfers and recruitment based on flattery and bribery. They will have to give value to seniors and respect experienced officers. Motivation in rank and file in banks will only help bank management in containing risk and in curing disease for good and for ever. Banks were better managed during seventies and eighties compared to what they are doing in the name of merit , in the name of reformation and in the name of freedom.
RBI mulling proposal to give lenders 51% equity control in company that fails to repay -
Economic times 8th June 2016
MUMBAI: Banks and the banking regulator are running out of patience as sticky loans soar. Last week, senior officials of Reserve Bank of India and five large lenders met to discuss what could till now be the most dramatic step to deal with truant borrowers. On the anvil is a harsh new rule — christened "strategic debt conversion" — that will automatically give lenders 51% equity control in a company that fails to repay even after its debts are rejigged to give the management a second chance.
Read more at:
http://economictimes.indiatimes.com/articleshow/47578551.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
http://economictimes.indiatimes.com/articleshow/47578551.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
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