FM: Government has taken various measures to deal with the issue of Non Performing Assets (NPAs) in Banking Sector
The Union Finance Minister, Shri Arun Jaitley said that the Government has taken various measures to deal with the issue of Non Performing Assets (NPAs) in Banking Sector especially in case of Public Sector Banks (PSBs). The Finance Minister said that there are two categories of defaulters, viz. those who are unable to pay back due to economic slowdown both in domestic and global market and other reasons outside their control as well as wilful defaulters including loans sanctioned without due diligence by the banks. The Finance Minister said that the Government has taken various measures to deal with both these categories of defaulters. The Finance Minister Shri Jaitley was making his Opening Remarks at the Second Meeting of the Consultative Committee attached to the Ministry of Finance on the subject: “NPAs in Banking Sector” here today.
The Finance Minister Shri Jaitley further said that in order to deal with default due to economic slowdown, the Government has taken various measures to revive the stressed sectors which mainly include steel, textiles, power and roads among others. Shri Jaitley said that the Government has also done recapitalization of banks by providing Rs. 25,000 crore in the last year Union Budget 2015-16 as well as in this year’s budget 2016-17. He said that transparency and professionalism has been brought in appointment process for top management positions in the PSBs including Chairmen and Managing Directors. He said the Government has taken various measures to make the management professional, has given full autonomy to the banks in taking commercial decisions without any interference from the Government..
The Finance Minister Shri Jaitley said that Bankruptcy Law has been cleared by the Joint Parliament Standing Committee and is likely to be discussed in the current Budget Session of the Parliament. The Finance Minister also said that SARFAESI Act and DRT Act have been amended to make the recovery process more efficient and expedient. The Finance minister said that wherever it was observed that number of cases in which action taken by the banks against guarantors for recovery of defaulted loans is insufficient, the Government has advised the banks to take action against guarantors in the event of default by borrowers under relevant Sections of SARFAESI Act, Indian Contract Act and RDDB & FI Act. The Finance Minister said that a direction to this effect has been issued to the banks last month. The Finance Minister also highlighted the various measures taken by the Government for revival of stressed sectors such as steel, road, power and textile sectors among others.
Later the Members of the Consultative Committee gave their suggestions with regard to recovery of loans and bringing NPAs under control. Members suggested that there is need for bringing more transparency in the system and list of all the defaulters whose loans have been written off by the PSBs be made public. They asked for exemplary action against the wilful defaulters so that others do not indulge in similar activities. Some members appreciated the Government’s effort to make the appointment process for the top management positions of banks professional. Some members also suggested that there is need for restructuring of agricultural loans in order to help the farmers. Members also suggested that there should be no employment cut due to any amalgamation or merger of banks. Members asked the Government to ensure level playing field to all Indian entrepreneurs across the board. They suggested that due to wilful default by some prominent business men, others may not be considered and treated in a similar fashion. Some members suggested that a committee be constituted to finalise recovery process in case of loans given to big corporate houses by various PSBs.
The Members of the Consultative Committee who participated in the aforesaid Meeting include Shri Anirudhan Sampath, Shri Baijayanta Jai Panda, Shri Dilip Kumar Mansukhlal Gandhi, Shri Kailkesh Narayan Singh Deo, Smt. Poonam Mahajan, Shri PrabhatsinhPratapsinh Chauhan, Shri Ram Charitra Nishad, Shri Sriram Malyadri, Shri Subhash Chandra Baheria, Smt. Supriya Sadanand Sule, Shri Suresh Chanabassappa Angadi (all members of Lok Sabha); Shri Anil Desai, Shri Digvijaya Singh, Dr. K.P. Ramalingam, Shri Rajkumar Dhoot, Shri Ranvijay Singh Judev, Shri Satish Chandra Misra, Kumari Selja and Shri Sukhendu Sekhar Roy (all members of Rajya Sabha).
Along with the Finance Minister, the Minister of State for Finance Shri Jayant Sinha, Shri Ratan P. Watal, Finance Secretary, Shri Shaktikanta Das, Secretary, DEA, Dr. Hasmukh Adhia, Revenue Secretary, Ms. Anjuly Chib Dugal, Secretary, Financial Services, Shri Neeraj Kumar Gupta, Secretary, DIPAM, Dr. Arvind Subramanian, Chief Economic Adviser (CEA), and other senior officers of the Ministry of Finance attended the aforesaid Consultative Committee Meeting.
Causes Of Rising NPA In Banks AND Risk Of Rating Downgrade -My Views On Naxatra TV on 27 APRIL2016 Part 1
Click Here To Watch Me Live On Naxatra TV
Principles of Sound Lending
Lending is one the primary function of a bank. The banks accept deposits from people and then lend that money to the needy people in the form of loans, advances, cash credit and overdraft. Interest received from these lending is the main source of income for the bank. So a bank should examine the security offered against loan, credit worthiness of the borrower and the purpose of the loan. Therefore a bank uses these following principle for smooth running of the business.
1. Liquidity - Liquidity is an important principle of bank lending. Banks lend money for short periods only because they lend public money (money accept as deposits from people) which can be withdrawn at any time by depositors. They, therefore, advance loans on the security of such assets which can be easily converted into cash at a short notice. A bank chooses such securities because if the bank needs cash to meet the urgent requirements of its customers, it should be in a position to sell some of the securities at a very short notice without disturbing their price much. There are certain securities such as central, state and local government bonds which are easily saleable without affecting their market prices.
2. Safety - The safety of funds lent is another principle of lending. Safety means that the borrower should be able to repay the loan and interest in time at regular intervals without default. The repayment of the loan depends upon the nature of security, the character of the borrower, his capacity to repay and his financial standing. Like other investments, bank investments involve risk. But the degree of risk varies with the type of security. Securities of the central government are safer than those of the state governments and local bodies. From the point of view, the nature of security is the most important consideration while giving a loan. Even then, it has to take into consideration the creditworthiness of the borrower which is governed by his character, capacity to repay, and his financial standing. Above all, the safety of bank funds depends upon the technical feasibility and economic viability of the project for which the loan is advanced.
3. Diversity - A commercial bank should follow the principle of diversity. It should not invest its surplus funds in a particular type of security but in different types of securities. It should choose the shares and debentures of different types of industries situated in different regions of the country. The same principle should be followed in the case of state governments and local bodies. Diversification aims at minimizing risks of the investment portfolio of a bank. The principle of diversity also applies to the advancing of loans to varied types of firms, industries, businesses and trades. A bank should follow the maxim: “Do not keep all eggs in one basket.” It should spread it risks by giving loans to various trades and industries in different parts of the country.
4. Stability in the Value of Investments - The bank should invest its funds in those stocks and securities the prices of which are more or less stable. The bank cannot afford to invest its funds in securities, the prices of which are subject to frequent fluctuations.
5. Profitability - A commercial bank by definition is a profit hunting institution. The bank has to earn profit to pay salaries to the staff, interest to the depositors, dividend to the shareholders and to meet the day-to-day expenditure. Since cash is the least profitable asset to the bank, there is no point in keeping all the assets in the form of cash on hand. The bank has got to earn income. Hence, some of the items on the assets side are profit yielding assets. They include money at call and short notice, bills discounted, investments, loans and advances, etc. Loans and advances, though the least liquid asset, constitute the most profitable asset to the bank. Much of the income of the bank accrues by way of interest charged on loans and advances. But, the bank has to be highly discreet while advancing loans.
6. Saleability of Securities - Further, the bank should invest its funds in such types of securities as can be easily marketed at a time of emergency. The bank cannot afford to invest its funds in very long term securities or those securities which are unsaleable. It is necessary for the bank to invest its funds in government or in first class securities or in debentures of reputed firms. It should also advance loans against stocks which can be easily sold.
7. Margin Money – in case of secured loans (A secured advance is one which is made on the security of either assets or against personal security or other guarantees. An advance which is not secured is called an unsecured advance), the bank should carefully examine and value of security. There should be sufficient margin between the amount of loan and value of the security. If adequate margin is not maintained, the loan might become unsecured, in case the borrower fails to pay the interest and return the loan. Margin means a sufficient gap between loan value and security value for ex if security market value is Rs 1000 then bank may offer Rs 800 as loan.
8. Principle of Purpose - At the time of granting an advance the banker must ask about the purpose of the loan. If it is for unproductive purposes, then there is less chances of repayment of loan. On the other hand, If it is for productive purposes then there is more chances of repayment loan value with the interest.
The Finance Minister Shri Jaitley further said that in order to deal with default due to economic slowdown, the Government has taken various measures to revive the stressed sectors which mainly include steel, textiles, power and roads among others. Shri Jaitley said that the Government has also done recapitalization of banks by providing Rs. 25,000 crore in the last year Union Budget 2015-16 as well as in this year’s budget 2016-17. He said that transparency and professionalism has been brought in appointment process for top management positions in the PSBs including Chairmen and Managing Directors. He said the Government has taken various measures to make the management professional, has given full autonomy to the banks in taking commercial decisions without any interference from the Government..
The Finance Minister Shri Jaitley said that Bankruptcy Law has been cleared by the Joint Parliament Standing Committee and is likely to be discussed in the current Budget Session of the Parliament. The Finance Minister also said that SARFAESI Act and DRT Act have been amended to make the recovery process more efficient and expedient. The Finance minister said that wherever it was observed that number of cases in which action taken by the banks against guarantors for recovery of defaulted loans is insufficient, the Government has advised the banks to take action against guarantors in the event of default by borrowers under relevant Sections of SARFAESI Act, Indian Contract Act and RDDB & FI Act. The Finance Minister said that a direction to this effect has been issued to the banks last month. The Finance Minister also highlighted the various measures taken by the Government for revival of stressed sectors such as steel, road, power and textile sectors among others.
Later the Members of the Consultative Committee gave their suggestions with regard to recovery of loans and bringing NPAs under control. Members suggested that there is need for bringing more transparency in the system and list of all the defaulters whose loans have been written off by the PSBs be made public. They asked for exemplary action against the wilful defaulters so that others do not indulge in similar activities. Some members appreciated the Government’s effort to make the appointment process for the top management positions of banks professional. Some members also suggested that there is need for restructuring of agricultural loans in order to help the farmers. Members also suggested that there should be no employment cut due to any amalgamation or merger of banks. Members asked the Government to ensure level playing field to all Indian entrepreneurs across the board. They suggested that due to wilful default by some prominent business men, others may not be considered and treated in a similar fashion. Some members suggested that a committee be constituted to finalise recovery process in case of loans given to big corporate houses by various PSBs.
The Members of the Consultative Committee who participated in the aforesaid Meeting include Shri Anirudhan Sampath, Shri Baijayanta Jai Panda, Shri Dilip Kumar Mansukhlal Gandhi, Shri Kailkesh Narayan Singh Deo, Smt. Poonam Mahajan, Shri PrabhatsinhPratapsinh Chauhan, Shri Ram Charitra Nishad, Shri Sriram Malyadri, Shri Subhash Chandra Baheria, Smt. Supriya Sadanand Sule, Shri Suresh Chanabassappa Angadi (all members of Lok Sabha); Shri Anil Desai, Shri Digvijaya Singh, Dr. K.P. Ramalingam, Shri Rajkumar Dhoot, Shri Ranvijay Singh Judev, Shri Satish Chandra Misra, Kumari Selja and Shri Sukhendu Sekhar Roy (all members of Rajya Sabha).
Along with the Finance Minister, the Minister of State for Finance Shri Jayant Sinha, Shri Ratan P. Watal, Finance Secretary, Shri Shaktikanta Das, Secretary, DEA, Dr. Hasmukh Adhia, Revenue Secretary, Ms. Anjuly Chib Dugal, Secretary, Financial Services, Shri Neeraj Kumar Gupta, Secretary, DIPAM, Dr. Arvind Subramanian, Chief Economic Adviser (CEA), and other senior officers of the Ministry of Finance attended the aforesaid Consultative Committee Meeting.
Causes Of Rising NPA In Banks AND Risk Of Rating Downgrade -My Views On Naxatra TV on 27 APRIL2016 Part 1
Click Here To Watch Me Live On Naxatra TV
Principles of Sound Lending
Lending is one the primary function of a bank. The banks accept deposits from people and then lend that money to the needy people in the form of loans, advances, cash credit and overdraft. Interest received from these lending is the main source of income for the bank. So a bank should examine the security offered against loan, credit worthiness of the borrower and the purpose of the loan. Therefore a bank uses these following principle for smooth running of the business.
1. Liquidity - Liquidity is an important principle of bank lending. Banks lend money for short periods only because they lend public money (money accept as deposits from people) which can be withdrawn at any time by depositors. They, therefore, advance loans on the security of such assets which can be easily converted into cash at a short notice. A bank chooses such securities because if the bank needs cash to meet the urgent requirements of its customers, it should be in a position to sell some of the securities at a very short notice without disturbing their price much. There are certain securities such as central, state and local government bonds which are easily saleable without affecting their market prices.
2. Safety - The safety of funds lent is another principle of lending. Safety means that the borrower should be able to repay the loan and interest in time at regular intervals without default. The repayment of the loan depends upon the nature of security, the character of the borrower, his capacity to repay and his financial standing. Like other investments, bank investments involve risk. But the degree of risk varies with the type of security. Securities of the central government are safer than those of the state governments and local bodies. From the point of view, the nature of security is the most important consideration while giving a loan. Even then, it has to take into consideration the creditworthiness of the borrower which is governed by his character, capacity to repay, and his financial standing. Above all, the safety of bank funds depends upon the technical feasibility and economic viability of the project for which the loan is advanced.
3. Diversity - A commercial bank should follow the principle of diversity. It should not invest its surplus funds in a particular type of security but in different types of securities. It should choose the shares and debentures of different types of industries situated in different regions of the country. The same principle should be followed in the case of state governments and local bodies. Diversification aims at minimizing risks of the investment portfolio of a bank. The principle of diversity also applies to the advancing of loans to varied types of firms, industries, businesses and trades. A bank should follow the maxim: “Do not keep all eggs in one basket.” It should spread it risks by giving loans to various trades and industries in different parts of the country.
4. Stability in the Value of Investments - The bank should invest its funds in those stocks and securities the prices of which are more or less stable. The bank cannot afford to invest its funds in securities, the prices of which are subject to frequent fluctuations.
5. Profitability - A commercial bank by definition is a profit hunting institution. The bank has to earn profit to pay salaries to the staff, interest to the depositors, dividend to the shareholders and to meet the day-to-day expenditure. Since cash is the least profitable asset to the bank, there is no point in keeping all the assets in the form of cash on hand. The bank has got to earn income. Hence, some of the items on the assets side are profit yielding assets. They include money at call and short notice, bills discounted, investments, loans and advances, etc. Loans and advances, though the least liquid asset, constitute the most profitable asset to the bank. Much of the income of the bank accrues by way of interest charged on loans and advances. But, the bank has to be highly discreet while advancing loans.
6. Saleability of Securities - Further, the bank should invest its funds in such types of securities as can be easily marketed at a time of emergency. The bank cannot afford to invest its funds in very long term securities or those securities which are unsaleable. It is necessary for the bank to invest its funds in government or in first class securities or in debentures of reputed firms. It should also advance loans against stocks which can be easily sold.
7. Margin Money – in case of secured loans (A secured advance is one which is made on the security of either assets or against personal security or other guarantees. An advance which is not secured is called an unsecured advance), the bank should carefully examine and value of security. There should be sufficient margin between the amount of loan and value of the security. If adequate margin is not maintained, the loan might become unsecured, in case the borrower fails to pay the interest and return the loan. Margin means a sufficient gap between loan value and security value for ex if security market value is Rs 1000 then bank may offer Rs 800 as loan.
8. Principle of Purpose - At the time of granting an advance the banker must ask about the purpose of the loan. If it is for unproductive purposes, then there is less chances of repayment of loan. On the other hand, If it is for productive purposes then there is more chances of repayment loan value with the interest.
Tools Used By Banks To Assess A Person Who approaches For Loan
- Banks use rigorous policies and analyses when determining if and how much money to lend to clients.
- The methods used by banks are often summarized by categorizing lending analysis as the five Cs of credit.
- The five Cs of credit are character, capital, capacity, conditions and collateral.
- Banks use the five Cs for specific reasons respective to each category, but all are utilized to understand the risk of default on a loan.
Character
It is important to a bank to have significant comfort with the character of its prospective borrowers. Indicators such as credit rating and borrowing history coupled with more qualitative factors such as honesty and integrity all support a case for a borrower's willingness and ability to repay a loan. It is important to assess the creditworthiness of a loan seeker and for this purpose it is important that the loan seeker is honest and of good character.
Capital
A bank needs to understand the capital position of the prospective borrower's business or personal wealth. More capital represents the borrower's ability to withstand volatility. It also demonstrates the commitment an owner of a borrowing entity maintains. A strong capital position reassures a lender of repayment capacity in a borrower.
In modern era , banks have started extending loan even to a borrower who does not possess own adequate capital to sustain loss. This happens only when lender becomes more positive and ignores negative feature in the beginning itself to achieve imposed high target which puts banks in critical position at later stage.
Capacity
Understanding capacity to repay a loan is critical for a bank during the underwriting process. Capacity is determined by the borrower's ability to generate cash flow to service the interest and principal on the loan. Strong cash flow from borrowers' normal business activities demonstrates capacity to repay debt and mitigates the probability of default.
Unfortunately , banks in order to achieve target does not give much value to cash flow to service interest and principal on the loan . Loan seekers also put entire blame on bankers when they fail to generate enough income due to misconception about business potential. It has become fashion on the part of borrower not to own responsibility for failure but shift entire blame on lenders . This is due to borrower friendly culture created by clever government .
Conditions
A bank must also understand the broader market conditions affecting the industry, segment, market and overall economy in which its borrowers engage in commerce. Strong industry growth or economic conditions support a business' ability to generate cash and repay debt.
Collateral
Lenders often take a lien on borrower collateral. In the event a borrower is not able to repay debt with its cash flow, a lender must rely on the quality and saleability of borrower collateral to repay the loan. A robust analysis of the collateral supporting a loan is an important step in granting a loan.
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