Showing posts with label public sector bank. Show all posts
Showing posts with label public sector bank. Show all posts

Wednesday, August 27, 2014

CBI Booked Senior Officers Of Central Bank

CBI books Electrotherm for cheating Central Bank of Rs436 crore-Live mint

Company requested credit to enable it to supply steel and iron to an other firm in Tanzania, CBI says
 
New Delhi: The Central Bureau of Investigation (CBI) on Tuesday said that it had registered a case against the directors of Ahmedabad-based Electrotherm (India) Ltd and officials of state-owned Central Bank of India for entering into a “criminal conspiracy” and cheating the bank to the tune of Rs.436.74 crore.
 
The case was registered on a complaint filed by the Central Bank of India. “It is further alleged in the complaint that the company requested for credit to enable them to supply steel and iron to one other firm in Tanzania,” CBI said in a statement.
 
A CBI official identified the Tanzania-based company in question is Kamal Alloys Ltd. CBI said that one of the directors in Electrotherm was also on the board of Kamal Alloys.
The agency conducted searches at nine places on Tuesday in Ahmedabad, Gandhinagar, Vadodara and Kutch in Gujarat.
 
Electrotherm “did not submit any proof of delivery of the material and defaulted on the loans taken”, the agency said. CBI further said that “standby Letters of Credit (were) opened by the bank to facilitate trade in machinery and coal devolved.” The bank had to make payment when Electrotherm did not pay the company it had taken the material from.
 
CBI has also alleged that Electrotherm made “false representations” to “induce the bank to extend credit facilities” to itself.
 
A company spokesperson could not be immediately reached for comment.
This is the latest in a string of cases involving public sector banks that CBI has begun investigating in the recent past.
 
De-stressing banks is no short-term process-Sri Anand Adhikari --Business Today
 
A week after the Central Bureau of Investigation (CBI) pounced on Syndicate Bank Chairman and Managing Director S.K. Jain, a branch manager of Central Bank of India in Jabalpur, Madhya Pradesh, was convicted by the CBI special court in a bribery case. The branch manager R.R. Das, who has retired now, has been sentenced to three years imprisonment and has been fined Rs 5,000. Das actually demanded a bribe of Rs 5,000 from a customer for clearing the 'Kisan Credit Card' loan of Rs 80,000. Das was caught red-handed by the CBI on receiving a tip off from the customer. Das' conviction came after seven long years. He has a right to contest the conviction in higher courts.
 
This is not an isolated case of bribery in a PSU bank. There are dozens of such cases handled by the CBI every year where the bribery amount is as low as Rs 5,000. The officers involved are often branch managers to senior managers. Imagine the waste of human resources and also of CBI's time in taking such cases to their logical conclusion. The arrest of Syndicate Bank 's Jain, however, is an exception. And it is not just a coincidence that the new government under Prime Minister Narendra Modi is now committed to wiping out corruption from the system. Modi, who often says Na Khaunga, Na Khane Dunga (neither will I take bribe, nor will I allow anyone to take it), has reportedly given a free hand to the agency (CBI) to go after the high and the mighty without any fear.
"A message has been clearly sent out that bribery and corruption are unacceptable, particularly with custodians of public money," says Nikhil Shah, Senior Director at Alvarez & Marsal India, a firm that specialises in turning around stressed cases.
 
There are some who smell political vendetta in all this. Jain's relative, who was also arrested by the CBI in the bribery case, is former Congress spokesperson Vineed Godha. " Syndicate Bank is a small bank-one-seventh the size of the SBI. CBI should have gone after bigger banks," says a banker on the condition of anonymity.
 
But whatever the critics may say, the arrest of a CMD of a PSU bank in a bribery case will act as a deterrent to those officers who take the depositors money for a ride.
 
The PSU bankers are already under scrutiny for a higher share of non-performing assets (NPAs) in their books as compared to their counterparts in private and foreign banks. With a 76 per cent lending share, the PSU banks contribute 85 per cent to the overall NPAs , as on March 2013.

Clearly, the disproportionate share of PSU banks points to poor governance structure, lax credit appraisal systems, near absence of concept of risk and also corruption. These systemic issues are directly linked to the way CMDs are appointed, the short tenures, musical chairs at top management, etc. While the government (be it the Congress or BJP) as a single largest shareholder of PSU banks will always play favourite to appoint a CMD, the stability at the top or fixed tenure will surely go a long way in bringing out a change.
 
The previous Congress-led UPA government had already made a beginning in the country's largest bank, the State Bank of India (SBI), by setting in motion a gradual road map for a five-year fixed tenure for Chairman. Arundhati Bhattacharya, who assumed the role of Chairperson last October, has a fixed three-year tenure. Bhattacharya's successor, in October 2016, will have a four-year tenure, while all chairmen thereafter will get five years.
 
"The new policy change will also allow all the four MDs to compete for the Chairman's post irrespective of their residual service on the date of the retirement of the Chairman," Bhattacharya told Business Today in an exclusive interview last month. The government should also replicate the fix tenure in all other PSU banks for effective leadership.
 
The P.J. Nayak Committee on reviewing the governance of PSU boards has suggested splitting the post of Chairman and MD. The bifurcation will allow an outside professional of eminence to come as a Chairman. "This change will improve the governance, board deliberations and bring fresh thinking to deal with risks," says M.D. Mallya, former chairman of Bank of Baroda. The private sector banks such as ICICI Bank and HDFC Bank have separate Chairman and MD. Take, for instance, K.V. Kamath, who is ICICI Bank's Non-executive Chairman, and Chanda Kochhar, who is the MD and CEO of the bank. Today, large borrowing proposals go to a credit committee at the headquarters where the CMD, executive directors and senior general managers take a call. "The splitting of CMD post will help in a focused role of a Chairman looking after the larger issues than sitting on a credit committee," says Mallya.
 
There are some banks such as SBI which are proactively reviewing the concept of risk in lending and also tightening, but the PSU pack as a whole needs a lot of prodding. The RBI has also come out with a new framework for containing NPAs to force banks to take early action. On his very first day, the new RBI Governor Raghuram Rajan had said: "The system has to be tolerant of genuine difficulty while coming hard on mismanagement or fraud." The RBI has introduced a new prudential framework from April this year for early detection of stressed assets. The regulator has asked banks to create a new asset classification called 'Special Mention Accounts' to identify early signs of stress based on stress indicators. The purpose is to increase the accountability of bankers.
 
There has been a shift in the banks's approach in addressing stressed assets. They are moving towards using the services of external professional management agencies who can provide transparent oversight and objectively drive operational improvements to increase the borrowers's cash flows. "While used extensively in markets like the US and UK, it is a relatively new concept in India. The banks who have used this route in India have seen tangible value created in their stressed assets," says Shah of Alvarez & Marsal. SBI had engaged the services of Alvarez & Marsal to help them in restructuring cases.
 
The RBI has also set up a credit central repository for information of large borrowers of banks. P. Rudran, MD & CEO at Asset Reconstruction Company (India) Ltd, says in a multiple lending, the credit information from a borrower doesn't come together-such as drawing power, utilisation of funds, monitoring of loans, default if any, non-fund facilities availed by borrower, etc. "The repository will help lenders to know all the credit information at one place. This will help in knowing the credit worthiness of a borrower," says Rudran.
 
Therefore, if a large borrower defaults, the information will be shared with other lenders on a quarterly basis. This measure will not only reduce the banks's leverage, but also keep the bad borrowers away from the banking system. A PSU banker narrates a case where a private sector bank took exclusive security (against the loan) from a corporate borrower, which the other bank didn't know. "We are now fighting with the borrower in a CDR (corporate debt restructuring) forum. The repository will help in knowing all the information well in advance," says the banker.
 
S. Ravi, a Non-executive director on the board of IDBI Bank, says: "The turnaround time for restructuring a stressed assets should be faster." Today, a lot of time is wasted as every lender in a consortium (lending) has to go back to head office for approval. "If the patient is on the death bed, you need to act fast," says a banker. The matter again lands at the doorstep of PSU bankers. And then there are limited DRTs (debt recovery tribunals), lack of faster bankruptcy laws, etc. A lot needs to be done to fix the structural issues at the PSU banks. "The positive action in the PSU space is happening too late. Don't expect any result too soon," remarks a private banker.
 

A Game of Shadows-Business Today-28th August 2014

The recent bribe-for-loan scandal involving Bhushan Steel and Syndicate Bank could just be the tip of the iceberg. The systemic rot runs much deeper.
 
 
Appearances can often be deceptive. A few months ago, all seemed well at Bhushan Steel. Indeed, in May, the steelmaker shifted its corporate office to a palatial building at Bhikaji Cama Place in New Delhi, an upscale commercial destination in the capital. It is a new 12-storey structure within the complex of the luxury hotel Hyatt Regency. But barely four months later, the company found itself at the centre of a storm that has rocked the banking sector.
On August 7, the Central Bureau of Investigation (CBI) arrested Bhushan Steel's Vice Chairman and Managing Director Neeraj Singal for allegedly offering a bribe of Rs 50 lakh to Syndicate Bank Chairman and Managing Director Sudhir Kumar Jain for extending its credit limit. Jain had been arrested five days earlier. Significantly, Bhushan Steel is already neck deep in debt and owes around Rs 40,000 crore to 51 banks, including State Bank of India (SBI), Punjab National Bank and others.

When Business Today visited the company's corporate office a few days ago, we were told that the senior management had stopped coming to work. A white Jaguar parked outside the main entrance to the lobby was in stark contrast to the nazar battu (a mask-like object supposed to ward off the evil eye) hanging about 15 feet above on the building façade. The huge visitors' lobby wore a deserted look. The silence at the corporate office was at odds with the hubbub at Bhushan's factory in Sahibabad Industrial Area, one of its three manufacturing units. Every two minutes, a big iron gate opens up to allow trucks to enter or exit the factory premises.
 The movement of trucks, mostly carrying scrap, is being supervised by security guards round-the-clock. "The incident is an aberration. The company has not defaulted so far," says a senior employee at the factory.
There is a dire need to strengthen the vigilance departments within banks, says CBI director Ranjit Sinha.Meanwhile, the company's lenders have planned to tighten the noose on the steelmaker. A consortium of banks last week decided to appoint three directors on Bhushan's board and conduct a forensic audit of its books, besides asking the company to sell its non-core assets to generate equity.

An email seeking an appointment with Bhushan Steel Chairman Brij Bhushan Singal went unanswered.
So how can a loss-making, debt-laden company manage to get additional loans? In the past three quarters till June 2014, Bhushan Steel has posted net losses. Its debt-to-equity ratio was 3.47 at the end of 2013/14; in contrast, the average debt-to-equity ratio of top five steel companies is just 1.7. "The Syndicate Bank CMD was extending credit limits to companies like Bhushan Steel even though it was not proper. Such cases appear to be quite rampant. There is a dire need to strengthen the vigilance departments within banks. If we come across more specific instances, we will examine them," says Ranjit Sinha, Director, CBI.

The CBI is also probing the role of middlemen in the scam. The involvement of Pawan Bansal, the mastermind in the Syndicate Bank scam and the man behind boutique investment bank firm Altius Finserv, has once again turned the spotlight on debt syndication agencies.
Indeed, for a long time, banks have not acknowledged the role of middlemen in manipulating the system. Following the recent incident, PSU banks such as Indian Bank and Andhra Bank have finally acknowledged their murky dealings and come down heavily on them. The Indian Bank has reportedly barred middlemen from entering its offices while Andhra Bank wants the borrower to accompany the middlemen during bank visits. Recently, Reserve Bank of India (RBI) Governor Raghuram Rajan said that "a good middleman acts as a broker. But if the point of a middleman is to pay bribes, that is obviously not okay. Its part of the whole set of governance issues that we need to look at."

This is a rare occasion when policymakers and bankers have accepted the presence of middlemen in the system. Last year, the CBI arrested a deputy managing director of SBI for colluding with a former official of the bank to sanction a Rs 400 crore loan to a Delhi-based company. Reportedly, the ex-employee was caught with Rolex and Omega watches, part of the kickbacks for the loan.

The [sensationalisation of the Syndicate Bank case] creates a pervasive kind of environment where trust is totally lost, which is not the right thing, says SBI chairperson Arundhati Bhattacharya.Former bank officials are generally employed by loan syndicate companies. Performing investment banking and consultancy functions and much more, these middlemen operate in a highly unorganised space, with no guidelines or RBI rules governing them. Even as the exact number of such companies is not known, observers point out that anyone who has any connections with bankers, secretaries or politicians and some financial background can pass himself off as a loan syndicator. "No licence, qualification or experience is required to set shop.

However, chartered accountants, former bankers from PSU and private sector banks and MBAs from low-rung institutes generally make the fit," says a mid-level officer working for a Delhi-based loan syndicate company. All interviews with executives of loan syndicate companies were off the record.

In most cases these syndicators scout for businesses looking to raise debt. With a large number of players in the market, the ones with a proven track record and connections to boast of, understandably, bag bigger deals. "The cut-throat competition among loan syndicators not only leads them to undercut their fees but also go to great extents to facilitate loans for clients," confirms another loan syndicator.

Click here to EnlargeThe promoter signs an 'engagement letter' with the loan syndicate company and pays a management fee, also called success fee, to the syndicator. The fee varies from 0.5 to 5 per cent of the loan amount after the approved loan sanction letter is facilitated by the middleman. Depending on the size of the syndicate company, roles of officials are well defined: some in the team solicit or scout for the business, others are masters at liaisoning with different departments, ministries and agencies. However, in some cases the roles overlap as well.

Industry insiders reckon that in three out of four loan approval requests, the services of middlemen are availed of and are especially sought after by companies with a turnover of Rs 500 crore to Rs 2,000 crore. From making plain-vanilla project reports mandated for every loan proposal to preparing intricate Credit Monitoring Analysis (CMA) reports that reflect the financial health of the company, the syndicates work in close association with the bankers to get the necessary approvals.

A mid-size promoter explains the dynamics. "The middleman unofficially shows the books to the banker and agrees upon a pre-decided amount for the loan, which the promoter eventually applies for," he says.
 
Loan syndicators point out that the policy framework is such that it leaves a lot of room for maneuverability. For example, portions of balance sheets are selectively highlighted to show the company in sound health while preparing the CMA report. There are a lot of grey areas and plenty is left to subjectivity. There are no RBI guidelines on the essentials of the CMA.

Collateral valuations can easily be manipulated even if they are prepared by external agencies. In the techno-economic viability (TEV) report for every new project, costs can be inflated, and loans can be taken against incorrect projections. Inflated project costs work to the advantage of promoters who avoid pumping in their own equity.
 
They are mandated to put in 30 per cent of the cost as equity in order to get 70 per cent debt from the bank. "Most promoters give an impression that they are utilising their share of 30 per cent equity whereas the entire project or operations is run on bank's money," says a middleman. CBI's Sinha also pointed to cases of siphoning off bank loans through over-invoicing of equipments, especially in the power sector. Eventually, a number of such loans turn into NPAs.

In lieu of speedy loan sanctioning, especially for over-leveraged companies, the middleman negotiates a percentage of kickback for the bankers. "No deal comes through without an obligation angle or kickback in case of an over-leveraged company," confirms a middleman. "We know where our file is, with which agency, officer and at what level. We accordingly network to move the file."

Kickbacks can range from cash, money transfer in foreign accounts via the hawala route to foreign holidays, luxury watches and solitaires. In the case of willful defaulters, the amount of kickback ranges from four to seven per cent of the loan amount as against 0.5-2 per cent in other cases.
 Depending upon the amount of the loan and the financial condition of the company, the middleman either pays kickback from his own success fee or seeks graft from the businessman. In a perfectly legitimate activity the promoter pays one time finance charges to the syndicate after he facilitates the loan. The cash kickbacks and gifts are shown as business promotion expense in his books. The big cash deals however happen in black.

Bankers often can't be blamed for sanctioning more than the due amount to promoters if TEV and CMA reports are manipulated. "These are all technical reports. How is the banker expected to know technicalities? He would go by the report and take a credit call on the basis of the papers presented to him," says a middleman." According to experts, the big problem is when the bankers, in order to show a good record, suggest ways to promoters to white-wash bad loans. "At one end, he has to deploy deposits to generate income. On the other hand, when such cases emerge and the bankers go slow on credit, they are pulled up," says a PSU banker.

The practice of paying off debt by taking fresh loans is common among overleveraged companies. This 'evergreening' of debt is rampant and the RBI governor has already voiced his concern about the practice. "The natural and worst way for a bank management with limited tenure to deal with distress is to 'extend and pretend' to evergreen the loan, hope it recovers by miracle, or that one's successor has to deal with it. The natural incentive for a promoter to deal with distress is to hold on to equity and control despite having no real equity left," Rajan had observed at a banking seminar last November. "Not all bankers and promoters succumb to these natural incentives but too many do," he added.

Bank loans are classified as non-performing when the borrower fails on repayments after 90 days. Gross NPAs for the banking sector rose to 3.85 per cent as on March 2014 from 3.26 per cent in the previous year, as per ratings agency Care Ratings. Even as there is no clear consensus on a direct link between corruption in banking and a jump in NPAs, it exposes the vulnerability of the banking system.

PSU banks, with a 76 per cent share of lending, contributed 85 per cent to the overall NPAs as on March 2013. "Ten per cent of NPAs are related to corruption," estimates a partner at a law firm. The government is worried. Finance Minister Arun Jaitley recently said "some recent incidences have been disturbing. I only hope that they are a drop in the ocean".

Arundhati Bhattacharya, Chairman, State Bank of India, says bribes-for-loans cases are exceptions. "The [sensationalisation of the Syndicate Bank case] creates a pervasive kind of environment where trust is totally lost, which is not the right thing," she says.

Naina Lal Kidwai, Chairman, India and Director, HSBC Asia Pacific, says graft cannot be the prime reason for growing NPAs. "In most cases, it is just used to speed up a proposal rather than getting a loan sanctioned. Most NPAs are on account of slowdown in the infrastructure sector which has been marred by bottlenecks," she asserts.

There are some who smell a political vendetta in the scandal involving Bhushan Steel. Jain's relative, who was also arrested by the CBI in the bribery case, is a former Congress spokesperson Vineed Godha. "Syndicate Bank is a small bank, one seventh the size of SBI. The CBI should have gone after bigger banks," says a banker on condition of anonymity.

The problem, according to experts, began during the 2008 downturn when stimulus packages were announced by the government to revive the economy. The banks began to lend generously resulting in piling up of NPAs and stressed assets. As per a PwC report, the total banking credit outstanding as on March 2013 was Rs 57.90 trillion (one trillion is 100,000 crore) out of which stressed assets (a combination of gross NPAs and restructured assets) are Rs 5.91 trillion - 10.2 per cent of the total credit outstanding. In other words, the rot on the Indian banking sector's books tote up to over 5.5 per cent of the country's GDP.

Some companies that have gone through corporate debt restructuring in recent time includes Hotel Leelaventure, Suzlon, HCC, Bharati Shipyard, GTL Group, 3i Infotech and KS Oils. Pankaj Agarwal, Vice President at Ambit Capital, says these stressed accounts can be classified into three categories. "Genuine cases impacted by the economic slowdown, diversion of funds by the promoters to other ventures which have been impacted by the slowdown, and promoters siphoning off the funds for personal use."

Analysts say the problem of stressed assets has swelled on account of promoters unable to raise fresh equity through the capital market to pay off their debts. Sources say the government is seriously considering implementing the P.J. Nayak committee report released in May this year. The report has called for an overhaul of state-run banks. It suggests splitting the post of chairman and managing director, and also points out how appointments to the board is a politicised process.

The Nayak committee report also picks holes in the law governing the public sector banks. It says that the Bank Nationalisation Act of 1969 is too primitive and irrelevant to cope with the needs of corporate governance. Private sector banks, on the other hand, are governed by the Companies Act, which stipulates stricter norms.

Senior banker Rana Kapoor, President of industry body Assocham, agrees that solutions to the current problems lie in strengthening the corporate governance structure. "Right now, the CMD takes care of both policy and implementation aspects. A single person should not become a power centre." Private sector banks such as ICICI Bank and HDFC Bank have separate chairman and managing director positions. At ICICI Bank, for instance, K.V. Kamath is the non-executive chairman and Chanda Kochhar is MD & CEO.

Even as some feel the splitting up of roles is a step in the right direction, it can only work well if the chairmen are not political appointees. "If the appointments are politicised it will not solve any purpose. The chairmen's post has to be in good hands. In private sector banks, chairman, MD and CEO are different with well defined roles," says Krishnamurthy Subramanian, Assistant Professor at the Indian School of Business and a member of the Nayak committee.
"Also, there are independent board directors. A lot of governance and processes comes through the board. If the board is not strong there is temptation to indulge in such practices."

Banks are now also using the services of outside consultants to restructure loans. SBI, for instance had engaged the services of Alvarez & Marsal. "It's a relatively new trend and Indian banks have been benefiting from it," says Nikhil Shah, MD, Alvarez & Marsal.

To minimise the risk for the banking sector, the central bank has also proposed to cut the exposure limits of banks to a group of borrowers from the present 40 per cent to 25 per cent of a bank's capital. The RBI has also set up a credit central repository for information on large borrowers of banks. However, a lot also will depend on the macroeconomic outlook as well. If the Indian economy revives, the business environment improves and the stock markets rally, it could come as a shot in the arm for indebted corporates.

Meanwhile, even as the government and the RBI plan to implement the Nayak committee's recommendations, businessmen are already sceptical about the move. A Delhi-based businessman says this move will only slow down the approval process and make securing of the loans costlier. "Now we will have to grease more hands. This certainly will not end graft."
 
 
 
 
 
 

Monday, August 25, 2014

Scam After Scam --Default By Mahua TV Rs1724 Crore - Is It Not Case Of Fraud And Forgery ?

Cases of defaults in public sector are many. List of accounts causing loss to banks either b fraud or by bad debts is long. Scam after scam are coming to light which were hitherto hidden in the system. CMDs of banks who were involved in credit scam or who are responsible for rise in volume of bad debts in PS banks have either retired or promoted to higher level. They have earned lacs of rupees as incentive from MOF as because they booked credit growth higher than target allocated to them. Same CMD who earned huge incentive are now denying wage hike to bank staff when they take part in Bipartite settlement  from the platform of IBA

After Kingfisher, Winsome diamonds, Deccan Chronicles, Bhusan Steel and many cases of default exposed in recent past , now case of Mahua TV has erupted causing a loss of Rs.1724 crore and another cases of Rs.9800 crore of Jet Airways in in pipeline. Hundreds of others will follow.

Wait .... positive minded politicians and bureaucrats are hopeful of achhe din in banks.

They (gang of CMD in IBA and Ministers in GOI) allow lacs of crores of rupees lost in bad debts, another lacs of crores lost in write off of bad loan, another lacs of crores locked in restructured loans and so on. But they are  not ready to agree to give respectable wage hike to staff who are innocently working day and night for keeping their bosses happy and for doing service to politicians, poor villagers and all. Very soon bank staff will also realise that they are being cheated by top officials to whom they salute all the time with the hop that they will take the bank to greater height.

Mahuaa TV raised Rs 1,724 crore in loans through deception-Times of India

NEW DELHI: Investigations into how Bhojpuri channel Mahuaa TV — one of the biggest bank loan defaulters -- raised hundreds of crores from PSU banks reveal that almost everyone seemed to have dipped into the cash pot of India's banks, or at the least, feigned willful ignorance as every norm was broken. Along with it, there was forgery and fraud.

The details are startling. Through five companies, Mahuaa TV's promoters raised Rs 1,724 crore from 14 nationalized banks. The highest amount of Rs 760 crore went to Century Communication, while Rs 334 crore went to Pearl Vision, Rs 234 crore to Mahuaa, Rs 201 crore to Pixion Media and Rs 195 crore to Pixion Vision.

On August 20, TOI had reported the possibility of India's second biggest loan defaulter, Winsome Group, diverting most of the loans raised from PSU banks abroad.

According to available details, the way Mahuaa TV obtained the loan reflects the rot in the Indian banking sector. Consider how Mahuaa Media obtained a term loan of Rs 75 crore from Punjab National Bank through an application on December 15, 2009, for setting up of state-of-the-art digital studios in Noida and Kolkata at an estimated cost of Rs 304.77 crore.

The application, signed by promoter Anand Tewari, contained a 150-page project report prepared by SBI Caps. The report said the promoter would bring in his share of Rs 101.59 crore and the balance Rs 203.18 crore would be financed through long-term loans by a consortium of Punjab National Bank, Union Bank of India and Bank of Baroda.

The site for the digital studio in Noida had not been fixed and no provision was made for leasing of studio premises in Noida in the SBI Caps report. Investigators believe there are several other lacunae in the SBI Caps report.

At PNB, before sanctioning the loan, nobody bothered to visit the Mahuaa Media office, though the company was a new customer for the bank. PNB officials also did not bother to obtain a credit opinion from existing bankers of the company. "No independent verification of the suppliers or the prices of equipment to be financed by the bank was done by the branch," an internal report said.

"There were major lapses by SBI Caps... The SBI Caps team led by vice-president Shalini Srivastava had blindly relied on the names of suppliers and prices of equipment provided by the company without independent verifications," the report said. Further, processes in loan sanction were done violating PNB's own guidelines for such approvals.

On March 25, 2010, P K Tewari, a promoter of Mahuaa TV, submitted a lease deed for a studio in Noida, and claimed that the teleport had been installed. However, it has now emerged that this lease was forged. The original deed was to a sister company, and there was no permission to install a teleport.

Not just PNB, no officials from the other two banks which loaned money for the project — Union Bank of India and Bank of Baroda — bothered to visit the office or the proposed studio of Mahuaa TV in Noida.

However, officials from all three banks visited a Kolkata property of the company that was mortgaged. Senior PNB manager Basant Gupta, Union Bank of India official B K Alagh and Bank of Baroda senior manager O P Sambharia travelled to Kolkata. However, none of them bothered to visit the next door studio and company office in Noida.

Sambharia spent an hour in the Kolkata studio of Mahuaa and certified that equipment invoiced for Rs 100 crore had been installed. It was a single page sketchy report.

SJA Technical Consultants, a bank-approved valuer for plant and machinery, certified in a report in September 2010 that studios were functional and verified the installation of equipment as per invoices. The invoices later turned out to be forged. The consultants certified equipment installed in plot numbers 13, 14, and 17-B of Sector 16A of Noida, whereas the loan was for setting up of a studio just in plot number 14.

K D Shah of SJA Technical Consultants travelled on tickets bought by Mahuaa with one of its senior executives on September 27. Four days earlier, he had submitted his report, claiming to have visited Kolkata already.

Another professional, Rajendra Srivastava of Garg A Associates who was commissioned to value plant and machinery, admitted during investigations that he couldn't identify the equipment mentioned in the invoices due to lack of technical expertise.

Investigations have also thrown up similar omissions from panel advocates of the banks, their auditors and others involved in approving the loan.

Link times of India

Icra downgrades Jet Airways' loan-Business Standard

Jet Airways has total debt of about Rs 9,800 cr, in rupee and dollar denominations
 
Following delays in Jet Airways servicing its interest payments, credit rating agency Icra has downgraded the company’s loans from ‘BB’ to ‘D’ (default grade). The agency has brought the airline’s long-term and short-term loans and fund- and non-fund based limits amounting to Rs 7,460 crore under this rating.

Jet Airways has total debt of about Rs 9,800 crore, in rupee and dollar denominations. This includes about Rs 6,000 crore of aircraft-related loans, term loans and working capital. The Naresh Goyal-promoted airline continues to spend about Rs 1,000 crore on interest every year.

The carrier, co-owned by Etihad Airways, plans to raise a $150-million foreign loan (in addition to $150 million raised earlier this year) to refinance its high-cost debt. Owing to high operating costs, weak revenue growth, one-off maintenance expenses and an impairment charge, the airline reported a record loss of Rs 4,129 crore for FY14.

Losses have put pressure on the airline in repaying creditors. The airline’s auditors, Chaturvedi & Shah and Deloitte Haskins & Sells, said repayment of dues have been delayed by as many as 60 days. However, the airline has managed to clear the dues on balance sheet as of May-end, according to its annual report for FY14.

A senior public sector bank executive said it was no secret that the airline was facing stress, after reporting huge losses for FY14. Lenders, however, aren’t unduly worried about the rating downgrade, as rating agencies immediately downgrade an entity even if payments are delayed by a year. Banks are worried about the overall health of the airline sector, as memories of the Kingfisher Airlines crisis were still fresh, the bank executive said.

At Jet Airways’ annual general meeting earlier this month, chief financial officer Ravichandran Narayan told shareholders the company was rationalising operations, with a focus on international routes. The company has finalised a three year business plan to increase revenue and control costs. For the first quarter of FY15, the airline cut its loss to Rs 217 crore, primarily through increased fleet utilisation and improved yields.

“It is very disappointing that the recently published ICRA downgrade is based on a historic delay in debt servicing, which occurred and was resolved in the previous financial year. In fact, there were no outstanding default in the repayment of dues to the financial institutions and banks as at 31 March 2014. Jet Airways can confirm that the airline is current on all its loan obligations and interest payments. Our recently published first quarter results show a positive trend in performance and that the airline’s three-year business plan is on track. Airline representatives will meet the agency on Monday to set the record straight,” Jet said in a statement.
 
 
Syndicate Bank scam: Criminality a major reason for current bad debt pile of lenders
 
A slowing economy and clearance delays for projects are the two commonly cited reasons for the spike in bad loans in the banking system, over the past few years in particular.
 
There could be a third – criminality among individual bankers and wrongdoing firms-which might have equally contributed to a sizable part of the sticky assets.

That’s something even the regulator hesitates to admit.
In the post monetary policy presser on 5 August, Reserve Bank of India (RBI) governor Raghuram Rajan cautioned against highlighting criminality as the reason for all bad loans ills of banking system.

“One should not extrapolate this (arrest of former syndicate Bank chairman S K Jain in bribe case by the Central Bureau of Investigation (CBI) to the entire public sector banking system and assume that all the problems in the public sector banking system are because of criminality rather than because of other factors,” Rajan told journalists to a question.

Rajan is correct in saying that “all the problems” are not because of criminality rather than other factors. But a look at the bad loan scenario would tell you, reasons for a sizeable chunk of bad loans can be indeed attributed to the element of criminality.

A lot will depend up on what defines criminality in a banking transaction. If the definition of criminality involves diversion of funds borrowed from banks to a non-stated purpose, with or without the knowledge of the banker, then it makes a perfect script for bad loans in many cases.

Similalrly, if a rich promoter is hesitant to pay back his banks even when he has the money, the promoter should well be treated as a criminal because he is fooling the banking system, which handle public money. A number of cases have happened in the past, where the promoter is a willful defaulter. In state Bank of India (SBI) alone, outstanding loan amount involving willful defaulters exceed Rs 10,000 crore.

In the past 3-4 years, the number of cases involving fund diversion by corporations from the stated purposes, cases of unlawful activities involving public sector bank officials and number of willful defaulters have significantly gone up, giving enough reasons to suspect that reasons for sharp rise in the pile of bad loans in the country’s Rs 86 lakh crore banking system has come through criminal conspiracy and not necessarily attributable to the much hyped twin reasons.

A look at some of the cases, where there are elements of fund diversions or willful default, points to characteristics of criminality in the conduct of the borrower.

Vijay Mallya-promoted Kingfisher Airlines defaulted Rs 6,500 crore of loans to a 17-bank consortium led by SBI. After some repayments, the due are currently about Rs 4,000 crore. Banks are in the process of declaring Kingfisher as a willful defaulter.

The CBI has registered a case against the airline in connection with the loan exposure. Banks argue that they have a good case to declare on account as a willful defaulter citing evidences for fund diversion and ability of the promoter to mobilise funds.

Similarly, in the case of Winsome Diamonds, the CBI have begun a probe to the working of the company after it allegedly defaulted Rs 6,500 crore worth of loans to a host of banks, making it equal in size to Kingfisher. While the company claims that the default has occurred following non-payment of dues by its trading partners in the Middle East.

But the banks haven’t bought that excuse and have slapped legal notices against the firm.

In another case, in 2013, the CBI had filed case against Deccan Chronicle Holdings Ltd (DCHL), for alleged cheating, fraud. According to some of the bankers to DCHL, part of the reason the company faced the crisis was diversions of funds to expansion plans of the group, which was not stated to the lenders at the time of taking the loan.

Also, there were lack of coordination among the banks in the consortium and Listed above are only a few prominent cases. The list is long.

The fate of the Rs40,000 crore loan to Bhushan Steel is currently uncertain in the backdrop of serious charges of bribery by the firm to bankers. Even though the loan is at present standard, bankers fear that any possible slippages in the loan can have huge impact on the banks in the consortium.

In November 2010, the CBI busted a corporate loan racket in Mumbai involving the former chief of LIC Housing Finance and several other officials of public sector banks, where investigators found that middlemen bribed bankers to facilitate loans to their corporate clients in violation of norms.
Indian banks are already reeling under the pain of stressed assets. The amount of bad debt of 40-listed banks in the country stood at Rs 2.5 lakh crore in the banking system as of end June.

Among the banks with high level of gross non-performing assets (NPAs) are United Bank of India (10.49 percent), Dhanlaxmi Bank (7.17 percent), Central Bank of India (6.15 percent), Andhra Bank (5.98 percent) and Indian Overseas Bank (5.84 percent).

Besides the bad loans, a huge chunk of loans are being restructured, which is estimated to be between Rs 5 lakh crore to Rs 6 lakh crore. A sizeable chunk of such loans could turn bad too in the absence of significant economic revival. Banking system is the backbone and a proxy to the economy, hence damages caused to it can have serious ramifications on the overall economic stability.

The fact is that criminality is a major reason for the current bad debt pile of Indian banks. The asset quality scenario could worsen if the regulators and the banks do not recognize the root causes of the bad loans of Indian banks.
The element of criminality in a banking transaction, whether it comes from any of the three parties involved in the transaction—the banker, the borrower or the mythical middleman— ultimately hits the banks, which are guardians of tax payers’ money.

The first task of the central bank is to have the courage to acknowledge the problem, see the larger picture and not ignore the recurring signals.

Friday, July 25, 2014

Why Public Sector Banks Are Sick

Inspite of all efforts said to have been taken by Reserve bank of India and Ministry of Finance, stress assets in public sector banks are relentlessly increasing. Every quarter some bank of the other exhibit rise in bad debts and fall in profit. In the quarter ended June 14 some banks like PNB, Indian Bank, Allahabad bank have already declared bad results. 

Only difference is that some officials of some banks are clever and some are less clever. Some banks get success in concealing bad debts in March Quarter and some others in some other quarter. Some banks are expert in art of hiding Non Performing Assets by adopting the process of evergreening of loan and some other are apt in process of restructure, reschedule and rephasing the bad loan so that it remains in standard category. Some other banks are selling bad debts to Asset Recovery Companies and some other banks are sacrificing good money of banks by giving extraordinary discounts to bad borrowers to recover the money and some others think it wise to write off bad loans.  

None of the bankers are interested in real improvement of quality of lending and effective steps for recovery of dues form bad borrowers,  , I say none because majority of top officials are bent upon simply hiding the bad loans by applying easy tools so that they may win the heart of clever politicians. Government of India or governments of states are little interested in recovery of loans from bad borrowers because they focus only on credit growth, rightly or wrongly. Politicians are themselves beneficiary of bad loans directly or indirectly and hence they do not like to have strong legal action against bad borrowers. 

This is why officials in judiciary and in administration or in Debt Recovery Tribunals show casual approach towards recovery and hence cases against bad borrowers do not result in real recovery. There is sharp rise in bank cases for recovery pending in various courts. Officials believe in peace process or you may say postponement of remedial measures so that they may retire from banks peacefully without facing any penal action. Bad borrowers who have taken crores of rupees in loan and who are not willfully repaying the dues lead luxurious life, change their firm's name or start business and lastly declare them bankrupt. 


Bank officials or RBI officials do not like to nip in the bud , they willfully and strategically delay the process of recovery and during this delay period , borrowers manage their assets and discover ways to safeguard them from bank's action. Two to three decades ago United bank, Indian Bank and UCO bank were identified as bad banks and there news of merging them with other stronger bank. But clever politicians in nexus with clever bank officials manipulated Balance sheet of these banks and kept the bank as standard. Now after two decades symptom of sickness are again surfacing not only in these three banks , but almost in all banks, even in so called strong banks like State Bank, Punjab National Bank, Bank of India and so on. 

If forensic audit of all these banks are carried out honestly, I think greater scam will come on the surface. Fraudulent activities are persistently and consistently going on in recruitment, promotion, lending, developing infrastructure, opening of new branches, opening of new ATM etc will come to light and people of India as well as bank staff who are denied wage hike for less profitability of banks will also understand the ground reality of banks.

There is not only mismatch in assets and liabilities of public sector banks but also in Human resource of these banks. Liquidity problems of these banks are self created problem. They mobilize short term fund to lend in infrastructure projects. They lend money to write off or to sacrifice bank’s fund in compromise. It is only public money which is sacrificed on the altar of self-oriented motives.

Some banks although book profit but they are unable to earn profit which they should earn in real sense. Profitability is on continuous downfall trend.

Similarly these banks recruit bank staff sometimes in scale I and sometimes in scale II and scale III. It means they are using liberty to give benefits to some officers and deprive others of rise in career. 30 years experienced officers are paid same salary as three year old officer. This happens in these banks only. Officers are not getting promotion in thirty years and some officers are getting promotion in three years. This mismatch has damaged the fundamental work culture and promoted flattery and bribery culture and this bad culture as a matter of fact forms the root cause of downfall of these banks.

RBI conducted forensic audit of United bank and that of Allahabad bank a few months ago, but the outcome is not known to common men of India. Every report is managed and manipulated as per whims and fancies of politicians. This is why system does not change; only new rules and policies are framed. Old wine in new bottle has become the working style of bank, politicians and Government as a whole. Neither judiciary nor administration nor police officials nor CBI and CVC nor auditing officials can function honestly and devotedly for the sake of growth of India.


It is quite evident from news appearing in Newspaper pertaining to United Bank and ongoing forensic audit , that health of United Bank of India is now critical and RBI has thought it better to keep it in ICU (Intensive Care Unit) by stopping new loans. 

It is though too late for RBI and Ministry of Finance to understand and realize the deep rooted mess prevalent in United Bank in particular and in all public sector banks in general. Still RBI is not ready to understand that health of almost all banks is almost similar to United bank .They do not want to attract the displeasure of corrupt ministers who appointed corrupt officials as ED and CMDs of the past.

 Only difference is that case of UBI is exposed by unbiased and bold CMD of the bank whereas CMDs of other banks are still hesitant and timid to declare their real volume of bad assets .It is because majority of them know that it is only the top officials of these banks who sanctioned high value loans to serve their vested interest willfully sacrificing the interest of the bank as also that of bank staff.

 RBI should at least now call the explanation of past EDs and CMDs of United Bank to know why they failed to stop rise in bad assets and why they continue to loot or allow the loot in the bank in the name of credit growth and to please the ministers and politicians. 

Will RBI now at least  fix accountability on top officials as also on ministers and RBI officials who  were indirectly involved and indulged in reckless lending and careless monitoring of credit made by them. 

Will RBI now ask retired ( or those who are posted in other bank now)  EDs and CMDs why they concealed bad debts for years together? 

It is to be noted here that NPA which are now coming on the floor are not newly created NPA but simply exposure of NPA hidden willfully for years and decades. 

Even now it is open secret that majority of bankers are unethical evergreening process to keep bad debts in standard category. By their dirty tools CMD and EDs of every band used to project attractive balance sheet and win the hearts of Minister but spoil the future of all including bank staff, bank customers and investors in the bank.

It is very easy to penalize junior and middle level officers of the bank and deny bank staff their right of respectable wage hike but it is very hard to accept the truth and punish the real guilty top officials of the banks as also of the government. I condemn FM who holds bank staff responsible for rise in bad debts and for fall in profits of the banks and then deny bank staff a respectable wage hike saying that entire profit of banks cannot be given in wage hike. FM should introspect to find out who are real culprits for fall in profits of the banks.

Last but not the least 

Are politicians not responsible for polluting and damaging the credit discipline and repayment culture in banks by using Loan Melas and then by advocating write off and compromise to enhance their vote banks? 

It is only politicians who are primarily responsible for the current poor health of banks. When protectors become destructers ,none can save banks from further damage.


Great writer late Munsi Presmchand said long ago   

"jab rakshak hi bhakshak ban jaye to vinash nischit hai"


Also Read





RBI fines 12 banks Rs 1.5 crore for Deccan Chronicle default-Times of India


MUMBAI: Reserve Bank of India has fined 12 banks Rs 1.5 crore ​​for not following proper guidelines in advancing loans to the Deccan Chronicle group which has defaulted to the extent of Rs ​4000 crore.

​The Reserve Bank had carried out a scrutiny of the loan and current accounts of Deccan Chronicle Holdings Ltd., in certain branches of these banks in late 2013. Based on the findings of the scrutiny, the Reserve Bank issued show cause notices to these banks in March 2014, to which the individual banks submitted written replies. " After considering the facts of each case and the individual bank's reply, as also, the personal submissions etc., by some of the banks before its Committee of Executive Directors, the Reserve Bank came to the conclusion that some of the violations were substantiated and warranted imposition of monetary penalty," said RBI in a statement.

The 12 banks that have been fined are Andhra Bank (Rs 10 lakh), Axis Bank (Rs 15 lakh), Canara bank (Rs 10 lakh), Corporation Bank (Rs 10 lakh), HDFC Bank (Rs 5 lakh), ICICI Bank (Rs 40 lakh), IDBI Bank (Rs 15 lakh), IndusInd Bank (Rs 10 lakh), Kotak Mahindra Bank (Rs 10 lakh), Ratnakar Bank (Rs 5 lakh), State Bank of Hyderabad (Rs 10 lakh), and Yes Bank (Rs 10 lakh)as determined above.

What was unusual about the loans was that these advances were not backed by enough security. The mortgaged assets are expected to fetch a third of the loan exposure. Secondly, most of the lenders were unaware of the extent of leverage by the company and the exposure of other lenders to the group. Sources said that RBI was shocked that advances were made by lenders without speaking to each other.

​T​his action is not intended to pronounce upon the validity of any transaction or agreement entered into between the concerned bank and the borrower the central bank said.​

​In July, Canara Bank, which has an exposure of Rs 350 crore to Deccan Chronicle, said that the company's promoters had approached the bank for restructuring. However the bank had asked for a one-time settlement as the promoters might not be in a position to meet the huge funding requirement.
Last year the Central Bureau of Investigation had filed a case of cheating, fraud and criminal conspiracy against Deccan Chronicle Holdings chairman T Venkattram Reddy, vice-chairman and managing director T Vinayak Ravi Reddy , vice chairman PK Iyer as well as the company's auditors CB Mouli & Associates.


Bad loans take a toll on AllBank net--The Telegraph

Calcutta, July 25: Public sector Allahabad Bank has reported a 72.71 per cent dip in net profit at Rs 112.7 crore in the first quarter ended June.

Net profit stood at Rs 413.09 crore in the same period a year ago.
The city-based lender’s bottomline was dragged down by a sharp rise in provisioning to offset an increase in bad loans.

Profit from treasury operations was also lower at Rs 203.31 crore against Rs 206.54 crore in the same period a year ago.

The bank’s total provisioning during the quarter stood at Rs 851.94 crore against Rs 445.50 crore in the year-ago quarter.

Gross non-performing assets (NPA) increased to Rs 7,619.06 crore from Rs 6,164.47 crore a year ago. Gross NPA, as percentage of advances, was 5.48 per cent against 4.78 per cent a year ago.

Net NPA stood at Rs 5,271.74 crore against Rs 4,921.74 crore. Tax expenses increased to Rs 254.87 crore from Rs 163.33 crore in year ago period.
Net interest income — the difference between interest earned and interest spent — increased 22.7 per cent to Rs 1,609.7 crore from Rs 1,312 crore in the corresponding year-go quarter.

As a result, the capital adequacy ratio under Basel II norms declined to 10.25 per cent from 11.07 per cent a year ago. According to Basel III norms, the ratio fell to 9.99 per cent from 10.60 per cent.

At the end of the quarter, the bank’s total business grew 4.24 per cent to Rs 3,22,231.19 crore.

There was a rise in credit to both agriculture as well small scale industries. Credit to the agriculture sector grew 30.54 per cent to Rs 23,243 crore from Rs 17,805 crore a year ago. Loans to the retail sector stood at Rs 19,635.72 crore against Rs 17,757.87 crore .

Chairman and managing director Rakesh Sethi had identified these sectors as the focus areas in the absence of lack of appetite for loans from the corporate sector.
The bank is planning to achieve a total business of Rs 3,80,000 crore by March 2015, a growth of 14.54 per cent.
The Allahabad Bank scrip today ended at Rs 118.75, an increase of 1.28 per cent over the previous close on the BSE

Wednesday, July 9, 2014

Liquidity Problem In Banks

Allowing banks to raise long-term bonds will ease liquidity pressure: India Ratings-
(read my views given below)

Mumbai, July 9:  
Permitting banks to issue senior long-term bonds will help correct asset-liability mismatches (ALMs) and provide a tool to improve liquidity coverage ratio, according to India Ratings and Research (Ind-Ra).
 
Growing divergence in the tenors of loans and deposits has resulted in rising ALMs in government banks. For some banks, there is even a shortage of ready collateral that could be used to repo with the Reserve Bank of India in a liquidity squeeze, the credit rating agency.
 
Senior bonds are rated at the same level as banks’ Long-Term Issuer Rating in the absence of a bank resolution regime and are not treated like loss-absorbing hybrid capital. Government banks have easy access to long-term investors such as insurance and pension funds and hence are well placed to tap this market.
 
Senior bonds issued globally by Indian banks have a good investor base. A similar (and possibly larger) market can be created among domestic investors.
 
“Indeed, investors take comfort from the benefits of government support, which is reflected in Ind-Ra’s stable Long-Term Issuer Rating of government banks during the economic slowdown in FY13 and FY14,” Ind-Ra said.
The existing guideline that permits banks to issue ‘infrastructure bonds’ has not found favour with investors, perhaps due to the implicit link with a sector that has been struggling to perform for some time.
 
The Indian banking system’s dependence on short-term liabilities has grown to a point where refinancing pressures are hurting margins. This also poses unique policy challenges, including diluted monetary transmission, a persistently flat-to-inverted yield curve and crowding out corporates from the commercial paper market.
 
Ind-Ra assessed that deposits maturing within one year increased to almost 50% of the total deposits in 2014, up from 33% in 2002. The ratio dipped in 2013 after growth in advances had moderated, before rising in 2014.
A significant part of these deposits had maturities within six months and, for some banks, included a growing share of wholesale money market borrowings. The share has grown independent of the interest rate cycle and will likely be explained, paradoxically, as a strategy by banks to preserve margins by remaining at the short end of liability tenor, the agency said.
It added that the domestic yield curve is likely to remain flat to inverted, unless issuance volumes shift to the long-end of the curve. Regulatory initiatives that help banks address this challenge and push long-term savings will benefit the economy in the long run.
 
Banking reforms likely to arrive in Modi govt's first Union budget-Hindustan Times
 
India's first national budget under Narendra Modi's reform-minded government is likely to include measures making it easier for banks to access long-term funding, according to sources close to the situation.

A growing asset-liability mismatch in the Indian banking system and the need to ensure a steady flow of long-term capital for the infrastructure sector have pushed officials to consider reforms to the use of senior bonds as a bank funding tool, the people said.

Details of the measures are still under negotiation ahead of the July 10 Union Budget statement, but the discussions ongoing within the finance ministry underline the new government's determination to address the failings of India's banking system.

India's mostly state-owned lenders have shied away from issuing senior bonds in the local market simply because the Banking Regulation Act of 1949 does not explicitly allow banks to do so. Some banks have circumvented the rules by issuing senior debt overseas, but most lenders remain heavily reliant on deposits and short-term funding.

Almost half of all bank funding in the country matures in one year or less, according to analysts, while nearly 80% of the Indian banking sector's funding is held in deposits.

At the same time, Indian banks are heavily exposed to the infrastructure sector, typically through long-term loans. As of April this year, Indian bank lending to the infrastructure sector stood at Rs. 8.4trn, up 11% year-on-year and nearly 15% of all Indian credit.

Such a mismatch in maturities raises the risk of a systemic crisis should short-term funding markets seize up, as proved to be the case in the US in 2008.

It also complicates efforts to raise long-term funding for sorely needed infrastructure projects, and leaves developers exposed to varying interest charges that can have a big impact on running costs.

"Banks keep annual resets on project and corporate loans so that they can align their short-term funding costs with long-term liabilities," said a DCM banker. "Banks generally avoid raising long-term money at market rates."


Big potential

Senior bonds are an established source of bank funding worldwide, and the potential for an Indian market is huge. Assuming restrictions are lifted, market participants believe Indian banks could issue at least Rs. 500bn-Rs600bn (US$8bn-$10bn) of senior bonds in the first year at tenors mainly of 10 to 30 years.

The government is expected to take a flexible approach to allowing senior bank bonds given the failure of a similar attempt in the past.

In June 2004, the Reserve Bank of India allowed banks to issue long-term bonds but attached a lot of conditions.

The RBI banned call and put options on these long-term bonds, and restricted the total amount of bond sales to no more than a bank's exposure to infrastructure loans with more than five years' residual maturity. Hardly any bank attempted such an issue.

The lack of senior bonds has also distorted risk pricing. "As Indian banks do not issue senior bonds onshore, their subordinated bonds get priced like senior bonds," said Atul Joshi, CEO of India Ratings and Research, the local arm of Fitch.

"In 2004 when the RBI allowed long-term bonds of a minimum five years to be issued, the pricing of those bonds also automatically got linked to the bank's subordinated bonds, plus investors started asking for a premium for the infrastructure risk."


Pricing skewed

Indian investors see little difference between senior and subordinated bonds, an approach that has been reflected in the rating of these instruments. But Basel-III rules, which require subordinated bonds to carry loss-absorbing features, are challenging that approach, and analysts believe a pricing differential between senior and subordinated bonds will eventually open up.

Senior bonds should come at least 5bp-10bp tighter than the subordinated Basel II-compliant outstanding bonds from the same bank, Joshi said. Other market participants said the spread between the senior and subordinated bank bonds might even go up to 50bp-100bp if a proper yield curve is established - as is the case in other, more developed markets elsewhere.

Privately owned lender ICICI Bank has made a few attempts to issue senior bonds onshore. In March 2013, the lender issued Rs11bn of 5.3-year senior bonds paying a coupon of 9.0%, 15bp-20bp tighter than its subordinated bonds at the time.

A flat-to-inverted rupee yield curve is likely to provide a further catalyst for long-term issues. At current benchmarks, an Indian company with a local Triple A rating can expect to raise 15-year money at a yield only 25bp higher than for one-year funding.

Modi's government has already approved a number of stalled infrastructure projects, and there is a strong case for banks to fix their asset-liability mismatches. The previous government set an ambitious infrastructure investment target of US$1trn in the five years ending 2017.

Nearly half of this investment was to come from the private sector, including banks - split roughly into US$150bn of equity capital and about US$350bn of debt.
Link Hindustan Times

My Opinion On Liquidity Issue


It is unfortunate that all policies framed by RBI and government of India in last two decades are directed to reduce savings and increase spending.

First and foremost is policy to reduce interest rate in banks during reformation era started from 1991 under the guidance of economist Mr. Manmohan Singh has made credit delivery from banks comfortable for corporate sector and small traders but reduction in interest rate on deposits has played more damaging role in last two decades.

Due to decline in interest rate on deposits made in banks, people are no more interested in keeping their idle money in banks but searching other avenues like gold or real estate to park their surplus income. This is why there has been continuous fall in growth of savings and due to which government has very little room to increase investment, neither in infrastructure nor in manufacturing sector or in social welfare schemes.

Due to fall in savings and resultant fall in growth in deposits received by banks, there is always liquidity crisis in banks. RBI and Government of India is forced to provide liquidity to banks by reducing CRR, SLR and by by lending at Repo rate or by other monetary measures. Besides banks is constrained to depend on sources of money like call money or bonds.

Due to liquidity problems, banks are not in a position to lend money to needy business men .Though banks are making best efforts to make more and more credit growth, their hands are tight. To add fuel to fire banks are not able to recover the money they lend as per schedule which further create mismatch in asset liability .Banks are not able to recycle money to create more and more money by sanctioning more and more loans.

Secondly government has policies more favourable for real estate builders, less for home seekers. GOI has given more concessions in tax in such a way that real estate builders get more and more opportunity to grow in wealth but adversely affects the purchasing capacity of home buyers. Cost of a house has gone up manifold during last decade than that in preceding five decades. Poor and middle class persons cannot afford buying a new house or a flat. Upper middle class may afford buying a house after taking loan from banks. 


Due to continuous rise in prices of all commodities required for survival of life, common men without any rise in their income, 95 percent of Indian population is not in a position to taste the so called fruits of reformation era.


Further due to addition of more and more retail marts in urban areas, big towns and metros, public tendency to spend more and more has grown up without commensurating rise in their income.  This is why saving capacity of middle class and rich class of India is also shrinking day by day. Further to add fuel to fire, GOI has allowed foreign companies to open their shops in Indian towns to give dangerous boost to spending habits of Indians as a whole.

Negligible portion of Indian population who can afford buying new and new electronic and other luxurious goods and services are also not bothered of making savings for rainy days. As in America, people of India are also now getting hassle free personal and consumer loans from banks which again cause erosion in savings growth.

It is important to point out here that banks are also promoting more and more retail loan because they consider these loans safer than other commercial loans. Due to this, capacity of businessmen to increase manufacture and increase their contribution in service sector has also decreased year after year.

In brief , until GOI changes it s policy and make them conducive for growth in savings and for growth in investment in manufacturing and agriculture sector , Indian cannot dream of solving its financial problems , it cannot dream of real welfare of common men , it cannot increase GDP growth on permanent basis , it cannot save sinking banks and what not.

Sooner or the later, GOI will have to frame uniform interest rate structure conducive for growth in savings and growth in capacity of banks to lend more and more in agriculture and manufacturing sector. Efforts of Government to distribute cash subsidy to poor may enrich their vote bank for a short period but in the long run this dirty policy will turn the poor as beggar and they will develop a habit of not working but depending on alms they will receive freely from politicians.

GOI may give free mid day meal to students but cannot force them to read until there is quality teaching in schools. 

GOI may feel pride for MANREGA scheme but ground reality that rural mass are getting alms for few days but not in a position to work hard for earning real permanent income .

GOI may distribute subsidy in cash directly in bank but cannot inculcate good habits of work in rural and urban poor. 

GOI will have to formulate and activate policies whic will help in  creating more and more employment opportunities as their forefather created by SAIL, BHEL and other PSUs.