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Letter from Mumbai Surge in Indian banks’ bad assets

Letter from Mumbai: Surge in Indian banks’ bad assets

IT is one of the biggest challenges confronting the Indian banking sector, but governments have for years maintained an ostrich-like attitude, refusing to take it head-on.

Stressed assets of Indian banks — especially state-owned lenders, who account for almost 85pc of bad loans — have grown phenomenally, but the government has failed to tackle the looming crisis. The gross non-performing assets (NPAs) of 39 listed banks amounted to Rs3.4tr towards the end of the September quarter. (This does not include restructured assets of banks).

Towards the end of the previous fiscal (March 31, 2015), gross NPAs stood at a little over Rs3tr, accounting for 4.6pc of total advances. Six months later it shot up by Rs400bn and constitutes 5.1pc of total advances.

And taking into account stressed assets, the figure has gone up to 11.3pc. However, these are formal figures; industry estimates are that stressed assets are at least two to three times higher and could cross the Rs7.5tr-mark.

Much of the crisis has been caused by reckless lending by banks to several sectors. According to the Financial Stability Report of the Reserve Bank of India (RBI), a handful of sectors — mining, iron and steel, infrastructure including power and civil aviation and textiles constitute more than half of total stressed loans, though their share of total advances is just 25pc.

The problem of bad loans is expected to worsen over the next few years. Last week, India Ratings, a Fitch group company, estimated that impaired asset loans are likely to rise to 12.5pc by March 2017, following the RBI’s strict norms to recognise stress in the system.

The ratings agency said banks may have to take a ‘haircut’ of Rs1tr to revive stressed assets (a haircut is the difference between the market value of an asset used as collateral and the loan amount). Once a loan turns bad, banks sell off the collateral asset at a discount to asset reconstruction companies.

India Ratings estimates that about a third of corporates who have borrowed from banks are reeling under stress. “These corporates form 21pc of system credit, of which 9pc have been recognised as NPAs or restructured accounts in FY15, 2.5pc are in the process/pipeline of SDR or 5:25 refinancing, 1pc have been sold to asset management companies or are in talks for sale, and the balance 8.5pc are yet to be recognised by banks,” said the agency.

In 2014-15, the RBI initiated several schemes including a strategic debt restructuring (SDR) scheme, tightening the corporate debt restructuring (CDR) mechanism and establishing a joint lenders’ forum. It urged banks to clean up their books by revealing the true picture and cajoled the lenders to increase provisioning on stressed assets.

The RBI also introduced a 5:25 scheme, with loans to be amortised over 25 years and with a refinancing option after every five years. Banks were also empowered to take majority control of defaulting firms under the SDR.

Over a dozen companies were acquired by banks under the SDR scheme, but most of the promoters had stripped off whatever assets they could lay their hands on before handing control to the lenders.

THE National Democratic Alliance (NDA) government is now considering setting up a ‘bad bank,’ or an ARC to transfer the bad loans of public sector lenders and to enable them to clean up their balance-sheet and then focus on their core activity of meeting the needs of the corporate sector.

The finance ministry and the Niti Ayog (the erstwhile Planning Commission) want the government to set up an ARC to take over the stressed assets of public sector banks.

The ministry has called for a meeting of experts, including officials from the International Monetary Fund (IMF), later this month to discuss the setting up of an ARC.

After the 2008-09 global financial crises, many countries set up such reconstruction companies to bail out troubled banks. The US, for instance, set up the Troubled Assets Relief Programme, to rescue corporate giants including Citigroup, AIG, General Motors and Chrysler. The programme imposed curbs on the compensation of top executives of these firms and has turned out to be a success.

However, the Indian central bank is uncomfortable with the idea of the government using tax-payer money to bail out banks and defaulters.

RBI governor Raghuram Rajan feels setting up a bad bank to handle stressed assets is effective when the assets are owned by private lenders and the government is not involved in capitalisation.

“Unless the bad bank is going to do a job of either pricing, or recovery or it is done in a transparent way that public does not start getting angry, unless we can have structures in place to assure us of that, it is not clear if it solves any problem that we have,” he remarked.

While the central bank is not opposed to the setting up of National Asset Management Company, as suggested by the government, it is not in favour of relaxing the rules for the ARC.

With the government now appearing to be serious on ways to spin off the bad loans of public sector lenders, global vulture funds have started circling the space, looking for opportunities and possibly lucrative pickings.

This is especially so with the government planning to enact a bankruptcy law; a draft law is currently being examined by a parliamentary panel. Once the law is in place, international funds would not have to worry about cases dragging on in court for years.

Many banks that have acquired control of companies that have defaulted on their loans are eager to sell off the assets, providing opportunities for the vulture funds. A few weeks ago, JP Morgan Asset Management Co sold off its bonds in Amtek Auto Ltd, recovering 85pc of what it had invested, to a Hong Kong-based vulture fund.

As lenders start selling off stressed assets, many international funds looking for double-digit returns would risk buying them.

Courtesy : Dawn News



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