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Banking News Dated 28 July 2017

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Banking News: July 28, 2017


Banks' exposure to telecom sector at
Rs 97,681 crore 'highly unsustainable': Jaitley

The Press Trust of India
Published on July 26, 2017


New Delhi, July 26 (PTI): Finance Minister Arun Jaitley on Tuesday said banks have an exposure of Rs 97,681 crore in the telecom sector, which is grappling with financial stress.

In a written reply to the Rajya Sabha, Jaitley said State Bank of India (SBI) Chairman has pointed out that stress in the telecom sector has reached "highly unsustainable levels" due to erosion of topline and earnings of the service providers.

Quoting the Reserve Bank of India figure, Jaitley said total outstanding (funded) advances by public sector banks to the 'communications' sector stood at Rs 63,415 crore, while total exposure to the sector worked out to be Rs 97,681 crore. 'Communications' sector include, telecom - fixed network; telecom towers; telecommunications and telecom services.

For public sector banks, the gross Non Performing Asset (NPA) ratio and stressed advances ratio for the sector stood at 3.68 percent and 11.29 percent respectively, at the end of 2016-17 fiscal.

Jaitley further said the SBI Chairman (Arundhati Bhattacharya) has made certain recommendations for tackling stress in the sector. The suggestions, include aligning deferred payment liabilities for spectrum for its life, rationalisation of regulatory charges, quick resolution of litigation on definition of adjusted gross revenues, easing regulation of merger and acquisition.

"Government has already constituted an Inter-Ministerial Group for the sector," the financed minister said.

At present, a portion of spectrum auction amount is taken as upfront payment by Department of Telecommunication, and the rest after a two-year moratorium is paid out every year in 10 instalments.

The Indian telecom industry is locked in an intense tariff war following the entry of Reliance Jio.



Big financial blow for NPA-laden banks on cards
as RBI unlikely to ease provisioning load

Saloni Shukla & Sangita Mehta
The Economic Times
Published on July 27, 2017


Mumbai, July 27: Banks hoping to escape steep provisions on loans referred to bankruptcy court, apart from the 12 companies that the Reserve Bank of India (RBI) recently mandated for the insolvency process, are set to be disappointed.

The central bank will soon direct lenders to set aside 50% of bad debt as soon as a referral happens, and 100% if the tribunal orders liquidation, taking a heavy toll on finances already marred by provisioning requirements on non-performing assets (NPAs).
“Provisioning requirement would be uniform for all cases going to NCLT (National Company Law Tribunal) because the principle is the same,” said a senior RBI official involved in drafting the regulation.

“It is clear that these 12 accounts need provisioning and for the remaining accounts banks have been given time. Banks already have certain tools and each tool has its provisioning requirement.”

Most banks had interpreted an RBI communication on higher provisioning that referred to the “said” companies as applying only to the dozen entities. This note had been sent about 10 days after RBI’s June 13 letter on the 12 companies. RBI did not respond to an email sent by ET.

SBI chairman Arundhati Bhattacharya had said in an interview earlier this month that banks were awaiting more clarity on provisioning norms for accounts referred to NCLT.

“Provisioning requirements at this point of time is only for the 12 accounts,” Bhattacharya had said. “For the rest of the things, RBI has not come out with anything yet. We will see what provisioning rules they come out with and then take a call.”

Bank earnings have been savaged in past quarters following an RBI-mandated asset-quality review aimed at recognising bad debt.

Higher provisioning across the board will further dent those numbers.

Current provisioning norms vary widely based on the sector and tenure. While 148 companies have been admitted to the NCLT process, banks had factored in provisions only for the 12 accounts.

India Ratings had estimated that additional provisions for the 12 companies could be as high as Rs 18,000 crore. Rating agency Crisil had projected a hit of Rs 2.4 lakh crore if banks have to write off 60% of the value of bad loans for the top 50 defaulters.

RBI has given banks three quarters to set aside provisions on cases referred to NCLT.

The 50 stressed companies, which account for Rs 4 lakh crore in soured loans, are largely from the metals, construction and power industries and accounted for about half the total NPAs in the banking sector as of March 31. The banking industry has been struggling with bad debt of more than Rs 7.3 lakh crore, or 9.6% of total loans.

RBI told banks on June 13 to initiate insolvency proceedings against 12 companies — Bhushan Steel, Lanco Infra, Essar Steel, Bhushan Power, Alok Industries, Amtek Auto, Monnet Ispat, Electrosteel Steels, Era Infra, Jaypee Infratech, ABG Shipyard and Jyoti Structures.



SS Mundra says firms free to move higher courts

The Free Press Journal
Published on July 27, 2017


Mumbai, July 27: With some large stressed firms challenging RBI’s directives to banks to initiate proceedings against them under the Insolvency and Bankruptcy Code (IBC) in high courts, Reserve Bank deputy governor SS Mundra on Wednesday said nobody can be prevented from approaching the judiciary.

Last week, the Gujarat High Court had dismissed Essar Steel’s plea against RBI to start insolvency proceedings against it.

The court refused to grant any relief to the steel major on proceedings initiated against it by the State Bank of India and Standard Chartered Bank at National Company Law Tribunal (NCLT) under the IBC, indicating that all issues raised by the company should be considered by the NCLT.

“Freedom of speech is a fundamental right and approaching the higher judiciary is open to everyone,” Mundra told on the sidelines of a Canara Bank function.

“If an individual company chooses to use that route, I don’t think that can be prevented, but I am sure that in any judicial system past pronouncements create a kind of future direction and that direction has now become evidently clear,” he said.

Essar Steel had moved the high court seeking the court’s direction to quash and set aside RBI’s direction to the banks to initiate insolvency proceedings against the company through a release dated June 13.     

The RBI had last month identified 12 accounts (companies) for insolvency proceedings with each of them having over Rs 5,000 crore of outstanding loans, accounting for 25 per cent of the total NPAs of banks. The steel company’s debt has increased to over Rs 42,000 crore.



Reserve Bank of India extends
'rest' period for auditors to 6 years

Anup Roy
The Business Standard
Published on July 28, 2017


Mumbai, July 27: The Reserve Bank of India (RBI) on Thursday criticised private and foreign banks for appointing the same set of auditors alternatively after mandatory rest of two years, as such practice establishes a “comfortable relationship that may lead to compromise in strict adherence to audit principles.”

As per the extant rules, a statutory auditor has to be appointed for a period of four years and then there should be a rest of two years. Now the central bank extended the rest period to at least six years.

According to RBI, in some cases in private and foreign banks, the same audit firm was reappointed after a gap of two years’ rest. In a few other banks, the immediately preceding statutory auditor firm was appointed on completion of the four-year tenure of the current statutory auditor.

“The statutory central audit responsibility in such banks thus remained confined to two audit firms which were appointed on a cyclical basis,” said RBI in a notification on its website.

Criticising these banks, the central bank said the rest and rotation policy in the appointment of auditors have been mandated so that books are looked at afresh, “as a new team is likely to examine the issues in a bank from a different perspective.”

RBI bars banks from appointing same auditors frequently

In order to make the banks follow the policy in letter and spirit, the central bank said that an auditor, after completion of its four-year tenure in a bank “will not be eligible for appointment as SCA of the same bank for a period of six years.”

The central bank’s directive assumes importance in the light of wide divergence found in the books of some private sector banks, which reported much lower NPA in their books for FY 16 than what the central bank auditors later found. If the divergence found is more than 15 per cent from RBI’s perspective, it is now mandatory than banks disclose the information in the annual report.



$191 billion and counting:
Enormous bad debt burden is
splitting India's banks in 4 ways

Andy Mukherjee
The Economic Times
Published on July 28, 2017


When Moody's Investors Service polled market participants in Hong Kong recently, 70 percent picked India's banking system as the most vulnerable among seven countries in South and Southeast Asia. I wonder what the remaining 30 percent were smoking.

As another earnings season rolls on, the weaknesses of Indian lenders -- depleted capital levels in state-run banks and an inability to shed soured corporate debt even in non-state-controlled ones -- are once again obvious. What's not as apparent, though, is an quadrifurcation of Indian banking.

Axis Bank bad loans: $3.4 billion

Axis Bank Ltd., one of the embattled lenders from the second category, dropped almost 3 percent on Wednesday after it reported a $546 million addition to its non-performing assets in the June quarter. Were it not for an unusually large write-off of $380 million of hopeless debt, fresh slippages would have made the bank's $3.4 billion bad loan pile even bigger.

That's just the reported non-performing assets, which now comprise 5 percent of Axis Bank's loan book. Loans on the bank's internal watch list, plus accounts that have been restructured, mean another 4.1 percent of the book is stressed, according to Nirmal Bang Institutional Equities.

Worse, for the fourth straight quarter, more than half of the lender's operating profit was spent on making provisions. An investor who had only seen a graph of provisions at Axis between 2006 and 2015 would have expected such haemorrhaging of profit to never occur.

Some corporate lenders, though, are faring better. Yes Bank Ltd., which spooked the market three months ago when it was forced by the regulator to disclose a chunky bad loan to an infrastructure firm, has managed to recover 60 percent of that money. Bad loans at Yes are down to less than 1 percent of the total, the lender announced Wednesday.

The contrast in performance of Axis and Yes shows bankers can't shift the blame to things they can't control, such as a multiyear funk in corporate profitability that has made Indian borrowers' capacity to service debt the worst in Asia. A quarter of the loan book at Yes is exposed to what the lender describes as sensitive: power; iron and steel; engineering; and telecoms. Yet, Yes is boxing on, while Axis is boxed in.

The bank that's leaving both Axis and Yes -- and everyone else -- behind is HDFC Bank Ltd. The retail-focused lender took a knock in the June quarter because of the distress in farm markets triggered by New Delhi's decision in November to outlaw most of the bank notes in circulation. As politicians rushed to announce waivers of agricultural advances, farmers strategically defaulted on their obligations.

While that pushed up HDFC Bank's bad-loan ratio to 1.24 percent, Managing Director Aditya Puri paid the higher credit costs and still delivered a net interest margin of 4.4 percent in the June quarter, beating Yes Bank's 3.7 percent and Axis's 3.3 percent.

India's banking industry is splitting four ways. State-run lenders, as well as Axis, will remain in the doghouse for at least a couple more years. HDFC Bank will steal their best corporate clients and add them to its formidable retail franchise.

Lenders like Yes and IndusInd Bank Ltd. fall somewhere in-between. They have few constraints on growth, but managing their existing exposure to large firms with weak profitability will be taxing.

The real opportunity lies in bite-sized loans. This prize, however, might go to specialists like Au Small Finance Bank Ltd., which went public earlier this month. Bernstein analyst Gautam Chhugani expects Au to quadruple its loan book in five years, mainly by lending to tiny businesses that have never had any access to finance.

The gloomy sentiment captured by the Moody's poll is still the biggest drag on Indian banking because of the sheer size of bad debt: $191 billion and counting. But for investors placing longer-term bets, it's the other three corners of the industry that deserve more attention.



Indian banks are most at risk in
South and SE Asia, Moody's says

The Zee Business News
Published on July 26, 2017


Ø      Indian banks most vulnerable in South and Southeast Asia

Ø      Moody's says result from a poll in Hong Kong and Singapore

Ø       Indian banks are under-funded, the poll said

Mumbai, July 26: Global ratings agency Moody's on Wednesday said that Indian banks remain most at risk in South and Southeast Asia. The agency has revised the outlook on several Indian banks to stable or negative from positive on 24 July, signalling a lowering in potential government support under our Joint-Default Analysis (JDA) model, and/or weaknesses in solvency metrics.

Moodys's said, "We agree that many banks in India remain undercapitalised and continue to lack sufficient loan-loss provisions. Moreover, the government has appeared reluctant to increase capital injections into the public sector banks, despite the limited ability of these banks to access equity markets for much-needed capital."

Moody's said that the results were a finding of a poll it conducted of market participants in Hong Kong and Singapore.

"Moody's itself is also of the same opinion and we had revised our outlook for APAC banks to stable from negative in early July to reflect easing risks to banks' asset quality as macroeconomic conditions turn mildly positive in the region and commodity prices broadly stabilize," says Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer.

On India, the poll said, "Near 70% of the respondents in Hong Kong picked India's banking system as the most vulnerable among seven systems in South and Southeast Asia. In Singapore, 44% of the respondents chose India and a quarter of the votes went to Indonesia."

"We agree that many banks in India remain under-capitalized and continue to lack sufficient loan-loss provisions. Moreover, the government has appeared reluctant to increase capital injections into the public sector banks, despite the limited ability of these banks to access equity markets for much-needed capital," says Tarzimanov.

As a result, Moody's had revised the outlook on several Indian banks to stable or negative from positive on 24 July, signalling a lowering in potential government support, and/or weaknesses in solvency metrics.



Is there a plan to scrap
 the Rs. 2,000 note?

The Press Trust of India
Published on July 26, 2017


New Delhi, July 26 (PTI): The Opposition in the Rajya Sabha asked Finance Minister Arun Jaitley to clarify whether the government has decided to scrap the newly launched Rs. 2,000 note and introduce a Rs. 1,000 coin. However, Jaitley who was present in the House, did not respond even as the Opposition members insisted for clarification from him on the issue.

Raising a point of order during the Zero Hour, Samajwadi Party’s Naresh Agrawal said, “The government has taken a decision to scrap the Rs. 2,000 note. The RBI has been given orders not to print the Rs. 2,000 notes ... If any policy decision has been taken during the Parliament Session, the tradition is to announce it in the House.”

So far, the RBI has printed 3.2 lakh crore pieces of Rs. 2,000 notes. Agarwal said that the RBI has stopped printing of these notes. “One note ban has been done, the second one is being planned,” he noted. He alleged that the earlier note ban decision was taken by the government and not the RBI. “The RBI board had opposed it but the government took the decision. The earlier decision (of demonetisation) was taken by the government, the second one is also from the government,” he said.

Echoing his views, the Leader of Opposition Ghulam Nabi Azad too sought clarification from the government on whether it was planning to introduce Rs. 1,000 coins.“Every day we read about coins of 1,000, 100 and 200. What is the actual status? Are we to go by what media is writing? The House is to be enlightened by the Finance Minister. What is the truth?,” he asked.

Adding that there was no politics in this issue, he asked, “Are we going to have coin of Rs. 1,000? To carry coins, we have to purchase a bag. We must know. Our sisters have the purse. We shall also have to buy purse just to carry the coins of Rs. 1,000.”
Another member from the Opposition, Tiruchi Siva (DMK) said he cannot dispense with the media reports completely and sought clarification from the government on the issue. Sharad Yadav (JD-U) said the issue was serious as the rumours are strong. He wanted the government to clarify and stop the rumours, warning the government that the people will start returning the Rs. 2,000 notes.



Is India prepared for demonetisation 2.0?

The DailyO Online
Published on July 27, 2017


Demonetisation 2.0? That might happen soon. Phasing out the
Rs 2,000 note makes sense, but it should be done with caution.

Mumbai, July 27: According to reports, the Reserve Bank of India has stopped printing the Rs 2,000 currency notes altogether and will not be bringing in new notes in the current financial year. The last few weeks saw a shortage of Rs 2,000 notes. Many attribute this scarcity to cash-hoarding, given that it is easier to hoard black money in Rs 2,000 notes as compared to other denominations. But is that all?

If the government really plans to go ahead with a demonetisation drive once again, there are several things it should do, in order to avoid the chaos that the November 8, 2016 announcement caused.

1) First of all, the government should definitely not scrap both the high-value denominations. A lack of Rs 2,000 notes is something the people may be able to survive, but the absence of both notes (Rs 2,000 and Rs 500) will be tough for everyone. A section of the population may be better prepared for another wave of cashlessness, but a huge chunk still isn’t.

An RTI enquiry has revealed that the Pradhan Mantri Jan Dhan Yojna has 28.9 crore bank accounts as of July 14. According to an ICE 360° survey from December, 2016, covering 61,000 households 99 per cent of households in both rural and urban India have at least one member with a bank account.

But that still does not change the fact that digitisation of currency will not affect people. A bank account neither guarantees availability of accessible branches or ATMs, nor does it account for the section of people unable to use internet banking, mobile wallets and debit cards because of nonexistent infrastructure.

2) The RBI should have a new currency ready to minimise damage caused by cashlessness. A lot of problems emerged during the first wave of demonetisation and the unpreparedness was one of them. Notes were not being reprinted fast enough, bank ATMs did not have the hardware to carry the new notes and haphazard notifications from the central bank did not help any.

It is more than evident that black money cannot be flushed out by demonetising notes. In fact, a month into the drive, huge chunks of black money caught by the Income Tax department and the Enforcement Directorate were found to be in the new currency. Additionally, the central bank is yet to give us a figure on how much of India’s estimated cash currency (in Rs 500 and Rs 1,000 notes) have been deposited.

3) There have to be stricter laws about the use of demonetised currency for emergency services. Hospitals, petrol pumps, ration stores and pharmacies should be allowed to use demonetised notes, in case the cash shortage becomes a problem. Too many lives were lost due to mismanagement last time. The government should exercise all forms of caution this time.

The Centre is fairly unpredictable. We don't know what they can or will do. But we can speculate. And in terms of a second wave of demonetisation, the signs are abundant.

Economic Times reported that there is talk of this in Parliament as well. The Opposition on Wednesday, July 26, in Rajya Sabha asked finance minister Arun Jaitley to clarify whether the government has decided to scrap the newly launched Rs 2,000 note. Jaitley, however, did not respond.

Another report says that State Bank of India (SBI) - the country’s biggest bank - has started recalibrating the Rs 2,000 currency cassettes in a few of its ATMs to Rs 500 currency ones so that more cash can be stuffed inside the machines.

A few months ago, The Statesman reported that in order to curb fresh generation of black money, the government is preparing to gradually phase out the Rs 2,000 note. An official was quoted saying: "The idea behind introduction of the high denomination Rs 2,000 notes was to quickly remonetise the economy with the value in circulation.”

It was a stop-gap arrangement and now there is enough currency and hence the note should be given the marching orders.

A Mint report quotes an anonymous source (who is aware of the inner workings of the Reserve Bank of India), according to whom, about 3.7 billion Rs 2000 notes amounting to Rs 7.4 trillion had already been printed, when the printing process was allegedly stopped five months ago. The report also adds that RBI’s printing press in Mysuru has started printing the new Rs 200 notes, which are likely to come into circulation by August.

“Initially, around a billion Rs 200 notes are expected to hit the market,” revealed the source.

Phasing out the Rs 2,000 note makes sense. It is too huge a denomination, especially when the next biggest denomination is Rs 1,500 away. But there has to be a proper way of doing it. India managed to survive a mindless move once. The country is now stronger and will probably withstand another.

But does it still make sense to subject the population to yet another mismanaged demonetisation drive? No.



Rs 2,000 note ban unlikely, say bankers

The Daily News & Analysis
Published on July 27, 2017


They say the government and the RBI may
be rebalancing the supply of the currency

Mumbai, July 27: The government on Wednesday was tight-lipped on whether the Rs 2,000 denominated notes were going to be demonetised. Despite repeated questioning from the opposition, finance minister Arun Jaitley preferred to ignore the questions and refused to be drawn into a discussion.

Bankers say that it is unlikely that the government would demonetise the high-value currency. They say the government and the Reserve Bank of India (RBI) may be rebalancing the supply of the currency. Initially, the government was printing more of Rs 2,000-denominated notes and is going slow now.

Bankers say that the fresh supply of Rs 2,000 denominated notes from RBI is gradually going down and fresh supplies of Rs 500 notes are taking place as the central bank tries to increase lower-denominated currency notes.

A senior banker said, "There are sufficient supplies of Rs 500 and Rs 100 but lower denominations are little scarce. The bulk of the notes we are receiving is the Rs 500 denominations."

RBI data shows that currency in circulation stood at Rs 15.22 trillion (lakh crore) as on July 14, eight months after demonetisation. This is about 86% of the Rs 17.7 lakh crore that was in circulation on November 4.

However, bankers said, "There may not be a plan to demonetise the Rs 2,000 notes. They may be trying to rebalance the supplies. Initially, it was the Rs 2,000 notes that were getting printed to replenish the demonetised stock of currency. Now they may be going back to lower currency. "

Naresh Agrawal, a Samajwadi Party MP, said in the Parliament on Wednesday, "The government has taken a decision to scrap Rs 2,000 note. The RBI has been given order not to print the Rs 2,000 notes. If any policy decision been taken during the parliament session, the tradition is to announce it in the House," he said.

"So far, the RBI has printed 3.2 lakh crore pieces of Rs 2,000 notes. And now, it has stopped printing. RBI cannot bully. One note ban has been done, the second one is being planned. Let the finance minister reply," he added. But the finance minister chose not to respond.



There's One Good Reason
India Shouldn't Cut Rates

Mihir Sharma
The Bloomberg View
Published on July 28, 2017


Mumbai, July 28 (Bloomberg View): When the committee that sets monetary policy for India’s central bank meets early next month, their decision should be clear. There are plenty of good reasons for them to cut rates. Still, there’s one even better reason to hold off.

Since the committee last conferred two months ago, inflation has steadily declined. Food is cheaper now and overall consumer price inflation stands at less than 2 percent. That’s below the Reserve Bank of India’s target zone, which gives the bank more than enough space to loosen policy.

And economic conditions would seem to cry out for lower rates. Growth has slowed for four consecutive quarters, with the last print coming in at a far-from-respectable (for India) 6.1 percent. While the International Monetary Fund predicts India will grow at 7.2 percent, its most recent estimates have tended to be high.

It’s unclear what more the government-- which in 2015 was promising to deliver double-digit growth but has now discovered how “difficult” that task is-- can do to revive the economy. The real problem is that the private sector remains unusually unwilling to invest. Investment as a proportion of gross domestic product needs to rise by several percentage points if India is to return to its previous levels of growth or to match China’s high-growth takeoff. The textbook advice is clear: To increase investment, lower the cost of capital.

But things never work quite that simply in India. For one, there’s no reason to suppose that a cut in the policy rate by the RBI would lead to entrepreneurs actually gaining access to cheaper capital. Both the current governor, Urjit Patel, and his predecessor, Raghuram Rajan, often complained that banks simply refused to pass on lower rates to their customers. Partly that’s because competition doesn’t quite work in the Indian banking sector, which is largely state-owned; partly it’s because most banks are struggling with bad loans. They’re feeling particularly cautious about new lending.

Even if that hurdle can be surmounted, there’s another, deeper reason why the RBI should consider holding off. Now that the minutes of the monetary policy committee’s June meeting are available, one intriguing passage stands out. The central bank’s deputy governor, the economist Viral Acharya, apparently answering a suggestion that easier monetary policy would help stressed banks recapitalise, correctly points out that would be a terrible idea: “It is best for the sake of policy credibility to not mix instruments with objectives they are not meant to target.”

His argument against thinking of easier money as a tool to fix banks holds as an argument against a rate cut in general. “This would relax the pressure,” Acharya argues, “on good efforts that are underway … to improve the banking architecture.” In other words, if thrown a lifeline now, banks will have less of an incentive to clean up their books.

The same logic applies to India's most indebted and badly managed firms. The economy has reached a crucial point, where owners and operators of companies are finally coming face-to-face with the consequences of a decade of bad choices. If markets are to work properly, this is the moment when those executives should lose control of the companies they’ve mishandled. Only then can the system be flushed and capital allocated to more productive and innovative enterprises.

If allowed to raise more cash, on the other hand, these companies will simply stay in the game until the economy as a whole recovers and all is forgiven. Holding off on a rate cut might delay that recovery. But at least it would help ensure an infusion of new blood and credibility.

Policymakers in China face a very similar dilemma. Everyone there admits that the economy needs a shakedown that reduces excess capacity, cleans up ownership and helps China face the future. But the temptation to keep extending credit-- just for another quarter, just till political problems sort themselves out, just till the economy turns up on its own -- is overwhelming.

Both of Asia’s giants face something of a reckoning, in which their long-term needs clash with their short-term interests. China appears to have made its choice, for now. India might want to think twice before making the same one. 

Mihir Sharma is a Bloomberg View columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”







 








Source: Internet News papers and Anupsen articles

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