NPA sales down to a trickle of just 2% of total bad loans

Notwithstanding rising bad loan problems in the system, sale of stressed assets to asset reconstruction companies (ARCs) in 2015-16 was only a trickle of the NPA mount at 2 per cent of the total of nearly Rs 5.8 trillion, which is down a whopping 20 per cent from previous year, says a report.

Notwithstanding rising bad loan problems in the system, sale of stressed assets to asset reconstruction companies (ARCs) in 2015-16 was only a trickle of the NPA mount at 2 per cent of the total of nearly Rs 5.8 trillion, which is down a whopping 20 per cent from previous year, says a report.

“The overall loans sold in FY2016 were lower by 20 per cent y-o-y and around 15 per cent of the overall loans in the banking system,” Kotak Institutional Equities said today in a report that is based on the analysis of 33 public and private banks.

The report did not offer any reasons for the massive dip in the sales, but it can be noted that banks are not happy with the cheap valuation that ARCs are offering while these companies are capital starved to make the higher upfront payments to the banks. The report also did not quantify the total amount of bad loans sold to ARCs.

As per RBI, total NPAS in the system jumped to 7.6 per cent in 2015-16, up from 4.6 per cent in the previous fiscal, which it warned could jump to a whopping 8.5 per cent by this fiscal end. The total stressed assets including NPAs stood at a staggering 13 per cent or over Rs 8 trillion in 2015-16.

State-run banks sold 75 per cent of their overall bad loans, lower than the 90 per cent of loans sold in 2014-15.

Axis Bank sold the largest quantity of loans but at a significant loss. The SBI Group, however, had the largest share of loans sold at 33 per cent of the overall loans compared to over 60 per cent in 2014-15.

Allahabad Bank and Central Bank were the two large public sector banks which sold a high share of their loans to ARCs last year.

Why central vigilance commission shouldn't be part of a NPA resolution forum

It is a time-honored tenet of the auditing world that an auditor should not partake directly or indirectly in designing a system. The reason is not far to seek. If he does, he would be compromising his position tremendously. For, in that case he would be put in an embarrassing and awkward position of having to audit the very system he has had role in designing.

It is for the same reason the code of conduct for auditors proscribes the statutory auditor of a company from doubling in as its internal auditor as well - as statutory auditor he has to comment upon the adequacy and effectiveness of the internal audit system put in place by the management. The role of internal auditor would conflict with his role as the statutory auditor though in actual practice, auditing firms get round this moral hazard and code of conduct by getting a proxy auditing firm appointed as internal auditor.

It is against this backdrop that the central government’s proposal to set up a NPA resolution forum comprising among others the RBI and the Central Vigilance Commission (CVC) has raised eyebrows and hackles. The implicit rationale underpinning CVC’s induction is its overweening presence would deter and nip in the bud quid-pro- quo deals (mutual backscratching deals to put in more bluntly) between the officialdom and the wily borrower. But what must be nipped in the bud is this hare-brained proposal.

First, any adjustment with an incipient and potential defaulter would involve a small or big sacrifice on the part of the bank. By being a party to such a compromise as a forum member, the CVC would find it difficult to proceed against the banker or any official later on because he would turn around and smugly point out that it was consummated with CVC’s blessings. Surely, CVC as indeed any investigative agency

should be spared the blushes.

It must also be remembered that a committee or forum is by definition perceived as antidote to deals on the sly by individuals. That is why it is said larger the committee the better unless of course all of them fall a prey to blandishments which is unlikely. The point is the forum itself can be counted upon to behave with rectitude without the hawkish presence of the CVC.

Second, banking is not CVC’s forte. It lacks domain knowledge and expertise which RBI has in abundant measure. On the contrary, it would smell rat in any compromise or restructuring. It may not be able to tell between defaults engendered by genuine economic reasons experienced by the borrower and wilful ones.

Thirdly and lastly, the move flies in the face of the recently crafted comprehensive bankruptcy code which sets store by the principle of early resolution of NPA problem without allowing it to fester or take roots. The National Company Law Tribunal (tribunal) that would resolve corporate bankruptcy quickly and comprehensively by addressing the concerns of other stakeholders as well like employees and government should not be snapped at its heels much less exposed to the threat of even being unwittingly marginalised or undermined by a parallel forum.

Parenthetically, it may be mentioned that financially advanced economies have found a way out of the niggling problem of NPAs by simply asking the corporates to seek funds from the bonds market which has its own disciplining mechanism - the threat of being awarded the junk bond status with its grim implications for cost of borrowing. The argument is banks should lend only to small and medium enterprises (SMEs) which cannot access the bond market and which give lesser shocks than a big ticket borrower. But that is another story for another time.

Are private equity investors going slow on India?

Between 2013 and 2015 they PEs increased their exposure little by little and in the first quarter of 2015 they ploughed in USD 4704 million. Right now, their total India exposure is down to USD 1054 million in the second quarter of 2016.

Private equity investors have had a love-hate relationship with India. Just in the last three years, they have yo-yoed a lot in their attentions to India. Between 2013 and 2015 they were upbeat on the Indian subcontinent. The period saw the PEs increasing their exposure little by little and in the first quarter of 2015 they peaked ploughing in USD 4704 million. The same quarter witnessed a total of 112 deals being inked. However, in the last nine months the PEs lost interest. Their total India exposure is down to USD 1054 million in the second quarter of 2016 which had only 52 transactions taking place.  The second infographic shows how internet/technology received the maximum investments of USD 1110 million till date beginning 2016. Business services and transportation clocked the least equity inflows with USD 17 million and USD 12 million, respectively, out of a combined USD 2139 million for the period.

NPAs: Need For A Holistic Approach To Resolution

The banks have been given time till March 31, 2017 by RBI to clean up their books while the gross non performing assets have reportedly ballooned to over Rs 5.5 lakh crore by end of March 2016

Banking system faces enormous challenges as the spectre of gargantuan non-performing assets (NPAs) is haunting them even as the regulator is coming out with new schemes to address the NPA menace head-on.

The banks have been given time till March 31, 2017 by RBI to clean up their books while the gross non performing assets have reportedly ballooned to over Rs 5.5 lakh crore by end of March 2016. This Herculean task needs to be addressed in a holistic manner, keeping the Indian ecosystem in mind, so as to minimise future slippages in the accounts. To begin with, it would be pertinent to recognise that all borrowers are not ‘chors’ and that all lenders cannot be accused of not having done the due diligence and then try to find a resolution before the problem starts eating into the very growth of economy.

Aggravating Factors
The list of factors that caused a jump of more than 475 per cent in NPAs in a matter of 5 years are many. However, factors like commodity cycle downturn, delays in approval from government be it environmental clearance, land acquisition process, obtaining right of way, forest clearance and lack of dispute redressal mechanism in a business-like manner, besides, policychanges like cancellation of telecom licences, withdrawal of coal and iron ore mines, dumping by some countries which made local products unviable, were other contributory factors which were further compounded by the indecisiveness of the decision makers who simply did not take any timely decisions fearing political backlash.

Just to elaborate this point further, let me draw on the steel sector. According to RBI’s Financial Stability Report, June 2015, five out of the top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors. And then the operational units in the steel sector lost their cost competitiveness. As is well-known, some of the critical factors affecting the competitiveness of this industry, particularly in economic downturn, include government’s support (tax incentives), tariff protection, raw material security at competitive prices and availability of infrastructure and logistics. Who would have seen this coming when the projects were set up.

Five Sectors-Demand Upside Holds The Key
It is interesting to note here that five sectors-iron and steel, infrastructure, EPC, mining and textile account for bulk of the reported NPAs which had their share of external factors responsible for accumulation of NPAs in the last 4-5 years. While wilful defaulters need to be dealt with strictly, it is also a fact that all these sectors play key role in the growth of the economy-both at the domestic level and in international trade. A robust revival of demand would enable the companies in these sectors to generate enough cash flows to not only service the debt but return to growth path in a short time.

RBI’s S4A Scheme-May Not Meet With Enough Success
During the last few years, the corporates have piled on an unmanageable mountain of debt without commensurate increase in the earning capacity. In this backdrop, the caveats attached relating to limiting the lenders from changing any of the terms of repayment and interest rate in respect of the sustainable debt portion as also the high level of equity dilution that could be expected with the implementation of the scheme, may lead to limited success and may not meet with the desired results.

Financial Health-palliative Care
As RBI Governor rightly put it, ‘band aid’ approach would not work over a long term. What is needed is a major surgery. While it is a good sign that banks are finally willing to acknowledge the problem, it does not mean that the issue is resolved. The real task begins only now. It is not DRT or CDR or SDR or S4A or Bankruptcy laws alone which can cure this malady. What we need is a macro view taken on the entire economy and then arrive at a resolution strategy which could unlock fair value from the distressed assets for the benefit of all stakeholders. 

The success of the above will to a great extent depend on pro-active measures taken in a co-ordinated manner by Govt. and the Regulator to quickly respond to the challenges being faced by the industry and ensure long term stability in policies which are critical to their well-being. To address the existing NPA problem and protect the economic value of their loan, it is imperative that banks go for a holistic resolution. It is the right time that pain is acknowledged, loan book is corrected, and assets are rightly priced and nurtured further by infusing new money for revival and operations by inviting a new promoter or special situation fund who can bring in their portion of equity or risk capital.

We all understand that without removing the extra flab of debt, the brides may not find any suitors. Further, the investors willing to take over stressed assets are well informed and fully aware of the inherent risks and challenges associated with reviving a distressed company without the support of the old promoters. The new promoter/investor will not be able to bring in the entire equity since Indian businesses cannot sustain superlative returns as they are not very competitive. Thus, it essentially means that the project/company would need to be supported mostly by the existing lenders who have access to cheaper funds in the form of low cost deposits and can manage risk of recovery in the hands of new management/special situation fund who have proven track record of success with higher credibility. When this happens as also with the bankruptcy laws coming in place, the business of investment in distressed assets will become more mature and there will be good interest among serious investors and business assets will be put back to use.

Unlike in other parts of the world, where business successes and failures are taken with equanimity and promoters do not mind shutting the business and moving on, Indians hate ‘failure’ and see failure as a stigma and leave no corner to project success. This die hard belief in making the venture successful and running might turn out to be a blessing in disguise in turning around the stressed assets and resolving the NPAs.

Bankers to conduct marathon meetings to deal with stressed cases

Bankers also intend to evaluate the feasibility of a new financial structuring scheme introduced by the Reserve Bank of India in June

In March, lenders had held similar meetings over two days, where almost all large stressed cases were taken up and tough measures to counter stress were discussed

Lenders, led by State Bank of India (SBI) and ICICI Bank, will conduct extensive joint lender forum (JLF) meetings with the managements of at least 10 stressed firms this month, two people in the know said. Apart from taking stock of progress of these accounts, bankers also intend to evaluate the feasibility of a new financial structuring scheme introduced by the Reserve Bank of India in June.

According to one of the two persons quoted above, an official at a large state-owned lender, this is a quarterly process where banks talk to large stressed companies to monitor the progress of previously approved resolution plans and to decide on new recovery strategies. The banker spoke on conditions of anonymity as he is not allowed to be quoted in the press.

In March, lenders had held similar meetings over two days, where almost all large stressed cases were taken up and tough measures to counter stress were discussed. The companies that banks had met included Visa Steel Ltd, Uttam Galva Steels Ltd, Adhunik Metaliks Ltd, Aban Offshore Ltd, Bhushan Power & Steel Ltd and Bhushan Steel Ltd.

In many cases, banks had asked managements to implement these measures and show results by June end.

“We have already mandated necessary evaluation tests in almost all large stressed cases. In the meetings, we are only focussing on cases where the evaluation tests have established viability. In the other cases, we may look at some other stricter measures,” said the second person quoted above, also speaking on condition of anonymity.

An evaluation test is needed to establish viability if banks choose to go with the Reserve Bank of India’s (RBI’s) newly introduced scheme, Scheme for Sustainable Structuring of Stressed Assets (S4A). Under S4A, which was introduced last month, banks can convert up to half the loans held by corporate borrowers into equity or equity-like securities.

The user’s guide to early-stage fundraising

The user’s guide to early-stage fundraising

Over the last decade, the early-stage funding environment has dramatically changed. There are now myriad financing options that founders can consider as they look to build their companies. Nearly 70,000 companies received funding through angel networks and 3,000 through venture capital firms annually, according to CB Insights.

On the most recent episode of Ventured, we spoke with Qasar Younis, Chief Operating Officer of Y Combinator (YC), about the early-stage funding landscape and how entrepreneurs can best navigate the waters of raising capital today. Here are some takeaways from our discussion

Benefit from more accessible investors

The startup ecosystem is more sophisticated than ever before because of global availability to startup resources and new types of funding sources. With platforms like AngelList and Indiegogo, access to early capital has dramatically improved. Investors like Y Combinator (YC) and KPCB have continued to increase funding accessibility for founders regardless of location. Programs such as KPCB Fellows or KPCB Edge target entrepreneurs earlier in their careers while the YC Fellows Program and the YC College Tour seek to educate new entrepreneurs on how they can begin their journeys as founders.

Consider all funding options before tapping VCs

There are roughly four ways to get funding for your startup. Understanding your funding options and thinking critically about each path is crucial to your success — and is often overlooked.

Bootstrapping: This is how the majority of companies are funded today. The benefits here are that you retain maximum ownership of your company. However, this may not be sustainable as your capital requirements grow.

Incubators & Accelerators: If you are a first-time entrepreneur, it can oftentimes be helpful to join an incubator or accelerator to get your business going. While there’s a variety of these that exist today, most usually provide mentoring, content and a small amount of capital.

Online Platforms: There are a number of funding platforms available online. As a founder you can utilize these to get a sense of demand for your product, find angel investors from across the globe and get feedback on your company.

Venture Capital: While some founders may jump straight to venture capitalists, most usually reach this step later in the life of their companies. By utilizing the options, or a combination of options outlined above, you can prove more out as a founder prior to meeting investors.

Don’t worry too much about today’s macro environment

While the current economic environment has been fluctuating over concerns of global growth and European solidarity, early-stage founders should not panic. The macro-funding environment does not necessarily constitute a barrier to achieving success. Oftentimes, downturns provide unique opportunities for entrepreneurs to succeed because it’s harder for competitors to raise capital, and talent is usually cheaper to hire. For instance, more than half of the companies on the Fortune 500 list in 2009 were started during recessions or bear markets, as well as almost half of the firms on the Inc. list of America’s fastest-growing companies in 2008. In the most recent economic turmoil of 2009, both WhatsApp and Square were started.

Great companies are founded irrespective of a boom or bust. Startups are a test of will and determination and as a result are often on a seven- to 10-year time horizon, if not longer.

Stay focused on customers and users

While many entrepreneurs don’t realize it, they may be going through the motions and simply doing things that look and feel like work but aren’t actually creating value that will ensure long-term success. Two areas that highlight this gap are customers and product fit, or making stuff that people really want. Not enough entrepreneurs truly understand their customers, especially in the early days, even though that understanding will help dictate product and roadmap decisions. Similarly, founders need to be able to explain why customers actually want the product they are creating, since that insight will help drive almost any business forward.

Know that VCs invest in people, not pitch decks

Although we evaluate certain metrics that help us gain conviction about a particular company, we often invest in the intangibles — the things that are hard to get across on paper. We find ourselves asking questions like how do the founders work with each other, how do they communicate, what do they know that no one else knows and how are they uniquely positioned to solve this unique problem? Having conviction about the team beyond quantifiable growth or user metrics is a major driver for how we decide to invest in companies.

Global Investment Banking Review H1 16 - some big losers

Global Investment Banking Fees Total US$37.1 billion; Slowest First Half for IB Fees since 2009; Americas and Europe Decline 26%

Fees for global Investment Banking services, from M&A advisory to capital markets underwriting, totaled US$37.1 billion during the first half of 2016, a 23% decrease over last year at this time and the slowest first six months for fees since 2012. Fees in the Americas totaled US$19.9 billion, down 26% compared to the first half of 2015 while fees in Europe also decreased 26% and Asia Pacific fees decreased 10%. Fees in Japan decreased 19% compared to a year ago, while fees in Middle East/Africa also decreased 19% compared to first half 2015 levels.

JP Morgan Takes Top Spot for Global Investment Banking Fees; Top 10 Firms Register Combined Wallet Share Loss of 2.2 Points

JP Morgan topped the global investment banking league table during the first half of 2016 with US$2.6 billion in fees, or 7.0% of overall wallet-share. Goldman Sachs booked US$2.4 billion in fees during the first half of 2016 for second place, while Bank of America Merrill Lynch moved into third place from fourth a year ago. The composition of the top ten banks remained unchanged, with seven firms moving rank position compared to a year ago. Within the top 10, Goldman Sachs and Deutsche Bank saw the steepest wallet share declines with losses of 0.7 and 0.6 wallet share points, respectively.

Consumer Staples IB Fees Register 23% Increase; Healthcare and Telecom Fees Post Steepest Declines

Investment banking activity in the financials, energy & power, industrials and technology sectors accounted for 58% of the global fee pool during first half 2016. JP Morgan topped the fee rankings in six sectors during the half, with double-digit wallet-share in the technology and telecom sectors. Fees from deal making in the consumer staples sector increased 23% compared to a year ago with Bank of America Merrill Lynch commanding 9.0% of all fees booked in the sector during the first half. Healthcare and telecom fees registered the steepest percentage declines this half, down 49% and 42%, respectively.

Financial Sponsor-related Fees Down 40%; Carlyle Group, Barclays Tops Financial Sponsor Fee Rankings

Investment banking fees generated by financial sponsors and their portfolio companies reached $3.9 billion during the first half of 2016, a decrease of 40% compared to 2015. Fees generated from leveraged buyouts accounted for 29% of financial sponsor-related fees during the half, while ECM exits accounted for 10% and M&A exits comprised 23% of overall fees. The Carlyle Group and related entities generated $222 million in investment banking fees this year, down 1% compared to the first half of 2015, while Barclays collected an industry-leading 7.0% of financial sponsor-related fees during the first half.

IPOs Pull Equity Capital Markets Fees Down 43%; Debt Capital Markets Fees Down 11%, while M&A Fees Decline 15%

Dragged down by a 57% decrease in fees from IPOs, equity capital markets underwriting fees totaled US$7.3 billion during first half 2016, down 43% from a year ago. Fees from debt capital markets underwriting totaled US$11.4 billion, down 11% compared to last year's tally and accounted for 31% of overall IB fees during the first half of 2016. M&A advisory fees totaled US$11.5 billion during first half 2016, a decline of 15% compared to the same period last year, and accounted for 31% of the global fee pool, while fees from syndicated loans decreased 24% compared to the first half of 2015.