What monetary transmission means: Abheek Barua

Reducing policy rates is not enough. The key is to ensure banks lend to credit- constrained borrowers

If there is a single blot on the otherwise unblemished track record of Reserve Bank of India ( RBI) Governor Raghuram Rajan, it would be his inability to ensure smooth “ transmission” of RBI’s policy signals to actual lending rates in the economy. While the central bank has lowered the signal repo rate by one- and- a- half percentage points, banks have reduced lending rates by less. It is perhaps legitimate for the governor to claim that he is hardly to blame for this, that he has done his bit and the ball has always been in banks’ courts. However, the effectiveness of monetary policy is ultimately about RBI’s actions translating into reduced EMI’s on mortgages and car loans, lower credit card rates, cheaper working capital and so on. Thus, transmission of RBI policy is agauge of how well monetary policy as a whole has worked in stimulating the economy. If it hasn’t quite done the trick, the central bank must take some responsibility for it.

Mr Rajan’s predicament was partly because of the monetary policy regime that he inherited. Around 2010 when D Subbarao was at the helm, RBI decided to change the monetary regime it operated in. Previously, the central bank allowed episodes in which banks were short of liquidity ( thus, borrowing from RBI through its repo window) and those in which they were surplus ( parking surplus funds with RBI at the reverse repo rate). The new regime was one in which they there would be a “ permanent” or “ structural” liquidity deficit of roughly one per cent of banks’ deposits, ensuring that banks would always be net borrowers at the central banks refinance window.

This shift in regime, coupled with the fact that the actual liquidity deficit often exceeded the target, introduced an element of uncertainty about their fund position that kept bankers on edge. Thus, it wasn’t surprising that banks wanted to ensure that they had enough deposits to fall back on. Deposit rates remained sticky. Banks run on commercial principles and attempt to maximise the margin between lending and deposit rates. In the absence of significant deposit rate reductions, lending rates did not change much.

                                   Abheek Barua

Mr Rajan finally addressed this problem in the April 2016 monetary policy by reverting to the old regime, and committing to maintain aneutral liquidity regime. This meant plugging the “ structural” deficit by infusing liquidity both through bond purchases ( buying bonds from the market and offering cash in exchange) or by buying dollars in exchange for freshly minted rupees. Critics would claim that RBI could have done this much earlier to give the economy a helping hand instead of laying the blame on banks’ shoulders. A more charitable view is that a major systemic change of this sort takes time, especially with inflationary pressures ( traditionally associated with high liquidity) looming in the background.

Even if banks were to fall in line in this new regime, that might not be the end of RBI’s problems. A recent paper by Johannes Stroebel and three of his colleagues (‘ Do Banks Pass Through Credit Expansions? The Marginal Profitability of Consumer Lending During the Great Recession’, August 2015, New York University Working Paper) points out that transmission is likely to boost the economy only if banks pass on the benefits of monetary or credit expansion by the central bank (like a cut in the policy rate) to credit- constrained borrowers, those with ahigh marginal propensity to borrow. These borrowers, freed from their credit constraints are likely to spend more. Increasing the supply of credit to those who already have ample funds does not give the economy a cyclical boost. Trying to lend to borrowers who already have enough cash is somewhat pointless — if they wanted to spend more, they would have already done so.

Mr Stroebel and his colleagues examine the impact of a reduction in the cost of funds for 8.5 million credit card holders in the US between 2008 and 2014. They find that banks were least willing to increase credit limits for those who wanted to borrow the most, and most eager to lend to those who were not interested in borrowing at all. This apparently strange pattern has a simple explanation — the marginal propensity to borrow is inversely related to the risk- score (FICO scores) of borrowers. Credit constrained borrowers are the riskiest and while they provide a ready market for loans, high default rates actually erode banks’ profitability.

Mr Stroebel and his colleagues claim that this disconnect between the marginal propensity to borrow and the marginal propensity to lend of banks is why the attempt to expand credit, or more generally monetary policy, has not been effective in fighting the recession in the US that followed the great financial crisis. Their work does not have lessons only for the American credit card market or the US economy. The findings have implications for all credit markets, both retail and corporate. I would find it particularly relevant for India. With default rates and stressed loans already high in the system, banks would be perfectly justified (as a rational business decision) not to lend to those firms that are strapped for credit, desperate to borrow but likely to find it difficult to service loans. Going by RBI data, there has been a noticeable drop in credit disbursed to small and medium enterprises over the past few months. While some of this could be explained by the lack of demand for funds, banks’ reluctance to lend has also been a factor.

Monetary transmission in the sense of getting policy rate cuts to actually impact on the economy is not just about persuading banks to lower their benchmark lending rate in tandem with policy rates. They might just comply now that RBI is willing to keep liquidity neutral; whether they will actually lend to the ‘ right’ borrowers in the current economic environment is another story. Mr Stroebel’s paper shows that India will not be alone in finding out that monetary policy is somewhat weak in propping up a sagging economy. Fiscal policy, anyone?

When banks return to retail lending

Banks burdened by NPAs in areas such as infrastructure seem to be back in the retail game, after a retreat in the years since 2005-06. How will this play out?

With an increase in the bad loans burdening the books of the banking sector, commercial banks once again seem to be focusing on the retail lending business. While broadly defined as lending to individuals, retail lending covers a host of loans: those meant for investment in housing, those for purchases of consumer durables and automobiles and those for education, deferred payments on credit card expenditures or unspecified purposes.

The post-liberalisation changes in banking practices included an increased emphasis on retail lending, which transited from being a risky and cumbersome business to one considered easy to implement, profitable and relatively safe. In some instances, such as housing, the income earned (rent received) or expenditure saved (stoppage of rent payment) from the investment is seen as providing a part of the wherewithal needed to service the loan.

In other areas, confidence that future incomes to be earned by the borrower would be adequate to meet interest and amortisation payments provides the basis for enhanced retail lending.

Too much exposure

The result of the transition in perception has been a sharp increase in the share of retail lending in total advances since the early 1990s. After having risen gradually from 8.3 per cent of total outstanding bank credit at the end of 1992-93 to 12.6 per cent in 2001-02, the share of personal loans rose sharply to touch 23.3 per cent at the end of 2005-06 (Chart 1). This was a time when total bank credit too was booming.

It is to be expected when there is a sharp increase in lending to a few sector of this kind, those who would have earlier been considered risky or not creditworthy could enter the universe of borrowers.

Not surprisingly, by this time the fear that overexposure could result in an increase in defaults had begun to be expressed.

Addressing a seminar on risk management in October 2007, when the subprime crisis had just about unfolded in the US, veteran central banker and former chair of two committees on capital account convertibility, SS Tarapore, warned that India may be heading towards its own home-grown sub-prime crisis (‘Sub-prime crisis brewing here, warns Tarapore’ BusinessLine, October 17, 2007).

Banks too began to hold back as reflected in a gradual decline in the ratio of personal loans to gross bank credit from 23.3 per cent to 15.6 per cent in 2011-12. While this was still above the level at the beginning of the previous boom, the decline in share did suggest that the retail lending splurge had moderated.

However, more recently, this decline in the share of retail lending has reversed, rising from 15.6 per cent in 2011-12 to 16.6 per cent in 2014-15. Figures on rates of growth tell a clearer story.

According to Care Ratings, over the financial years ending March 2015 and March 2016, while overall non-food credit grew at 8.6 and 9.1 per cent respectively, personal loan growth rates were 15.5 and 19.4 per cent respectively.

Over the financial year ended March 2016, the home loan segment grew by 19.4 per cent, vehicle loans by 22 per cent, and credit card outstanding by 23.7 per cent.

House of cards

The reason for this turn are not difficult to find. First, the other major area of growth in bank lending has been infrastructure, which today accounts for a large proportion of the non-performing assets on the books of the bigger banks. So banks have been seeking out new avenues of lending. With industry not performing too well and agriculture languishing, retail lending emerges as the preferred choice.

Second, since retail lending was discouraged in the period prior to financial liberalisation, the exposure of the retail sector to debt is still quite low.

The ratio of personal loans to personal disposable income has indeed increased in India, from 2.4 per cent at the end of 1995-1996 to 13 per cent in 2007-08, and it still is at a historically high level of around 12.5 per cent (Chart 2).

However, this is extremely low when compared with, say, South Korea, where in 2013, when it faced a housing loan crisis, the ratio of household debt to household disposable income was around 150 per cent.

While that may be far too high a figure for a country like India with a much lower per capita income to approach, it has considerable headspace in this area.

Finally, default rates on retail lending, even if increasing, are still quite low. In the case of the State Bank of India for example, NPAs in its retail loan portfolio are placed at a little above 1 per cent, whereas the aggregate NPA ratio is above 6 per cent according to recent estimates. So shifting to retail lending seems a sound idea.

Segments of concern

That of course depends on the degree to which increasing exposure in the retail market requires diversifying the retail portfolio of banks. As of now, housing loans overwhelmingly dominate that portfolio, accounting for well above 50 per cent of the total (Chart 3).

With loan-to-value ratios in housing still low in many cases, and housing serving as good collateral, NPAs in this segment are among the lowest. There are three other areas that account for a reasonable share of personal loans outstanding: automobiles, education and credit card outstanding.

Of these, while the automobile loan segment is not a high default area, education is definitely proving to be so. Government policy mandates provision of education loans of up to ₹4.5 lakh without collateral.

So recovery too is difficult. Yet the inability to find jobs after financing education with loans is resulting in rising defaults, which, according to reports, average 8 per cent of such loans.

Moreover, well over a quarter of retail lending is in the “others” category, and possibly includes personal loans for unspecified purposes advance without collateral or lending against shares, etc. by banks trying to build their retail portfolio.

Here too, rising default is a probability as aggregate lending increases and recovery difficult.

That prospect notwithstanding, it is more than likely that India would witness another retail lending boom, led by banks trying to maximise their presence in this ostensibly underexploited area.

That may well result in exposure of a kind that warrants the fears expressed earlier by the late SS Tarapore.

Inter-bank squabbles delay NPA resolution

There is discontent about larger banks striking bilateral deals with promoters of firms with stressed assets

While the Reserve Bank of India does not prohibit a bank from conducting bilateral dealings with a borrower, it doesn’t seem to have foreseen private deals struck outside the joint lenders’ forum. Photo: Aniruddha Chowdhury/Mint

Cracks in the joint lenders’ forum (JLF) experiment, aimed at timely resolution of stressed loans, are beginning to show and the picture isn’t pretty.

According to at least four people in the know, there is discontent among factions of lenders about larger banks in the forums striking bilateral deals with promoters of firms with stressed assets, making it difficult for JLFs to effectively implement a resolution or recovery procedure.

“In some large cases, larger banks have taken possession of land parcels or other fixed assets, reducing the outstanding debt of the company. This allows them to maintain a standard asset classification on the asset for some time,” said a senior official at a large public sector bank, the first of the four people quoted above. The banker spoke on condition of anonymity as discussions at JLFs are confidential.

These decisions are usually taken outside the JLF in direct discussions with borrowers, said the banker quoted above. What such deals end up doing is reducing the pressure that the JLF would put on an errant borrower and delaying the resolution process further.

Indian banks have gross bad loans of Rs.5.8 trillion, a number which bankers expect to rise.

“The JLF mechanism is a time-bound process; so, any delays in it will only hurt the bankers involved. We have issued a clear mandate that if any such bilateral dealings are discovered from now, they will be reported to the regulator immediately and action will be requested,” he added.

To be sure, the Reserve Bank of India (RBI) does not prohibit a bank from conducting bilateral dealings with a borrower.

In January 2014, the central bank issued norms that require banks to form a JLF as soon as an account delays repayment by over 60 days. The JLF will be organized by the lead lender in a consortium lending case and by the largest lender in cases with multiple lenders. The JLF is then required to come up with a corrective action plan within 30 days and a majority of the lenders are required to sign off on the plan within 30 days.

Delays in decision-making or implementation of the plan are met with accelerated provisioning on the case, according to the regulatory norms.

But RBI doesn’t seem to have foreseen private deals struck outside the JLF.

In April, private sector lender Axis Bank acquired control over Jaypee Group’s headquarters in Noida, in exchange for reducing debt. In the same month, IDBI Bank Ltd and State Bank of India (SBI) were also offered parcels of land to reduce the debt. At the beginning of the year, ICICI Bank, too, had taken over 275 acres from Jaiprakash Associates Ltd and reduced nearly Rs.1,800 crore worth of debt of the company.

Eventually, the promoter was forced to offer an option to other lenders as well to take over unencumbered land. The proposal is still under discussion and yet to be approved, the first person confirmed.

SBI, IDBI Bank, Axis Bank, ICICI Bank and a spokesperson from the Jaypee Group did not respond to e-mails seeking comment.

In the case of Bhushan Steel Ltd, according to a public sector banker who is the second of the people quoted above, most public sector banks had moved to classify the account as a non-performing asset (NPA) in April. However, some of the private sector banks continued with a standard asset classification on the account.

“Divergence in asset classification tends to work against any recovery measures as lenders won’t ever be on the same page. Besides, if a majority of the banks in the consortium have classified the account as NPA, it is unfair that others continue with it as standard,” the second person said.

While it is unclear why some banks continued with a standard asset classification in this case, a probable reason could be some short-term repayments which were received by them, added the second person.

Bhushan Steel has over 40 lenders, most of which are public sector banks. SBI and Punjab National Bank (PNB) are the lead lenders. Calls and text messages to spokesperson for PNB and Bhushan Steel remained unanswered till the time of going to press.

“Some smaller private banks and foreign banks who have small loan exposures in certain cases also break protocol and threaten to file winding-up petitions, even as the JLF process is going on. If lenders are quibbling among themselves, then you cannot force the borrower to do anything,” said the second person.

However, the blame for any delays in JLF proceedings does not just lie upon private sector or foreign lenders. According to a senior official at a large private sector bank, state-owned lenders often have an elaborate and rather slow decision-making process, which makes the JLF resolution very cumbersome.

“There have been cases where smaller state-owned lenders agreed to give additional working capital loans to a borrower and then never sanctioned it because the head office differs from what the banker at the JLF has agreed to. If the borrower cannot run daily operations, it would be unfair to expect them to pay back their dues,” the private sector banker said.

According to RBI’s financial stability report released last month, gross non-performing assets of banks rose to 7.6% of total advances in the March compared with 5.1% in September 2015. The top 100 borrowers accounted for nearly a fifth of these bad loans. A large number of these top borrowers have a JLF looking at possible solutions to ensure recovery.

“These differences among lenders point to the fact that probably the JLF system is not working to the extent that it was meant to. Bankers will have to sit together and resolve their differences themselves. It is likely that the deadlines that were talked about earlier will be stretched further,” said Saswata Guha, Fitch India Services Pvt. Ltd.

In December, RBI governor Raghuram Rajan said that banks would be required to clean up their balance sheets by 31 March 2017. This meant recognizing visibly stressed assets, providing for them and coming up with a resolution plan.

Turn of the screw

Ultra-low interest rates are slowly squeezing Germany’s banks

BANKS the world over are groaning under the burden of low, even negative, interest rates. The gripes from Germany are among the loudest. In March, when the European Central Bank cut its main lending rate to zero and its deposit rate to -0.4%, the head of the savings banks’ association called the policy “dangerous”. At the co-operative banks’ annual conference this month, a Bundesbank official earned loud applause just for not being from the ECB.

Germany’s banking system comprises three “pillars”. In the private-sector column, Deutsche Bank, the country’s biggest, expects no profit this year. That is mainly because of its investment-banking woes, but low interest rates have also weighed it down: it wants to sell Postbank, a retail operation it took over in 2010. Commerzbank, ranked second, specialises in serving the Mittelstand, Germany’s battalion of family-owned firms. It has felt the interest-rate squeeze even more. Analysts at Morgan Stanley place it among the worst-hit of Europe’s listed lenders.

Most Germans, however, entrust their savings to the other two pillars. One includes 409 savings banks (Sparkassen), mostly municipally owned; the other, 1,021 co-operatives. These conservative, mainly small, local banks are the most vocal complainers—even though at first blush they have little to moan about. Savings banks’ combined earnings declined only slightly last year, to €4.6 billion ($5.1 billion) from €4.8 billion in 2014. Deposits and loans grew; mortgages soared by 23.3%. Capital cushions are reassuringly plump: their tier-1 ratio rose from 14.5% in 2014 to 14.8%. Co-ops had a similar story to tell. But trouble is brewing.

The ECB has flattened long-term rates as well as short ones, by buying public-sector bonds and, starting this month, corporate debt. Ten-year German government-bond yields are near zero—and recently dipped below, thanks in part to markets’ fears about this week’s Brexit referendum. For banks, this means ever thinner margins from taking in short-term deposits and making longer-term loans—from which, says McKinsey, a consulting firm, German banks earn 70% of their revenue.

Lenders have been well insulated so far, because most loans on their books were made when interest rates were higher: 80% of loans last longer than five years. Rising bond prices (the corollary of falling rates) have provided further padding as banks’ portfolios gain in value: that effect alone has brought the savings banks €19.4 billion over the past five years. But as old loans mature, they are being replaced by new ones at today’s ultra-low rates. The mortgage boom is thus a mixed blessing: rates are typically fixed for ten years or more.

With no increase in ECB rates in sight, the screw is tightening. Half of the 1,500 banks surveyed by the Bundesbank last year—before the latest rate cuts—expected net interest income to fall by at least 20% by 2019. Although banks would prefer higher rates, too sudden an increase would also be awkward, pressuring them to pay more for deposits while locked into loans at rock-bottom rates.

Banks are seeking ways to alleviate the pain. Commerzbank is charging big companies for deposits, above thresholds negotiated case by case. (It is also reported to be pondering stashing cash in vaults rather than be charged by the ECB.) Bankers warn of an end to free personal current accounts. But with so many banks to choose from, scope for raising fees is limited.

Selling investment products and advice seems more promising; and commission income has risen, as some savers seek out higher returns. Yet low rates have made many Germans, already a cautious lot, even less adventurous. They are stuffing more, not less, into the bank—but into instant-access accounts: with rates so low they may as well keep cash on hand.

Low rates are not banks’ only worry. Both bankers and politicians vehemently oppose a proposed deposit-insurance scheme for the euro zone: the savings banks and co-ops have always looked out for each other, and don’t see why they should insure Greeks and Italians, too. Smaller institutions complain about an increase in regulation since the financial crisis—even though they weathered the storm far better than many larger ones. The savings banks’ association claims that red tape costs its members 10% of earnings—and some as much as 20%.

Another concern is the march of technology. Germans have been slow to take up digital banking, but their banks—reliant on simple deposits and loans, and still carrying the costs of dense branch networks—are vulnerable to digital competition nonetheless. Number26, a Berlin startup, has signed up over 200,000 customers across Europe for its smartphone-based current account within months. The savings banks plan to hit back this year with Yomo, a smartphone app aimed at young adults.

McKinsey reckons that low rates, regulation and digitisation together could cut German banks’ return on equity from an already wretched 4% in 2013 to -2% within a few years if they do nothing in response. The pressure is starting to tell. This month the Sparkasse Köln-Bonn, one of the biggest savings banks, said it would close 22 of its 106 branches. Some rural banks have replaced branches with buses.

All this is likely to thin the crowded ranks of Germany’s lenders. Consolidation has been under way for decades: since 1999 the number of co-ops has fallen by half; on August 1st their two remaining “central” banks, DZ Bank and WGZ Bank, which provide co-ops with wholesale and investment-banking services, are to join forces. The pace of mergers has steadied in recent years. Negative rates may speed it up again.

Here’s why the pickup in India’s loan growth has few believers

Lenders seem to be benefiting mostly because a jump in short-term commercial paper rates is driving companies into their arms, say analysts.

Loans climbed 11.6%, the most since July 2014, in the year through 19 February, according to fortnightly data from RBI.

Mumbai: A rebound in loan growth to a 20-month high sounds like good news for Indian banks as they struggle to shake off the impact of a surge in bad debts. But a deeper dive into the reasons behind the revival shows it may be unsustainable.

Lenders seem to be benefiting mostly because a jump in short-term commercial paper rates is driving companies into their arms, according to Prabhudas Lilladher Ltd. A weakening Indian rupee is also making domestic borrowing more attractive, with local companies raising $2.5 billion via foreign-currency loans in 2016 in the slowest start to a year since 2012.

Any pickup in credit could help revive economic growth and improve performance at banks after profitability, as measured by return on assets, slumped to the lowest in at least a decade. With distressed assets at a 14-year high, lenders in Asia’s third-largest economy are under pressure from regulators to give priority to cleaning up balance sheets.

“A strong revival in credit growth is still some time away,” said Nitin Kumar, a Mumbai-based banking analyst at Prabhudas Lilladher. “One reason for recent improvement is substitution of offshore funds and money-market instruments with bank loans, while the other is some pickup in retail loan demand. We expect loan growth to stay at about 12% this year and the next.”

Loans climbed 11.6%, the most since July 2014, in the year through 19 February, according to fortnightly data from the Reserve Bank of India (RBI). That compares with a 20-year low of 8.88% in February last year.

Three-month commercial paper (CP) rates have surged 105 basis points this year to 8.8%, data compiled by Bloombergshow, as India’s capital markets regulator restricted the amount of money that mutual funds can invest in debt instruments such as commercial paper and corporate bonds.

The rupee has weakened 0.5% this year to 66.5050 a dollar in Asia’s worst performance, after completing a fifth straight annual decline in 2015. Morgan Stanley this month lowered its year-end estimate to 73 from 70, while predicting a fall to 69 by the end of this quarter. That’s weaker than the currency’s record low of 68.845 seen in August 2013.

Foreign-currency borrowings by Indian companies so far in 2016 have more than halved from the $6.38 billion seen in the same period last year, according to data compiled byBloomberg.

Nomura Holdings Inc. expects lending growth to stay around 11.5% this year, Sonal Varma, a Mumbai-based economist, said in a phone interview on Friday.

The pickup in loans “may also reflect increased working capital needs” of corporates, Varma and her colleague Neha Saraf wrote in a report earlier this month. “The upside in credit growth is limited. Hence, instead of cheering the uptick, we remain in a wait-and-see mode.” 

Sun Capital

Sell assets of guarantors if firms don't repay loans: Govt to banks

Gross NPAs of PSBs rose to Rs 3.61 lakh cr while that of private lenders were at Rs 39,859 cr at the end of Dec'15

In order to effectively deal with Vijay Mallya type loan default cases, government Friday directed public sector banks to immediately invoke personal guarantees of promoter directors and recover loans from them in case the companies fail to repay.

Issuing the directive to heads of PSBs, the Finance Ministry regretted they seldom recover loan from guarantors in case of loan default by companies.

"It has been observed that there are a less number of cases where action has been taken for recovery against guarantors for attachment of assets owned by them and sell the same for recovery of defaulted loan," it said while issuing the directive in consultation with the RBI.

The ministry further told banks that "it would be prudent to take steps against guarantors immediately when no sign of revival is visible".

Asking banks to approach Debt Recovery Tribunal (DRT), it said action against guarantors should be taken under SARFAESI Act, Indian Contract Act and relevant legislations.

Exit of beleaguered industrialist Mallya to London early this month created huge uproar in Parliament as well as outside. Various companies associated with him owe over Rs 9,000 crore to different banks.

Mallya and his group firms are being probed by several agencies including Enforcement Directorate.

Gross NPAs of PSBs rose to Rs 3.61 lakh crore while that of private lenders were at Rs 39,859 crore at the end of December 2015.

Gross NPA ratio, as percentage of advances, rose to 7.30% while for private banks, it stood at 2.36% as of December-end.

In the event of default in repayments or loan by the borrower company, all directors are liable to repay the guaranteed loan with interest as the liability or the guarantor is co-extensive with the principal debtor (borrower).

"Action can be taken against the guarantor without suing the principal debtor for recovery and even if the decreed amount is covered by mortgage decree," the ministry said.

As per the law, if a guarantor has given any pledge of share held by him, the steps should be taken to sell the pledged share, under the Indian Contract Act.

The directive said that if the guarantor has not created any security Internet over his property but owns property and other assets, the banks should move DRT for their attachment and sale.

The banks, it said, should also keep a watch on periodical statement of book-debts and receivables submitted by the borrower and take steps for attachment and recovery of such book-debts under SARFAESI.

Sun Capital

RBI orders probe into alleged frauds in loans to farmers

The Reserve Bank of India (RBI) has ordered a probe into allegations of irregularities committed by public, private and foreign banks to claim achievements of targets in lending to farmers and the agro-sector, an official said on Friday.

The probe has been ordered following a detailed memorandum listing the alleged frauds, submitted by the Vasantrao Naik Sheti Swavalamban Mission (VNSSM), a state-run body, in December.

The finance ministry had forwarded the VNSSM complaint to the Chief Vigilance Officer of RBI after which the probe was initiated, said VNSSM President Kishore Tiwari, who enjoys the rank of a minister of state.

"It is shocking that due to failure of banks to implement the RBI Targeted schemes, farmers and agro-sectors are suffering and the country has witnessed lakhs of farmland suicides, including over 25,000 in Maharashtra alone, in the past decade," Tiwari said.

He said that as per RBI's guidelines, all banks in the country were given a specific target of lending 18 percent of Adjusted Net Bank Credit or credit equivalent of Off-Balance Sheet Exposure, whichever is higher, to the agro-sector and farmers.

However, a study by the VNSSM revealed the massive alleged irregularities and frauds perpetrated by the concerned banks merely to tom-tom achievements of targets and sub-targets, thereby defeating the purpose of benefiting the farmers and agro-priorities sectors, Tiwari said.

The modus operandi reportedly involved forming fictitious farmers' Joint Liabilities Groups with fraudulent documents in the name of the farmers. The disbursements of crores of rupees of agro-credits never reached them though the targets were shown as 'achieved'.

Similarly, paper-borne schemes of agro-finance against collaterals of agricultural lands of the farmers at subsidized interest rates were shown, but immediately the entire amounts were turned and put in fixed deposits at higher interest rates, Tiwari said.

"Hence, though it was shown as disbursed on paper, in reality the money never reached the farmers and while the banks 'enriched' themselves, the poor farmers resorted to suicide. This is virtually a white collar crime," he said.

Another paper-borne scheme pertains to Agro Warehousing Receipt finance through Urban Cooperative Socieites by way of Cash Credit against agro-produce, said to be stored in warehouses against which the societies claimed finance for farmers at low interest rates. Again the entire amount was converted into FDs and did not reach the famers, according to Tiwari.

The VNSSM listed other methods to defeat the agro-sector and farmers with big Cash Credits made available at low interest rates to corporate houses for their farming businesses to show achievement of targets.

Sun Capital

India can deliver two-third of world growth: IMF

Appreciating continuing reform process in the country, IMF chief Christine Lagarde today said “India’s star shines bright” amid global economic challenges and can deliver nearly two-thirds of the worldwide growth over the next four years despite a slowing momentum.

The world’s fastest-growing large economy, she said, is on the verge of having the largest and youngest-ever workforce and, in a decade, set to become the world’s most populous country.

“So, India stands at a crucial moment in its history — with an unprecedented opportunity for transformation. Important reforms are already under way,” the IMF Managing Director said at a conference on ‘Advancing Asia: Investing for the Future’ here.

“Think, for example, of Make-in-India and Digital India. And with the promise of even more reforms to come, India’s star shines bright.”

The conference is being organised by the Ministry of Finance and IMF, which was attended by Prime Minister Narendra Modi.

Recalling that India and IMF go back a long way together — India was a founding member of the Fund more than 70 years ago — Lagarde said Asia is the world’s most dynamic region and today accounts for 40 per cent of the global economy.

“Over the next four years, even with a slightly declining momentum, it stands to deliver nearly two-thirds of global growth,” she added.

Lagarde, who got reelected for the second term as chief of the Washington-headquartered International Monetary Fund (IMF), pointed to the global economy facing many challenges.

These challenges, she said, include volatile markets and capital flows, economic transitions and financial tightening in many countries, the large drop in commodity prices, including oil and escalated geo-political tension.

Sun Capital

Reforms in India will be slow, tedious: Morgan Stanley

Experts said domestic woes, including ballooning NPAs reported by banks and weak quarterly numbers in various other sectors, also added to the market weakness recently.

Big bang reforms will not be the operating template for India and the process will be a 'slow and tedious one', says a Morgan Stanley report.

The global financial services major said that the recently announced Budget for 2016-17 has proved once again that major reform initiatives will not be the operating template for the country.

"Reforms in India will be a slow and tedious process, requiring the buy-in of the opposition and the bureaucracy," it said. Since the beginning of this year, Indian markets have seen heavy volatility largely owing to high fluctuations in global markets led by the Shanghai Composite and domestic events such as the Union Budget, it said.

The Indian equity markets have seen extreme weakness due to various negative factors, including global economic slowdown fears, falling crude prices, worries related to Chinese economy and muted quarterly earnings.

Experts said domestic woes, including ballooning NPAs reported by banks and weak quarterly numbers in various other sectors, also added to the market weakness recently. Meanwhile, the index slumped to its lowest level in 21 months, when the Sensex crashed 807 points to drop below the 23,000-mark on February 11, this year.

"Moreover, what was evident once again this year, is that while India may be in a relatively better position based on external macro indicators compared to 2013, the correlations with global markets always rise disproportionately during periods of heightened uncertainty in other parts of the world," the report added.

Sun Capital

Banks disburse over Rs 1.15 lakh crore under PM Mudra Yojana

Banks have so far disbursed over Rs 1.15 lakh crore under Pradhan Mantri Mudra Yojana (PMMY), financial services secretary Anjuly Chib Duggal said on Tuesday.

Micro Units Development and Refinance Agency Ltd (Mudra) focuses on 5.75 crore self-employed who use funds totalling Rs 11 lakh crore and provide jobs to 12 crore people.

Under PMMY, loans between Rs 50,000 and Rs 10 lakh are provided to small entrepreneurs.

"We have been working with Mudra. It has been a runaway success ... we are looking at Rs 1.15 lakh crore plus right now," she said at an event organized by MFIN here.

The scheme was launched by Prime Minister Narendra Modi in April last year.

Three products available under the PMMY are Shishu, Kishor and Tarun, to signify the stage of growth and funding needs of the beneficiary micro unit or entrepreneur.

Shishu covers loans of up to Rs 50,000 while Kishor covers those above Rs 50,000 and up to Rs 5 lakh. Tarun category provides loans of above Rs 5 lakh and up to Rs 10 lakh.

With regard to Banks Board Bureau, Duggal said, she would be meeting newly appointed chairman Vinod Rai this week to discuss operationalisation of this specialised body.

Last month Rai, a former CAG, was appointed head of Banks Board Bureau by Prime Minister Narendra Modi.

The bureau will give recommendations on appointment of directors in public sector banks and advise on ways to raise funds and mergers and acquisitions to the lenders.

There are 22 state-owned banks in India including SBI, IDBI Bank and Bhartiya Mahila Bank.

Besides, she said that there would be meeting of heads of the bank on March 22 to discuss about the recently launched crop insurance scheme by Prime Minister.

The crop insurance scheme scheme has already been approved by the Cabinet that would replace the existing ones to ensure that farmers pay less premium and get early claims for the full sum insured.

Investment Banking

Banks with strong networks will find takers

Mumbai The government, which recently stepped up focus on consolidating weaker public sector banks (PSBs), plans to reduce the number from 27 now to six or seven larger banks.While market capitalisation is a reflection of how the Street (investors, analysts, etc) views the bank's core fundamentals, the current state as well as the future prospects, a detailed look at the nine months' data of these banks provides some insight on their financial and business condition.In terms of asset quality, for instance, Indian Overseas Bank (IOB) and UCO Bank are the worst placed as they had the highest gross non-performing assets (NPA) at 12.6 per cent and 11 per cent, respectively, as on December 31, 2015.Dena Bank was the third on this list with gross NPA ratio of 9.9 per cent. 

However, if one adds the restructured assets, it would reflect the real asset quality picture of a bank. While the latest figures of total stressed assets for many banks are not available, the situation is not alarming, say analysts.Many PSBs also have low levels of capital to fund growth as well as any fresh losses that they may witness on account of bad loans. For example, while Dena Bank reported a net loss for the nine months ending December 31, 2015; its Tier-1 capital of 7.1 per cent is the lowest amongst its peers. United Bank's Tier-1 capital ratio, too, stood at 7.1 per cent in this period. Again, not all banks have declared their Tier-1 capital ratios as at the end of the December 2015 quarter.Notably, while PSBs consolidation will be largely driven by regulations, larger banks would not want to buy banks having low capital adequacy as well as poor asset quality, unless they prove to be of strategic importance. A key factor that will aid consolidation will be a bank's branch network. Historically, banks having larger presence in one region have bought smaller banks having stronger presence in another region. This ensures there is minimal overlap and the businesses are complementary in nature. The key hurdle and integration challenge, though, will be the employee unions in some of the PSBs that might resist such mergers and acquisitions. Nevertheless, with the advent of digital banking, the attraction of a branch network might not be enough.Analysts, however, believe most smaller and relatively weaker PSU banks could be potential takeover targets.Vaibhav Agrawal of Angel Broking says, "United Bank, IOB, OBC, Dena Bank, Vijaya Bank, Bank of Maharashtra, Andhra Bank, Indian Bank, Corporation Bank, among others, could be key takeover targets. The prime criteria will be complementary network, capital adequacy, asset quality, unions and actual integration of this merger."

Sun Capital

Banks will have to lower lending rates in April

Mumbai Irrespective of whether the Reserve Bank of India (RBI) cuts its policy rate on or before the April 5 policy review, banks will have to cut their lending rates by at least 25-30 basis points (bps) in April, to catch up with the lag in transmission.

The central bank has, so far, cut its repo rate by 125 bps and banks have passed on between 60-70 bps of the cut. If the central bank cuts some more, as is expected by the market, banks' lending rate cuts should be steeper, too. One basis point is 0.01 per cent.

But, the lending rate cuts might not happen immediately in March, as banks would ideally want to shore up their treasury profits by taking advantage of the recent dip in bond yields, and also enjoy an improvement in spreads in the last month of the financial year, when credit demand generally picks up.

The resultant profit will also mend their bottom line to some extent, as they have been severely hit by RBI's asset quality review programme, which will continue to exert pressure in the March quarter as well. "Transmission will happen, irrespective of the rate cut quantum (by RBI)," said Soumya Kanti Ghosh, chief economist, State Bank of India.

However, that will likely not be in March, said A Prasanna, chief economist at ICICI Securities Primary Dealership Ltd.

"There is pressure on bank balance sheets now. Transmission will improve with liquidity in April," Prasanna said.

From April 1, RBI's marginal cost-based lending rate (MCLR) would kick in, which will prod banks to use their incremental cost of funds, rather than average cost of deposits to arrive at the lending rate. Since money market rates move faster than deposit rates and banks tap into these money markets, the incremental cost will add dynamism in lending rate calculations. And, 10-year bond yields have fallen 15-20 bps since the Budget. If this trend continues till March-end, banks would have to factor in this drop.

Finally, with RBI infusing longer-term liquidity in the system through secondary bond market purchases, banks should have less reason to complain that system liquidity tightness is not letting them pass on rate cuts. Under the new liquidity framework, RBI ensures call money rates are anchored at around the repo rate, no matter how much liquidity infusion is needed. However, bankers have complained that the liquidity infused is short-term, and more permanent liquidity needs to be infused through secondary market bond purchase. The central bank does so through its open market operations, or OMO. Including a scheduled Rs 15,000-crore OMO purchase on Thursday, RBI's liquidity infusion is close to Rs 50,000 crore in recent months.

The OMOs, and with government spending picking up, have ensured that from an acute shortage of Rs 1.6 lakh crore at the end of January, banking system liquidity has improved to less than Rs 1 lakh crore now.

But there would be stress on the liquidity front again, starting March 15, when advanced tax outflow starts, pointed out Gaurav Kapur, India economist at Royal Bank of Scotland.

The tight liquidity condition would be needed to be evened out first before banks can move with rate cuts and that would be by the next financial year, Kapur said.

However, whether the rate cut would be of any meaning to revive growth is a different question altogether, articulated IDFC Bank's Chief Economist Indranil Pan.

"With MCLR pricing the incremental cost, pass-through of the cumulative 125-basis point rate cut is expected to be at 25-30 bps. So, even after a transmission of 85-90 bps if credit growth doesn't take place, one needs to ask if the problem lies with the RBI rate cuts and transmission mechanism or the credit channel itself," Pan said.

Investment Banking 

India says will ensure that banks are well-capitalised

India has "good control" over stressed loans at state-owned banks and will ensure lenders are well-capitalised, junior finance minister Jayant Sinha said on Friday.

Speaking as senior officials from the banks, the Reserve Bank of India and the finance ministry held an annual meeting, Sinha said the government would allocate capital based on the banks' capital-adequacy ratios, performance and credit growth.

"We will provide more as necessary to ensure that our banks are well-capitalised," he told reporters.

"As far as the set of stressed assets is concerned, as far as the NPA (non-performing assets) situation is concerned, that we think we now have very good control over and of course (we are) working very closely with the RBI."

Some critics accused the government of skimping on a bailout for the ailing state banks after Finance Minister Arun Jaitley did not announce additional funding in his Feb. 29 budget.

He stuck to plans to provide state banks with 250 billion rupees ($3.7 billion) of new capital in the next financial year towards a sector-wide bailout that the government estimates will cost $26 billion over four years.

Stressed loans -- those that have already turned bad and those seen at risk of doing so -- amount to 8 trillion Indian rupees ($119 billion), or 11.25 percent of total loans, Sinha said on Friday.

A recent surge in bad loans at state-run lenders after their regulator ordered a clean-up has led rating agencies to suggest banks will need more capital support from the government to cover losses and meet Basel III global banking rules.

More than two-dozen state-run lenders account for over two-thirds of India's banking assets and some 85 percent of troubled loans in the financial sector.

($1 = 67.0630 rupees)

Sun Capital