WHEN India loosened its rules on how banks deal with bad debts in 2008, the financial crisis was raging. The aim, sensible enough, was to give breathing room to borrowers in temporary difficulty because of a shock that originated thousands of miles away in America’s housing market. Five years on, however, the policy has come back to haunt the country’s financial industry.
Bank loans are usually classified as either performing or non-performing. If non-performing, lenders must build up reserves against potential losses. In 2008 the Reserve Bank of India (RBI), the supervisor, permitted the widespread use of an intermediate category of “restructured” loans. The terms of these loans had been watered down to help the borrower but banks could assume any difficulties were a blip and avoid building up provisions.
The spirit of that rule has been abused in the past five years as firms have rushed to get laxer terms in order to avoid admitting they are bust—ably assisted by their bankers. Consider India’s state-owned banks, which are responsible for three-quarters of all bank loans and where bad debts are overwhelmingly concentrated.
The proportion of the present stock of restructured loans that has deteriorated to become non-performing has risen, to 25% in the case of State Bank of India, the biggest government-run lender. That disproves they are safe. And total problem loans, either non-performing or restructured, have reached 9% of the total, according to Morgan Stanley (see chart). That is alarmingly near the level of a decade ago, when Indian banks were in the doghouse. >> Read More
Europe’s non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts andnon-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain’s bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).
With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks, it seems the Cyprus deposit haircut non-template may indeed become the key template.
Simply put, the greater the unemployment the more the strain on banks to generate “profits” by any means possible (GGBS?) to cover the capitalization shortfall from NPLs until at some point liability haircuts have to begin…
Non-performing loans as % of total loans across the Euro area
Unemployment rates across Euro area countries >> Read More
State Bank of India (SBI) Chairman Pratip Chaudhuri today said Non Performing Assets (NPA) remained an area of concern for the Indian banks.
He attributed the build up of NPAs in the banking sector to the general slowdown in the domestic economy over the last couple of years, which had seriously impaired the repayment capacity of borrowers.
Giving the example of the textiles hub of Kanpur, Chadhuri said there was general sickness in industry. “While disbursing loans, the bank had anticipated timely repayment by industry. But, the borrowers are not able to repay,” he said adding even the occupancy rate of hotels had come down drastically, signifying a slowdown. >> Read More
HSBC said its first quarter profits almost doubled from a year ago to more than $8 billion (5 billion pounds) as bad debts and costs fell, with Europe’s biggest bank showing the benefit of a 3-year restructuring plan.
HSBC reported a pretax profit of $8.4 billion on Tuesday, up from $4.3 billion a year ago and above the average forecast of $8.1 billion from analysts polled by the company.
Losses from bad debts plunged 51 percent to $1.2 billion and costs fell 10 percent in the first quarter from a year ago, benefiting from Chief Executive Stuart Gulliver’s drive to streamline operations, reduce complexity and axe businesses that are unprofitable or lack scale. He has shed 52 businesses since taking over in early 2011.
The slowing economy may limit the scope of banking in fiscal 2014 and loan growth may witness a 15-year low, analysts said, even as bankers hope that it will be business as usual.
Loans grew in the past one year—until 22 March—at 14.1% from the year before, according to the latest Reserve Bank of India (RBI) data.
Typically, in the last month of the financial year, banks rush to disburse short-term loans, or working capital loans, and buy short-term corporate bonds, or commercial papers, to show a healthy balance sheet for the 12-month period.
Although last week’s loan-disbursement figure is still not available, analysts said fiscal 2013 has been no exception. >> Read More
Indian regulators should introduce a US-style “Chapter 11” bankruptcy law to help recover bad debts and end long-running disputes with borrowers, the head of one of the country’s largest banks has said.
Aditya Puri, chief executive of HDFC Bank, India’s largest private sector bank by market capitalisation, told the Financial Times that the country’s laws provided few options when the businesses of his bank’s corporate customers were no longer viable.
India’s banking system has grappled in recent years with a number of high-profile businesses struggling to stay afloat, including Kingfisher Airlines , which has estimated debts of $2.5bn, and Suzlon, the renewable energy producer.
A 17-lender consortium, not including HDFC Bank, has spent several years attempting to cajole Kingfisher to start repaying some of its debt with little success, while the airline itself has lurched ever-deeper into crisis. >> Read More
India’s leading banks need to mimic the mass scale of Chinese financial institutions if they are to meet increasing demands for infrastructure investment and economic development, the head of the country’s largest private bank by assets has said.
Chanda Kochhar, chief executive of ICICI, told the Financial Times that her bank planned to open its first full branch in Shanghai later this year, while also predicting possible future consolidation in the sector as Indian banks sought global scale over the next decade.
However, Ms Kochhar warned that problems of weakening asset quality and bad debts among India’s largest industrial companies could worsen in the short term, against a backdrop of sluggish growth in Asia’s third-largest economy that has seen bank expansion slow sharply.
“In India we do need bigger banks, as we have had to fund $1tn of infrastructure expenditure [over the next five years],” Ms Kochhar said, claiming that the country’s banking system had the capacity to expand at three times the rate of overall economic growth, or up to 24 per cent annually. >> Read More
08 January 2013 - 1:03 am
Indian banks reiterated their demand for higher tax deductions for provisions of bad debts as well as a reduction in the lock-in period for fixed deposits (FDs) from five years to three years to be eligible for tax deduction.
The demands were made at a pre-budget meeting with finance minister P. Chidambaram on Monday.
Banks also asked that interest on FDs for the purpose of tax deducted at source be increased to Rs.25,000 from Rs.10,000.
The lenders sought an extension of the interest subvention scheme for agricultural loans to term loans and loans to self-help groups, bankers said. Currently, interest subvention is available only to credit limits extended to farmers.
Some banks also sought the reintroduction of tax-saving bonds with a tax exemption of Rs.20,000, the finance ministry said in a statement. >> Read More 09 October 2012 - 1:12 am
Eurozone finance ministers formally inaugurated a permanent €500bn rescue fund on Monday, but left unresolved whether it would be used to shoulder existing bad debts of Irish and Spanish banks.
Klaus Regling, managing director of the new fund, the European Stability Mechanism, said the issue of “legacy assets” – bank liabilities currently being wound down by the Irish and Spanish governments – had not been discussed in “any European body” and signalled the issue may not be resolved for months.
Still, eurozone officials insisted the creation of the ESM – which, unlike its temporary predecessor, will be funded by paid-in capital from eurozone countries rather than just guarantees – will give their crisis-fighting tools more credibility.
“The euro area now is equipped with a permanent and effective firewall,” said Jean-Claude Juncker, the Luxembourg prime minister who will chair the ESM board.
The issue of who will be responsible for bailing out weak eurozone banks was cast into uncertainty last month after finance ministers from Germany, Finland and the Netherlands insisted the ESM would not take on debts incurred while banks were being supervised by existing national regulators. >> Read More