Reserve Bank of India (RBI) governor Raghuram Rajan’s insistence on cleaning up bank balance sheets under the central bank’s asset quality review (AQR) programme shows that banks were hiding nearly half of their stressed assets so far. Rajan had linked the AQR programme to a ‘deep surgery’ that was needed for banks to regain health.
In his speeches earlier, Rajan had blamed banks for taking advantage of the various forbearance schemes that the central bank had extended to them. “If the bank wants to pretend that everything is all right with the loan, it can only apply band-aids – for any more drastic action would requireNPA classification,” Rajan said at a CII event in February. He also said at the same even that: “In sum, to the question of what comes first, clean up or growth, I think the answer is unambiguously, ‘Clean up!’. Indeed, this is the lesson from every other country that has faced financial stress.”
And banks could not drag their feet anymore.
Contrary to popular perception, it is not only public sector banks that were under-reporting their bad assets, but large private banks were also hiding their dirt under the carpet. Out of the total slippages in Axis Bank and ICICI Bank in the third quarter (Q3), 50 per cent and 66 per cent respectively were on account of RBI’s AQR exercise. In the fourth quarter (Q4), AQR accounted for 43 per cent of ICICI Bank’s slippages. Notably, Axis had accounted all AQR loans in Q3 itself. ICICI Bank, on the other hand, provided for Rs 30,000 crore towards AQR slippages in Q4. HDFC Bank, Kotak Mahindra Bank and IndusInd Bank had nothing to account for under AQR, making them bright exceptions in the Indian banking industry. Of the total slippages of large banks that have reported their results so far, about 44 per cent were towards AQR in the second half of FY16.
Indian banks’ asset quality and capitalisation are likely to remain under pressure in the next 12 months mainly because of tepid industrial activity and high leverage by some corporates, Standard & Poor’s said.
“We expect profitability of Indian banks to decline over the next two to three quarters because banks recently cut base lending rates, and their credit costs are likely to remain high,” S&P credit analyst Amit Pandey said.
He said non-performing loans of banks with high exposure to troubled sectors will continue to rise, and credit costs of banks with a backlog of provisions will increase.These factors could strain the capitalisation of banks with below-average profitability, particularly as capital demands are likely to soar as Basel III norms get implemented.
“The asset quality and capitalisation of India’s banking sector is likely to remain under pressure in the next 12 months because of tepid domestic industrial activity, and subdued profitability and high leverage in some corporate sectors,” S&P said in its report- Indian Banks Face An Uphill Road This Year.
Until mid-day on Thursday, 11 February, 26 of the 39 listed banks had reported earnings. For this set of banks, the gross non-performing assets (NPAs) have jumped 27% between the September- and December-ended quarters toRs.2.72 trillion from Rs.1.90 trillion. Provisions have surged more than 72% quarter-on-quarter (q-o-q) for this set. (Note: A q-o-q comparison is more relevant in this case because it tells you the extent to which bad loans were under-reported and the inadequacy of provisioning. Both are now getting corrected following the RBI’s asset quality review.)
While the aggregate jump in bad loans is worrying enough, some of the mid-sized banks have reported real howlers. The country’s largest lender, State Bank of India (SBI), reported a 28% increase in gross bad loans between the third and fourth quarters and an 82% uptick in provisions. Profits fell 62%. Arundhati Bhattacharya, chairperson of SBI, warned that a further hit may need to be taken in the fourth quarter. However, Central Bank of India, Dena Bank, Allahabad Bank and Indian Overseas Bank, have all reported large losses as the increase in provisions completely wiped out profits. Punjab National Bank (PNB) managed to report a small profit because of tax write-backs. If not for that, it, too, would have reported a loss.
BAD LOANS For the year-ending March 2015, gross NPAs of scheduled commercial banks stood at Rs 3.02 lakh crore in absolute terms, or 4.6 per cent of total advances. Six months later, this rose to 5.1 per cent. The stressed advances ratio — stressed assets is defined as bad loans plus loans that have been restructured by banks — increased to 11.3 per cent in September 2015 from 11.1 per cent in March. Private estimates of stressed assets, however, are significantly higher and vary between 17.5 per cent and a quarter of all bank advances.
Moody’s Investors Service says that banks in China (Aa3 stable) will face a higher degree of uncertainty — and therefore risk — amid increased volatility in interest rates, exchange rates, stock prices and fund flows.
“We also anticipate further increases in loan delinquencies, more defaults on corporate debt and some losses in wealth-management products, as more borrowers struggle to meet payments against the backdrop of high financial leverage and a downturn in their respective sectors,” says Christine Kuo, a Moody’s Senior Vice President.
“While the Chinese authorities will implement measures to mitigate financial market volatility and corporate default, the effectiveness of such measures will vary, because of the challenges of managing China’s large and complicated market,” adds Kuo.
Moody’s analysis is contained in its just-released report titled “Banks — China: Frequently Asked Questions about Chinese Banks amid Recent Volatility,” and is authored by Kuo.
Moody’s report says that the financial performance of Chinese banks over the next two years will be driven primarily by the evolution of their asset quality, which is in turn a reflection of their risk appetites.
As the burden of bad loans turned worse for banks in 2015 especially the state-run players, they are betting big on the seven-point ‘Indradhanush’ reforms to bounce back in the New Year and expect more steps from the government and the RBI to clean up their books.
Besides, the commercial banking industry is also gearing up to face a new kind of competition in form of payments and small finance banks that would begin operations in 2016.
Also on anvil could be the Government’s divestment in IDBI Bank and setting up of the long-awaited Bank Board Bureau (BBB).
Non-performing assets (NPAs) remained a matter of concern for both the government and RBI although the situation is expected to get better by March 2016 as some major decisions are anticipated soon to tackle the issue of bad debts.
To revive the fortunes of public sector banks (PSBs), the government in August unveiled a seven-point plan named ‘Indradhanush’ or ‘Rainbow’ encompassing Rs 20,000 crore immediate fund infusion and creation of a single holding company.
Moreover, the Government has also resolved to set up a Bank Investment Committee, which will act as a holding company for shares on behalf of the Government for facilitation of capital requirement through innovative manner.
The action plan has also been put in place for a new framework of Key Performance Indicators (KPIs) to be measured for performance of PSBs to bring them at par with the private sectors banks in terms of efficiency.
Will cut RRR by additional 50bps for qualifying institutions
Cuts effective 24th Oct
Says it is liberalising deposit rates for commercial banks and credit cooperatives
Will increase regulation of interest rates
Wants to improve the transmission mechanism of monetary policy
Removes deposit rate ceiling for banks
AUDUSD takes a leap to 0.7297 from around 0.7260
Most headlines are saying the RRR cut is 50bps but Reuters are saying the cut is 25bps with an additional 50bps cut for the qualifying institutions. It looks like it’s just a cut from 18% to 17.5% for most big banks
Update: Reuters have corrected their headlines for the RRR and confirm with everyone else that it has been cut by 50bps
In 1999, the Federal Reserve, under Alan Greenspan, convinced the US Congress to repeal the Glass-Steagall Act, which had been passed in 1932 to eliminate banks’ abilities to offer loans far beyond the actual level of their deposits.
When I learned of this development in 1999, I anticipated that it was put through to allow banks to once again recklessly loan money and that the outcome would be essentially the same as what occurred in 1929 – a depression of major proportions.
Major depressions do not occur overnight. They go in downward waves, interrupted at intervals by false recovery waves. The first major event of what would become the Greater Depression took place in 2007 with the housing crash. A year later, right on cue, came the first of the stock market crashes.
Since then, the US Federal Reserve and the governments and central banks of much of the world have been involved in Band-Aid solutions to postpone further crashes, in spite of the fact that the economy is, in fact, a “dead economy walking.”
The Band-Aids have been many and various and, at some point, one of them will fail. The fact that they are all Band-Aids and not true solutions assures that, when the first one lets go, they will all fail in succession. Only at this point will the average person understand that we have been in the early stages of a depression all along.
“They want to be on the top table in all areas of international trade and this is no different,” Sharps Pixley CEO told Bloomberg earlier this month, tying China’s move to participate in the twice-daily auction that determines London gold prices to Beijing’s efforts to embed the yuan more deeply in international investment and trade.
As a reminder, the auction has its roots in efforts to deter manipulation. Here’s what we said last month:
A long time ago, in a financial galaxy far, far away, a “fringe” blog raised the topic of gold market manipulation during the London AM fix. Several years later (which, incidentally, is about average in terms of the lag time between when something is actually going on and when the mainstream financial media finally figures it out and reports on it), it was revealed that in fact, shenanigans were likely afoot and indeed, regulators are still trying to sort out what happened. The ‘fix’ for the ‘fixed’ gold fix (only in the world of corrupt high finance is such a hilariously absurd passage possible) is supposedly a new system whereby the fixings are derived electronically.
On June 16, the LBMA announced that Bank of China would become the first Chinese bank to participate. Earlier this week, ICBC said it may also join the electronic auction process. From the press release introducing Bank of China’s participation: