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Tue, 28th February 2017

Anirudh Sethi Report

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Archives of “Loan” Tag

Greece : Banks worry over sudden bad loan spike in January

Nonperforming loans last month posted a major spike of almost 1 billion euros, reversing the downward course set in the last few months of 2016. This has generated major concerns among local lenders regarding the achievement of targets for reducing bad loans, as agreed with the Single Supervisory Mechanism (SSM) of the European Central Bank for the first quarter of this year.

Bank sources say that after several months of stabilization and of a negative growth rate in new nonperforming exposure,the picture deteriorated rapidly in January, as new bad loans estimated at 800 million euros in total were created.

This increase in a period of just one month is considered particularly high, and is a trend that appears to be continuing this month as well. Bank officials attribute the phenomenon to uncertainty from the government’s inability to complete the second bailout review, fears for a rekindling of the crisis and mainly the expectations of borrowers for extrajudicial settlements of bad loans.

Senior bank officials note that a large number of borrowers will not cooperate with their lenders in reaching an agreement for the restructuring of their debts, in the hope that the introduction by the government of the extrajudicial compromise could lead to better terms and possibly even to a debt haircut

China Just Created A Record $540 Billion In Debt In One Month

One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”

DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “ 

India : Asset quality worry for MFIs

Rating agency Icra has expressed concerns over the deterioration in asset quality of non-bank microfinance institutions in the wake of demonetisation.

The agency in a report said an inadequate supply of currency and a disruption in borrowers’ cash flows have led to a sharp decline in collection efficiencies.

The share of overdue loans in a total loan portfolio of around Rs 57,000 crore was less than 1 per cent as on September 30, 2016. But, this has increased to around 19 per cent as on December 31, 2016, Icra said.

 Factors such as over-leveraging, shortage of currency and the possibility of the borrowed amount being used for consumption rather than income generation is affecting credit recovery even as the RBI provided a special dispensation in classification of loans of microfinance institutions.

“While the RBI’s additional 90-day dispensation to classify accounts as non-performing will provide a temporary relief in asset classification, Icra believes it would be difficult for microfinance institutions to recover multiple instalments from borrowers together,” Rohit Inamdar, senior vice-president and group head – financial sector ratings – Icra.

“Over-leveraging among borrowers coupled with the shortage of currency and the impact of demonetisation on borrowers’ earnings will adversely impact the asset quality of microfinance institutions,” he added.

“The pace of replenishment of cash supply in the system, the medium- to long-term impact of demonetisation on borrowers and the quality of customer engagement by the microfinance institutions will be the key determinants of asset quality in the future,” the Icra official said.

“Also, the extent of credit costs that microfinance institutions have to incur will depend on its share of affected portfolio, capital structure as well as loss-sharing arrangements,” he added.

Taking into account the expected increase in both credit costs and operating expenses, Icra has revised its profitability projections to sub-10 per cent for 2017-18 from 13-15 per cent estimated earlier.

Global Debt Hits 325% Of World GDP, Rises To Record $217 Trillion

While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world’s gross domestic product.

In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including “an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness” presented challenges for borrowers.

Additionally, “a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities,” the IIF warned.

“Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs.”

For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market’s only concern is just when will the Dow Jones finally crack 20,000. 

Sadly, since we don’t have access to the underlying data in the IIF report, we leave readers with a snapshot of just the global bond market courtesy of the latest JPM quarterly guide to markets. It provides a concise snapshot of the indebted state of the world.

Short-term debt relief approved by Eurogroup but tough measures loom

Eurozone finance ministers struck a deal in Brussels on Monday on short-term measures to lighten Greece’s debt burden, but the conclusion of the country’s second review of its third bailout and the participation of the International Monetary Fund have been deferred to January.

“The Eurogroup endorsed today the full set of short-term measures, including extending the repayment period and an adjustment to interest rates,” the Eurogroup said a statement.

The decision was seen to reward Greece for implementing the latest batch of reforms demanded as part of its bailout program.

The head of the European Stability Mechanism, Klaus Regling, said after the meeting that the short-term measures will start being implemented “in the next weeks.”

The measures, however, did not meet the demands of the IMF, which has demanded substantial debt relief and harsher austerity procedures in order to join the Greek program.

India : Gross NPAs of PSBs jump nearly Rs 80,000 cr in Jul-Sep

Public banks have seen nearly Rs 80,000 crore increase in gross non-performing assets (NPAs) in the three months ended September 2016. As on September 30, gross NPAs of public sector banks rose to Rs 6,30,323 crore as against Rs 5,50,346 crore by June end.

This works out to an increase of Rs 79,977 crore on quarter on quarter basis. “The government has taken sector-specific measures (infrastructure, power, road textiles, steel etc) where incidence of NPA is high,” Minister of State for Finance Santosh Kumar Gangwar said in a written reply to the Rajya Sabha.

He listed measures like enactment of the Insolvency and Bankruptcy Code (IBC) and amendment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and the Recovery of Debt due to Banks and Financial Institutions (RDDBFI) Act aimed at improving resolution or recovery of bank loans.

Besides, he said, RBI has come out with a number of tools such as corporate debt restructuring, formation of Joint Lenders’ Forum, strategic debt restructuring scheme and sustainable structuring of stressed assets to fight NPAs.

In another reply, Gangwar said that out of Rs 2.80 lakh crore loans to the iron and steel sector at the end of June, Rs 1.24 lakh crore has gone bad, which works out to 44.54 per cent. Replying to another question, Gangwar said no corporate loan waiver has been done by the government.

India : Over 8,100 wilful defaulters owe Rs76,685 crore to banks, Lok Sabha told

Public sector banks (PSBs) have reported 16% rise in number of wilful defaulters at 8,167 who collectively owe them Rs76,685 crore at the end of March 2016.

As against the previous year, there is 16% rise in wilful defaulters owing over Rs25 lakh each to 8,167 from 7,031 at the end of March 2015. However, dues to the bank have increased to 28.5% to Rs76,685 crore in 2015-16 from the earlier Rs59,656 crore.

To recover loans from such defaulters, banks have filed 1,724 FIRs with a total outstanding of Rs21,509 crore in 2015-16. The conviction rate in all these cases was only 1.14%.

Last fiscal, banks recovery efforts in such cases yielded Rs3,498 crore. There were 129 wilful defaulters who borrowed loans in excess of Rs100 crore amounting to Rs28,525 crore from PSBs as on 30 June 2016, minister of state for finance Santosh Kumar Gangwar told the Lok Sabha in a written reply.

To bring down NPAs, he said, RBI has formulated guidelines for early recognition of financial distress for recovery from borrowers. “Before a loan account turns NPA, banks are required to identify stress in the account under three sub-categories of Special Mention Account (SMA),” he said.

India : 1 out of every 3 rupees of corporate loans unsustainable under S4A

Graphic: Paras Jain/Mint

About one out of every three rupees lent to industry over the past five years would have been classified as unsustainable under the central bank’s sustainable structuring of stressed assets, or S4A norms, according to aMint analysis.

Under S4A, banks are allowed to split a stressed firm’s debt into the two parts—sustainable and unsustainable. Sustainable debt (which has to be at least 50% of total funded exposure) is defined as that portion of debt that can be serviced by the company’s immediate cash flows. In other words, if a company had only this portion of debt, its interest coverage ratio (ICR) would be one, or its earnings from core operations would equal interest payments. Anything above this level of debt is unsustainable.

Chinese Banks Will Need $1.7 Trillion To Cover Bad Debt Deluge, S&P Calculates

Just last week we noted that in the latest shocker to emerge out of corporate China, at least a quarter of Chinese companies were unable to generate enough cash to cover their interest expense: as we noted previously this is the Ponzi Finance stage of China’s debt curve, the one that comes just before the inevitable “Minsky Moment” at which point all bets are off.

The implications of this, for the nation with nearly $20 trillion in corporate debt as well as a grand total of 300% in debt to GDP are staggering: it means that sooner or later, up to a quarter of bank loan exposure will have to be discharged, restructured, equitized or otherwise eliminated due to its non-performing nature, dramatically impacting not just the asset side of the bank ledger, but the liabilities as well, namely deposits, which could see a drop in the trillion.

Overnight, in a report published by S&P Global, the rating agency’s analysts noticed not only the latest deterioration in corporate China, but also the relentlessly growing leverage, noting that rising debt levels will worsen the credit profiles of China’s top 200 companies, requiring the country’s banks to raise $1.7 trillion in capital to cover a likely surge in bad loans. Read More 

India bad loans mountain grows, risks delaying bank clean-up

Stressed loans in India’s banking sector crossed $138 billion in June, central bank data reviewed by Reuters shows, an increase of nearly 15 percent in just six months that suggests a state clean-up effort will take longer and cost more than expected.

Fixing the mountain of bad debt weighing down India’s banks is vital for Prime Minister Narendra Modi’s government to revive weak credit and investment growth and put a faltering recovery in Asia’s third largest economy on a firmer footing.

India’s central bank has set a March deadline for banks to fully reveal problem loans on their books. When lenders disclose bad loans, they need to take writedowns that hit their bottom line and eat into equity.

The latest data obtained by Reuters through a right-to-information request showed stressed loans rose to 9.22 trillion rupees ($138.5 billion) as at end-June, from 8.06 trillion rupees ($121 billion) in December.

The end-December $121 billion figure has been cited by the government and bankers as the peak of stressed assets in the banking sector.

Stressed assets include both non-performing loans (NPLs) – defined as those that have not been serviced for 90 or more days – and restructured or rolled over loans, where banks have eased interest rates or the repayment period.