Video Part 1: https://www.youtube.com/watch?v=bkbD9Jvx9XE&t=1s
Video Part 2: https://www.youtube.com/watch?v=EK1JhUo5jGo&t=6s
Miles to go for the new
bankruptcy code
22.05.18
TH EDITORIAL
Good
news has finally started to roll out of the refurbished bankruptcy courts.
Tata Steel
acquired 73% stake in the bankrupt firm
Bhushan Steel
for about ₹35,000 crore last week, making it the first major
resolution of a bankruptcy case under the new Insolvency and Bankruptcy Code (IBC). Bhushan Steel was one among
the 12
major accounts referred to the National Company Law
Tribunal at the behest of the Reserve Bank of India last year to ease the burden of bad loans on banks.
The proceeds from the acquisition will go towards settling almost two-thirds of
the total outstanding liabilities of over ₹56,000 crore that Bhushan Steel owes banks. While it may be unwise to read too much into a
single case, the Bhushan Steel resolution is nevertheless an encouraging sign for banks
because they typically manage to recover only
about 25% of their money from defaulters. In fact, between April 2014 and
September 2017, the bad
loan recovery rate of public sector banks was as low as 11%, with non-performing assets worth ₹2.41 lakh crore written off from their books. The Finance
Ministry now expects banks to recover more than ₹1 lakh crore from the resolution of the other cases referred by the RBI to
the NCLT. If the banks do indeed recover funds of this scale, it would
considerably reduce
the burden on taxpayers, who
would otherwise have to foot the bill for any recapitalisation of banks. Even more important, speedy resolution would
free valuable assets
to be used for wealth-creation.
The
resolution of one high-profile case, however, should not deflect attention from
the many
challenges still plaguing the
bankruptcy resolution
process. The IBC, as the government itself has admitted, remains a
work in progress. This is a welcome piece of legislation to the
extent that it subsumes
a plethora of laws that
confused creditors; instead it now offers a more streamlined way to deal with troubled assets. But issues such
as the proposed
eligibility criteria for bidders have
left it bogged
down and suppressed its
capacity to help out creditors efficiently. Also, the strict time limit
for the resolution process as mandated by the
IBC is an area that has drawn much attention, and it merits further review in
order to balance the twin
objectives of speedy resolution and maximising recovery for the lenders. To its credit, the government has
been willing to hear out suggestions. It would do well to implement the recommendations of the
Insolvency Law Committee which,
among other things, has vouched for relaxed bidder eligibility criteria. Going forward, amendments to the bankruptcy code
should primarily be driven by the goal of maximising the sale price of stressed assets. This requires a robust market for stressed assets that is free from
all kinds of entry
barriers.
Cleaning up balance sheets
14.06.18
TH
What
is a ‘bad bank’?
WILL TAKE ON ALL BAD
LOANS AND TRY TO SALVAGE SOME VALUE FROM THEM: The Central government has revived the idea of
setting up an asset reconstruction or asset management company, a sort of ‘bad
bank’ first mooted by Chief Economic Adviser Arvind Subramanian in January
2017. Mr. Subramanian had envisaged a Public
Sector Asset Rehabilitation Agency that
would take on public sector banks’
chronic bad loans and focus on their resolution and the extraction of any
residual value from the underlying asset.
AFTER GETTING AN
INDIRECT BAILOUT, PSB CAN FOCUS ON FRESH LENDING: This would allow government-owned banks to focus on their core operations of providing credit
for fresh investments and economic activity. Unlike
a private asset reconstruction company, a government-owned bad bank would be
more likely to purchase loans that
have no salvage value from public sector banks. It would thus work as an
indirect bailout of these banks by
the government.
How
will it be capitalised?
3 POSSIBLE FINANCIERS
OF BAD BANK: GOVT, RBI, PRIVATE SECTOR – NOT SURE HOW FINANCING WILL BE DONE:
The bad bank will require significant capital to purchase stressed
loan accounts from public sector banks. The
size of gross NPAs on the books of public sector banks is currently over Rs.
10 lakh crore. The chances of private
participation are low unless
investors are allowed a major say in the governance of the new entity. Private
asset reconstruction companies have been operating in the country for a while
now, but have met with little success in resolving stressed loans. The CEA had
proposed a significant part of the bad bank funding to come from the Reserve Bank of India, which is likely to be a tricky proposition. That
means the government, which is already committed to recapitalising
state-run banks, will have to be the single largest contributor of capital even
if private investors are roped in.
How
will it help the NPA problem?
WILL HELP BANKS IN
RE-STARTING THE LENDING PROCESS: Hiving
off stressed loan accounts to a bad bank would free public sector bank balance
sheets from their deleterious impact and improve their financial position.
As the quality of a bank’s assets
deteriorates, its capital position (assets minus liabilities) is weakened,
increasing the chances of insolvency. Some
analysts believe that many public sector banks are effectively insolvent due to
their poor asset quality. Consequently, banks
have turned risk-averse and credit growth has taken a hit. If managed well, a bad bank can clean up bank
balance sheets and get them to
start lending again to businesses.
BAD BANK WILL NOT SOLVE THE CORPORATE GOVERNANCE
CHALLENGES AT PSB: But it will
not address the more serious corporate governance issues plaguing public sector
banks that led to the NPA problem in the first place.
XXX
Reality
check
28.06.18
TH EDIT
RBI
report warns that the worst on NPAs may be yet to come. Urgent changes are
needed
GNPA OF SCB CAN RISE FURTHER TILL 2019: The worst is far from over for Indian banks. The
financial stability report released by the Reserve Bank of India on Tuesday has
warned that the gross non-performing assets (GNPAs) of scheduled commercial
banks in the country could rise from 11.6% in March 2018 to 12.2% in March
2019, which would be the highest level of bad debt in almost two decades.
GNPA OF PCA BANKS CAN BE EXPECTED TO INCREASE MORE THAN
OTHERS: This puts at rest the hope
of a bottoming out of the NPA crisis that has affected the banking system and
impeded credit growth in the economy. The GNPA of banks under the prompt
corrective action framework, in particular, is expected to rise to 22.3% in
March 2019, from 21% this March.
INCREASED PROVISIONING FOR LOSSES + WEAKENED CAPITAL
POSITION: The RBI believes that this
will increase the size of provisioning for losses and affect the capital
position of banks. In fact, the capital to risk-weighted assets ratio of the
banking system as a whole is expected to drop from 13.5% in March 2018 to 12.8%
in March 2019.
EXTERNAL ECONOMIC HEADWINDS = US FED IR TIGHTENING +
INCREASE IN COMMODITY PRICES: The
deteriorating health of banks is in contrast to the economy, which is on the
path to recovery, clocking a healthy growth rate of 7.7% during the last quarter.
The RBI, however, has warned about the rising external risks that pose a
significant threat to the economy and to the banks. The tightening of monetary
policy by the United States Federal Reserve and increased borrowing by the U.S.
government have already caused credit to flow out of emerging markets such as
India. The increase in commodity prices is another risk on the horizon that
could pose a significant threat to the rupee and the country’s fiscal and
current account deficits. All these factors could well combine to increase the
risk of an economic slowdown and exert pressure on the entire banking system.
A
major highlight of the financial stability report is the central bank’s finding
that public
sector banks (PSBs) are far more prone to fraud than their private sector
counterparts. This is significant in
light of the huge scam unearthed at a Punjab National Bank branch earlier this
year. The RBI notes that more
than 85% of frauds could be linked to PSBs, even though their share of overall
credit is only about 65%. This
should come as no surprise given the serious
corporate governance issues faced by public sector banks, which to a large extent also contributed to the
lax lending practices that are at the core of the NPA crisis.
URGENT NEED FOR REFORMS TO IMPROVE FINANCIAL PERFORMANCE AND
DECREASE OPERATIONAL RISKS: In
his foreword to the report, RBI Deputy Governor Viral Acharya has noted that
governance reforms at PSBs, if implemented, can help improve their financial performance and also reduce their
operational risks. For
now, the RBI expects the government’s
recapitalisation plan for
banks and the implementation of the Insolvency
and Bankruptcy Code to
improve the capital position of banks. These reforms can definitely help. But
unless the government can gather the courage to make drastic changes to aspects of operational autonomy
and the ownership of PSBs,
future crises will be hard to prevent.
XXX
Risky recourse
02.07.18
TH EDIT
LIC GETS PERMISSION
FROM IRDA TO BUY 51% STAKE IN IDBI: The
Insurance Regulatory and Development Authority of India has approved a proposal
to allow the Life Insurance Corporation of India to increase its stake in the
ailing state-owned IDBI Bank to 51%.
NPA PROBLEM AT IDBI LED
IT TO BE PLACED UNDER PCA IN 2017: The
plan envisages the insurer injecting much- needed capital into the financially
stressed lender, which was placed under the Reserve Bank of India’s prompt
corrective action framework in May 2017 as a consequence of its non-performing
assets rising beyond a threshold.
While
there are no details on how exactly this capital infusion will take place —
reports suggesting that the LIC may acquire the additional 40%
stake it would need to reach 51% shareholding from the Government of India — market speculation
and media reports have estimated figures north of Rs. 10,000 crore.
While
for the LIC the sum is a small fraction of the Rs. 1.24 lakh crore it received
in just first-year premiums in the year ended March 31, 2017, for IDBI Bank the
funds would almost equal the Rs. 12,865 crore in capital infusion it got from
the government in the last fiscal.
Whether this will be
adequate to even staunch the flow of red ink at the troubled bank, leave alone
help it turn around, is another matter.
The bank posted a net loss of Rs. 8,238 crore in the 12 months ended March 31,
2018, and is facing the prospect of more losses with gross non-performing
assets rising to 28%.
WITH LIC INFUSING
CAPITAL, GOVT’S FISCAL DEFICIT IS UNHARMED; BUT IS THIS THE BEST LONG TERM
SOLUTION? The proposal raises
several troubling questions. The government clearly sees it as a relatively
painless way to recapitalise the bleeding bank without adversely impacting its
fiscal position, but the risks in increasingly banking on state-controlled
cash-rich corporations to help bail out other state-owned companies or lenders
are too significant to be glossed over.
BY GIVING LIC
PERMISSION TO BREACH 15% EXPOSURE LIMIT IN A COMPANY, IS IRDA NEGLECTING
INETRESTS OF POLICYHOLDERS? Then,
there are the regulators. The IRDA, whose mission is to “protect the interest
of and secure fair treatment to policyholders”, is reported to have exempted
the LIC from the well-reasoned 15% cap on the extent of equity holding an
insurer can have in a single company. This puts at risk the interests of the
premium-paying customers of the LIC.
SEBI IS ALSO TWEAKING
ITS OWN RULES TO ALLOW THESE KIND OF TAKEOVERS: The Securities and Exchange Board of India has in
the past waived the mandatory open offer requirement under its takeover
regulations when it involved a state-run acquirer and another state enterprise
as the target. As the capital markets watchdog, SEBI has an obligation in all
such cases to weigh the interests of the small investor.
SHOULD RBI PERMIT THESE
INTERCONNECTIONS AND RISK THE HEALTH OF LARGER PARTS OF FINANCIAL SYSTEM?
And the RBI, as the banking regulator, should
not ignore the contagion risks that the level of “interconnectedness” the
proposed transaction would expose the entire financial system to.
XXX
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