Companies & Sectors
Appraisal standards of nationalised banks responsible for steep rise in NPAs, says Chakrabarty

According to the deputy governor of RBI, poor appraisal standards of PSBs have led to increased NPAs, something that Moneylife pointed out over a year back. He also said that lack of quality projects and poor implementation of the PPP model was hurting the infrastructure sector

Public sector banks (PSBs) in India are not adhering to best practices while lending out capital to infrastructure companies, which have resulted in steep rise in non-performing assets (NPAs), feels a top official from Reserve Bank of India (RBI).
 

“There is enough evidence to suggest that a substantial portion of the rise in impaired assets in the sector is attributable to non-adherence to the basic appraisal standards by the banks,” said Dr KC Chakrabarty, deputy governor, RBI, while speaking at a conclave organised by SBI Capital markets.
 

This is exactly what Moneylife had pointed out in a cover story more than a year ago (Public sector banks - Loans turning bad)!
 

Dr Chakrabarty also deflected criticism that the infrastructure sector was stalled because of lack of funding. He said it was because of lack bankable and commercially viable projects. The infrastructure sector has been plagued by delays, which had led to an enormous rise in NPAs on part of banks, especially PSBs which has reached worrying levels.
 

According to the deputy governor, gross NPAs and restructured standard advances for the infrastructure sector, together as a percentage of total advances to the sector, has increased considerably to Rs1.37 lakh crore (17.43%) as at the end of March 2013 from Rs12,190 crore (4.66% of total advances) as at the end of March 2009.  “The evidence suggests that the higher NPA in the sector is not an industry wide issue, it is rather bank specific. In our assessment, the project appraisal and the decision making in public sector banks has been more impressionistic rather than being information based. How else does one defend the eagerness of some banks to fund power distribution companies with negative net worth,” he said.
 

Dr Chakrabarty also lashed out at infrastructure companies for their over-reliance on debt and expectations from the financial sector to fund their capital needs and the failure of the public-private partnership (PPP) model because infrastructure companies do not have what it takes for a project to succeed.  “In my view, the ‘Public-Private Partnership’ has, in effect, remained a ‘Public only’ venture. The infrastructure companies are highly leveraged and the flow of equity in the infrastructure project funding has been very minimal. The lack of equity investment in a project means that the promoter-developer has little ‘skin in the game’ and the motivation for the success of the venture is that much limited,” he said.
 

He also said, “The government has tried to address some major impediments like lack of transparency and accountability in procurement in order to ensure that PPP projects are procured and implemented by observing principles of transparency, competitive bid process, affordability, and value for money. But, the impact of these efforts on the ground level implementation is yet to show.” In other words, the government has not done enough to steer the infrastructure sector.
 

He also highlighted the dismal state of our infrastructure sector, according to which will leave you shocked:
 

  • Out of 576 SEZs that have received formal approval, only 172 are operational;
  • Against a target of awarding road projects aggregating 50,621 kms during 2008-13, only 10,690 kms have been awarded;
     
  • Out of 16 Ultra Mega Power Projects planned, contracts for only 4 were awarded. Out of this only one has become operational and another is nearing completion and that too much beyond the scheduled dates. Even the one project that has commenced operations is running much below capacity;
     
  • Under the New Exploration and Licensing Policy for exploration of crude oil and natural gas, of the 251 blocks allotted, 110 have reported discoveries but only 6 are actually operational.
     

In order to plug funding gaps, he said that there could be a possibility of relaxing norms for pension/insurance/provident funds so that they can fill in some of the gap in debt financing.

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COMMENTS

MG Warrier

3 years ago

It has become a fashion to blame ‘public sector’ when anything goes wrong in financial or social sectors. In the instant case, PSBs are used as ‘sources’ for financing projects which do not find favour with private sector banks and which are ‘popular’ from a government/political perspective. Several factors contribute to the unsatisfactory functioning of public sector. Interference by an inefficient and ‘caged’ government in functioning is one. Posting of ‘yours obediently’ executives at the top is another. The remuneration packages for CEOs and other top positions which are much below market rates ensure that PSUs/PSBs are managed by average people.

S Santhanam

3 years ago

How will he explain cases similar to that of King Fisher Airlines with over Rs.7000 crore default with a dozen banks involved? It is not the lack of knowledge of appraisal of proposals of corporates among the bankers, but the external factors- compulsion from vested interests who work in connivance with the bank officials which include management. None of these loans would have been cleared without the knowledge of the Boards of the concerned banks. Then how come the blame be shifted to lower level officials. Then how come the collaterals taken for the loan were inadequate to cover the full value of the loan outstanding? All should introspect including the RBI. Shifting blame on others is easy but we cannot disown our responsibilities.

nagesh kini

3 years ago

Dr. Chakrabarty needs to be reminded that there is absolutely nothing wrong with the appraisal process.
It is the 'higher ups' beginning with the MOF netas and babus who push for advances without any appraisals whatsoever. The Big Fish succumb but the smaller fry are trapped.
What is the Banking Regulator RBI doing for such inadequate appraisals? A special on-site stock audit of all potential NPAs will throw more light when this inadequate appraisal/push from the top is specifically included in the audit mandate

Bajaj Allianz charged Rs3.1 crore penalty for rejecting claims & overpaying agents

IRDA has imposed hefty penalty on Bajaj Allianz Life for numerous violations related to early death claims rejection, generous payments to corporate agents, violations of group insurance guidelines and making referral arrangements with master policy holders

Insurance Regulatory and Development Authority (IRDA) has put on a huge penalty of Rs3.10 crore on Bajaj Allianz Life Insurance for numerous gross violations. IRDA taking a tough stand is welcome as massive penalties should act as a deterrent for life insurance companies making violations till now with impunity. Early death claims rejections on technical grounds and making outrageous payments to corporate agents signal that the insurance company was more interested in concluding a sale than in giving a fair deal to the policyholders who purchase life insurance by trusting a well-know brand only feel betrayed.
 

IRDA slapped a penalty of Rs78 lakh penalty for 78 early claims rejected due to the policy bond not been received by the policy holder before the death even though the policy was underwritten and first premium receipt issued. It is called “un-concluded contracts” and it certainly makes mockery of life insurance death claim rejection on technical points. Just because the policyholder did not receive the policy bond in-hand means that cover is not yet started even though Bajaj Allianz Life did the underwriting and issued first premium receipt?
 

IRDA order states:” The Life Insurer is warned for the wrongful claim practices and directed to ensure the settlement of claims in fairness both as per terms and conditions of the policy contract as also as per the regulations referred herein.” Bajaj Allianz Life will have to reopen these 78 cases and the action regarding the settlement of 78 claims along with interest payment should be submitted to IRDA within 180 days.
 

Bajaj Allianz Life made substantial payments to numerous corporate agents which IRDA terms as “by any standard cannot be regarded as reasonable”. Bajaj Allianz paid Rs81.07 crore in FY 2009-10, Rs118.50 crore in FY 2010-11, Rs55.94 crore in FY 2011-12 and Rs14.07 crore in FY 2012-13 to various corporate agents towards Advertisements, Marketing, and infrastructure expenses etc. There were substantial payments made towards business development/cooperation expenses to some of the corporate agents. The volume of payments to various corporate agents is substantial and by any standard cannot be regarded as reasonable. IRDA put on a penalty of Rs20 lakh and directed the life insurer to discontinue these payments to any of the corporate agents immediately.
 

Bajaj Allianz Life did not submit the reasons and the objective of entering into two agreements on two different dates with Team Life Care Pvt Ltd (Corporate Agent) for same type of services, that is, Infrastructure Facilities.
 

They made following payments to Team Life Care Pvt Ltd.
 

S.No

Head of Account

Amounts paid (INR)

2009-10

2010-11

2011-12

2012-13 (Upto December, 2012)

1

Infrastructure Support Charges

Rs7.63 crore

Rs15.83 crore

Rs8.66 crore

-

2

Advertisement Expenses

Rs7.47 crore

Rs7.84 crore

Rs65.20 lakh

-

3

Business Development Expenses

-

-

Rs47.5 crore

Rs14.75 crore

 

IRDA order states:” All the above payments towards stated expenses are in violation of Clause 21 of Corporate Agents’ Guidelines. The above referred payments are considered significant and the manner of making various payments through different heads of account lead to substantial pay-outs to M/s Team Life Care (Pvt) Limited beyond the reasonableness by any standards. In light of the above violations, under powers vested under Section 102 (b) of the Act, a penalty of Rs40 Lakhs (Rupees Forty Lakhs only) is levied. The Life Insurer is hereby directed to discontinue making the extra payouts to the Corporate Agent.”
 

IRDA adding big penalty for one specific corporate agent violations is certainly a new trend. What is interesting is that Moneylife had written about Team Life Care involved in MLM in the year 2010.
 

Read Legitimate agent runs MLM scheme under a murky cover and also Murky covers: Unscrupulous schemes to sell insurance products continue unabated
 

Last year, Bajaj Allianz Life stated that Team Life Care is not involved in MLM. Bajaj Allianz Life had not responded to our query by the time this article was written, but even today there are numerous websites that point to the MLM nature of Team Life Care’s operations.
 

The websites http://earnmoneywithtlc.wordpress.com/ , http://www.tlcnet.in/ , http://tlcteamlifecare.blogspot.in/ , http://tlcinsuranceindia.blogspot.in/ , www.teamlifecare.in/ is redirected to http://www.globalfinsol.com/ContactUs.aspx which sells Bajaj Allianz Life products.

User

COMMENTS

GARRY

3 years ago

BAJAJ ALLAIANZ IS JUST MAKING MONEY ,THEY ARE CHEATING THE PEOPLE. THERE WORDING ARE TOTALLY DIFFERENT AT THE TIME OF BEGINNING OF INSURANCE AND WHEN SOMEONE CLAIMS FOR SOMETHING THEY JUST CHANGED LIKE A CHAMELEON, BY MAKING SILLY EXCUSES. THIS COMPANY SHOULD BE BAN.

G N GHOSH

3 years ago

AMWAY INDIA IS DOING MLM TYPE BUSINESS OF MAX NEWYORK LIFE INSURANCE WHERE THE DOWN LINE MEMBERS WITHOUT ANY IRDA LICENSE SELLS LIFE INSURANCE POLICY.

PRABHAT

3 years ago

COMMISSION PAID BY BAJAJ ALLIANZ TO MARKET THIER PRODUCT MUST BE THOROUGHLY INVESTIGATED FOR THE PROTECTION OF THE INTEREST OF THE PERSONS INSURED WITH THEM

sudip sheth

3 years ago

Good work byIRDA. Penalty only Rs.1 lakh per claim default is very less to company spend 73 crores for advt in 2 years. Earlier also IRDA has imposed penalties on such companies for expenses/commission in form of advt. support , training etc, but they continue due to less penalty ( in rupee only), hardly 1% of their spending, which they can afford. They should be ban for few months for doing new business.

REPLY

P M Ravindran

In Reply to sudip sheth 3 years ago

You are absolutely right! These penalties are not deterrent by any stretch of imagination. It is just tokenism to justify their existence!

RAJAGOPALAN

3 years ago

UNSCRUPLOUS ACTIONS &CLAIMS REJECTIONS ARE TO BE SEVERELY DEALT. GOOD ACTION BY IRDA

Bhupesh

3 years ago

Small penalty for such a huge illegal payment!!!

MOHAN SIROYA

3 years ago

Kudos to IRDA for this "Seemingly exemplary Penal action". I hope, IRDA will keep up the tempo. It is ( Insurace)all a "Eugine Stable" calling for Herculean effort from IRDA to clean it , besides strong will for penal action.

GEO THOMAS

3 years ago

Congraulation, carry on the good work.

Mid-sized IT companies can outperform the larger ones

According to Credit Suisse research, while many of the mid-sized Indian IT companies have attractive financials, these stocks trade at significant discounts to their larger peers

There are signs of improving demand in information technology (IT) sector, which can benefit all companies. However, margins of mid-sized IT companies tend are more leveraged to revenue pick-up due to their smaller scale. Besides these stocks are available at significant discounts compared with large companies, says Credit Suisse in a research report.

 

"Mid-sized IT services companies can offer attractive stock price returns and outperform larger peers when the demand environment is improving. The improving environment benefits all companies - a "rising tide lifts all boats" argument – while the larger companies usually navigate a deteriorating environment better. Also, in an improving environment, as price-to-earnings (P/E) multiples of the larger companies expand, investors can get attracted to the multiples, often single-digit, that the mid-sized ones offer," the report said.
 


While many of these mid-sized companies have attractive financials – high return on equity (ROE), net cash, good growth – these stocks trade at significant discount to their larger peers given the plethora of investment options in this sector and their higher leverage to economic cycles.

 

"At this point in time, most of these companies trade at single-digit 12-month forward P/E multiples, on consensus estimates. We also believe that the risk to changes in consensus estimates is to the upside – we do not think the full impact of the recent significant rupee depreciation is factored in and an improving demand scenario can also lead to some upgrades. A combination of even a 2-3 point multiple expansion and likely earnings growth over the next 12 months can lead to attractive stock price returns," the financial services company said.

 


Credit Suisse said, there is some amount of unpredictability in smaller stocks given the smaller scale of operations – one large customer that defers spending or a large project that gets cancelled can hurt near-term earnings and hurt stock prices disproportionately.

 


“Hence, we prefer a combination of good near-term revenue momentum, inexpensive valuations and reasonable-quality management. Among our coverage universe, we like Tech Mahindra (though it is possibly no longer a 'mid-sized' company), Mindtree and Hexaware. Outside our coverage universe, stocks such as KPIT and Persistent have demonstrated some good business momentum recently," Credit Suisse added. Strangely, Credit Suisse does not cover one of the top performers of the IT sector, Accelya Kale.

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