Companies & Sectors
Bad loans recovery grim, because they are concentrated among large companies, this time
Religare conducted a conference call, the key takeaway of which was that in the current cycle of bad loans, non-performing assets are not concentrated in smaller accounts (SMEs), as the last time. They are concentrated in large companies. This makes recovery more difficult. Due to the bloated ticket sizes, banks are deterred from turning hostile. Earlier, the ticket size was around Rs100 crore –1,000 crore. Today, many of the loan ticket sizes are around Rs5,000 crore. This makes the current scenario different as compared to the earlier downturns where stress was restricted to Small and Medium Sector industries (SMEs). Another key point is that earlier a large part of stressed SME loans was backed by real estate as collateral, which is not the case currently. 
 
Postponement of stress recognition due to which solving the stressed assets problem has been delayed, is another key issue associated with the sector. Interest has been accrued over many years. The stressed non-fund exposure has not yet been fully recognised. These are currently being treated as restructured, Strategic Debt Restructuring (SDR) or 5:25 loans.  It is a near-term risk for banks. According to experts, banks should ideally have a provision cover of 60-65% against these loans compared to the 40-45% coverage in place for public sector banks (PSU). 
 
The impact of Asset Reconstruction companies (ARCs) to resolve the problem of stressed assets is limited, finds Religare. This is because they prefer to buy small to mid-sized companies with debt below Rs1,000 crore which are in the initial stages of difficulty. Thus, ARCs are unwilling to take loans of large distressed carriers, especially when promoter credibility is perceived to be lacking. Secondly, due to limited capital, ARCs cannot resolve the problem. Consider these figures. The total credit in the system is more than Rs70 trillion, while the total stress in the system is around Rs10 trillion. On the contrary, ARCs have a cumulative capital base of merely Rs4,000 crore. 
 
Another problem is that ARCs and banks cannot agree on the level of haircut. Currently, the spread between bid-ask rates stands at around 25%. This implies that on average ARCs wanted a 50% haircut whereas banks were ready to yield only around 20%. ‘One needs to sell an asset when it is sick and not dead,’ as per one of the experts. The consensus among our expert panel was that the average haircut on troubled iron & steel sector accounts should be 40-50%. It should be 36-40% for power sector loans. It should be around 60% on construction loans, where a large part is non-funded.  Experts from ARC’s believe that banks have been excessively optimistic about the realisation value of these assets. 
 
Coming to different sectors, the steel sector is considered to be the worst. It has a humungous Rs3trillion – Rs5 trillion of stressed assets. The dependence on China and the low capacity of steel plants are a few reasons responsible for its woes. Another issue is one of promoter credibility in some large steel companies due to which many ARC’s are unwilling to work with them. The government has not been very keen on solving problems in this sector as opposed to the power sector. 
 
In the Engineering, Procurement, Construction (EPC) sector, the total stress is around Rs3 trillion, out of which only Rs 700bn is fund-based. If the non-fund based exposure is increased, then the loss given default (LGD) will increase. Key issues in the construction sector include the build-operate-transfer (BOT) nature of most projects, and an inflated cost of assets due to the accumulation of interest over the last three years. When it comes to construction sector, the build operate transfer (BOT) nature of most projects is an issue. Diversion of bank funding to real estate development by promoters is another one. An inflated cost of assets due to the accumulation of interest is another problem. 
 
“Provisions will likely stay elevated and bank P&L statements are unlikely to improve for 9-12 months at least”, according to one of the experts. In addition, some large accounts may also become NPA’s in the next 1-2 quarters. 
 
The Non Performing Assets (NPA) resolution process is likely to remain protracted despite the upcoming bankruptcy law. Setting up of infrastructure which includes setting up of national company law tribunals (NCLT) across India and training of judges is likely to take time. The Bankruptcy Code, which bears a strong resemblance to Chapter 11/9 of US bankruptcy law, tries to addresses the inefficiencies in the system by defining specific timelines for various processes. 

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COMMENTS

Anil Kumar

8 months ago

Good and thorough article. Excellent data to show the overall picture.

Mahesh S Bhatt

8 months ago

Enjoy the fun Chill Legally illegal situation self inflicted aping USA Amen Mahesh

Deepak Narain

8 months ago

It is quite a complicated matter. All the noise about growth has to be evaluated in the light of such bad loans. These giant-size players and politicians are having their pound of flesh and the common man is crushed under their weight for no fault. What kind of growth is this which benefits the looters in good and bad weather alike.

SuchindranathAiyerS

8 months ago

Too big to fail:

I remember when, as a Probationary Officer in the SBI, I was asked to summarise the Hegde and Golay file (File 80 A to G), by N. Sadashivan the then C & I Manager of Bangalore City Branch, into a single type written legal size page (1977). I did, and could not resist adding my recommendation in the last line which was to shut down the account and take legal action of recovery of debt.

Hegde and Golay had essentially used political clout (B.T.Shankar Hegde was a former Union Leader at Tata's) to get the deal going with the help of the Karrinayithikka Khangress. Bernard Golat S.A. was a failing watch company in Switzerland.

They had mulcted State Bank by importing large quantities of obsolete watch parts and demanding additional loans for "balancing" components. In essence this tactic, combined with the accusation that SBI did not understand the need for large economies of scale and horology had, with political assistance from the local politicians operating through Delhi had expanded the loan well beyond the original limits without, effectively, bringing the watch to market over several years. I had added my two bits worth from Cost accounting and Management accounting in paranthesis in the synopsis.

A few weeks later, the Branch Manager, M. Victor sent me off to meet the Circle Management Committee (S. K. Dutta Chief General Manager, T, K, Sinha, General Magaer (Operations) and V. N. V. Padmanabha Rao, General Manager (Planning) and R. Vishwanathan Chief Manager (Credit). I was asked a few searching questions on the contents of my synopsis that I had to answert from memory as I had not carried the files. (Unknown to me, the mirror file was available with the Credit Appraisal Cell of the Chief Manager Credit)

Based on this, the line of credit was immediately stopped and legal proceedings commenced with the approval of the Local Board.

My experience, as a Probationary Officer, in several branches such as Belgaum, Thiruvalloor, Vellore, and so on, with transferring "non performing assets" to Recalled Debts and Protested Bills, however, was entirely different. These had to be done aftre office horus as the onerous task would not be performed by the Unionized staff or the confirmed (unionized Grade Two) officers.These were mainly "priority sector" loans in small scale and agricultural sector distributed to politically preferred castes, tribes, religions and vote banks. In National aggregate they must have been enormous. But the Bank was simply not willing to go through with the enormous expense and effort of going through the legal processes demanded by the Bank's own policy! My hard work went in vain, and all this was simply covered up!

B. Yerram Raju

8 months ago

Religare's perceptions from the conference calls is worthy to note. Banks implementing the SARFAESi Act provisions, now armed with more powers after the latest amendments giving priority to institutional debt are on the trigger. They are resorting to either over valuing the assets and putting the bid amount at 10% and the related EMDs that instantly lead to repeat auctions as bidders are not showing interest when the assets on hold are more than 50 crores. This delays the realisation of the dues. In the case of SMEs the Banks are overenthusiastic in sale of assets even where the realisation is possible through restructuring or OTS.
RBI's guidelines are thrown overboard in being transparent on OTS norms. The Board decided OTS norms that should be non-discriminatory should be put on the Banks' websites as per RBI regulations. You can't find any. Asset sales to ARCs as mentioned in the Religare Study with large haircuts in the case of SMEs because of their interest, have few recovery tales to tell. Since the Boards of Banks are represented by the RBI and GoI Directors on the PSBs, these directors should review the NPA position in regard to the ARC and Auctions and ensure that their regulations are complied with fully for better monitoring and realisation of such loans.
The Banks are classifying quite a few companies as willful defaulters to save their skin where their actions like not granting in time adequate working capital or stopping working capital in the midstream of project execution by the companies, non-supervision of the advances, etc. The grievance procedure required to be followed in such cases as required under the RBI guidelines is followed in breach as several borrowers do not even know that such a procedure existed. The Grievance Redress Committee consists of the officials from the same Bank and it is anybody's guess as to why the members disagree with the branding of willful default that would affect the interests of their officials. RBI typically distances itself from many such lapses as they fall under micro management. The border line between non-conformance to regulation and micro management is very thin.

B. Yerram Raju

8 months ago

Religare's perceptions from the conference calls is worthy to note. Banks implementing the SARFAESi Act provisions, now armed with more powers after the latest amendments giving priority to institutional debt are on the trigger. They are resorting to either over valuing the assets and putting the bid amount at 10% and the related EMDs that instantly lead to repeat auctions as bidders are not showing interest when the assets on hold are more than 50 crores. This delays the realisation of the dues. In the case of SMEs the Banks are overenthusiastic in sale of assets even where the realisation is possible through restructuring or OTS.
RBI's guidelines are thrown overboard in being transparent on OTS norms. The Board decided OTS norms that should be non-discriminatory should be put on the Banks' websites as per RBI regulations. You can't find any. Asset sales to ARCs as mentioned in the Religare Study with large haircuts in the case of SMEs because of their interest, have few recovery tales to tell. Since the Boards of Banks are represented by the RBI and GoI Directors on the PSBs, these directors should review the NPA position in regard to the ARC and Auctions and ensure that their regulations are complied with fully for better monitoring and realisation of such loans.
The Banks are classifying quite a few companies as willful defaulters to save their skin where their actions like not granting in time adequate working capital or stopping working capital in the midstream of project execution by the companies, non-supervision of the advances, etc. The grievance procedure required to be followed in such cases as required under the RBI guidelines is followed in breach as several borrowers do not even know that such a procedure existed. The Grievance Redress Committee consists of the officials from the same Bank and it is anybody's guess as to why the members disagree with the branding of willful default that would affect the interests of their officials. RBI typically distances itself from many such lapses as they fall under micro management. The border line between non-conformance to regulation and micro management is very thin.

Nifty, Sensex may rally a bit – Wednesday closing report
We had mentioned in Monday’s closing report that Nifty, Sensex might fall further. The major indices of the Indian stock markets were range-bound on Wednesday and closed with very small gains over Monday’s close. The trends of the major indices in the course of Wednesday’s trading are given in the table below:
 
 
The Indian equities market traded flat during the mid-afternoon trade session on Wednesday. Negative global cues, coupled with slide in factory output data for July and profit booking dented investors' sentiments. However, the BSE market breadth was tilted in favour of the bulls -- with 1,764 advances and 947 declines and 198 unchanged. On the NSE, on Monday, there were 1006 advances, 458 declines and 57 unchanged.
 
On Monday, both the key Indian indices were dragged lower by increased possibility of a US rate hike, coupled with profit-booking and outflow of foreign funds. The Indian equity markets were closed on Tuesday on account of Eid-ul-Zuha.
 
IT (information technology) stocks faced resistance at higher levels due to profit booking, while banking, auto and pharma stocks held early gains due to buying support at lower levels. Oil-gas stocks traded with mixed sentiments. Aviation stocks traded with mixed sentiments on profit booking, and power sector stocks witnessed buying support from lower levels. FMCG (fast moving consumer goods) stocks traded with mixed sentiments on short covering at lower levels.
 
India's annual rate of inflation based on wholesale prices moved up to 3.74% in August, from 3.55% in the month before, as per official data released on Wednesday. Nonetheless, the annual rate of inflation for some commodities remained rather high: Potatoes (66.72%), pulses (34.55%) and fruits (13.91%). But onion prices were down 64.19% in August this year, against the like month of the previous year. Data released by the Commerce and Industry Ministry further showed that the annual inflation for manufactured products and fuels remained modest at 2.42% and 1.62%, respectively. Earlier, data on the consumer price index released on Monday by the Central Statistics Office (CSO) had showed that the annual retail inflation had eased by 100 basis points to 5.05% in August. With inflation easing, there is reduced pressure on aggregate demand and corporate earnings.
 
Credit rating agency Moody's Investors Service on Wednesday said the State Bank of India's (SBI) issuance of additional tier 1 (AT1), Basel III compliance securities would set the pricing benchmark for other issuers. Moody's said the SBI's issue price would also provide Indian banks with an alternative funding option. "We expect more Indian banks will look to raise capital via this route to overcome some of the limitations of the domestic bond market," Alka Anbarasu, Vice President and senior analyst was quoted as saying in a statement. "In particular, most Basel III securities issued by the banks domestically have been privately placed, thereby offering limited liquidity for investors," she added. On Wednesday Moody's assigned a B1 (hyb) rating to the perpetual non-cumulative capital securities issued by SBI, Dubai International Financial Centre (DIFC) branch. The terms and conditions of the capital securities incorporate Basel III-compliant non-viability language in accordance with Reserve Bank of India (RBI) guidelines, and will qualify as AT1 capital securities. The securities are issued under SBI's $10 billion Medium Term Note (MTN) programme, via the bank's DIFC branch. According to Moody's the other recent measures like capital infusion by the Indian government and issue of securities will boost SBI's loss absorbing capacity and help in managing its bad loans. The bond market is likely to see more growth in the country with reduced bullish trends in the equity markets.
 
The board of Reliance Capital, part of the Anil Ambani-led group, on Tuesday approved a proposal to independently list its home finance business on the stock exchanges. The independent listing of Reliance Home Finance is expected to unlock substantial value for existing shareholders of Reliance Capital, the company said in a statement. "The listing of Reliance Home Finance will also lead to increased management focus and accelerated growth in the home finance business," it added. "To address the needs of this sector, Reliance Home Finance has charted an aggressive growth plan in this space, and aims to increase its book size to over Rs50,000 crore in the next few years," said Anmol A Ambani, Director, Reliance Capital. According to the proposal, 49% stake in Reliance Home Finance will be allotted to all shareholders of Reliance Capital, in the ratio of one share free of cost in Reliance Home Finance for every one share held in Reliance Capital. Reliance Capital shares closed at Rs578.85, up 8.69% on the BSE.
 
US median household income saw the first annual increase in 2015 since the Great Recession, said the US Census Bureau on Tuesday. The median household income reached $56,516 in 2015, 5.2% higher than the level in 2014. "This is the first annual increase in median household income since 2007, the year before the most recent recession," it said in a statement. The data was 2.4 per cent lower than the peak level of the median household income of $57,909 in 1999, the bureau said. The data shows the remarkable progress that American families have made as the recovery continues to strengthen, said Jason Furman, chairman of the Council of Economic Advisers under the White House. The bureau also said the US poverty rate in 2015 fell to 13.5%, 1.2 percentage point lower from 2014 and the people in poverty reduced to 43.1 million, 3.5 million lower than 2014. This is one more indicator that US equity markets are likely to be in a bullish trend in the current season.
 
State-run telecom company Mahanagar Telephone Nigam Ltd's (MTNL) net loss was slightly lower for the April-June quarter at Rs718.02 crore, a regulatory filing said here on Tuesday. The company posted a net loss of Rs734.24 crore during the corresponding quarter in 2015-16. The total income of the company for the April-June quarter was at Rs744.72 crore, which is slightly less than Rs780.12 crore clocked during the same period a year ago. MTNL shares closed at Rs20.65, down 2.82% on the BSE.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 
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SpiceJet waives off flight cancellation charge for Bengaluru
Budget passenger carrier SpiceJet on Wednesday said that it has waived off flight cancellation charges for operations from Bengaluru for a limited period of time.
 
"In the wake of the serious disturbance in Bangalore, for all our flights booked on or before 12th September, 2016, and flying to and from the city between 12th and 14th September 2016, in adherence to the IROP policy, SpiceJet will be providing a full refund in case of cancellation," the airline said in a statement.
 
According to the airline, passengers seeking a reschedule will be provided with a move flight within seven days of actual departure.
 
"While for a no show, passengers booked on flights departing from Bangalore, we will be accommodating them on our next available flight on a complimentary basis which will be slated within 7 days from the actual flight departure date though the customer will also have the option of availing a refund on request," the statement said.
 
Most of the domestic airlines on Tuesday waived off flight change penalties for operations from Bengaluru for a limited period of time.
 
In their respective accounts on micro-blogging website Twitter, domestic airlines announced that the step was taken due to the law and order problem that has emerged in Bengaluru. 
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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