Companies & Sectors
Continued losses can erase revenue reserves of public sector banks: CRISIL
A sharp decline in profitability and mounting losses could wipe out revenue reserves of some public sector banks (PSBs) and hamper their near-term ability to service coupon on additional tier 1 (AT1) bonds issued under Basel III capital regulations, says a research note. The Basel III-compliant AT1 bonds are meant to be loss absorbing in times of stress.  
 
In the report, ratings agency CRISIL says, "...some banks are reporting revenue reserves in their audited balance sheets without adjusting for profit and losses (P&L). Instead, these losses are being shown as a negative ‘balance in P&L Account’ on the liability side. As a result, reported revenue reserves do not deplete despite losses. For loss-making banks, the ability to service coupon on AT1 bonds depends only on adequacy of revenue reserves."
 
As many as 13 of the 21 PSBs (taking the State Bank of India and its associates as a consolidated entity, reported losses for fiscal 2016, and almost half of them could do so again this fiscal. As on date, 14 PSBs have Rs22,600 crore of AT1 bonds outstanding. "While Government of India has committed capital support to PSBs to sustain their capital ratios above regulatory minimum, the coupon on AT1 bonds can only be serviced through current year’s profit or from revenue reserves and hence any capital infusion by government alone cannot improve the bank’s ability to service coupon on these bonds," the report says.
 
Krishnan Sitaraman, Senior Director for Financial Sector and Structured Finance Ratings at CRISIL says, “A part from high probability of posting losses this fiscal, negative or low revenue reserves are likely to make six PSBs vulnerable. Of these, four have AT1 bonds outstanding, where continued losses could wipe out their revenue reserves and pose a challenge when it comes to coupon servicing. The other two have not issued any AT1 bonds so far."
 
According to the ratings agency, four other PSBs are also expected to post losses in the near term, but they have adequate revenue reserves, after adjusting for expected losses, to service coupon on AT1 bonds outstanding. "However, their ability to continue to do so over the medium term will depend on a return to profitability. On the other hand, 11 banks are expected to report a profit in the near term or have sizeable revenue reserves despite weaker profitability, which would help them service coupon obligations on AT1 bonds over the medium term," the report says.
 

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COMMENTS

Govinda Warrier

4 months ago

RBI and GOI need to take cognizance of the possible damage such vague observations about the possibility of some banks failing to meet payment obligations will cause to the banking system. The easiest way, traditionally, to kill a bank is to spread a rumour that it may not be able to meet payment obligations on due dates. Crisil has unwittingly done just that without mentioning the name of the bank.

B. Yerram Raju

4 months ago

PSU Banks have all professionals - most have qualified in banking diplomas from IIBF or IBL and several are also CAs. It is not so much professionalism that is lacking as integrity and support to integrity at various tiers in the organisation. If the seniority principle gives place to merit and proven integrity, half the ills of banks are cured. The other half is cured by the government not pushing its targets. Public sector bank executives are still measured by the targets they receive on government schemes. Same number of staff at various levels achieve millions of Jan Dhan and Mudra Accounts in just a couple of years that they missed out for decades!! Why the Finance Department of GoI is not able to see the red line in such target achievement? Both PSBs and the Government of India seem to be interested in scratching each other's back. Second, why the same Government cannot say that a portfolio of certain viable quantum and number of corporate accounts shall be managed by a person no less than a GM for at least three years continuously? Even if such GM were due for promotion in between such 3-year period, monitoring by the same person should be continued. Then accountability increases. Committee approach for sanctioning is okay but not for shifting responsibility and accountability. NPAs can significantly go down in the corporate sector at least in a couple of years.

REPLY

Govinda Warrier

In Reply to B. Yerram Raju 4 months ago

I agree with the contents, especially the opening two sentences. Though we are not raising these issues for the first time, at the risk of repetition, we need to talk out more often. As of now, the only option is to strengthen PSBs. If Privatisation was to help, post-nationalisation, the residual and new generation private sector banks would have subsumed a decent share of banking business by now. Their share remains below thirty percent means that they avoid a large section of clientele PSBs service. I am reminded of the prophetic assertion by All India Rural Credit Survey: "Cooperation has failed, cooperation must succeed"
PSBs, in whatever structural form they survive, need to be retained in good health.

Akshay Kini

4 months ago

Many of these PSU banks have incredibly high CASA ratio, yet are suffering. Shows how badly are run.

REPLY

Govinda Warrier

In Reply to Akshay Kini 4 months ago

Infuse professionalism, give them functional freedom to manage HR and compensate workers with level playing field compared to banks in private sector, when they are asked to do unremunerative business for meeting social objectives, make good their losses by appropriate interventions, just as GOI has made RBI's MPC a body of experts, take care to fill board vacancies and top positions with competent persons and ensure they remain in position for reasonably long tenure...

Shrikant Dattatraya Sahasrabuddhe

4 months ago

Names of banks not published.Why?

Shrikant Dattatraya Sahasrabuddhe

4 months ago

Names of banks not published.Why?

Govinda Warrier

4 months ago

Many are wise after the event. Some pretend to be. The compulsions to be realistic in accounting practices have forced some banks to report losses. Slowly some discipline is in sight. The overall position of public sector is painted grey by vested interests. As of now, there seems to be no escape from infusing professionalism into the working of public sector organizations. There are no takers for the 'ugly' but unavoidable work they are doing.

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Stock manipulation: Yarn Syndicate
Yarn Syndicate Limited, supposedly, trades in, and exports, cotton yarn. In the past quarter, the company made total sales of just Rs5 lakh and incurred losses of Rs22 lakh. In quarter before that, the company incurred a loss of Rs2.11 crore and had no sales at all. It has been incurring losses for the past 14 quarters, except quarter ended September 2013, and has practically no sales. 
 
However, that has not stopped the stock from rocketing up—from Rs1.9 to Rs6.28—a 231% rise in 18 months. Yarn Syndicate cannot pay dividends; its earning per share stands at a negative Rs7.77. It has only 3,671 shareholders. The number of trades of the stock has generally been between one and five per day, reaching five shares a day, once. There was no trading activity for three months between 16 February and 16 May 2016. However, a total of 24,720 shares were traded on 10th September, in just two trades. 
 
Seems like some individuals are interested in taking the stock price up, to convert black money to white, laundered through the tax-free long-term capital gains route. Is SEBI watching?

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COMMENTS

DEV GORE

4 months ago

SEBI chairman said people opened up shops to offer a LTCG to a pre-decided group of people. there are more than 200 listed companies SEBI had short listed. why SEBI is not publishing that list openly. Scrutiny of LTCG scam by SEBI is its
elf an another scam

Surinder Mohan Arora

4 months ago

company made total sales of just Rs5 lakh and incurred losses of Rs22 lakh, wheather loss has cash or Depreciation

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