Money & Banking
Decline in banks’ asset quality is a concern, says Kotak

As bad loans balloon to unprecedented levels, we take a look at why this has happened

Kotak Institutional Equities (Kotak), in its recent report, has voiced its concern over the decline in asset quality in the banking sector, including private banks. Kotak stated, “2QFY13 results of PSU banks showed further increase in their non-performing loans (NPLs) and restructured loans from their already high levels while private banks had a relatively benign quarter with a modest decline in asset quality” Moneylife had already written an extensive cover story on public sector banks’ woes and their structural problems. The cover story can be accessed here. The story revealed that bad loans of public sector banks grew by a whopping 56% during the 2011-12 fiscal and the reason had nothing to do with the economy but the way the banks were managed.

While there isn’t much of a difference in the loan composition between private and public sector banks (PSBs), the former tend to have a much more prudent credit policy to make sure that debtors are solvent and have the capacity to repay the principal. Kotak mentions that there was a steep rise in restructured loans, especially amongst PSBs. The table below illustrates this:

As you can see, restructured loans are fairly stable in private banks, even though numbers have gone up in some private banks. But, by and large, private banks have vastly outperformed PSBs. In fact, the Reserve Bank of India (RBI) had admitted that 15% of PSB restructured assets had become bad debts. The main differences between private and PSBs is the way both are run. PSBs do not have a shareholding mindset to make profits and are often under the watchful eyes of the government. Sometimes, things can get political, even though on paper, a loan can turn bad. A case in point is how inept PSBs had been in bailing out companies like Air India and more pertinently, a private carrier that is Kingfisher, which has begged PSBs to use tax payers’ money for a bailout. The government has simply forced PSBs to throw good money (i.e. tax payers’ money) over bad loans.

Several other reasons explain poor performance of PBSs. They are:

  1. Inadequate and poor credit assessment. Even big companies like Paramount Airways has come under the CBI scanner for causing losses to PSBs. What makes PSBs choose such companies? And, of course, there’s Kingfisher and Air India.
  2. Large pending cases with the debt recovery tribunal with scant resources in courts. This delays recovery of loans, which continue to be in PSBs’ books.
  3. Borrowers can obtain stay orders from higher courts and prevent banks from enforcing the securities, despite SAFAESI Act.
  4. The appointment of chief executive officers (CEOs) of PSBs is a game of musical chairs and inherently political rather than based on merits.
  5. Vertical organisational structure prevents PSBs from keeping a close watch on funds.

A more detailed analysis of the above can be found in our cover story here.

A Moneylife index comparing returns of public sector banks (PSBs) and private banks threw up some very interesting findings, where investing in private banks would have increased boosted your returns by 50%, over three years—an enormous difference.

Kotak mentions, “The government and regulator may want to ensure better lending practices at PSU banks or enforce better practices (lending and otherwise) of private-sector companies on PSBs.” However, we feel this is just wishful thinking. It will take years for cultural changes to impact PSBs, in a good way. Policy makers and regulators would need to get their act together, now. Our columnist, MG Warrier, had written about banking reforms in detail over here.


Jaguar Land Rover, Chery Automobile to set up manufacturing unit in China

The joint venture between Tata motors-owned Jaguar Land Rover and Chery Automobile, includes the creation of a new partnership brand to assemble models tailored specifically for the Chinese market, including the marketing and distribution

Mumbai: Tata motors-owned Jaguar Land Rover (JLR) and Chery Automobile are setting up a new manufacturing facility in China in a joint venture as part of a 10.9 billion renminbi investment plans, reports PTI.


"Jaguar Land Rover and Chery will now accelerate plans to build a joint venture manufacturing plant in Changshu, near Shanghai, as part of a 10.9 billion renminbi investment that will also include a new research and development centre and engine production facility," a JLR statement said.


JLR and Chery Automobile had formally laid the foundation stone for their new manufacturing facility in China, it added.


The project includes the creation of a new partnership brand to assemble models tailored specifically for the Chinese market, including the marketing and distribution, it added.


"The two companies plan to complete the Changshu facility in Jiangsu province during 2014. Construction of a new engine plant for production of fuel efficient engines is also part of the JV partnership agreement," it said.


The equal partnership will be called Chery Jaguar Land Rover Automotive Company.


In a joint statement, Jaguar Land Rover Chief Executive Officer Ralf Speth and Chery Automobile Company Chairman and Chief Executive Officer Yin Tongyao said, "...We will now begin working in close collaboration on our partnership plans to harness the capabilities of our respective companies, to produce relevant, advanced models for Chinese consumers."


Chery Jaguar Land Rover Automotive Company will also produce models for a domestic brand tailored specifically to local customer demand, the statement added.


The sales of Jaguar and Land Rover brands in China rose 80% in the first 10 months of 2012. In the 2011 calendar year, Jaguar Land Rover saw sales increase more than 60%, driven mainly by the Jaguar XJ and XF models, and strong demand for the fuel-efficient Range Rover Evoque.


Chery Automobile is the largest Chinese car exporter and one of the country's most productive automotive manufacturers.


British Airways apologises after re-tweeting racial abuse against customer

British Airways' Twitter account, which has 210,000 followers, reposted the message which included extremely profane language and a racist term against Asian people. The carrier later apologised

London: British Airways (BA) has launched an investigation after an offensive and racist message was apparently re-tweeted from its official Twitter account, reports PTI.


The BA Twitter account, which has 210,000 followers, reposted the message which included extremely profane language and a racist term against Asian people, yesterday.


After the offensive message was deleted, staff at the airline then tweeted an apology.


It said: "Apologies for the last RT. We are sorry for any offence caused and are investigating how this may have happened," the Daily Mail reported.


The incident started when a profane message was posted by a disgruntled Twitter user named Jae Jang Ladd.


Another user of the social networking site tweeting under the name Asian Ronaldo, replied, again using profane language, asking Jae Jang Ladd asking him to go back to his country.


This message was then re-tweeted by the official BA Twitter account.


Within minutes, hundreds of Twitters users resent the re -tweet and later more than 160 followers had re-tweeted the apology.


BA spokesman Helena Flynn said the team were thoroughly investigating how the incident had occurred.


She said it had not been ruled out that the account may have been hacked.


Flynn said: 'We don't know yet how this has evolved.


"We'd just like to apologise to all of the poor people who have been involved in this and apologise for any offence caused."


She said that police had not been in touch over the post and as yet there had been no official complaints.


BA said the Twitter account was managed by its large marketing team.


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