Money & Banking
Identifying banks ‘too big to fail’: The RBI way

RBI's approach on too big to fail gives more weightage to factors such as securities issued and bought by banks in India and overlooking risky assets and growing NPAs of the lenders

The financial crisis that hit the world economy at the beginning of the year 2008 was an eye opener. It showed how fragile the entire financial system was and how systemic risks arising from weakness of financial institutions could easily spill over to the real sector. The crisis also highlighted the need to have a re-look at the financial institutions and monitor risks posed by these financial institutions. Many large financial institutions, which looked infallible before financial crises, failed during the crisis giving rise to the fear that such financial institutions require closer monitoring and could pose serious systemic threat in future. With the crisis in the background, the concept of, “too big to fail” gained significance. Though the term, “too big to fail” was used in earlier crises as well, it assumed significance post-2008 crisis. Federal Reserve Chair Ben Bernanke defined the term in 2010: "A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.”
 

Basel Committee on “too big to fail”:  Post financial crisis of 2008, the Basel Committee on Banking Supervision (BCBS), adopted a series of reforms to improve the resilience of banks and banking systems. In order to ensure that banking system has enough resilience, the committee started working on two key areas which included assessment methodology for globally systemically important bank and how these banks can develop additional loss absorption capacity.
 

BCSB came out with an indicator-based approach to identify systemically important banks. The selected indicators are chosen to reflect the different aspects of what generates negative externalities and makes a bank critical for the stability of the financial system. The advantage of the multiple indicator-based measurement approach is that it encompasses many dimensions of systemic importance, is relatively simple, and is more robust than currently available model-based measurement approaches and methodologies that only rely on a small set of indicators. The selected indicators reflect the size of banks, their inter-connectedness, the lack of readily available substitutes for the services they provide, their global (cross-jurisdictional) activity and their complexity.
 

As per Basel Committee’s indicator based measurement approach, 20% equal weightage has been given to five critical factors which are cross-jurisdictional activities, size, interconnectedness, substitutability and complexity which is explained in the chart below:
 

Source:Basel
 

For each bank, the score for a particular indicator is calculated by dividing the individual bank amount by the aggregate amount summed across all banks in the sample for a given indicator.The score is then weighted by the indicator weighting within each category. Then, all the weighted scores are added. For example, the size indicator for a bank that accounts for 10% of the sample aggregate size variable will contribute 0.10 to the total score for the bank (as each of the five categories is normalised to a score of one). Similarly, a bank that accounts for 10% of aggregate cross-jurisdictional claims would receive a score of 0.05. Summing the scores for the 12 indicators gives the total score for the bank. The maximum possible total score (ie if there were only one bank in the world) is 5.
 

Additionally in order to find out this category of bank, BASEL approach says that banks need to be identified from list of 75 largest banks based on leverage ratio prescribed by Basel. Banks can be added in this list depending upon descretion used by national supervisor.
 

RBI approach on “too big to fail”: Based on the Basel approach, the Reserve Bank of India (RBI) has also decided to identify banks which are domestic systematically important. The RBI draft document says, “The banks will be selected for computation of systemic importance based on the analysis of their size (based on Basel III Leverage Ratio Exposure Measure) as a percentage of GDP. The banks having size as a percentage of GDP beyond, 2% will be selected in the sample of banks. As foreign banks in India have smaller balance sheet size, none of them would automatically get selected in the sample. However foreign banks are quite active in the derivatives market and so the specialised services provided by these banks might not be easily substituted by domestic banks. It is therefore appropriate to include a few large foreign banks also in the sample of banks to compute the systemic importance. The total assets of the banks selected for the sample would constitute 100% of the GDP. For this purpose, latest GDP figure released by Central Statistical Office, Government of India will be used”.
 

The broad comparison between RBI and Basel approach is given in the table below.
 

Source: RBI
 

While cross-jurisdictional activity is considered as a key factor for determining the risks posed by globally systemically important banks, for domestic banks size has been given a higher weightage by RBI. Cross jurisdictional activity has been given a weightage by RBI in sub-indicators and it has replaced level 3 assets by cross jurisdictional factors. RBI prescribes additional capital requirements for too big to fail to banks as follows:


Source: RBI
 

Apparently RBI’s approach on too big to fail gives more weightage to factors such as trading books of the banks in India. Under all three heads of interconnectedness, substitutability and complexity, the focus is more on market securities which include securities issued by the banks as well as securities which banks have purchased. The key aspect of core banking business is not explicitly mentioned. Banks in India in the current scenario face threat from rising non performing assets which pose threat to the banking operations. Risky assets in the books of most of the banks such as exposure to real estate sector or lending to various corporate also pose threat to the banking industry. The quality of assets of a bank should definitely be a key criteria in identifying too big to fail status. Also, with banks in India spreading wings across world, cross-jurisdictional liability should have been given a higher weightage.

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COMMENTS

Dayananda Kamath k

3 years ago

all of them have already failed and have become big to be managed prudently.so it might be priortising whome to be saved. the new bankin licences is necesitated because the existing banks can not be resurrected due to mis managemnt by regulator, finance ministry.

MG Warrier

3 years ago

The introductory paragraph of the December 2, 2013 RBI release on the subject reads asunder:
“A few banks assume systemic importance due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness. The disorderly failure of these banks has the propensity to cause significant disruption to the essential services provided by the banking system, and in turn, to the overall economic activity. These banks are considered Systemically Important Banks (SIBs) as their continued functioning is critical for the uninterrupted availability of essential banking services to the real economy.”
The cut and paste approach to policy formulation which impaired the finance ministry’s policy apparatus is, perhaps slowly, affecting the RBI also. The entire approach has been borrowed from the ‘international’ context. Failure of insitutons, big or small, affect the stakeholders. Remember the famous conclusion of All India Rural Credit Survey Committee of the 1950’s: “Cooperation has failed. But cooperation must succeed”
The sporadic releases of policy approaches on banking policy in different context send out blurred signals which get interpreted by stakeholders based on their constituency interests. The central bank should, on its own, take up a serious study of the structural and policy issues affecting the financial sector.

Auto sales in November weaker than expected across segments

During November, all automakers reported weaker-than-expected numbers due to soft demand

Indian auto industry witnessed weaker sales during November across the segments. While passenger car and medium and heavy commercial vehicles (MHCV) volumes declined tractor sales were the only exception where growth was higher than expected. Two-wheeler volumes increased mainly due to 43% higher sales reported by Honda Motorcycle and Scooter India, Pvt Ltd (HMSI).

 

Nomura feels if the current trend continues, there may be downside risks to its FY14 volume estimates for Bajaj Auto Ltd and commercial vehicles (CVs) Ashok Leyland and Tata Motors. "There could be some upside risks to our volume estimates for Hero MotoCorp Ltd (HMCL)," it said in a research note.
 


During November the demand subdued, however lower commodity prices are positive for profitability of automakers, Nomura said.

 

The note says, "As per our discussion with the companies, demand is soft post the festival season. Discounts came down marginally in the October-November period but can inch up higher in December. However, companies sounded more positive on profitability as commodity prices have come down and thus recent price increases should lead to better margins, we believe."

 

During the month, car industry volumes declined 7%, while two-wheeler volumes increased 6-7%. Nomura said, "HMSI reported a strong set of numbers (up 43%), led by robust growth in both bike and scooter segments. HMCL’s volumes increased by about 6%, below Nomura’s expectations of around 10% growth. Bajaj Auto saw a 29% decline in domestic motorcycle volumes compared to our expectations of 12% decline. As per the company, this was partly due to run-down of inventory and lower production of newly launched Discover 100M. TVS saw 10% decline in domestic two-wheeler volumes while Yamaha’s volumes increased by about 7%."

 

According to Nomura, overall MHCV industry volumes weakened further in November. "Volumes declined by about 35%, much below our expectations of 15% decline. Volumes for Tata Motors declined, by about 28%, while Ashok Leyland saw a 40% decline in MHCV volumes. Eicher’s total CV volumes fell by 44%," the report said.

 

 

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Kingfisher Airlines is biggest defaulter of public sector banks

Vijay Mallya's Kingfisher owes Rs2,673 crore is the largest defaulter of PSBs while Winsome Diamond and Jewellery Co with dues of Rs2,660 crore is the second biggest defaulter

Vijay Mallya-owned and now defunct Kingfisher Airlines is the biggest defaulter and owes Rs2,673 crore to public sector banks (PSBs), says All India Bank Employees' Association (AIBEA).

 

According to the bank employee association, Kingfisher tops the list of 50 biggest defaulters of PSBs that owes Rs40,528 crore. In order to highlight the increasing bad loans or non-performing assets (NPAs) menace in PSBs, the bank employees are observing 5th December as 'All India Demands Day' by wearing badges and holding rallies.

 

According to the union, Mumbai-based Winsome Diamond and Jewellery Company (erstwhile Su-Raj Diamond India Ltd), with dues of Rs2,660 crore, is the second highest defaulter, followed by Electrotherm India Ltd at Rs2,211 crore.

 

In May 2013, ratings agency CRISIL downgraded the Jatin R Mehta-led Winsome Diamond to a ‘D’ rating while placing it under watch in view of continuous defaults of the company’s overseas customers and consequent development of letters of credit (LoCs). At that time, Punjab National Bank, the lead bank of the consortium, has an exposure of more than Rs1,800 crore to the Winsome Group.

 

Some of the other big-ticket defaulters include, Zoom Developers Pvt Ltd (Rs1,810 crore), Sterling Biotech Ltd (Rs1,732 crore), S Kumars Nationwide Ltd (Rs1,692 crore), Surya Vinayak Industries Ltd (Rs1,446 crore), Corporate Ispat Alloys Ltd (Rs1,360 crore), Forever Precious Jewellery and Diamonds (Rs1,254 crore), Sterling Oil Resources Ltd (Rs1,197 crore) and Varun Industries Ltd (Rs1,129 crore).                                                                                                             

                                                                                                  (Rupees in crores)                                 

 

BORROWER

LOAN NOT REPAID

  1.  

Kingfisher  Airlines

2673

  1.  

Winsome Diamond & Jewellery Co. Ltd.

2660

  1.  

Electrotherm India Limited

2211

  1.  

Zoom Developers Private Limited

1810

  1.  

Sterling Bio Tech  Limited

1732

  1.  

S. Kumars Nationwide Limited

1692

  1.  

Surya Vinayak Industries  Ltd.

1446

  1.  

Corporate Ispat Alloys Limited

1360

  1.  

Forever Precious Jewellery & Diamonds

1254

  1.  

Sterling Oil Resources  Ltd.

1197

  1.  

Varun Industries  Limited

1129

  1.  

Orchid  Chemicals  & Pharmaceutical Ltd.

938

  1.  

Kemrock Industries & Exports Ltd.

929

  1.  

Murli Industries & Exports Limited

884

  1.  

National Agricultural Co-Operative

862

  1.  

STCL Limited

860

  1.  

Surya Pharma Pvt. Ltd.

726

  1.  

Zylog Systems (India) Limited

715

  1.  

Pixion Media Pvt. Limited

712

  1.  

Deccan Chronicle Holdings Limited

700

  1.  

K.S. Oil Resources Ltd.

678

  1.  

ICSA (India) Ltd.

646

  1.  

Indian Technomac Co. Ltd.

629

  1.  

Century Communication Limited

624

  1.  

Moser Baer India Ltd. & Group Companies

581

  1.  

PSL Limited

577

  1.  

ICSA India Limited

545

  1.  

Lanco Hoskote Highway Limited

533

  1.  

Housing Development & Infra Ltd.

526

  1.  

Mbs  Jewellers  Pvt. Ltd.

524

  1.  

European Projects And Aviation Ltd.

510

  1.  

Leo Meridian Infra Projects

488

  1.  

Pearl Studios Pvt. Ltd.

483

  1.  

Educomp Infrastructure & School Man

477

  1.  

Jain Infraprojects Limited

472

  1.  

Kmp Expressway Limited

461

  1.  

Pradip Overseas Limited

437

  1.  

Rajat Pharma/ Rajat Group

434

  1.  

Bengal India Global Infrastructure Ltd.

428

  1.  

Sterling Sez & Infrastructure Pvt. Ltd.

408

  1.  

Shah Alloyes Ltd.

408

  1.  

Shiv Vani Oil And Gas Exploration Limited

406

  1.  

Andhra Pradesh Rajiv Swagruha Corp. Ltd.

385

  1.  

Progressive Constructions Ltd

351

  1.  

Delhi Airport Met Ex Ltd.

346

  1.  

Gwalior Jhansi Expressway Limited

346

  1.  

Alps Industries Limited

338

  1.  

Sterling  Port Limited

334

  1.  

Abhijeet Ferrotech Limited

333

  1.  

Sujana Universal Industries

330

 

 

40,528

List released by General Secretary, AIBEA

                                   
In view of the rising bad loans in state-owned banks, the AIBEA said the government should set up a special investigation team to probe the decisions of their credit appraisal committees in cases where borrowers have turned wilful defaulters.

 

In addition, the bank employee association also wants responsibility fixed on banks’ top brass for the loans that have turned bad, allow banks to share information on NPAs and wilful defaulters under the Right to Information (RTI) Act, and declare wilful loan default as a criminal offence.

 

Pointing out that the credit appraisal committees of public sector banks had powers to sanction single loans up to Rs400 crore in the case of large banks and up to Rs250 crore in the case of small banks, Vishwas Utagi, General Secretary, Maharashtra State Bank Employees Federation, an affiliate of AIBEA, alleged that promoters of large defaulting companies diverted bank loans into real estate and floated cricket outfits for competing in domestic league matches.

 

According to the Union, over the past seven years, there are fresh bad loans worth Rs4.95 lakh crore only in PSBs, while during the same period, these lenders wrote off band debts worth Rs1.4 lakh crore. Top four defaulters of state-run banks constitute Rs23,000 crore of NPAs, the AIBEA said.

 

AIBEA has demanded remedial measures to address the growing menace of NPAs in state-run banks. The Union has demanded PSBs to publish list of bank loan defaulters of Rs1 crore and above, make wilful default in bank loan a criminal offence, order investigation to probe nexus and collusion (between the borrower and officials), amend Recovery Law to speed up the process, take stringent measures for recovering bad debts and not to incentivise corporate delinquency.

 

Last month, the Nitin J Sandesara-led Sterling Biotech, a Vadodara-based Gelatin maker, received approval from lenders to restructure its $250 million (about Rs1,575 crore) bonds. According to a report from Business Standard, Sterling Biotech’s bondholders of Zero Coupon Convertible Bonds which were due in 2012 had agreed to suspend all litigations in India and the United Kingdom, thereby opening a way for the consensual restructuring of the existing bonds.

 

Over the past year, Kingfisher, S Kumars Nationwide and Winsome Diamonds share prices have tumbled by over 60%. Following restructuring of bonds last month, Sterling Biotech shares rose 40% to Rs8.11 from Rs5.8 a year ago.

 

Kingfisher shares have fallen 63% to Rs4.92 as of 4 December 2013, from Rs13.25 as on 3 December 2012. During the same period, S Kumars and Winsome Diamonds shares fell 61% and 80% to Rs5.96 and Rs6.4, respectively.

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COMMENTS

nagesh kini

3 years ago

Thanks Mr. Utagi for coming out with the data that was always available but deliberately withheld from public scrutiny.
It now up to the Parliamentary Standing Committee to suo moto take it up and ascertain full facts from the poor risk assessment, deliberate low monitoring of the advances, lack of pro-active checks, faulty debt restructuring giving rise to back door write-off without proper approvals.
Since there are high profile big ticket players out to sabotage any enquiry only those with impeccable credentials should be associated with the Inquiry.
There has to be an immediate action in putting up all the charged assets to realize all that is possible and above all immmediately freeze any more funding by insisting that the promoters pump in additional funding right away.
As one paper rigthtly headlines it "NPA - The great bank robbery - thanks to judicial protection to the large wilfull defaulters stake holders of the lenders are in the dark about the loans."
In addition the borrowers and their guarantors ought to be named and shamed by each bank now that the High Court has cleared publishing their mug shots.

REPLY

Vinay Joshi

In Reply to nagesh kini 3 years ago

You are an activist!? Presumably!

WHY CAN'T YOU PETITION RS MP Mr. CHANDRASEKHAR ON THIS ISSUE?!?!

WHO STOPS YOU?? WHY CAN'T YOU PETITION & TALK ON 'RIL INSIDER TRADING' & 'GAS PRICING'??!!

Ashish

3 years ago

surprising most of the top defaulters don't even have a corporate website..

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