RBI fears stressed assets of Rs5 lakh crore from power, real estate and infrastructure sectors on higher interest rates and slow growth. The rise in NPA may reflect very badly on bank’s book
The Reserve Bank of India (RBI) fears that bank loans of around Rs5 lakh crore (Rs5 trillion) may come under stress due to rising interest rates and slow revenue growth. The sectors affected most by the bad loans would be power, aviation, real estate and roads. Experts believe that if economic activity does not pick up, the rising non-performing assets (NPAs) from these sectors will have a severe impact on the books of Indian banks.
Subir Gokarn, deputy governor of the RBI, on 8th November, had said that the NPAs of banks are not posing any threat to the banking system. However, sources confirm that the RBI is expecting huge bad debts of Rs5 lakh crore from various sectors.
According to the sources, the central bank has arrived at the amount considering possible NPAs from the state electricity boards (SEBs), real estate due to slow demand, particularly from the metros, and de-growth in aviation sector on higher cost of turbine fuel and excess capacity.
During the second quarter of the current fiscal, bad loans of listed banks in the country rose by 33% to Rs1 lakh crore due to rising interest rate and sluggish growth.
Power sector is under financial strain due to increasing losses by SEBs and non-execution of new projects because of the regulatory hurdle. Last year, power distribution companies, lost about Rs40,000 crore due to subsidised tariffs. Currently, experts say, banks are hesitating to extend fresh loans to these companies. Allahabad Bank, a public sector lender, has already frozen lending to power sector companies.
Macquarie Economic Research, in a report, noted that losses by SEBs would result in huge state fiscal deficit: “The last audited, published review of SEB finances in FY10 reflected an average loss of Rs.0.86/kWh in India, the FY11 annual SEB losses (without accounting for subsidy) have been reported by media to be around Rs700 billion+ (US$15bn, 0.9% of GDP). Incorporating the SEBs losses (subsidy received basis) would result in the state fiscal deficit widening from 2.3% of GDP to 3.0% of GDP in FY12,” Macquarie said.
According to rating agency, CRISIL, advances of around Rs56,000 crore, or 12%, which is the exposure of domestic financial institutions’ to the power sector, may turn into to bad loans if power distribution reforms are not taken soon. CRISIL said the sector also suffers from huge aggregate technical and commercial losses apart from the wide gap between average cost of power supply and actual realization.
Things are not rosy for the Indian aviation sector, as well. Kingfisher Airlines is not the only one under mounting debts. The entire sector is hit by the rising aviation turbine fuel cost, which is the major operational cost and over-capacity created due to more leased aircrafts by the companies. At the same time the yield per seat has fallen.
According to the estimates by Centre for Asia Pacific Aviation (CAPA), an aviation industry consultant, during FY12, Indian aviation sector is likely to make a net loss of around Rs12,500 crore. Usually, the airlines cover the losses through additional funding from banks in the form of loans as working capital. Experts believe that in case there is a default, it directly affect the bank’s balance sheet.
Same goes with Indian real estate sector. According to RBI, Indian developers’ outstanding credit rose 23% to $24.4 billion or about Rs1.22 lakh crore at the end of June 2011 from a year ago period. However, with surging input costs and slumped sales, realtors are finding it tough to repay their dues. High inflation scenario has also made taking loans expensive. DLF, India’s biggest realtor, saw its debt going up by almost Rs1,000 crore during July-September 2011 to Rs22,519 crore. Mumbai-based realtor, HDIL has incurred a debt of Rs4,000 crore as of September end.
A series of scams hit the union government since last year, which has taken toll on the infrastructure projects such as construction of highways. Non-execution of these projects has put in financial strains on the infrastructure sector that may lead to possible default on loan repayment. According to a media report, the 20 biggest loans given by banks are related with infrastructure sector. Experts say that the rising input cost and interest rate is also escalating the cost of the projects.
An accusatory letter by a Whole Time Member, an unusual writ petition by some eminent citizens, an explosive rebuttal by the finance ministry and the buck of senior appointments at the capital market watchdog again stops at the Prime Minister
At the end of the day, it may boil down to an outgoing director’s pique at not getting a two-year extension at the Securities & Exchange Board of India (SEBI) or a well-paid-perked directorship at its National Institute of Securities Management (NISM). SEBI’s director K M Abraham’s letter to the Prime Minister (PM) hurling a slew of stunning allegations at the new incumbent, Mr U K Sinha and Finance Minister Pranab Mukherjee has caused a heap of dirty linen to spill into the media. This will hopefully have the salutary effect of a much needed clean up of an extraordinarily arbitrary, high-handed and increasingly corrupt regulatory body. But an unintended consequence of the many rivalries is that it again exposes the failure of Prime Minister Manmohan Singh.
Clearly, a well-orchestrated plan has gone awry; but those of us who follow the news closely can now see a clear pattern.
* It started with a series of reports about how and why Chairman C B Bhave and his two whole time directors did not get a five-year term as had been proposed and put on hold over a year earlier. These reports appeared despite the fact that U K Sinha’s appointment as SEBI chairman had already been announced. Those of us who track SEBI regularly, knew that a five-year term for Mr Bhave and the directors had been mooted within months after their 3-year appointment but had been put on hold by the Finance Minister long before their term ended. Why then did it make news when it was no longer relevant?
* Soon after, media reports selectively carried portions of K M Abraham’s letter to the Prime Minister (PM). He portrayed himself as a whistle blower and alleged that Chairman U K Sinha, under pressure from Finance Minister (FM) Pranab Mukherjee was diluting SEBI action in four specific cases. Strangely, the full letter was made public only on 28th October by First Post which obtained it through an RTI filing. (http://www.firstpost.com/business/pranab-pressured-sebi-to-go-easy-on-ril-save-rs-1500-cr-118531.html)
* Moneylife then scooped U K Sinha’s rejoinder to Abraham’s charges, which showed there had been no dilution in SEBI’s stance in the four named cases even the allegations of political pressure were true. Sinha also alleged that Mr Abraham was mentally disturbed, in the habit of secretly taping people and had repeatedly sought an appointment in NISM which was apparently assured to him by Mr Bhave.
* Next, the media reported another letter from Dr K M Abraham to the PM, where he claimed that he and his family were under threat because the PM’s office had forwarded his letter to the Finance Minister, who was the prime subject of his complaint.
* In the meantime, a group of eminent citizens have filed a public interest litigation alleging that the constitution of the search committee for appointing the chairman and directors was altered to give the finance minister more say on the selection. Since the case is sub-judice, we are reproducing the writ petition and the affidavit verbatim.
Moneylife has pointed out that the recommendation of the appointment committee has been frequently ignored in selecting the SEBI chairman. (http://www.moneylife.in/article/regulation-appointments-disappointments/20543.html). We pointed out that even C B Bhave was not on the list forwarded by the committee. Worse, he was appointed despite an on-going litigation by the National Securities Depository Limited (NSDL) which he founded and headed for over a decade, with SEBI. All this has now been reiterated by the Times Group on 13th and 14th November. In fact, the then Joint Secretary K P Krishnan called senior journalists to explain how Bhave would be “ring-fenced” from NSDL related issues. The fact that the ring-fence did not work and all NSDL’s wrongs were sought to be buried have been extensively reported. Media reports now reveal that P Chidambaram pushed for Mr Bhave’s appointment even when he had told the selection committee that he was not interested in the job. In fact, Mr Bhave had taken the unusual step of appearing before the selection committee, despite not wanting the job, only to be able to air his grievances against then SEBI Chairman M Damodaran, who had initiated action against NSDL in the IPO (Initial Public Offering) case of 2006 and appointed a two-member bench of the SEBI board (comprising Dr Mohan Gopal and V Leeladhar) to look into the issue. The negative findings of the bench were first sought to be buried by SEBI and later declared null and void until the displeasure of the Supreme Court forced a volte face.
Now we come to the interesting part of the new PIL. The writ filed by eminent citizens says that orders to extend the term of C B Bhave and the two whole time members from three to five years was “reviewed and negated” and the rules for the composition of the selection committee were amended to give more powers to the FM. Anyone who has followed SEBI closely (unlike the petitioners in this case) is in fact rather shocked and surprised at the quiet and surreptitious move to extend the term of the chairman and his two whole time members through the petition.
What if the apex court goes into issues that the eminent citizens have ignored? For instance, who proposed the move to grant this extension? Wasn’t it the same finance minister (P Chidambaram) and Joint Secretary (Dr K P Krishnan) who stood by and allowed SEBI to throw out an order of its own bench in the NSDL matter? Wasn’t this the same finance ministry team which stood by and allowed Dr Mohan Gopal to be so humiliated that he did not attend any SEBI board meeting towards the end of his tenure?
Or, what action was taken by the government and the finance ministry on the explosive and anguished letter to the PM by Dr Mohan Gopal (who headed the National Judicial Academy and has taught at Harvard Law School for over a decade before returning to India) about capricious functioning of SEBI under Mr Bhave (http://www.moneylife.in/article/dr-mohan-gopals-explosive-exposé-of-sebis-functioning-under-bhave/16246.html).
Since the buck stops at the PM, it could well be that these issues are not likely to be raised before the apex court. But if they are, a few surprising skeletons could tumble out and expose the many machinations and vested interests at work behind the scenes.
The Group has alleged that NSE issued certain circulars in contravention to the rules and guidelines of the SEBI and thus favoured brokers over investors
Delhi-based Investor Protection Group (IPG) has filed a writ petition in the Delhi High Court (HC) against the National Stock Exchange (NSE), requesting to give directions to the Securities and Exchange Board of India (SEBI), to conduct an in-depth investigation into the alleged illegalities committed by the NSE. The petition is scheduled to be heard on 16th November.
In a release, IPG said, “We have asked court to direct SEBI to conduct a thorough investigation into the illegalities committed by the NSE and investigate if the acts of NSE are biased and are responsible for plotting loopholes in the system and to initiate appropriate legal action including cancellation or suspension of the registration/ licenses of NSE, if the same is established.”
According to the IPG, the Exchange deliberately issued certain circulars, in contravention to the rules and guidelines issued by SEBI, favouring the brokers and not to the investors. The group has also prayed to declare “those clauses of the circulars as null and void.”
Explaining the dubious role of NSE, the Group alleged that, “NSE acts as an informer to the brokers whereby they retrieve the critical information/ complaint from client and provides the information to the broker, but do not provide the complete documents /information to the client from brokers.”
It adds that, “Clients are made to fight their cases with incomplete information and as a result loose their case. NSE also does not support or provide any information about your account till they are forced by the Arbitrators.”
It has also alleged that illegal and unauthorized trading is carried out by the stock brokers under shelter of NSE. SEBI is also been named in the writ petition, because according to the group, such illegal trading are not monitored by the SEBI, as its responsibility as a stock market regulator.
The Delhi-based group has also alleged NSE for allowing brokers to make agreements/ contracts on their own without the mandatory signature of the clients required at the time of registration. The writ petition has been referred to a division Bench of Delhi HC in the category of Public Interest Litigation (PIL).