Government hopes all banks will be out of PCA list by June
The Finance Ministry is hopeful that all banks will be out of the prompt corrective action (PCA) list by the end of June with their net NPA level coming in the range of 6 per cent by then.
 
The capital needs of all PCA banks have already been taken care of by the government through recapitalization in December 2018 and January 2019. 
 
The government took three banks - Bank of India, Bank of Maharashtra and Oriental Bank of Commerce - out of the PCA list last month. 
 
Two others - Dena Bank (part of merger with Vijaya Bank and Bank of Baroda) and IDBI Bank (through acquisition by LIC) - will be out of the PCA list by default. 
 
This leaves just six banks in the list of weak banks that will be under pressure from the peer group to improve on their NPA improvisation performance. They could cut down their NPA by June this year, informed sources said. 
 
While the BoB-Dena Bank-Vijaya Bank merged entity will start operations from April 1, 2019, the LIC-IDBI entity is in the process of starting banking operations. 
 
LIC had in January completed the deal with IDBI bank. However, IRDAI Chairman Subhash Chandra Khuntia had stated that the approval for the LIC-IDBI Bank deal had been on the condition that the stake will eventually be brought down to 15 percent. 
 
The six banks which will be eyeing non-PCA status in 2019 will be Allahabad Bank, United Bank of India, Corporation Bank, UCO Bank, Central Bank of India and Indian Overseas Bank. 
 
There is no time deadline given to any bank from the Finance Ministry. Officials say it should be their own goal to get out of PCA. They need to improve all key parameters of NPAs, capital savings and non-core assets monetization. 
 
All the agenda and roadmap have been given to them but they also have to realize that the sooner they get out of this framework restrictions, they will be able undertake more expansion and operations, the sources said. 
 
Recently, the government announced infusion of Rs 28,615 crore into seven public sector banks (PSBs) through recapitalization bonds which have raised their capital ratio and improved recovery mechanism, targeting lower net NPA level. 
 
Some banks are performing well and they are adequately capitalised as per the Basel norms. So, capitalization and loan recovery steps will facilitate them to come out of PCA. 
 
The PCA framework kicks in when banks breach any of the three key regulatory trigger points: capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA). 
 
Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government and some of the independent directors of the RBI board, like S. Gurumurthy, are in favour of this practice being adopted for the domestic banking sector as well. 
 
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.
 

 

  • User

    COMMENTS

    zaid mansuri

    6 months ago

    Good headline

    Hardeep Singh Puri Releases Moneylife Foundation’s Report on Reverse Mortgage
    Reverse mortgage (RM), an obvious product for India’s aging and senior citizen population, which is often asset-rich and cash poor, needs to be made more viable by improving product design and structure. This includes following international practices, where the government bears part of the risk (easily covered through an insurance product), as a social security initiative and also puts in place a strong regulatory mechanism including protection to borrowers from unscrupulous lenders. 
     
    These are some of the key findings of a "Report on Reverse Mortgage", by Moneylife Foundation, which was released by Hardeep Singh Puri, Union minister of state for housing and urban affairs (independent charge) on Saturday. The study was released at a function to mark Moneylife Foundation's 9th Anniversary at the Bombay Stock Exchange (BSE) Convention Centre. 
     
    "Due to poor financial literacy and extremely high property prices in India (relative to the income levels), millions of savers are likely to retire with a large chunk of their savings locked up in the apartments that they live in. They may not be poor in terms of net worth, but would not have the cash required to meet the rising cost of retirement living. In other words, they would be asset rich but cash poor. This is where reverse mortgage is useful," the study says.
     
    The research was supported by Housing Development Finance Corp (HDFC). Two bankers, Shrinivas Marathe and Pradeep Bhave, did the research for the Report.
     
    A reverse mortgage is a type of home loan for older homeowners that requires no monthly mortgage payments but gives them a monthly payment instead. 
     
    The Report includes the demand and supply scenario, analysis of the currently available reverse mortgage products, analysis of the present regulatory framework, misconceptions about the scheme and incentives required to make reverse mortgage a popular product for both customers and banks, and how reverse mortgage schemes can be made affordable and popular among borrowers and lenders.
     
    Here are the findings of the Report...
     
    • It is difficult to evaluate the reliability and effectiveness of all the schemes by various lenders as these have been in existence only for the past 10 years or so. 
    • None of the loans under the schemes have come to a stage of ensuing security as yet. 
    • Also, the response and behaviour of the legal heirs is not tested to get an idea of the extent to which repayment in this manner would be acceptable to them.
    • In most cases, however, where the loan-to-value (LTV) is less than 100%, it can be safely assumed that the heirs would be more than glad to settle the loan if they are financially sound. 
    • Whereas the risk to the lenders of the loan amounts exceeding the value of security (LTV in excess of 100%) reduces with a drop in interest rates, the borrowers benefit with higher annuity payments. 
    • Whether it is China, UK or India, the psychology of the seniors remains the same: 'leaving legacy to the next generation'. This thinking is preventing this section of the society, susceptible to financial woes, from exploring the power of their hard-earned asset, their HOME, from supplementing their income in case of need.
     
    The Report suggested some new designs of reverse mortgage product suitable for Indian conditions. It says, "The negative emotional response of borrowers to reverse mortgage is not India centric. Anywhere in the world, where reverse mortgage has not gathered momentum, this phenomenon is held responsible for its failure of the scheme. The supply side i.e. the lenders also need to shed their overcautious approach and shift their strategies to make reverse mortgage work."
     
    According to the Report, a little more acceptability of the reverse mortgage loan scheme can be brought about with implementation some suggested schemes like  discounted monthly payments rising yearly or with other suitable periodicity, providing a line of credit to borrowers, reduced payout to the surviving borrowers, share in future gains, providing reverse mortgage in tranches, periodical review of payouts with property valuation, insurance for property value, interest subvention by the government, funding by the government for payouts or part of the loan and raising the eligibility criteria for age of the borrower.
     
    "The government actually should be actively involved in reverse mortgage product and needs to do a lot in this regard from the social security angle for senior citizens. However, unfortunately, except for a couple of amendments in the Income-tax law, the government seriously lacks on legislative front," the Report concludes.
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    COMMENTS

    tapan sur

    6 months ago

    Shri. Hardeep Puri came as a very honest & an excellent minister who would take care of basic problems a common man faces. Thank you for the invite.

    Ashok m Rane

    6 months ago

    It is a commendable effort to make a research on Reverse Mortgage and to publish the Report, Congrats.

    Ramesh Bajaj

    6 months ago

    Reverse mortgage is a necessity and we should work towards it to make it viable (also from the psychological angle)

    REPLY

    chellam

    In Reply to Ramesh Bajaj 6 months ago

    Sufficient marketing is not done in India giving salient features of the scheme. Further enough encouragement is not being extended by the lenders

    Banks Are Not Helping MSMEs and Here Is What Should Be Done
    The latest Financial Stability Report , published by the Reserve Bank of India (RBI) , states that the sectoral deployment of gross bank credit exposure to industry sector expanded by 2.3% in Q2FY18-19 compared a meagre 0.7% in Q4FY17-18. Large industry gained the most with almost 3% increase in exposure in the most recent quarter, compared to 0.8% in March 2018. The manufacturing micro, small and medium enterprise (MSME) segment, on the other hand, experienced a negative growth of (-) 1.4% in September compared to 1% credit expansion recorded in March. Banks continue to be risk-averse as much of credit increase occurred in working capital segment and not term loan segment. Banks are no less to blame than the MSMEs for their ills. What we found is:
     
    • Many MSME projects have been financed without consideration of the total cost of the projects, including machinery installation costs, rates and taxes including goods and services tax (GST), loading and unloading charges, transit insurance costs and other connected expenses.  

     

    • Trial run for commercial production that should be part of pre-operative costs is also not included in the total project cost. 

     

    • In addition, interest during the construction period is also debited to the working capital account opened simultaneously with the term loan account while such working capital account should be opened only from the date of commercial operations. Consequently, even by the time the unit starts commercial production, the unit becomes sick. 
     
    Then there are issues of handling sticky loans. Moratorium should start from the date of release of last instalment whereas most banks are starting from the date of first instalment. 
     
    Sometimes, project implementation delays like delay in release of successive term loan instalments, receipt of imported machinery and its erection, would result in time overruns and cost overruns besides repayment starting well before commercial production. 
     
    This practice leads to inadequate financing of the enterprise and this is another contributory factor for sickness of the enterprise. 
     
    Further Blows
     
    Master directions by the Reserve Bank of India (RBI) dated 17 March 2016 on revival and restructuring suggest that each bank appoint zonal committee to consider revival. Corrective action was to be initiated for special mention accounts – SMA within certain timeframe like SMA-0 to be provided corrective action. SMA-1 to go for restructuring and SMA-2 for recovery. 
     
    Zonal committees were not formed; even where formed, there is no record as to how many have been revived following the directives. Though RBI empowered committee meets every quarter, no reliable data on the revival of manufacturing micro and small enterprises (MSEs) were available. RBI’s instructions on manufacturing micro and small enterprise revival seem glossy.
     
    Yielding to the pressure of MSME Ministry, the RBI on 1 January 2019, or after a lapse of two years and over since the master directions, issued new directions for restructuring. 
     
    This circular clearly says that the standard assets SMA-0,1,2 need to be restructured and the exercise should be completed by March 2020 for loans up to Rs25 crore. There is an overdrive among banks now to restructure the SMA accounts. This is certainly a very efficient preventive tool for NPAs (non-performing assets) if effectively implemented.
     
    Banks, invariably, would like to avoid provisioning and, therefore, categorisation of some assets as NPAs. Some banks even try to provide as long a rope as possible for the unit to pay up the arrears of instalment and/or interest. 
     
    But what is intriguing is the units closed for six months due to failure to pay up electricity dues remain active in banks’ books of accounts. Either banks did not visit these units, or they prefer not to declare them as NPAs lest they should show up in provisions. 
     
    If a unit continues not to produce for six months, it will end up either in closure or sale.  A good number of them have the potential to revive unless they willfully defaulted. During the first three months of such non-payment of electricity dues, proper diagnostics would help the revival. 
     
    Since several ailing units suffering in silence would lead to labour retrenchment, idle machinery junking up would be a national loss, here is what should be done:
     
    1. All non-performing MSMEs in manufacturing sector up to Rs1 crore due for consideration for revival even though the banker may take a different view, should be referred to an external accredited institution (EAI). Such accreditation could be given to an independent organisation like the industrial health clinic wherever set up or to a committee set up by the state government involving bank representatives that should include MSME-DI. The committee should also hear the entrepreneur.
     
    2. Above Rs1 crore but up to Rs25 crore, such consideration for revival shall be referred to a committee of the bank at the appropriate level that should include ‘MSME expert’ and a state government representative, in order that interests of sovereign dues is taken due notice of and equitable attention is devoted for their recovery as part of revival package.  
     
    The committee before taking any decision should have the view point of the entrepreneur and record it in the minutes for considering or otherwise duly giving valid reasons thereof.
     
    3. The committee shall consider the ‘revival policy’ of the state government wherever it is in place.
     
    4. All such revival packages shall consider the following financial facilitation:
     
    a. Freezing the status of the classification of asset on the date of reference to the external institution or the committee of the bank for one year or till the date of rejection.
     
    b. Reversal of penal interest and other penal charges;
     
    c. Charging simple interest at marginal cost based lending rate (MCLR) from the date of reference for one year;
     
    d. Fees or charges levied by the EAI including IHCs should be borne by the GoI through a special fund set up for the purpose;
     
    e. Bank should share ‘pari pasu’ charge on the borrower’s assets for any external funding towards borrower’s margin including such funding by the IHCs;
     
    f. Additional funding where required, should be charged at MCLR by the involved agencies.
    Such guidelines should be applicable to all the banks, non-banking finance companies (NBFCs), Small Industries Development Bank of India (SIDBI) and state financial corporations (SFCs).
     
    (Dr B Yerram Raju is an economist and risk management specialist. The views are his own.
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    COMMENTS

    S. Ganesan

    6 months ago

    Bankers are scared of Vigilance Enquiry in case something genuinely goes wrong. Since Vigilance officials get promotion based on number of officials they have "hanged" many vigilance officials, without having any knowledge of the subject, attribute motives. I have been informally told (I do not have written evidence) that punishments have been awarded even by over ruling the Enquiry Officer's report. (By this, I do not claim that all Bank officials are Gods and have no malafide intentions at all)

    If this fear is removed in genuine lapses, the position will improve

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