How Banks Are Ever-greening Bad Loans
CDRs and other schemes have failed to fix the huge bad loan problem which are enriching borrowers, bleeding the exchequer while destroying shareholders wealth
 
Non-performing assets (NPAs) and restructured (stressed) assets in the Indian banking system stood at a worrisome 11.06% of gross advances, as on 31 March 2015, and were increasing rapidly. The situation was alarming for...
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  • Mudra Bank is not a game changer, says report, based on experience of SKS Microfinance
    With 10% cap on spread, large NBFCs and MFIs like SKS will not see any improvement in margins or profitability and a cheaper loan from Mudra Bank may not make it into a game changer, says Religare 
     
    SKS Microfinance Ltd (SKSM) on Wednesday said the Micro Units Development & Refinance Agency (MUDRA) has sanctioned a refinance line of Rs100 crore to the lender at an interest rate of 10%. However, since there is a 10% cap on spread for all large non-banking financial companies (NBFCs) and micro-finance institutions (MFIs), lower funding cost does not improve margins or profitability, says Religare Capital Markets Ltd in a report.
     
    At present, the average funding cost of SKSM is about 11.9%, while incremental funding cost is around 11.2%.
     
    Religare, in its previous report has said that Mudra Bank's micro unit refinance scheme has turned out to be a non-starter due to the strict caps on onward lending spreads. As against a current corpus of Rs5,000 crore, Mudra Bank has disbursed just Rs150 crore to banks and MFIs since April 2015. 
     
    The RBI has fixed the rates at which Mudra Bank can lend funds under its refinance scheme for unsecured micro loans. For banks, this will be at cost of funds (COF) + 0.75%, for co-operative or regional rural banks at COF + 3.5%, and NBFCs or MFIs at COF + 4 to 6%. The central bank has also capped the spreads that banks, NBFCs and MFIs (Fig2) can charge borrowers if they avail of refinancing from Mudra. While banks have to lend at base rates, NBFCs and MFIs cannot earn spreads over 6% and 10% respectively, implying lending rates of 16-18% for NBFCs and 20-22% for MFIs. This renders Mudra refinancing unattractive due to the high operating and credit costs involved in unsecured microfinance lending.
     
    This also means, small finance banks (SFB) can avail loans from MUDRA at much lower rate than MFIs. "Mudra is lending at 6.75% to universal banks. However, borrowing rate for SFB is not decided, in our view it will be lower than MFIs and marginally higher than rates charged to universal bank i.e. between 6.75-10%. One of the main objectives for Mudra is to enable banks to fund low-income people at much reduced cost. Small finance banks will be better off as compared to MFIs, if they get funding at a cheaper cost by about 100-200bps," Religare said in its latest report.
     
    Religare feels MFIs who got the small finance bank license will see rating upgrades and in turn reduced cost. "We believe SFBs will see rating upgrades by at least 2-3 notches which will result in lower cost of funds. In our view, their ability to tap wholesale market has already improved (recently few MFIs who got the license have done CP issuance at 10.5%). Post conversion into a bank, SFBs will have similar or lower cost of funds compared to MFIs resulting in immense competition," it concluded.
     
    SKS Microfinance closed Wednesday 6.4% up at Rs425.70 on the BSE, while the 30-share benchmark ended the day marginally down at 27,039.
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    COMMENTS

    Raghavendra

    4 years ago

    Religare is spreading lies about SKS Microfinance. Even in the face of spectacular results and revised guidance it is trying to beat the stock hook and crook. Shame on Parag Jariwala

    Raghavendra

    4 years ago

    Religare is spreading lies about SKS Microfinance. Even in the face of spectacular results and revised guidance it is trying to beat the stock hook and crook. Shame on Parag Jariwalas

    Stress Test for Banks
    Non-performing assets (NPAs) and restructured assets are galloping. Over the years many patchwork solutions have been tried. Last year, the Reserve Bank of India introduced a structure for rehabilitating "specified infrastructure and core industry projects" for tenures up to 80%-85% of the projects’ economic life. Is this a sham? Rajendra Ganatra, a banker and expert in stressed assets, rips apart this new structure and the earlier Corporate Debt Restructuring scheme. He finds  it will only encourage promoters to play with lenders’ money. In fact, it is our money since it is government-controlled banks that are laden with bad loans. Mr Ganatra gives proof of ‘ever-greening’ of bad loans of three infrastructure companies, which raised debt ranging from 47.6% to 167% of their debt-servicing requirement. Don’t miss this eye-opening analysis on page 30.
     
    Senior citizens, who invest their hard-earned money in private retirement homes, usually do not get what is promised by developers of such properties. Unfortunately, at present, there are no norms for this sector. Sucheta, in her Different Strokes, highlights the need of proper government advocacy for senior citizens, based on S Krishnamoorthy’s (an 80-year-old air-force veteran) plea, asking the Madras High Court to direct the state government to set up a specific regulatory authority for retirement homes.
     
    The Aadhaar number is based on the social security number (SSN) concept used in the US. But did the US SSN simplify government administration? In Crosshairs, Sucheta writes that this may be far from the truth. In 2014, improper payments cost the US government a whopping $124.7 billion. Clearly, a national identity number has not prevented massive leakage of government funds. Why will it be any different in India, where governance standards are worse?
     
    Moneylife Foundation will be coming to Chennai on 7 November 2015, with its flagship seminar on “How to Be Safe & Smart with Your Money”. Register online here - goo.gl/z3UoPA. Hope to see you there!
     
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