Union Bank of India's Capitalisation under Strain after Merger with Andhra Bank and Corporation Bank: S&P
The merger of Union Bank of India with Andhra Bank and Corporation Bank in April 2020 has eroded its capital buffers. Tough operating conditions will further strain the Bank's already weak capitalisation, says S&P Global Ratings.
 
In a note, it says, "We anticipate Union Bank's earnings will remain muted for the fiscal year ending 31 March 2021. The amalgamated entity could take more than two years to benefit from the significant improvement in scale and franchise, and generate superior profitability."
 
"Meanwhile, the sizable pile of stressed assets will likely drag on earnings. Union Bank's capitalisation could also become increasingly stressed as credit costs are likely to stay high, given our forecast that India's economy will shrink 9% this fiscal year. The bank's Tier 1 capital ratio fell to 9.5% as of 30 June 2020, compared with the pre-merger level of 10.7% as of 31 March 2020," the ratings agency says.
 
According to S&P, the challenging operating environment and lower capitalisation post-merger could weigh on its assessment of Union Bank's capital position and stand-alone credit profile (SACP). 
 
It says, "We may lower the bank's SACP by a notch to 'bb-' from 'bb' if we believe its risk-adjusted capital ratio would drop below 5% over the next 12-18 months. However, government support should continue to underpin the ratings. Our outlook on Union Bank is stable, and we see a very high likelihood that the bank will receive support from the Indian government if needed."
 
In S&P's views, Union Bank will be dependent on infusions from the government to ensure compliance with regulatory minimum capital requirements until earnings recover. 
 
It says, "The bank's board has approved an Rs100 billion capital-raising plan, which we believe will alleviate, but not completely offset, downside risks. We also stopped assigning equity credit to additional Tier 1 instruments issued by Indian public sector banks, including Union Bank, due to uncertainty over their ability to absorb losses on a going-concern basis." 
 
"We are awaiting comprehensive Pillar 3 disclosures of the amalgamated entity to assess its capital position under our risk-adjusted capital framework. The amalgamated entity's future capital-raising and management plans will be key to its stand-alone creditworthiness," the ratings agency concludes.
 
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    Interest Waiver:'Common man's Diwali in your hands', SC Tells Govt
    The Supreme Court on Wednesday told the Centre that the common man's Diwali is in the government's hands, as it sought implementation of the decision to waive interest-on-interest for loans up to Rs2 crore for eight categories.
     
    The top court gave time till 2nd November to the Centre to update it on the issuance of circulars in this matter.
     
    A bench, headed by Justice Ashok Bhushan and comprising Justices MR Shah and R Subhash Reddy told solicitor general Tushar Mehta, representing the Centre, that it does not require one month time to implement its decision on waiver of interest on interest on loans up to Rs2 crore.
     
    "This is not fair on the part of the government," said Justice Bhushan, noting that the top court has given enough time to the government to act in the matter.
     
    "When you have decided, then why it is taking time," he asked.
     
    The bench insisted that the Centre should issue necessary orders based on its decision so that the common man can receive the benefits.
     
    Justice Shah told Mr Mehta that the government should see the plight of the common man, as they know that Centre has taken a decision in their favour. "But they want some concrete result," he added.
     
    Mr Mehta said the government has considered the plight of the common man and it does not gain anything by delaying its decision unnecessarily, but there are certain formalities which have to be completed.
     
    To this, the bench said the government should have issued a circular to implement its decision. Mr Mehta replied that banks will waive interest on interest and then they will get reimbursement from the government in the eight categories of loans up to Rs2 crore.
     
    "To implement this, we have to ensure banks give us proper format," he submitted.
     
    Justice Bhushan said the court will hear the matter in November and then the Centre should inform it steps taken to implement its decision.
     
    "We want order for circular for implementation of this decision," he said.
     
    The bench reiterated that it welcomes the decision of the Centre, but the only thing is that it should be translated practically.
     
    Justice Shah said that "the common man's Diwali is in the government's hands."
     
    The top court has scheduled the matter for further hearing on 2nd November.
     
    The government has agreed to waive compound interest on MSME and personal loans up to Rs2 crore during the moratorium.
     
    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.
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    Securitisation Dives 80% during the First Half on Moratorium Blues: CRISIL
    Securitisation transactions plunged 80% to just over Rs20,000 crore by value in the first half of the current fiscal, following the COVID-19 pandemic and the moratorium on loan repayments allowed thereafter, says a note from ratings agency CRISIL, adding since September, however, number of originators and investors have increased.  
     
    In the report, CRISIL says, "September saw a rebound in transactions to about Rs10,000 crore as economic activity began clawing back. Overall volume, however, continues to be well below the levels seen in the past few years, when securitisation had become one of the preferred fund-raising tools for non-banking financial companies (NBFCs). Volume in the first half of fiscal 2018 was around Rs37,000 crore, which surged to about Rs 68,000 crore in the same period of fiscal 2019, and onwards to around Rs96,000 crore in the first half of fiscal 2020."  
     
    According to the ratings agency, NBFCs have had to increasingly take recourse to securitisation to raise funds after the default by a large financial institution in September 2018. Securitisation proceeds accounted for 26% of the disbursements done by the top-20 non-banks (13 NBFCs and seven microfinance institutions) in fiscal 2020. In fiscals 2019 and 2018, the numbers were 18% and 12%, respectively, it added.
     
    Krishnan Sitaraman, senior director at CRISIL Ratings says, “Disbursements by non-banks had declined sharply in the first half as business activity hard-braked. That also reduced the need for non-banks to access the securitisation market to churn assets. Investors also preferred to wait on the side lines, assessing the impact of moratorium on collection efficiency and credit behaviour, and awaiting clarity on improvement in borrower cash flows and economic activity. Further, in the interim, NBFCs were able to secure funds through alternate means such as targeted long-term repo operations and partial credit guarantee scheme.”
     
    According to the ratings agency, asset-backed securities constituted 70% of the overall securitised volume in the first half of this fiscal, which marked a 1,000-bps (basis points) growth on-year (see Chart 1 below). 
     
     
    The direct assignment (DA) route, being the most preferred mode for mortgage-backed securities, accounted for nearly two-thirds of all deals (see Chart 2 above). In terms of asset classes, commercial vehicle and gold loans comprised more than half of the transaction volume in the first half of this fiscal.
     
    Direct assignment transactions supported by partial credit guarantee of the government, saw renewed interest from banks in the past few months, accounting for nearly 12% of volumes.
     
    According to CRISIL, the number of active originators have increased in the past three months as portfolios under moratorium fell. "Consequently, interest of investors, too, picked up, as more data became available on borrower behaviour during the moratorium. Investors preferred to acquire loans given to borrowers who had not opted to avail of the moratorium from June to August," it says. 
     
    While private banks and insurers remained the main investors, as per the ratings agency, public sector banks and NBFCs also put money into some securitised pools. However, it says, mutual funds, major investors in recent years, have been largely inactive this fiscal.
     
    With containment measures beginning to be relaxed from June, economic activity is picking up and NBFCs have begun disbursement of loans—but on a limited scale—amid operational constraints.
     
    According to Rohit Inamdar, senior director at CRISIL Ratings, as more data becomes available on borrower behaviour at portfolio and pool levels, and if they point to predictable, and pre-pandemic-level, collection efficiencies, investor interest will increase. "The contours of the one-time restructuring likely for borrowers will determine the extent of the securitisation recovery in the near term,” he added.
     
    CRISIL says, the spread, intensity and duration of the pandemic and further lock-downs will also be monitorables.
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