While Cleaning NPAs from Balance Sheet, Public Sector Lenders Are Losing Banking Relations: Report
India's public sector banks (PSBs) are losing valuable lead banking relationships with the country's largest companies while attempting to rid their balance sheets of huge volumes of non-performing assets (NPAs), says a report.
 
In its 2019 study, Greenwich Associates, a market intelligence and advisory services provider, says, "...even when public sector banks do retain their status as a company's No. 1 or No. 2 credit provider, they are being cited less often as leading providers in non-credit products such as foreign exchange and cash management-roles that are being filled most often by private sector banks. The one outlier to this trend is State Bank of India (SBI), which has moved faster and made more progress than other PSU banks to address the NPA issue, actually increased its share of lead corporate banking relationships to 6% of large companies in 2018 from 4% in 2016. SBI has also posted dramatic gains in cross-selling foreign currencies and trade finance to companies for which it is a top credit provider."
 
"Even after recent mergers, it's apparent that the PSU banks need to consolidate in order to achieve the scale needed to compete as well as ensure that banks are investing in people, platforms and technology to effectively compete in the future," says Gaurav Arora, Greenwich Associates' head of Asia.
 
As of 2016, 20% of large Indian corporates participating in the Greenwich Associates annual Corporate Banking Study said they used at least one PSU bank as a lead corporate bank. By 2018, that share had fallen to just 15%. The bulk of those relationships went to private sector banks, Greenwich Associates says.
 
The market intelligence and advisory services-provider estimates that 92% of Indian companies will make a change to their corporate banking rosters in 2019. Ït says, "That shift is having a major impact on the competitive landscape for India's leading corporate banks. The 2019 Greenwich leaders in Indian large corporate banking are navigating a stressful and volatile period of transition, as the consequences of long-needed reform ripple through the marketplace. HDFC Bank and SBI top the list of local banks. Each is used for corporate banking services by roughly three-quarters of large Indian companies. Close behind is ICICI Bank, with a market penetration score of 71%. These three banks also secure the top spots among middle market banking companies, with HDFC in first place and ICICI and SBI statistically tied in the No. 2 spot."
 
"In terms of quality, HDFC has differentiated itself from all competitors to claim the title of 2019 Greenwich quality leader in both large corporate and middle market banking. Among foreign banks, Standard Chartered Bank and Citi are tied statistically with a market penetration of 51%-54% among large Indian corporates, followed by HSBC at 50%. In the middle market space, among foreign banks, HSBC ranks first and Standard Chartered in second and Citi a close third."
 
Given the current dynamics of the industry and the priorities of the new government, Greenwich Associates says it is becoming increasingly clear that restoring India's banking system to health is a priority. "The potential implications could range from privatization/consolidation, to setting stronger corporate governance structures, to guidance on technology infrastructure upgrades. But weak balance sheets and other immediate challenges are preventing PSU banks from making the long-term IT investments needed to compete for wholesale banking business in the future," it concluded.
Like this story? Get our top stories by email.

User

COMMENTS

Shweta Shetty

20 hours ago

Can you also give a review of hdfc life.

Shrikant Narayan Dhekne

5 days ago

Can maintaining banking relations be more important than or have priority over avoiding and reducing NPAs?

Bankruptcy Code: Needs an Indian Solution to Issues
On 4th July, instead of a celebratory statement at successfully navigating the penultimate hurdle in its bid to acquire Essar Steel, Arcelor Mittal issued a cryptic one-line press release: “We note today’s ruling by the NCLAT (National Company Law Appellate Tribunal). We need to review the full written order to understand any implications on completion of the transaction.”
 
The ruling is not shattering for Arcelor Mittal. Having run the gauntlet of innumerable legal challenges by the Ruia group, it is clearly prepared for the issue to go up to the Supreme Court (SC) for a final verdict. 
 
However bankers, who have been waiting for over 530 days and counting, are preparing to challenge the order in SC.
 
The reason? The NCLAT order has puts secured and unsecured creditors almost on par. It suggests that lenders of secured loans do not have drastically superior rights to the money from the resolution process; they will have to share it more equitably with operational creditors as well.
 
Bankers argue that the judgement is disastrous because it calls into question how credit markets work and how risk is priced.
 
There is, indeed, great merit in this view and I started out agreeing with it. However, applying it rigidly, without taking into account the peculiarities of the Indian situation, would also be grossly unfair to operational creditors. 
 
The story would have been different if banks had been prudent about their lending practices, not turned a blind eye to rampant diversion of funds, giving in to ‘phone’ calls from Delhi to allow repeated debt restructuring (with no claw back), massive write-offs, permit interest outstanding to pile up and, right at the beginning, turn a Nelsons’ eye to a massive padding of project costs. 
 
One banker told us how a Rs800-crore project had been inflated to Rs1,300 crore and then to Rs2,000 crore in a group company by one of those involved in this very litigation. Banks, usually public sector banks (PSBs), have been complicit in this mischief.
 
We have also seen how PSBs lent over Rs15,000 crore to Prashant and Ravi Ruia in Essar Investments against personal guarantees that are not backed by any significant security.
 
Should operational creditors, who play a critical role in keeping the businesses running, pay a bigger price when the corrupt nexus between bankers-business-politicians goes unpunished? 
 
Justice SJ Mukhopadhyaya’s order on 4th July has refused to allow the committee of creditors (COC), comprising bankers and asset reconstruction companies, to corner almost the entire Rs42,000 crore offered by Arcelor Mittal. The order disposed a large number of petitions, including those of a wide spectrum of operational creditors, whose continued association with the company after the resolution process began has kept Essar Steel going.
 
The NCLAT order, in deciding to safeguard the rights of the operational creditors (including workmen, employees, and the large number of trade- and services-related creditors) notes that they are larger in number than financial creditors and are not fully listed. It asks the COC to take help from a professional and ensure distribution based on the percentage decided by the bench. This has been provided in a tabulated form. 
 
There was another issue which is, in fact, to the credit of operational creditors who kept the company going and even earned a profit. Financial creditors had argued that the reason why ‘operational creditors’ were not assigned any claim in the resolution process was because they had done “business worth Rs55,000 crore during the pendency of the resolution.”
 
There was also a discussion on how the profit earned during the pendency of resolution should be distributed; both financial creditors as well as the bidder, ArcelorMittal had laid a claim to it.
 
The NCLAT order asks the RP (resolution professional) to file an affidavit providing details of this profit and distribute it among all financial and operational creditors on a pro rata basis. 
 
There is, however, one legitimate issue that needs to be clearly resolved. A person familiar with the resolution says, “the order has left open a path for those trade creditors, not settled by this order, to renew their claims after the deal closes and Arcelor Mittal takes over Essar Steel. That would pose a huge problem, because the aggregate number of trade creditors, by value, is large. If the order does not provide for a clean break and clear acquisition, Arcelor Mittal could end up paying a higher cost and remain engaged in endless and expensive litigation.”
 
That would cast a huge shadow on the entire IBC (Insolvency and Bankruptcy Code) process for larger companies, especially at a time when the long delay and never-ending litigation in Essar Steel is a matter of great embarrassment for the government which had promised swift resolution. 
 
While we wait for the Supreme Court to clarify issues raised by the NCLAT order, it is important to note that the IBC has evolved and been amended fairly quickly to plug loopholes and provide clarity on issues while taking into account the Indian reality.
 
In November 2017, after the very first and flawed resolution of Synergies Dooray Automotive Ltd, Debashis Basu wrote in the Business Standard, “One of the many flaws of the badly drafted IBC and the whole new bankruptcy architecture is that it did not take into account the very Indian possibility that promoters (and others) will try to game the system in many obvious ways.”
 
IBC was amended twice since then. In 2018, it was amended to safeguard home-owners, who were left in a lurch by large realty companies, although they were making regular payments and held a signed agreement promising ownership to specific properties. The legislature, as well as the SC, backed them, despite vociferous protests and lobbying by lenders and builders who had argued that it would irrevocably damage the bankruptcy process. This issue is still open. Real estate companies have filed over 140 petitions challenging constitutional validity of this amendment.
 
Another amendment to Section 2 made the IBC applicable to personal guarantors of corporate debtors and proprietorship firms and Section 29 A was also inserted to prevent defaulters from bidding for their own assets. 
 
In recent months, NCLAT and SC have both provided the much needed clarity with regard to statutory dues claimed by revenue agencies. In the past, exorbitant tax claims and litigation by revenue agencies had always played spoilers to any corporate resolution. 
 
In the Monnet Ispat case, SC (August 2018) held categorically that provisions of Section 238 of IBC will override anything inconsistent contained in any other enactment, including the Income-tax Act.
 
In the Raj Oil Mills case, NCLAT, in a combined order (March 2019), decided that all statutory dues owed to revenue agencies would be treated as operational debt. 
 
The order said, “As the income tax, value added tax and other statutory dues arising out of the existing law arises when the company is operational, we hold such statutory dues has direct nexus with operation of the company. For the said reason also, we hold that all statutory dues including ‘income tax’, ‘value added tax’ come within the meaning of operational debt.” It, however, allowed these agencies to initiate the resolution process to recover their dues. 
 
A final resolution of the Essar Steel case is important, not only to set at rest issues raised by the 4th July NCLAT order, but also to signal that resolution provides a better alternative to liquidation, which will entail far bigger losses to lenders. 
 
Indian PSBs’ bad loans stand at a massive Rs10 lakh crore+ and the NCLT is already bogged down with just 1,860 companies admitted for resolution so far, while an estimated 12,000 more await admission. 
 
The task is humungous and it is important for everyone to ensure that it works at a time when several distressed asset companies from around the world remain interested in acquiring Indian companies and can provide an exit to our beleaguered lenders. 
Like this story? Get our top stories by email.

User

COMMENTS

vikram chinmulgund

3 days ago

A gentleman's word is his bond. If you borrow something- anything - you must keep your word and return it even at the cost of personal hardship.
There is only one real way to deal with bankruptcy and losing other people's money. The borrower or business owner must work as hard and honestly as possible to repay the money by fixing the business or selling parts of it before value reduces to zero. If that is not possible the borrower must endure personal hardship to return the money he borrowed. What is borrowed must be returned or at least honest and strenuous efforts must be made to do so. Laws that are lakhs of words long to describe the same are lengthy in proportion to the vested interests and lobbies that seek to evade returning borrowings or to profit from bad borrowings in some alternate way.
This is why business empires like the Godrej's or Tata's are trusted even though several of their businesses do flop. The family's word is it's bond.

Godavari Joshi

5 days ago

The Operational creditors need to be taken care of because this class of creditors end up at receiving end by way of extended credit periods, forceful reductions in claim /invoice acceptances, cut throat procurement practices and so on. The Operation creditors are not as organised nor do they have the muscle power which a Secured Lender has. The Secured creditors, if they had monitored the Lending and the Recoveries in right earnest, the problems of NPAs would have not remain hidden for so long. The IBC cannot be used as a tool for injustice to Unsecured Creditors !
The moot question is that IBC should take into account whether the Insolvency was resultant of misgovernance or was it indeed a business failure. Most of the cases coming up seem to be more of former. In that instant, let the Secured Lenders own up the responsibility and show accountability rather than ducking behind the Honest Tax Payers Umbrella! They only are wasting their depositors and the tax Payers money by endless Litigation.

Prasanna

5 days ago

The issue at hand is whether Arcelor Mittal has bought "Assets" of Essar Steel under the IBC or has bought the "Business" of Essar Steel. If it is "Business" as a whole, then the terms of auction / bid under IBC would come into play to decide whether any creditors of Essar Steel follow into Arcelor Mittal. If it was "Assets" there is no question of any creditors of Essar Steel latching on to Arcelor Mittal. But by and large, our judiciary, comprising of courts and tribunals has to realise that world makes a mockery of the time required to resolve issues in India. If it continues, then what ever policies and programmes are implemented for growth, India will come a cropper unless Judiciary gets its house in Order. It was indeed sad to see time wasted in last 5 years at Supreme Court on issues which were at best unproductive.

B. Yerram Raju

5 days ago

Sucheta Dalal and Debashis - both of you have flagged the right issues in IBC code. When the authors of the Law do not choose to keep the draft of such an important legislation for public views this is what would happen. Every law should be subject to Regulatory Impact Assessment in the Parliament's first session in the year to correct any aberrations as have been pointed out so that the subjects of Law get the full deal.

SuchindranathAiyerS

5 days ago

Double Financing and over financing has been a standard top management Banking practice in India. Particularly in Public Sector Banks and with a wink and a nod from their masters, the Neta Babus,

HARISH CHANDRA KOHLI

5 days ago

Missed Ticking the "Alert Me Box ..."

HARISH CHANDRA KOHLI

5 days ago

This article brings to mind the recent news about Indigo owners and related party matter raised by Mr. Gangwal. Is it possible that some of the operational creditors of Essar Steel could be "related party" claiming money? I hope my understanding of the article is correct.

Give Rs 18,000 cr to go abroad: HC to Naresh Goyal
The Delhi High Court on Tuesday asked Jet Airways promoter Naresh Goyal to submit Rs 18,000 crore in bank guarantees in order to be allowed to travel abroad.
 
"If you can give Rs 18,000 crore as bank guarantee, then you can go," said Justice Suresh Kait while refusing to grant interim relief to Goyal
 
During the course of hearing, senior advocate Maninder Singh who appeared for Goyal argued that the Look Out Circular issued against his client is illegal as it is not issued under any law enacted by the Parliament.
 
The Centre, through Additional Solicitor General Maninder Acharya, told the court that allegations of serious frauds amounting to Rs 18,000 crore are being investigated against Goyal.
 
Citing the reasons for his visit abroad, Goyal, through his counsel, told that court that he needs to explore financial options for the airlines which is under a serious financial crunch.
 
Singh further submitted that Goyal is an NRI and is a resident of Dubai and hence, he needs to go back to the country before July 10, else his residential rights would be revoked.
 
On July 5, Justice Vibhu Bakhru recused himself from hearing the case.
 
On May 25, Goyal and his wife Anita Goyal were stopped from leaving the country by immigration authorities at Mumbai airport.
 
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.
Like this story? Get our top stories by email.

User

COMMENTS

Deepak Narain

5 days ago

If he is allowed to leave the country, there will be an addition to the list of VIPs like Vijaya Malya, Neerav Modi, etc and govt will be fighting in foreign courts to get him back to justice.

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

online financial advisory
Pathbreakers
Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
online financia advisory
The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Online Magazine
Fiercely independent and pro-consumer information on personal finance
financial magazines online
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
financial magazines in india
MAS: Complete Online Financial Advisory
(Includes Moneylife Online Magazine)