Declining margins, rising credit costs and provisions are likely to affect the profitability of banks in fiscal year 2014, according to ICRA Research.
Downgrading the Indian banking sector will, however, depend on how the lenders fare in terms of core profitability and non-performing assets (NPAs), said Vibha Batra, senior vice-president, co-head financial sector ratings, Icra Ltd, the Indian unit of Moody’s Investors Service.
Batra expects state-run bank’s return on equity (RoE) to drop to less than 10% in the year to 31 March, down from 13.1% in the previous year, while that of private sector banks to drop to 11-12% in 2013-14 from 16.3% last fiscal. Return on equity is measured by dividing a company’s net income with shareholders’ equity.
The BSE Bankex, which includes 14 lenders, has lost 22% since April.
The report by the research firm said, “A weak macro environment, large rupee depreciation, vulnerability of a large number of infrastructure projects and the rising yields will have significant bearing on the earnings and asset quality of the banks.”
The research is based on an analysis of 26 nationalised banks and 15 private sector banks, which collectively accounting for around 90 per cent of the total credit portfolio and deposits of all commercial banks as of June 2013.
According to the report, gross non-performing assets (NPAs) ratio for public sector banks (PSBs) could rise from 4.2 per cent as on June 30, 2013 to 4.8–5 per cent as on March 31, 2014. As the NPAs of PSBs have a larger bearing on the banking system, the gross NPA ratio for banking system as a whole could further rise to 4.2- 4.4 per cent as on March 31, 2014 (3.8 per cent as on June 30, 2013).
Overall gross NPAs for all banks increased to 3.8 per cent as on June 30, 2013 from 3.3 per cent as on March 31, 2013 and 3.1 per cent as on June 30, 2012. Asset quality and earning pressures could make banks more risk averse, which could further make availability of credit scarce even if the credit demand were to pick up.
Rajeev Mehta, research analyst at India Infoline Ltd, agreed with Icra’s assessment and said this fiscal year will be one of the toughest that Indian banks will have to face “in a decade”.
“Banks credit growth is likely to slow to 12% -13% this year and because this is a stressful environment macroeconomically, banks will be wary of increasing their loan book for fear of increased risk,” he said.
“For private sector banks with large infrastructure exposures, slippages in the large accounts could increase the credit provisions and dilute the core earnings over the medium term,” ICRA said.
According to ICRA estimates, return on net worth for PSBs could drop to single digit in 2013-14 which along with low valuations could necessitate them to rely primarily on the Government to shore up capital to comply with Basel III norms or for growth.
For private sector banks, some stress is likely to build up in the commercial, retail and SME portfolio. At the same time, private sector banks with significant infrastructure exposures may see an increase in restructuring, though stress may not get reflected in NPA ratio in 2013-14.
Souece: (1) Business Line (2) Live Mint (3) NDTV Profit
A bulk of the public sector bank non-performing assets (NPAs), which is under the Central Bureau of Investigation scrutiny for suspected wilful misappropriation of public money running into thousands of crores, is on account of debt repayment defaults by 30 corporate majors, said CBI Director Ranjit Sinha.
‘A bulk of NPA is from top 30 accounts which is learnt to be running into thousands of crores. CBI has already initiated inquiry into some of the big defaulter accounts,’ Sinha said, The CBI, which is learnt to have come across irregularities in certain cases, is soon expected to register a preliminary enquiry for further probe.
Mr. Sinha said that according to government estimates, the gross NPAs rose substantially from Rs.59,924 crore in 2010 to Rs.1,17,262 crore in 2012.
Speaking at the fifth annual conference of chief vigilance officers of Public Sector Banks and Financial Institutions and Officers of CBI, Sinha cited number of issues which adversely affect agency’s efforts to track and recover these assets.
Highlighting issues which hamper CBI investigation into bank frauds, he said banks are often reluctant to declare bad accounts as fraud despite there being clear manifestations. The CBI Chief said the banks need to realise that delay in reporting of frauds adversely affect tracking and recovery of proceeds of crimes as the initiative is lost.
Top CBI officials said the agency’s banking probe unit has also scrutinised cases of loan restructuring, a common route taken by the defaulters to escape immediate loan repayments. As the probe advances, the investigating agency would also probe the suspected complicity of bank officials in question.
Today, the estimated gross outstanding advances are pegged at Rs.50 lakh crore, putting the restructured debt figure at roughly Rs.5 lakh crore compared to Rs.2 lakh crore as recorded four years ago.
According to an RBI analysis, CBI officials said, the number of fraud cases had shown a decreasing trend from 24,791 cases in 2009-10 to 13,293 cases in 2012-13.
Emphasising the importance of in-house vigilance, C. Rangarajan, Chairman Economic Advisory Council to the Prime Minister said both preventive vigilance and punitive vigilance were very important factors in maintaining discipline in the banking and financial sector. Those who violated procedures and rules must be appropriately punished.
Source: (1) The Hindu – August 21, 2013 23:41 IST (2) Press Trust of India | New Delhi August 21, 2013
The judgment by The Calcutta High Court pointed out an important fact that default might not always be a willful act and in such a case,the self-respect and honour of a borrower should not be taken away by publishing his photograph
The Calcutta High Court (Court) recently disposed of two writ petitions (WP) by passing an order restricting secured creditors to publish photographs of defaulting borrowers innewspapers/ magazines and termed the act as ‘impermissible’. The Court was of the opinion that such a common practice of the secured creditors is an act which resorts to ‘extra-legal means’ in the process of enforcing their security interest under the Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
The judgment of the Court came, while simultaneously hearing the matters of Ujjal Kumar Das & Anr v/s State Bank of India & Ors (WP 10315 (W) of 2013) and Allianz Convergence Pvt Ltd v/s The General Manager, State Bank of India & Anr (WP 9850 (W) of 2013). The subject matter of the petitions was that whether a secured creditor who has already initiated action under the SARFAESI Act for the enforcement of their security interest is allowed to publish photograph of the defaulting borrowers in newspapers/ magazines or not? While passing the judgment, Justice Dipankar Dutta strictly adhered to provisions of the SARFAESI Act and Security Interest (Enforcement) Rules, 2002 (Rules) regarding enforcement of security interest. The judgment was based on the following observations of the court:
- Rule 8 of the Rules and Appendix IV stipulates the form in which the ‘notice of possession’ is to be given. But it does not authorize the secured creditor to publish the photograph of the defaulting borrower.
- Publishing photograph of the defaulting borrower is neither explicitly mentioned in the provisions of the law nor by necessary implication.
- Notice to the borrower and public at large can be given in newspapers/ magazines, which shall contain details of the borrower, the loan account and details of the secured asset. But the law does not authorize a secured creditor to publish photographs.
- A ‘public authority’ cannot act on any particular matter until and unless expressly authorized by the law. A public authority cannot act merely on the fact that ‘something is not prohibited by the law can be enacted’.
- A secured creditor can act to the extent it is empowered and authorized to act and in the manner as stipulated in the statute. As the Act stipulates the exact procedure for the enforcement of the security interest, any method adopted apart from that will be held as resorting to ‘extra-legal means’. Thus, if the Act does not permit the publication of photographs, such photographs cannot be published.
- A borrower is entitled to an alternative remedy under section 17 (approaching the Debt Recovery Tribunal or DRT) of the SARFAESI Act only after the secured creditor has initiated action under section 13 of the Act. Now, if the DRT holds that the secured creditor has acted contrary to the provisions of the Act and orders restoration of possession to the borrower, the damage and prejudice caused to the borrower by such publication of his photograph is irreparable.
The Court separated itself from the judgment of the Madras HC (KJ Doraisamy v/s the Assistant General Manager, State Bank of India, Erode Branch, 2007 136 Comp. Case 568) and the Madhya Pradesh High Court (Archana Chauhan v/s State Bank of India, Jabalpur, AIR 2007 Madhya Pradesh 45) given earlier on similar matters. Both these HCs upheld the contentions of the banks/ financial institutions of publishing photographs ‘permissible’ as it is not prohibited by the law. The Calcutta High Court strictly opined that dissemination of information by the secured credited about the borrower can be done only if it is a ‘public authority’ as per section 2(h) of the Right to Information Act, 2005, and banks being a public authority shall be entitled to such dissemination to the extent authorized by the SARFAESI Act.
“Public authority” means any authority or body or institution of self-government established or constituted-
(a) by or under the Constitution;
(b) by any other law made by Parliament;
(c) by any other law made by State Legislature;
(d) by notification issued or order made by the appropriate Government, and includes any-
(i) body owned, controlled or substantially financed;
(ii) non-Government organisation substantially financed, directly or indirectly by funds provided by the appropriate Government;
The judgment of the Court pointed towards one most important fact that default may not always be a willful act of the borrower, default in paying a loan amount may result from a common person’s inability to pay at that moment of time and in such a case default in repaying a loan cannot in any way be regarded as a criminal offence as it is a civil wrong.
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At the end of FY13 almost 43,000 cases involving a whopping Rs 1.43 lakh crore were pending with 33 debt recovery tribunals (DRTs) across the country.
Information from the finance ministry showed that the number of cases filed by banks and financial institutions to recover their debt pending in the DRTs jumped 21.6% from 35,221 at the end of 2011-12 to 42,819 as on March 31, 2013, while the amount involved in the cases rose 30% from R1.1 lakh crore to R1.43 lakh crore.
The DRTs managed to dispose of 9,816 cases in the last fiscal involving Rs. 18,162 crore. But fresh filings of 14,666 cases in the last fiscal with claims of Rs.48,037 crore pushed up the overall pendency.
In the same tmie the net non-performing assets(NPAs) of banks had gone up 51% in FY13 to R92,825 crore. According to a recent Crisil report, the gross NPAs of banks are slated to increase from 3.3% in March 2013 to 4% by March 2014.
The Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (RDBFI Act) under which DRTs were set up advises the tribunals to dispose of each case within 180 days from the date of its filing.
However disposing of cases in the advised time frame is proving to be difficult due to the shortage of DRTs and debt recovery appellate tribunals (DRATs) in the country.
For example the Mumbai region where the three DRTs have a total pendency of 3,632 cases involving Rs 43,401.37 crore has the highest pendency in DRT. The Kolkata region, having three DRTs, also has a high pendency with 11,212 cases involving Rs 20,642.74 crore. The Chennai region with three DRTs had 1,703 cases involving Rs 7,742.66 crore, while the Delhi region with three DRTs had a total pendency of 2,943 cases involving Rs 18,908 crore. Hyderabad with a single DRT had 2,590 pending cases involving Rs 11,614 crore.
In the case of ‘Union of India versus Debts Recovery Tribunal Bar Association’ the Supreme Court pointed out the same thing. The apex court then cited a submission on the need for an increase in these tribunals to reduce the workload of existing ones. The court also observed that the DRTs and DRATs suffer from many constraints including that several recovery officers in these tribunals “do not have a judicial background or are appointed on deputation from those very banks or financial institutions which are filing recovery cases in DRTs”, thereby raising serious questions about their independence, impartiality and fairness.
It was suggested by the court that filling up of vacancies for the posts of senior officials be expedited and computerisation of publication of notices and auctions on the website should be explored.