Bank NPAs are just the tip of the iceberg

[mkrishna100]

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Bank NPAs are just the tip of the iceberg


With losses being reported in the current quarter and the next, the rating of many PSU banks will go below the radar and if a downgrade happens, they will find it difficult to raise resources plus the cost of borrowings will go up for them. And after having burnt their fingers in the past, the risk-taking ability of many of the banks will diminish further and the slowdown will continue.

Though the government has so far committed around Rs 25,000 crores to the banks and an assurance to fund further, given its deficit financing compulsions and the need to provide for the Pay Commission/OROP recommendations in the next fiscal, and the poor disinvestment cash flows, the government would find it difficult to pump in the required capital.

Once these banks start showing losses, they will not be able to pay dividends to the government nor pay taxes, which will further aggravate the situation for the government as its return on investment as an investor would be very negligible for the next few years, says M V Subramanian.

For more refer this link :

http://www.rediff.com/business/column/bank-npas-are-just-the-tip-of-the-iceberg/20160216.htm

 

[Rangachari Sampathkumaran]

It is not prudent for the Govt of India to keep on pumping funds to augment the Capital Adequacy of Public Sector Banks, who have written off substantial amount of bad debts. Whatever staff accountability, punishment of the staff concerned for any violation of norms etc., is taken, the money lost as write off is lost for ever. The Best option for the Govt is to strengthen the existing SARFAESI, once used as an effective tool in recovery of secured loans - (now every defaulter borrower is able to obtain a stay of the recovery proceedings, putting the Bank into defence - at the mercy of moneyed borrowers and flourishing advocates). Unless the SARFAESI courts are ruthless, the situation may not improve. By doing so, the Corporate sector will be put on guard - not try to fleece the public money.

 

[asadu]

The govt. did pump in a huge amount every time into Air India. What happened to it. 125 planes brand new sold off as scrap to some xyz. Similarly the bank NPAs. These are looted money by the political parties and business mafia. If enough money is not pumped in immediately, all the banks would have to declare ......... and the value of rupee will not be even equal to waste paper. So, govt. has to safegaurd the general public with putting enough money and giving enough powers to RBI to act and recover the bad debts immediately. Or declare those defaulters and the public will take a decission thereon.

 

[yesmohan]

Defaulters should be punished severely besides confiscating all their properties.

 

[asadu]

Why stop at any imagination. It could be around some 500 lakh crores. Even our RBI can not resque the PSBs. All the money taken away from PSBs as loans and subsidies and freebies by our politicians. All the industrialists and businessmen joined the bandwagon in the looting. God (?) only can save our country.

 

[yesmohan]

Why stop at any imagination. It could be around some 500 lakh crores. Even our RBI can not resque the PSBs. All the money taken away from PSBs as loans and subsidies and freebies by our politicians. All the industrialists and businessmen joined the bandwagon in the looting. God (?) only can save our country.

Even God would be given a petty loan and sent away!!

 

[tbs]

Why stop at any imagination. It could be around some 500 lakh crores. Even our RBI can not resque the PSBs. All the money taken away from PSBs as loans and subsidies and freebies by our politicians. All the industrialists and businessmen joined the bandwagon in the looting. God (?) only can save our country.

hi

yahaam sab kuch chalta hai bhai...mera bharat mahaan...

 

[Vaagmi]

Just copy pasting without comments. Please read an d comment. Thanks.

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An old solution to bank capital woes
Aarati Krishnan
The Business Line
Published on February 25, 2016​

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[TD="width: 589"]The Centre can Borrow through Recapitalisation Bonds to Infuse Equity into Public Sector Banks, like it did in the 1990s
Desperate times call for desperate measures. And it is clear that the capital adequacy problems dogging public sector banks are beginning to cry out for some desperate measures.Today, estimates of capital requirements for the beleaguered public sector banks to meet Basel III norms range upwards of Rs. 2.4 lakh crore over the next three years. The Centre is hard-pressed to meet this requirement.After providing under Rs. 8,000 crore towards bank recapitalisation in the previous budget and getting a lot of flak for it, it has since raised this commitment to a mammoth Rs. 70,000 crore.But sector watchers have been pointing out that even this is woefully inadequate. Given the string of quarterly losses being posted by the state-owned banks of late, the Centre cannot be seen dragging its feet on the issue, as that would be toying with public confidence in the banking system itself.

The nineties solution One (desperate) solution, if the FM is willing to a leaf out of the history books, lies in a bit of financial engineering employed by the government (of the day) in the nineties.It goes like this. In the early nineties, nationalised banks in India saw a severe erosion in their profitability and capital base after their untrammelled lending to the priority sector in the preceding decade. This prompted the cash-strapped government to come up with a novel strategy to shore up the banks’ capital without an immediate demand on its budgetary resources.It simply borrowed from the banks themselves to meet their capital requirements! To do this, it issued several tranches of special non-marketable securities called “Recapitalisation bonds” to the nationalised banks. The banks subscribed to these bonds in the normal course of their business.The cash thus raised was used by the government to infuse fresh ‘equity’ into the beleaguered banks. Initially issued for a specified period, these bonds were later converted into marketable securities or into perpetual bonds, by mutual agreement between the banks and the Centre.

According to one estimate, as much as Rs. 20,000 crore was infused into public sector banks through this method between 1985 and 1995.While the government was merely postponing its obligations through these bonds, this move did not result in undue fiscal burden over the long term, as the Centre earned both dividends and market returns on bank shares.

The pluses The advantages of a bailout using such recapitalisation bonds are many. One, the government need not raise immediate tax revenues to fund the mammoth bill on bank recapitalisation, which means less burden on the taxpayer.Two, by borrowing directly from the banking system instead of the markets, the Centre can avoid crowding out private borrowings or distorting market yields.The fact that there is no such crowding out can justify keeping them out of fiscal deficit measurements too. (To make this effective, banks need to hold these bonds for the long-term and not liquidate them in the markets). Three, as the Centre can borrow at far cheaper rates than the distressed banks, this would be an economical way to raise funds.From the banks’ point of view, subscribing to the Recapitalisation Bonds does not really strain their finances, because lending to the Centre is about the safest thing they can do with their loan funds. In any case, public sector banks tend to invest well in excess of their Statutory Liquidity Ratio requirements in government securities.

As long as interest rates on these bonds are transparently pegged to prevailing market yields, banks will not suffer any opportunity loss on income either. Getting go-aheads for the bond issue from RBI and SEBI would take care of the regulatory aspects.

Financial engineering? But is such a solution really above-board? Isn’t it financial engineering? No doubt it is, but it can be considered in the interests of the economy, if it is transparently done. Whether the Centre borrows from the market or does so from banks themselves, this move will bloat its borrowings quite significantly. This will escalate the nation’s debt-to-GDP ratio and will cause rating agencies to look askance at it.But the negative impact can be mitigated to some extent, if the entire process is managed transparently, and the financial impact disclosed upfront.Given that global central banks have resorted to quite a large number of creative instruments in recent years to bail out their banks, the rating agencies will find it difficult to view this very negatively.The other big risk to this idea is obviously that the government would be borrowing money to invest in equities (bank shares), something that no conservative financial adviser would recommend.But, in the stock market, it is commonplace for private sector promoters to step in to acquire their company’s shares to signal confidence, if they believe the stock to be unfairly valued.

As the promoter of state-owned banks, the government is entitled to do the same. Given the huge discounts to their book value at which some of these shares trade currently, this is also a bet that could pay off for the exchequer over the long term.However, there is one very important caveat to be made on this idea. Using recapitalisation bonds can only act as a short-term, fire-fighting solution to the crisis afflicting Indian public sector banks today.Measures like this will not do anything to address the structural rot in the banking system that has created the bad loan menace in the first place — poor governance systems, badly judged lending decisions in good times, and the repeated white-washing of doubtful accounts in bad ones.

These problems need to be addressed separately through wide-ranging reform of bank ownership and governance structures by the RBI and the Centre. Else, the easy expedient of recap bonds, used for a second time, will certainly create a moral hazard for all future times to come.[/TD]
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[here2where]

Govt has brushed 'unpleasant' stuff under the carpet for far too long. This includes, and not restricted to, bloated PSUs that leaks money to keep staff happy, etc. Rajan has thrown the first stone to reign in this culture in PSBs atleast. Question is will Govt be brave enough to do the same in other PSUs? Then we will see a deluge of skeletons pouring from the dust covered sarkari Godrej cupboards.

 

[krish44]

Banks subscribing to centres recapitalisation bonds and receiving the money back as cash infusion is a leaf out of private companys operations.

Private companies borrow from govt banks and not return them . When they are made bad debts and NPA and given to ARCs , the shell companies of borrowing company

buy the same back from ARCs at highly discounted rates . This simple process makes them not lose control over their companies.

 

[krish44]

Shares of PSBs led by SBI are going up in anticipation of capital infusion of 30 to 35000 crores in budget on 29th feb.

But 7th pay recommendation are likely to be watered down to reduce the financial outgo.So central govt employees are likely to pay for mismanagement of banks and the

economy . Retirees are also likely to be hurt.

First to peg Fiscal deficit to be pegged at 3.5% for fy 2016-17, then inflation control leading to bank interest at 6-6.5% on deposits further getting lowered by 50 basis

points all in the name of better economic management wil put the squeeze on middle class.

Then spending if at all is likely on MNREGA, rural road missions,irrigation facilities, leaves nothing much for the urban class.

In the name of properly directing subsidies middle class will pay more for gas.utilities like power and water,

The reductions on oil prices will not be passed on much to public but will be used to benefit public sector oil companies or the govt exchequer.

Food procurement prices will be lowered, fertliser subsidies cut in the name of better finance management and procurement of grains will be at unrenumerative prices.

Private sector is clear. They will not bail out the govt nor will return the PSB loans or borrow further. They would stay put and not start any economic activity.

Govt of course will invest in infrastructure and pray to God private sector sentiment will improve.

All the numbers put out of 7-7.5 growth is exaggerated utilising market prices instead of factored prices and change of base year to 2011.It is just a statistical jugglery.

Only plus that salaried class can expect is raising of IT slabs by 50k across all incomes and higher 80c benefits to encourage savings. It is foolish to encourage

savings when there is a need for all to spend to revive the economy.